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India: Opportunity in adversity

Sep 24, 2001

"Either you are with us, or you are with terrorism". The message from the world's most powerful nation was loud and clear. Probably, the implicit interpretation that Mr. Bush wanted to send out was one hand there is an opportunity waiting to associate with US or be ready to face its wrath. Countries are rushing to include their name on the list of America's new ally's in a hope that the newfound relationship would reap rich dividends in time to come. Mr. Musharraf who had forwarded his list of demands got a carrot yesterday in terms of lifting of sanctions as an incentive to associate with the US. The world's geopolitical scenario would never be the same again.

Though the actual manner and impact of US retaliation is anybody's guess at this point of time one thing is certain. The impact would obviously be felt on the American economy and that would percolate down to the global economy. The US is somehow managing to avoid the word "recession" for quite some time now. (As per the definition recession is experienced when two consecutive quarters show a negative growth in GDP). The US economy was already in precarious position, but hopes of a sharp U turn are now turning soar. Markets round the world are hitting new bottoms in view of the threat of a global recession. An instant layoff of 70,000 personnel announced by the airline industry in less than a fortnight could just be an indication of how bad things can get for the economy.

However, giving due consideration to all concerns and impact on the Indian economy, there could be a hidden opportunity waiting for us based on two simple counts.

First given the fact that our share in the world trade is still negligible and therefore the impact of the global slowdown will only be marginal on the economy. Our exchange reserves unlike in the last crisis are fairly comfortable. In fact an improvement in Indo-US relations could well boost our exports.

Second if the world economy has to slowdown, developing countries like India and China could increasingly become attractive destinations for portfolio managers. Agreed that in the immediate run the country is witnessing flight of capital due to panic redemption. However, if we are able to log attractive growth numbers through fast track reforms we may well be on the way to become an investment haven.

The government has already increased FII investment on par with FDI limits in effect giving two-way fungiblity to foreign investors. This could effectively mean a sharp rise in quality papers as floating stock gets sucked. In the panic the markets have completely ignored this important development.

All we require is to push reforms as promised to global investors if we were to convert this threat into an opportunity.

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