Global financial crisis not to cut short Indian growth story: Dawnay Day AV Analytics

London - 14 March 2008

The ongoing turmoil in the global financial markets would impact the country’s bourses but not the strong growth dynamics of the Indian economy which remains largely decoupled even years after its integration with the global market, according to a research report by leading Indian financial analytics firm Dawnay Day AV Analytics.

“India’s GDP has experienced a high growth rate of over 9% in the last three years….The growth story is unlikely to be cut short by a slowdown in the global economy, mainly because of the strong cushion of extra cash available in the economy,” says the report titled ‘Interlinked Stock Market Inside a Decoupled Economy’ and presented by executive director Shailesh Dhuri here today.

While the Indian stock markets - that have traditionally followed the cues from global bourses and benchmark indices (eg S&P 500) in hard times - would be substantially influenced by the mayhem in the financial world, the real economy would remain largely shielded due to its protective armours - a healthy banking sector, strong consumption and investment demand, bulging forex reserves and relatively insignificant role of trade in GDP growth.

Even a flight of hot money is unlikely to dash the great Indian hopes given the large accumulation of spare cash (8.3 % of GDP) and forex reserves ($290.9 bn as of February 8, 2008) in the economy, Mr. Dhuri said, addressing a conference on the impact of a global downturn on the subcontinent, more specifically on China, India and Pakistan.

Presenting India’s case, he said the domestic bourses, which were driven by strong P/E expansion in the later part of the five-year rally till January 2008, has entered a phase of corrections post January, thus following a long-term trend of increased correlation during times of high volatility.

Drawing comparisons with the US, the report shows that India’s external debt position and twin deficits (a measure of external and internal claims on government) are far healthier than that of the largest economy in the world. As of FY2007, India’s external debt as a percentage of GDP was 16.47 per cent against 90.26 per cent of the US. These further buttress the claims of a minimal impact of any external shock on India’s long term growth prospects, but points a finger to the unnecessarily conservative ratings of the country from global credit rating agencies.

“Going forward, India’s rating is only expected to improve, implying a lower risk premium over the long term,” the report concludes.

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