Exports in choppy waters

Every time the Eurozone or the US economy got a chill the Indian IT sector would sneeze. It is hardly surprising that such is the case this time around too. For quite a while it has been clear that the US economy is having trouble shaking off its slough of despond and that the Eurozone, another major market for the software sector, is moving closer to the brink as Greece threatens to unravel its fragile unity. The present global uncertainty, however, could pose major systemic challenges affecting the performance of not just the country's software sector. Not the least because the governments in these regions do not appear to be in control of the situation. The Eurozone, after all, accounts for 20 per cent of India' s merchandise exports while the US is still crucial for software exports as it accounts for 61 per cent of the total. Meanwhile, it is anyone's guess whether the $400-billion plan to create jobs in the US will succeed in breathing life into its economy and boost world trade.

So, a section of the Indian government is worried, if an internal note doing the rounds is any indication. According to that assessment, GDP growth may be adversely affected if the 17-country Eurozone fails to get out of its deepening troubles and if the US does not experience an economic revival. Admittedly, of the southern Europe members and Ireland, only Spain has a significant share (11 per cent) in India's exports to that region, but the worry is that financial contagion may affect Western Europe, traditionally the major markets. True, there are others with a different take on the situation. Dr C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, for instance, does not think software exports will be affected, or that GDP will take a hit. While clearly striking a different tone from the internal note, the optimism may be borne out for the short term because US firms will still find it more efficient to outsource software work to Indian firms than hire domestically despite the Obama administration's disincentives to outsource.

But if the Obama plan for job revival does not work, for whatever reason, then the cries for protectionism may get more strident, affecting software exports. As for merchandise exports, especially textiles, competition from later entrants to the American market have done more to chip away at India's market share than have the US' economic woes. Be that as it may, the internal note does sound the right warning and policymakers would do well to pay heed and ensure some strategic policy-play to offset what could become a deepening crisis in the most advanced economies of the world. But a Government caught up in its own internal bickering doesn't inspire any confidence that it is equal to the task.

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