IMPACT OF U.S. CRISIS OVER INDIA AND THE WORLD

News & Analysis from the Perspective of Capital

1. Industry fears US downgrade will hurt Indian exports
2. Expert views: How will US downgrade impact global markets?
3. The week that was: World markets crash; S&P downgrades US
4. It was our duty to downgrade the US, says S&P
1
Industry fears US downgrade will hurt Indian exports

Published on Sat, Aug 06, 2011 at 18:13 | Source : PTI

Updated at Sun, Aug 07, 2011 at 11:33

The US crisis, aggravated after the downgrading of its sovereign rating by S&P, could severely affect India on account of a dent in country's exports to the world's largest market, business chambers said today.

CII, FICCI, Assocham and FIEO expressed concerns over events in the US economy, one of the biggest markets for Indian merchandise and software exports.

The Country's second largest software exporter Infosys 's CEO and MD Kris Gopalakrishnan said, "There are fears of another recession in the US and a debt crisis in Europe."

Putting up a brave face, he said, "I believe the industry will be able to withstand another downturn (after the 2008 crisis)."

Confederation of Indian Industry Director General Chandrajeet Banerjee said, "... we shall have to see how it plays out, we are likely to have a stronger rupee against the dollar, which is not good for our exports."

Assocham said, "Indian policymakers should keep a watch and analyse the impact of Standard and Poor's downgrading."

The Federation of Indian Exporters Organisations (FIEO) chief Ramu Deora said, "The downgrading will lead to further appreciation of the rupee against the American dollar which is already facing the heat, thereby blunting our competitive edge.

"The US Government will have to increase taxes to bring in more people under the tax net to curtail its deficit which will further shrink their disposable incomes and may have an impact on India's exports to North America."

He added, "Our worst fear that exports and fourth quarter (economic growth) will be affected may come true."

Garments, handicrafts, leather, gems and jewellery would be the most affected sectors besides IT, according to Deora.

India's merchandise exports to the US in 2010-11 made up for 13% of its merchandise exports of USD 246 billion. Besides, 60% of the country's software exports of USD 59 billion during that period were destined to the US.

FICCI Secretary General Rajiv Kumar said, "Problems in the US can cause major disruption in the world and would also affect India. Our exports would be affected if situation in the US deteriorates."

He said it would have an impact on the banking sector as well.

Indian exports since January have been registering high double-digit growth, but this may not be sustainable if the US falls into another recession and Eurozone problems persist.

Ramu Deora said the government should extend help to the exporters with interest subvention, reduction in transaction cost and upgrading of infrastructure, particularly ports and road.

He said another ramification of the US downgrade will be that while Indian exports will become uncompetitive because of a stronger rupee against dollar, the country imports may rise, putting pressure on domestic manufacturing.

"...the dollar weakening will benefit imports, thereby, putting pressure on domestic manufacturing as well," the FIEO chief said.

According to official figures, India exported USD 19.53 billion worth of goods to the US in 2010, while imports were USD 16.97 billion. Exports in the first six months of 2011 were measured at USD 11.85 billion.

There were also concerns about FDI inflows into India as a fall out of the weakening economies in the US and Eurozone.

"FDI will flow to India but we need to create the climate for the same by ushering in the second generation of reforms in taxation and investment policies, including launching of GST (Goods and Services Tax)," Deora said.

The US crisis, aggravated after the downgrading of its sovereign rating by S&P, could severely affect India on account of a dent in country's exports to the world's largest market, business chambers said today.

CII, FICCI, Assocham and FIEO expressed concerns over events in the US economy, one of the biggest markets for Indian merchandise and software exports.

The Country's second largest software exporter Infosys 's CEO and MD Kris Gopalakrishnan said, "There are fears of another recession in the US and a debt crisis in Europe."

Putting up a brave face, he said, "I believe the industry will be able to withstand another downturn (after the 2008 crisis)."

Confederation of Indian Industry Director General Chandrajeet Banerjee said, "... we shall have to see how it plays out, we are likely to have a stronger rupee against the dollar, which is not good for our exports."

Assocham said, "Indian policymakers should keep a watch and analyse the impact of Standard and Poor's downgrading."

The Federation of Indian Exporters Organisations (FIEO) chief Ramu Deora said, "The downgrading will lead to further appreciation of the rupee against the American dollar which is already facing the heat, thereby blunting our competitive edge.

"The US Government will have to increase taxes to bring in more people under the tax net to curtail its deficit which will further shrink their disposable incomes and may have an impact on India's exports to North America."

He added, "Our worst fear that exports and fourth quarter (economic growth) will be affected may come true."

Garments, handicrafts, leather, gems and jewellery would be the most affected sectors besides IT, according to Deora.

India's merchandise exports to the US in 2010-11 made up for 13% of its merchandise exports of USD 246 billion. Besides, 60% of the country's software exports of USD 59 billion during that period were destined to the US.

FICCI Secretary General Rajiv Kumar said, "Problems in the US can cause major disruption in the world and would also affect India. Our exports would be affected if situation in the US deteriorates."

