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US Economic Slowdown and India

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Extent and geographical spread unknown. Result: Less spending, including on imports ... middle class explosion. growing consumer credit. diversified trade market ... – PowerPoint PPT presentation

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Title: US Economic Slowdown and India


1
US Economic Slowdown and India
2
Source of global economic boom
  • Long housing
    boom in US

  • Positive wealth effect
  • Americans
    borrowed more money
  • Spent more
    than disposable income
  • US ran a current
    account deficit (M-X)
  • Other countries
    exports to US increased (X-M)
  • Supplier country exports also increased
    (central Asia, Africa, Latin America)
  • Forex reserves of exporting countries
    financed US deficit and kept i low
  • More
    spending by Americans

  • Global economic boom

3
Why the US economic Slow down?
  • Known Known

  • Housing bubble burst

  • Negative wealth effect

  • Less spending
  • Known Unknown
  • Negative
    consumer sentiment
  • Prolonged
    spending slowdown
  • Unknown Unknown

  • Sub-prime financial crisis
  • Massive
    financial losses
  • Extent and
    geographical spread unknown
  • Result
  • Less
    spending, including on imports

4
How will US slowdown impact other countries?
  • Will depend on the economys exposure to US
  • Both the direct and indirect impact has to be
    seen
  • Typically in a period of slowdown, countries try
    to
  • a. follow expansionary
    fiscal policy
  • b. lower policy rates
    and,
  • c. weak exchange rates
  • Hence, the impact will also depend on the
    flexibility in using the above means
  • Capital markets are more sensitive to global
    investor sentiments

5
How will US slowdown impact India?
  • India is a strong domestic demand story
  • Growth is propelled by
  • rising disposable incomes
  • middle class explosion
  • growing consumer credit
  • diversified trade market
  • Domestic saving at 35 of GDP it has developed
    strong skills
  • Capital has not really moved out of India
  • Scope for strategic business focus exists
  • 8 growth is clearly feasible despite US slowdown

6
Then why all this concern?
  • Sectoral impact will be present this will have
    political economy ramifications. But,
  • Flexibility in terms of fiscal stimulus limited
  • Domestic inflationary pressures will also reduce
    RBIs flexibility to reduce interest rates
  • This means rupee will be under pressure of
    appreciation
  • However, despite this lack of policy flexibility
    Govt. may give sops with elections in mind
  • Capital markets will in the short run respond to
    global investor sentiments may thus, act as a
    damper

7
Thank You
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