India likely to be the first to come out of financial turmoil

Even as G20 leaders concluded deliberations on ways to resolve the global financial crisis, a prominent US think-tank, perceived close to the American establishment, predicts India will be the first developing economy to emerge out of it and could use it as an opportunity to claim an enhanced role in international financial institutions.Despite India not emerging unaffected by the global financial crisis, and its long term growth prospects remaining uncertain, it may be in a better position to bounce back to its potential compared to many other developing economies, said Adam Segal, the Maurice R Greenberg senior fellow for China Studies at the New York-based Council on Foreign Relations.
In a policy paper on the present economic crisis and its impact on India, he said: ‘India has been hurt by the global financial crisis, but it may be better positioned for a quick recovery and for future growth than many of the other developing economies as the Indian financial sector is relatively insulated, the rupee is not fully convertible and Indian banks did not have significant exposure to sub-prime loans in the United States. “However, its stock market has been badly hit as foreign institutional investors have sold almost $10 billion of their investments in Indian companies to cover losses accrued in their home markets,” he said.
Admitting there are a lot of issues of concern and the Indian economy will be unable to avoid the fallout of a US and European recession, he said some industries are more vulnerable than others.
“IT, financial services and real estate are likely to be hit the hardest, although textile and garment sectors will also be affected by lowing exports and rising costs of capital.
India’s auto industry faces bleak prospects, with rising costs, reduced consumer credit and falling demand.Rising unemployment is a concern, and there have been some high-profile job cuts affecting the middle class,” he said, alluding to the Jet Airways episode.
There has also been an intense liquidity crisis in the Indian economy, created by the tightening of global credit markets and the withdrawal of FIIs, as well as earlier government efforts to fight inflation and prop up the declining rupee. However, Segal argued, there are reasons for optimism about how quickly India could recover. “Domestic demand could remain a strong driver of growth; farm income and rural employment are both up and consumers received large tax breaks in this year’s budget. India imports 80 percent of its oil, so it will benefit from crude prices hovering at around $70 a barrel as well as from the declining prices of other commodities,” he said. About the opportunities for India, he said that international institutions such as the IMF and World Bank will be remade to reflect the present balance of power, and that India may be able to turn this crisis into a “permanent place at a new high table.”