'Decoupling' turns to myth as India growth story stumbles
Nobody in India is using the word "decoupling" any more to suggest Asia's third-largest economy can dodge the impact of the widening recession engulfing the West.
The clearest sign that the financial turmoil is hitting India came late last week when official data showed factory output contracted for the first in 15 years, due to falling trade and shrinking domestic demand, economists say.
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"This whole idea of decoupling has been shot down very clearly by the global crisis, which is getting transmitted through trade and the financial markets," said Shubadha Rao, chief economist at Mumbai's Yes Bank.
Industrial production fell 0.4 percent in October -- a big turnaround from the 12.2 percent growth a year earlier, the data showed, and analysts said the picture would only worsen.
Up to a few months ago as the US-led banking crisis ballooned, Indian policymakers comforted themselves, saying the country, with its dynamic and vast domestic market of 1.1 billion people, had "decoupled" from the West.
But now property prices are falling, lending has stalled, factories have cut output, exports have tumbled and share prices are down by nearly 60 percent with foreign investors pulling out 13 billion dollars this year.
"The situation is much graver than expected," said Suresh Tendulkar, chairman of the Prime Minister's Economic Advisory.
An inward-looking Indian economy escaped the 1997-98 Asian crisis largely unscathed. But since then, the country has become entwined with the rest of the world at an ever-faster pace with the United States acting as "the epicentre of economic transmission," commented the Economic Times daily.
The chain reaction from the global downturn is being felt in India's flagship 52-billion-dollar outsourcing industry where Infosys, seen as an industry bell-wether, has said it plans to freeze new recruitment.
India's second-largest exporter of IT services expects the industry's revenue growth to halve to 15 percent this year, as recession grips its largest market, the United States.
"I strongly believe we're in the midst of a huge crisis," said Pramod Basin, chief executive of business and technology services provider Genpact India.
Indian exports in October tumbled for the first time in three years, falling by 12 percent, hit by slumping demand in key US and European markets.
Car sales in November posted their biggest annual fall in eight years, sliding by 19 percent, while truck and other commercial vehicle sales -- a crucial signal of future economic activity -- slumped by 50 percent.
"The worst is yet to be seen," said Sherman Chan, economist at Moodys.com. "Losing support from external sectors, India is unlikely to see a rebound in manufacturing output anytime soon."
Economic confidence has been shaken further by last month's Islamic militant attacks on India's financial capital Mumbai that left 172 people dead, including nine of the 10 gunmen.
The targets included two luxury hotels where foreign investors stay and do deals, throwing up questions about the security of conducting business in India, which has been hit by a slew of attacks in the past year.
"There has been a definite spurt in attacks by people trying to hit cities of importance to India," said Alok Bansal, research fellow at the Institute for Defence Studies and Analysis.
The economy's troubles have been aggravated by the impact of four years of aggressive monetary tightening to combat inflation, which has been tamed by the collapse in global commodity prices.
To tackle the downturn, the Congress government announced early this month extra spending of four billion dollars while the central bank sharply cut interest rates in a two-prong move to kickstart the economy.
Authorities say they plan more stimulus moves as early as this week.
But economists warn that India, with its already overstretched finances, can in no way match China's 586-billion-dollar stimulus package aimed at boosting domestic demand and will have to largely rely on interest rate cuts.
Still, analysts say, India's woes should not be overblown.
The government expects growth this year of at least seven percent while economists forecast around 6.8 percent expansion this year and 5.5 percent next year.
Even at the low-end, such rates would be seen as turbo-charged by anemic Western standards.
"Some may be overdoing the pessimism," said HSBC economist Robert Prior-Wandesforde, who forecasts India's growth will return to around eight percent by 2010-11.
Nobody in India is using the word "decoupling" any more to suggest Asia's third-largest economy can dodge the impact of the widening recession engulfing the West.
The clearest sign that the financial turmoil is hitting India came late last week when official data showed factory output contracted for the first in 15 years, due to falling trade and shrinking domestic demand, economists say.
(Advertisement)
"This whole idea of decoupling has been shot down very clearly by the global crisis, which is getting transmitted through trade and the financial markets," said Shubadha Rao, chief economist at Mumbai's Yes Bank.
Industrial production fell 0.4 percent in October -- a big turnaround from the 12.2 percent growth a year earlier, the data showed, and analysts said the picture would only worsen.
Up to a few months ago as the US-led banking crisis ballooned, Indian policymakers comforted themselves, saying the country, with its dynamic and vast domestic market of 1.1 billion people, had "decoupled" from the West.
But now property prices are falling, lending has stalled, factories have cut output, exports have tumbled and share prices are down by nearly 60 percent with foreign investors pulling out 13 billion dollars this year.
"The situation is much graver than expected," said Suresh Tendulkar, chairman of the Prime Minister's Economic Advisory.
An inward-looking Indian economy escaped the 1997-98 Asian crisis largely unscathed. But since then, the country has become entwined with the rest of the world at an ever-faster pace with the United States acting as "the epicentre of economic transmission," commented the Economic Times daily.
The chain reaction from the global downturn is being felt in India's flagship 52-billion-dollar outsourcing industry where Infosys, seen as an industry bell-wether, has said it plans to freeze new recruitment.
India's second-largest exporter of IT services expects the industry's revenue growth to halve to 15 percent this year, as recession grips its largest market, the United States.
"I strongly believe we're in the midst of a huge crisis," said Pramod Basin, chief executive of business and technology services provider Genpact India.
Indian exports in October tumbled for the first time in three years, falling by 12 percent, hit by slumping demand in key US and European markets.
Car sales in November posted their biggest annual fall in eight years, sliding by 19 percent, while truck and other commercial vehicle sales -- a crucial signal of future economic activity -- slumped by 50 percent.
"The worst is yet to be seen," said Sherman Chan, economist at Moodys.com. "Losing support from external sectors, India is unlikely to see a rebound in manufacturing output anytime soon."
Economic confidence has been shaken further by last month's Islamic militant attacks on India's financial capital Mumbai that left 172 people dead, including nine of the 10 gunmen.
The targets included two luxury hotels where foreign investors stay and do deals, throwing up questions about the security of conducting business in India, which has been hit by a slew of attacks in the past year.
"There has been a definite spurt in attacks by people trying to hit cities of importance to India," said Alok Bansal, research fellow at the Institute for Defence Studies and Analysis.
The economy's troubles have been aggravated by the impact of four years of aggressive monetary tightening to combat inflation, which has been tamed by the collapse in global commodity prices.
To tackle the downturn, the Congress government announced early this month extra spending of four billion dollars while the central bank sharply cut interest rates in a two-prong move to kickstart the economy.
Authorities say they plan more stimulus moves as early as this week.
But economists warn that India, with its already overstretched finances, can in no way match China's 586-billion-dollar stimulus package aimed at boosting domestic demand and will have to largely rely on interest rate cuts.
Still, analysts say, India's woes should not be overblown.
The government expects growth this year of at least seven percent while economists forecast around 6.8 percent expansion this year and 5.5 percent next year.
Even at the low-end, such rates would be seen as turbo-charged by anemic Western standards.
"Some may be overdoing the pessimism," said HSBC economist Robert Prior-Wandesforde, who forecasts India's growth will return to around eight percent by 2010-11.
