Even as the government sought to calm the nerves of investors and India Inc., the Prime Minister's Economic Advisory Council Chairman, C. Rangarajan, on Monday maintained that the U.S. sovereign rating downgrade by Standard & Poor's (S&P) would adversely impact exports and moderate capital flows into the country.
“More than the downgrade, the impact for the rest of the world will be the slow pace of recovery in the U.S. … In the first half of the current calendar year, the growth rate in the U.S. was 1.5 per cent. Perhaps for the year as a whole, other growth rates may not be much higher than that. That's a very, very slow pace of recovery and that has implications for the world in terms of capital flows, in terms of trade flow,” he said.
Commenting on the developments, particularly the slump in the markets during the day, Chief Economic Adviser Kaushik Basu echoed the views of Finance Minister Pranab Mukherjee saying the sell-off on the bourses was a panic reaction and there was no need for any policy intervention at present.
“Right now, we don't need any special measures ... Should the need arise, the government and the central bank [the RBI] are in a position to step in ... But barring the immediate reaction to what is happening now, the India story remains robust,” Dr. Basu told the media here.
Although the U.S. rating downgrade was a matter of concern, people should not overreact to the development. “The global event is a matter of concern, but not a matter of alarm, because the long-run story remains more or less intact.”
Dr. Basu argued that the stock market had over the past few months already factored in the troubles in the U.S. “What we are seeing now is a fluctuation ... reaction to this [S&P] news. In the long-run, I do believe, the market trend will remain more or less the same and people should not overreact to it,” he said, while conceding that in the event of a “possible” slowdown in the U.S. economy, Indian exports could suffer, the country being one of its largest trading partners. “[However], the impact will be [in the] short-run.”
India, safe haven
Striking a positive note, Dr. Basu pointed to signs of the tectonic plates of the global economy shifting towards the east (China and India). “In the next months and in the medium-to-long run, there will be global capital in search of safe haven ... We [India] can become the safe haven that a lot of global capital will be seeking.”