He said it would have an impact on the banking sector as well.

Indian exports since January have been registering high double-digit growth, but this may not be sustainable if the US falls into another recession and Eurozone problems persist.

Ramu Deora said the government should extend help to the exporters with interest subvention, reduction in transaction cost and upgrading of infrastructure, particularly ports and road.

He said another ramification of the US downgrade will be that while Indian exports will become uncompetitive because of a stronger rupee against dollar, the country imports may rise, putting pressure on domestic manufacturing.

"...the dollar weakening will benefit imports, thereby, putting pressure on domestic manufacturing as well," the FIEO chief said.

According to official figures, India exported USD 19.53 billion worth of goods to the US in 2010, while imports were USD 16.97 billion. Exports in the first six months of 2011 were measured at USD 11.85 billion.

There were also concerns about FDI inflows into India as a fall out of the weakening economies in the US and Eurozone.

"FDI will flow to India but we need to create the climate for the same by ushering in the second generation of reforms in taxation and investment policies, including launching of GST (Goods and Services Tax)," Deora said.

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2
Expert views: How will US downgrade impact global markets?
Expert views: How will US downgrade impact global markets?

The S&P has downgraded the US credit rating for the first time in history. The non-farm payroll number or the jobs data that came in was good . The number of jobs grew by about 117,000 in the month of July, much higher than what the street was expecting.

In an interview on CNBC-TV18, James Glassman of JPMorgan; Peter Hickson of UBS and Vandana Hari, Asia Editorial Director, Platts talk about what the reaction has been across global markets and what kind of ramifications this could have on our market.

Below is a verbatim transcript of his interview with CNBC-TV18’s Sonia Shenoy. For complete details watch the accompanying videos.

Q: What is your initial reaction to what has come out of the global markets, the jobs data and how you react to the S&P downgrade?

Glassman: The downgrade has been discussed and argued about for quite sometime now in the US markets and in the press. But down the road it would prove to be somewhat irrelevant for the reason that there are three rating agencies that count. The other rating agencies maintain their AAA rating. What that means is as long as those two rating agencies are the same; it’s not going to change anything.

The regulators also put out a statement that said - for purposes of calculating regulatory capital of the banks they are not going to change the way they treat treasuries. It defuses the impact it would have on the regulars. Thirdly, the investors know far more about the sustainability of the US situation than the rating agencies do as they debate this all the time. Most investors know that whatever Standard and Poor’s says nobody doubts that the US government will ever not pay the obligations on their debt.

There are two other problems here. When you look at S&P’s statement they really don’t distinguish between cyclical pressures and structural pressures. This is the problem that everybody around the world faces. When economies go into recession, deficits get very bad. Interest rates in the US are the lowest I can remember. What that tells you is that bond investors understand that the deficits will come down when the economies recover.

The issue is what the long-term sustainability is and there are long-term challenges in the US. It has to do with entitlement spending as everyone around the world faces. This is a political process and it requires a political response. I suspect that for rating agencies this is a bit unusual to get into this game to change the rating because of an opinion about the political process.

The problem is this story is not finished. Over the course of many years, the political process is going to have to continue to address this issue and I suspect they will. So, for all those reasons most people are going to shrug this off.

Q: More than the debt ceiling issue it’s the slowdown in the manufacturing data and overall consumer confidence that has rattled the street. What did you make of the better than expected non-farm payroll data that came out and do you think there would be a relief rally in the equity markets?

Glassman: It was a very confusing day. There should be a relief rally because people have become very fearful that the US was close to slipping into another recession. The job market data was seen as a relief. They do challenge some of the pessimism that we have been seeing. As the Federal Reserve has been saying, it is no mystery in why the US economy slowed. The disruptions in Japan to the auto industry really rippled throughout the world economy and the manufacturing sector those are beginning to get behind us.

The other problem is oil prices ran up very sharply earlier this year. They squeezed consumers and that is why the consumer sector slowed down. In the context of this ongoing battle about the debt ceiling and deficit, the market has become very nervous. Right now there is just a lot of fear and it doesn’t help that the Europeans are still struggling with their debt crises.

My own opinion is that the economy is going to be doing better over the second half of the year. The Federal Reserve had it right when they said these are transitory shocks that are slowing the US economy. They seem to be clearing and very soon we ought to see more news like the job market report. The job market report is very mysterious because if the US economy really is as slow as they say, it is mysterious as to why there would be much job growth at all. It challenges the notion that the US is grinding to a halt.

Q: But there are some disconcerting comments that the S&P has made where they do say that the deficit reduction plan did not go far enough to stabilize the US’ debt. How much of a ramification do you see this have on global equities?

Glassman: Equity markets have always been hearing about this possibility. The truth is it is a bit premature for S&P’s to be stepping in like this because part of the budget agreement, not only was there an agreement to cut spending now but there is a plan to revisit and try to address longer-term issues by the fall.

