India safe, for now, from global financial crisis

India is likely to emerge unscathed from the financial crisis sweeping the globe, thanks to the structure of its economy, exports and financial markets, feels a senior official of the IMF.

"India is increasingly a part of the global economy and so it cannot be de-coupled and it does move in sync with rest of the world... In our view, there are a few things going on in India that will likely insulate it from the worst of the effects that would be felt in other countries," IMF Senior Adviser and Mission Chief for India Kalpana Kochar said in response to a question.

"Domestic demand in India is very strong, where you still have investments that are growing very strongly. Consumption, especially of durables, has come off a little bit as interest rate has increased from last year and are beginning to bite, Kochar said in a teleconference.

Investments, which overtook consumption as the key driver of economic growth in 2003-04, has increased 20 percent from last year's level.

"But we do think that overall domestic demand growth is strong and that is going to keep growth going," she added.

“India is plugged into the world trading system but Indian exports have been diversified both in terms of goods and markets... On service exports... we don't have a whole lot of strong evidence but we do believe that impact could go either way”, Kochar noted.

"If in fact US companies are looking to cut costs, it could mean they outsource more. So, India could benefit from that," Kochar maintained.

"Overall in the spectrum of countries that are likely to be affected by this crisis, India is probably a bit further down," she added.

Another senior official of the IMF stressed that the strength of the Indian rupee is pegged to the strong fundamentals and that the Fund is more concerned about the "costs" of intervention by the central banks.

"The strength of the rupee reflects the strength of the Indian economy which is one of the fastest growing economies. It has one of the highest rates of productivity growth in the region, if not worldwide," said Charles Kramer, the Division Chief for the Asia-Pacific.

India has excellent prospects in terms of growth and a very strong corporate sector...which has shown a significant degree of resilience," Kramer added.

"The intervention (by the RBI) is basically to smoothen adjustments in exchange rates... Our concern with the intervention has more to do with the costs," Kramer said.

"When the RBI intervenes or the central banks intervene, generally they accumulate foreign exchange assets and carrying these assets has costs. While the cost is not very high right now, eventually the cost could increase in an environment where the authorities are trying to make progress... on the fiscal side. That could be undesirable," Kramer maintained.

The official said the prospect is bright for India in terms of economic growth -- about 8.75 percent this year and about 8.25 percent for the next fiscal year.

"The main driver of growth now is domestic demand, especially on the investment front. We have seen evidence of things slowing down a bit, but there are a lot of fundamental underlying strengths there -- strengthened corporate profits and certainly a lot of appetite for investment on the corporate sector side," Kramer remarked.