80th Annual General Meeting
February 15-16, 2008

Address by Dr Subir Gokarn, Chief Economist, Standard & Poor's (Asia Pacific) Chairman, Knowledge and Innovation Council, CRISIL

Thank you for inviting me to speak at this panel. As I was clear about the President's opening remarks and Prime Minister's inaugural speech this morning, the global environment is being perceived as potential threat to otherwise relatively optimistic domestic scenario. Let me start by trying to place this whole idea of global slowdown in context because we have to understand what exactly is going on in the global economy, before we start drawing any conclusion about how it is going to impact on the Indian economy.

Let me start with US which is obviously at this point the eye of the storm issue. The US at this point, my colleagues who monitor the US sitting in New York, are of the view that it will go into recession. It will see negative growth for 2 consecutive quarters which is the technical definition of recession, about -0.7% growth in first quarter of this year that is current quarter and similar decline in GDP in the second quarter. But after that, as a result of both the stimulus that the federal reserve has provided through interest rate cuts, which are expected to persist for some more time and the fiscal stimulus package that has just been approved by the Congress which will put $150 billion or so directly into consumer pockets. The third quarter will start to see recovery and the overall performance for the year 2008 is expected to be positive 1.2% growth. So, we have seen the macro economic impact of the housing decline which itself is related to certain turbulence in the credit markets and so on, it is starting to show up. The main driver of the slow down is the housing sector, residential construction in the US is expected to decline by about 25% over the course of 2008. Consumer spending which is something that should concern all of Asia including India is expected to decline only in one quarter, that is in quarter two by about 0.3% and the reason for this is, of course, that the fiscal stimulus is going to stimulate consumption starting in the second half of the year. From the US perspective, this looks like relatively uncomfortable first half but fairly quick recovery in the second half and associated with this are policy measures that is the interest rate cuts, the fiscal stimulus but also the consequence in terms of moderating both oil and commodity prices. This is very important because falling oil and commodity prices are actually going to benefit the rest of the global economy. So, it is mitigating or moderating factor as far as maintaining stable growth is concerned.

Let's keep in mind that global economy today is fundamentally different than it was 7-8 years ago when we saw the last US recession. Between 2004-05 measured in purchasing power per returns, China contributed 30% of incremental global GDP, the US contributed 14% and India contributed 12%. So when we look at the high growth years of the last 3-4 years, India's contribution to global growth has increased substantially and that, of course, is seen all over the profile elevation of Indian economy globally and it is very tangible but 56% of global growth between 2004-06 was contributed by these 3 countries. China and India contributing 44%. Compared to even 10 years ago the skew was much greater in favour of US, the US actually went into slow down, the impact on the global economy, just in quantitative terms, was far greater historically than is going to be the case now. China and India are driven substantially by domestic factors. We have already heard reference to that in the Prime Minister's address, the domestic drivers are far more important in the performance of the Indian economy. China is an interesting case because we all associate China very strongly with export to US and yes it is still huge export of the US as measured by bilateral trade surplus as China has with the US. But over the last 10 years, this dependence has been changing domestic drivers in terms of both investment spending and consumer spending have become far more important. In the event of relatively mild US recession, which is the scenario we are working with, the impact on Asian exports including China will be felt, it is not going to be zero impact but it is not going to be either very significant or very persistent. So, this basically points to scenario where the internal dynamism of the Asian economies keep in mind that Asia now with India and China as a region is growing at about 7- 7.5% a year and even worst case, pessimistic scenario in the event of US recession two quarter negative growth is that at worst it will go down to perhaps 6.5 for the region as a whole with China close to 10%, India around 8- 8.5% again predominantly driven by very strong domestic factors. If you have to look at the question that the session is raising, is India cushioned against the global slowdown ? In the event of relatively mild US slow down, I think the answer would be yes, that the strength of domestic drivers and the increasing alignment of Asian economies with each other is going to keep momentum both in the region and in our domestic economy quite strong. So I don't really see the need to significantly downgrade our outlook for Indian GDP growth based on the eventuality of moderate US recession, we could visualize worst case scenario but I don't want to do that here, but that is as far as the business cycle goes, that is as far as the next two quarters and subsequent half goes. Let's not forget that there are significant threats in the global economy that have nothing to do with the business cycle per se, that do pose some challenges and Naina referred the food prices , I think that is absolutely fundamental, we have over the last two years seen very significant up trend in food prices. Wheat is the most visible example, but we have started to see that in oil seeds as well. This is actually going to pose the global threat, those of you who were following the coverage of the Chinese new year celebrations last week, would recall that much of that was painted by both this horrible whether that they had but more so with the fact that food prices have risen dramatically in China, particularly pork prices which have gone up by 50% over the last 6-8 months. This is starting to show effect in other parts of Asia including Indonesia and the potential for political trouble is quite high. We are in a relatively comfortable situation today in India because we had very good monsoon and that has moderated price increases but one bad monsoon could tip balance and they will then be vulnerable to all of the drivers of the global food inflation. Number of factors are important. One is persistent drought in Australia, second is the diversion of oil seed in particular to bio-fuels and third which is something we have not picked up on yet is the fact that high energy prices are also affecting fertilizer prices locally and this is resulting in lower utilization of fertilizer and therefore lower yields across global production. So number of threats that are visible on the agricultural front and that is something from medium to long term perspective we have to be very careful about.

Let me conclude with another reference to the challenge vs opportunity or threat vs opportunity depiction of global slowdown. The last slowdown in US in 2001 was a trigger for a very significant opportunity for Indian companies, the explosive growth in outsourcing in the ITES sector. It really emerges from the fact that in that situation US companies started to look for opportunities to cut cost across the board and having established relationship with software providers, with IT sector, found it relatively easy to move from pure IT relationships to much broader spectrum relationships. So that was an opportunity that India gained because of business cycle downturn in the US. It is not unambiguous relationship similar public private partnership may arise in current slow down as well. So lets not rule that out. I think there are opportunities to be explored.

Let me conclude simply by reemphasizing the point that strength of domestic drivers in India, the combined impact of Indian and Chinese growth on Asian dynamics and what I would call the growth neighbour hood that Asia has emerged as to provide the region and, of course, India with significant cushion against recession, if things get much worse then we will have to rethink that proposition but for now I am not losing any sleep over this.

Thank you.