Will India sneeze when US catches a cold?

The adage 'what goes up, must come down,' becomes true in the case of
recession that follows vibrant economic activities that make people think would
continue forever.

By standard definition recession is a decline in the Gross Domestic Product
(GDP) for two or more consecutive quarters in a year.

Many economists, however, differ to believe this definition since they feel
it excludes factors such as unemployment rate and consumers spending that affect
the economy.

• The signs of an economic slowdown include:
• Decreased consumer spending
• Decrease in manufacturing yield
• Rising unemployment
• Dip in personal income
• A wildly fluctuating stock market
• Inflation

Why it happens

Consumer demand is usually high in a growing economy. To meet this increased
demand, producers optimize available resources, including labor. The greater
demand for labor brings more wages to people.

More wages increase consumer confidence, which lead to higher consumer
spending. Investors invest in stocks on rising consumer demand, resulting in a
bullish market.

However, the economy will not keep expanding indefinitely; it will contract
for a while. A period of contraction is known as a recession. When a severe
recession lasts longer, it is called a depression.

According to the International Monetary Fund, (IMF) global recessions occur
over a cycle lasting eight and 10 years.

What causes recession? Many aspects could affect the economy. For example, to
satiate the growing consumer demand, manufacturers may tend to overproduce.

Another reason could be layoffs and rising unemployment. Insecure jobs or a
slackened job market tightens consumers' purse strings, affecting the real
estate market, which will in turn lead to a dip in investments. These along with
other factors take the economy to a recessionary situation.

The current situation in the US was triggered by defaults on sub-prime home
mortgages. Sub-prime is a high-risk debt offered to people with poor credit
worthiness or unstable incomes.

Major banks saw red after people failed to repay loans. The huge number of
foreclosures shook the US economy. This, coupled with the rising oil prices at
over $100 a barrel, slowed down the economy.

Open markets, and increasing globalization and economic global connectedness
now mean that the ramifications of the recession in the US could be felt in the
rest of the world.

Effect on India

The IMF has predicted that the US would experience a 'mild recession' in
2008, from which it will slightly recover in 2009. The IMF has estimated the
impact of global financial turmoil following US sub-prime crisis at $1 trillion.

A slowdown in the US could increase the risk of a global chain reaction
triggered by decline in consumer spending by Americans.

The US sources a lot of its products and manufacturing from other economies.
A decrease in US' demand would mean fewer manufacturing orders for these
countries.

The American population, which accounts for about five per cent in the world,
consumes almost 25 percent of the world's resources, either as raw materials or
as finished products.

Compared to the developed nations, the impact of the US recession would be
lesser in emerging economies like India and China, IMF said.

Thanks to offshoring, India had registered better economic growth during the
earlier US recession that followed the terror attack on the US in 2001.

American billionaire investor George Soros also felt that India would not be
affected much by the current recession.

“China, India and some oil-producing countries are experiencing dynamic
developments, which may not be significantly disrupted by the financial crisis
and a recession in the United States,” he says in his latest book, The New
Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

The Indian economic growth is likely to slip to 7.9 percent in 2008 from 9.2
percent in 2007. In 2009, the Indian economy would expand at a slightly higher
rate of eight percent, the IMF's World Economic Outlook said.

However, Stephen Roach, chairman, Morgan Stanley Asia, said, “India would be
affected if the US goes into recession, you are going to feel it in Asia, you
are going to feel it in India.” It is still early to tell which course the
Indian economic would take a few quarters down the road.

Priya Padmanabhan