Optinomics

A reader of the Economist magazine while commenting on an article about the Indian economy has just coined an interesting word – Optinomist, meaning ‘optimistic economist’! (Read the article and the comments)

Will the Indian Economy suffer because of the global recession? A number of articles in the press that address this question fall in the ‘Optinomics’, rather than the Economics category. There are a number of standard points in any Optonomist argument but I would like to address the most common one, which goes something like this:

-India has a large domestic market which generates a strong internal demand
-Exports contribute to only 15-20 % of India’s GDP,

Hence growth will not be affected by the downturn in countries like the USA.

A good example of this logic is Shashi Tharoor’s article for the Daily Star (Lebanon), which is entitled ‘The global recession will stop at India's border’.

India’s dependence on the global economy is not limited only to trade in goods and services. So while it is true that India generates a strong internal demand and does not rely heavily on exports, it does rely heavily on foreign funds.

Shashi Tharoor says, “Investors are returning, and foreign direct investment inflows this fiscal year are set to exceed the $25 billion received in 2007-2008.”

That sounds reassuring, but what about Indian companies ? Apart from domestic bank credit and capital markets,they depend on ECBs/FCCBs ,ADRs/GDRs and Private Equity as sources of funds. Let us take a look at what has been happening with ECBs during the last two calendar years. RBI data throws up an alarming trend: a drop in borrowings from $33 billion in 2007 to $ 22 billion in 2008.A month by month comparison for the two years gives us a better picture

Source: Reserve Bank of India, External Commercial Borrowings

The reason for this huge drop is quite obvious: it is due to higher cost of funds, cautious bankers, and beleaguered financial institutions; in other words, the global recession.

It not only ECBs which will have an effect on growth. This article in the Financial Express based on a report by SMC Capital, tells us that ADRs/GDRs by Indian companies have also shown a sharp decrease.

The article goes on to tell us “In a nutshell, the ability of Indian corporate to raise funds via high profile instruments such as ADRs, GDRs, ECBs, FCCBs, IPOs, Private Equity has fallen from $ 63.17 bn in 2007 to $ 33.73 bn in 2008 to date, indicating a fall of -46.61%.”

With a US$ 30 bn shortfall in funds as compared to the last period, we cannot afford to swallow the Optonomist line and believe that the recession will ‘stop at India’s border’.