India feeling the effects of the financial crisis

Sources

Indian textile industry feels the crunch, Financial Times; India’s IT executives fear worst slowdown, Financial Times; India optimistic about outsourcing, despite global crisis, The Industry Standard; Industry’s Markets Will Be Among the First to Recover, Bhave Says, Bloomberg

India’s economy, the third largest in the world, is being hit hard by the credit crisis. Its textile industry, for example, has laid off an estimated 700,000 workers in the last six months and India’s trade secretary has said that textile companies will likely cut an additional 500,000 jobs in the next five months in order to survive the current economic downturn. The outsourcing industry is also bracing for the worst. The chief executive officer of Infosys Technologies, a major information technology firm headquartered in Bangalore, India, stated that India is experiencing the worst slowdown he has seen in his thirty years in the domestic outsourcing industry. This year’s growth projection is just 13 to 15 percent, less than half of the growth rate the industry has sustained for the last 10 years.

Some government officials remain optimistic about the condition of India’s economy, however, at least in terms of its financial markets. The chairman of Securities and Exchange Board of India claims that India’s markets will be among the first to recover from the financial crisis. In doing so, he said, India will likely climb in the world’s economic standings, placing more pressure on the country to be a world leader. Although the Bombay Stock Exchange Sensitive Index (Sensex) dropped by more than 56 percent this year as a result of the US mortgage meltdown, the chairman says that the only overseas companies getting out of the market are the ones that are overleveraged and, overall, India’s financial system is holding steady.

Textiles are the country’s second largest employer, after agriculture, and the industry is employs at least 50 million people in India. The industry also accounts for approximately nine percent of India’s gross domestic product, but in October it reported a 12.3 percent decrease in exports from the level it was at in the same period last year. High energy costs, increased prices for leather and cotton and decreased demand from its largest customers—the United States, European Union, and Japan—are responsible for the industry slowdown.

The outsourcing industry brings in $40 billion of offshore revenues each year, making it one of India’s biggest export industries. The industry encompasses a broad range of activities, including handling offshore clients’ computer systems, offshore clients’ accounts and even some of those clients’ business processes, including customer mortgage and insurance applications.

Questions

(1) What is the true state of India’s economy? Will it, as one government official claimed, be among the first to recover and emerge as a world economic leader? Or, as another government official said, experiencing one of the worst slowdowns in three decades and in bad shape?

(2) Do government officials have reason to be optimistic about India’s financial markets?

(3) How will India cope with the massive job losses it has incurred and will incur in the next few months?