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3
The week that was: World markets crash; S&P downgrades US

Published on Sat, Aug 06, 2011 at 13:40 | Source : Moneycontrol.com

Updated at Sun, Aug 07, 2011 at 11:33
The week that was: World markets crash; S&P downgrades US



The week started off quietly, but ended with a boom. Financial markets worldwide toppled towards the end of the week due to fears of a global recession. But the US took a big hit on Friday, with S&P downgrading its credit rating.

In a dramatic reversal of fortune, the United States lost its top-notch AAA credit rating from Standard & Poor's on Friday on concerns about growing budget deficits. This came through even though the US Congress had passed a debt deal on Tuesday.

At the 11th hour, the US House of Representatives passed a Bill to increase the country’s debt ceiling . The vote of 269 to 161 was relatively strong in support of the plan, which would cut more than USD 2.1 trillion in government spending over 10 years while extending the borrowing authority of the Treasury Department.

However, financial markets worldwide saw the worst fall since the financial crisis of 2008 , with more than USD 2.5 trillion has been wiped off the value of world stocks this week on mounting concerns of a global recession. The Dow Jones Industrial Average fell 512 points, which had a domino effect, leading to markets all over the world rallying in the red .

Due to these volatile conditions, investors heavily piled onto gold, pushing the metal to its lifetime high of USD 1681 per ounce . Gold has risen more than 17% this year because investors also use the yellow metal as a hedge against inflation and political and economic uncertainty. Oil, on the other hand has dropped nearly 12% this week to USD 83 , its lowest since Nov 26.

Back in India, the Government delivered a blow to diesel car owners , indicating that it might do away with the subsidy enjoyed by such vehicle owners. Currently, the Government gives a subsidy of Rs 6.08 per litre on diesel. But, this move will not help pull down inflation.

After dropping to a 20-month low in mid-July, food inflation inched up to 8.04% for the week ended July 23. This was mainly due to the expensive prices of onion, fruits and milk.

In a bid to provide iron ore to steel producers in India, the Supreme Court has allowed state owned NMDC to operate its two mines in the Bellary region of Karnataka, under certain conditions.

On the political front, Finance Minister Pranab Mukherjee met with top leaders of India Inc to discuss the state of the economy, crucial reforms and policy changes. A few people who attended the meet are Ratan Tata, Anil Ambani and Sunil Bharti Mittal.

On Friday, Congress president Sonia Gandhi was admitted to a hospital in the US to undergo a surgery for an undisclosed ailment. In her absence, Rahul Gandhi will co-head the political party.

Results this week were subdued; Sun TV Network , Bharti Airtel and DLF were a few companies that posted their first quarter results. But the highlight of the week was Cognizant , which recorded higher than the top four IT firms in quarterly revenue growth.
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4
It was our duty to downgrade the US, says S&P

Published on Sat, Aug 06, 2011 at 10:00 | Source : Reuters

Updated at Sat, Aug 06, 2011 at 12:17


The top official behind Standard & Poor's historic decision on Friday to downgrade the United States' prized triple-A credit rating said it was his company's duty to make such a hard and controversial call.

S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The decision could eventually raise borrowing costs for the American government, companies and consumers.

"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers told Reuters in an interview.



S&P has been under a lot of fire from the Obama administration for basing its decision and analysis too much on the acrimonious debt-ceiling debate that led to an eleventh-hour agreement on Tuesday to avert a US default.



President Barack Obama was briefed in advance on Friday on Standard & Poor's intention to downgrade the United States' top-notch AAA credit rating and has continued receiving updates from top aides, an administration official said.

Obama left the White House for the Camp David presidential retreat outside Washington in late afternoon just hours before S&P's announcement. "He was briefed before he left for Camp David and has been receiving updates through the night," the official said.

Government sources have also accused the agency of making a USD 2 trillion error in its calculations about US finances, and later removing that number from its estimates while sticking to its plan to cut the US credit rating.

Beers, who is the head of sovereign ratings at S&P, acknowledged that the agency's decision was highly influenced by a change in Washington's "political dynamics" that hampered members of Congress from reaching a more comprehensive plan to cut the deficit.

"From the standpoint of fiscal policy, the process has weakened and became less predictable than it was," he said.

"That's the story around the difficulty highlighted in the debt-ceiling debate, cobbling together some type of fiscal policy choices."

Asked about news reports that there had been a back and forth between the agency and the government during the past 24 hours over the justification of the decision, S&P spokesman John Piecuch said the agency always gives a debt issuer the opportunity to review the announcement before it is made.

"They can go through it and look for numbers, look for calculations -- that is what happened," Piecuch said.

Any change in those calculations would have been taken into consideration by S&P's committee before its rating decision was made public, Beers said.

Beers said one contributing element to the decision was the downward revision of US GDP numbers a week ago. The data showed that the US economy almost stalled in the first half of the year.

"The recession was deeper than what everybody thought a year ago and we think that this raises the possibility that the recovery will continue to be weak."

Source http://www.moneycontrol.com/

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