US sub-prime crisis to hit India, China

New Delhi, Sept16 : The slackening of US economy due to the sub-prime mortgage crisis will significantly impact the Indian and Chinese economies, which will find difficult to insulate themselves from the global slowdown, a survey said.

External trade in merchandise and services accounts for 45 per cent of the Indian economy and could impede the Indian growth story, it said, adding that the external sector has been growing at 30 per cent over the last four years.

In a survey conducted by industry body Assocham Business Barometer poll of 319 CEOs and CMDs, it revealed that 86 per cent of them did not agree with a premise that growth in Indian economy is largely domestic driven.

Almost 72 per cent of the CEOs said any downturn in American consumer spending and the employment growth will have a direct impact on the European, Chinese and Japanese economies with which India finds itself largely integrated.

''The problem of weakening housing prices in the US and the sub-prime mortgage crisis are indicative of declining trend of aggregate demand and consumer spending. This could decelerate the overall growth of US economy as consumer spending constitutes 70 per cent of the US's GDP,'' said Assocham President Venugopal Dhoot.

An official data stated that about 60 per cent of India's exports go to the US, Europe, China and Japan which have largely seen export-led growth mostly influenced by high-spending American consumers.

The signs of slowdown in US economy have started appearing. The non-farm payroll numbers in August have shown declined for the first time since 2003 as jobs fell by 4,000 in last month. Private payrolls growth has slowed to average 70,000 in the past three months from 1,65,000 in the second half of 2006.

While only 23 per cent of the ABB respondents felt that the strong Asian growth will sustain the economic growth in the event of a slowdown in the US.

Seventy-six per cent of them said a widespread slowdown in world economic growth is inevitable.

The recent UNCTAD Report has also warned that present slowdown in the US economy caused by reversal in previously booming housing market could disrupt the global economic expansion.

Almost 79 per cent of the CEOs surveyed felt that the economic conditions in the Indian economy are poised for slowdown. Sharp slump in the growth of industrial production in July 2007 at 7.1 per cent against 13.2 per cent in same month last year, is seen as an early indication of deceleration in pace of economic expansion.

The manufacturing sector which accounts for 79.3 per cent of the index of industrial production has taken the maximum hit with almost 50 per cent reduction in growth in July from 14.3 per cent in 2006 to 7.2 per cent this year. The slowdown in manufacturing is prompted by slack in machinery, transport equipments, metals, minerals and textile sector during April-July 2007 attributable to high interest rates and rupee appreciation.

The capital goods sector has registered 12.9 per cent growth in July this year as compared to 18.3 per cent same period last year.

Ninety-one per cent of the CEOs were concerned about slowdown in manufacturing growth as it is a job-oriented sector. Government is planning to shift labour from crisis-ridden agriculture sector to manufacturing sector.

About 76 per cent of the respondents said export growth is an important contributor to GDP growth of the Indian economy. With the merchandise exports growth slowing down to 18.52 per cent in July 2007 compared to 40.27 per cent growth in July 2006, it would be difficult to maintain the growth momentum.

As rupee appreciated by 8.2 per cent during April to July, the export growth in rupee terms was mere 3.10 per cent this year against the growth of 31.77 per cent in the month of July previous year.

UNI