The impact of both under-currents and over-currents of the US Sub-prime crisis has yet to be fully assessed even by those who are known for their quick-headed optimism; who clearly admit that it will take quite some more time to fathom its impact on the world economy, as such. Its impact has, however, been felt across the globe. There are other manifestations rearing their heads like inflation and rising crude and food prices which have only accentuated its impact. The combination of all these deadly factors would need to be watched with serious concern, it deserves. According to knowledgeable sources, the crisis is unlikely to relent and is even aggravate and peak in 2009 around the time, a new US President takes over.

It would be nave to think that the present situation of closest approximation to "Great Depression" would not seriously impact the global Textiles and Clothing (T&C) exports. I feel it is imperative to assess and forecast as to what is going to be likely picture of the world economy and T&C export trade, with specific reference to India.

US Leading World into Recessionary Trends

There are continuing and growing stories on slowdown (which is the best way to avoid saying the feared word "recession") in the US. Though the Federal Reserve has repeatedly announced cuts in interest rates as it tries to bolster an economy pummelled by the collapse of sub-prime mortgage market, there is a continuing downturn of the economy. According to the latest information, the US employers have shed as many as 80,000 jobs in March this year alone, which is the third consecutive month that the labour market has contracted. It is also the steepest drop in employment since March 2003. In fact, if we take into account the similar cuts in January and February, the total number of job losses in the first three months of the current calendar year crosses 232,000.

According to Paul Ashworth at Capital Economics, "Conditions are already bad in the labour market, but if history proves to be a reliable guide, they are going to be a lot worse over the next few months". Ben Bernake, Fed Chairman admitted, for the first time, that US economy could fall into recession this year. Ian Shepherdson, Chief US Economist at High Frequency Economics, said, "Trends are awful; unemployment will keep rising, squeezing spending". In fact, in a poll, 42 out of 58 economists said that the US was already in recession despite the Federal Reserve slashing 300 points from interest rates since September in an effort to prop up the worlds largest economy.

In January this year, the IMF had projected the US economic growth at 1.5%, which it has now lowered to just 0.50% for 2008, which is likely to increase to 0.6% in 2009.

IMF View on World Economy

It was not without a reason that the International Monetary Fund cut its forecast for global growth this year and said there is a 25% chance of a world recession, citing the worst financial crisis in the US since the Great Depression.

According to IMF, the world economy will expand 3.7% in 2008, the slowest since 2002. In January this year, the Fund had projected growth of 4.1%. In fact, this reduction is the third by IMF since July last, when it had predicted the world economy would cope up with the US credit squeeze and grow 5.2% this year. It added, "The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression". This view, however, has not been shared by the US Treasury Secretary Henry Paulson, who reacted with the comments "That sounds overblown to me".

The fact, however, remains that the worlds biggest financial companies have reported about $ 232 billion in credit losses and write-downs since the start of 2007, as per the data compiled by Bloomberg. This has driven the banks to lend to only safe borrowers, which has in turn undermined consumer spending and business investment. According to Andy Cates of UBS in London, "The world economy is slowing quite considerably and will be very different from what we have become accustomed to". The IMF considers that there are 25% chance that the global growth will drop to 3% or less in 2008 and 2009, which, IMF reckons as equivalent to a world recession.

The IMF document says, "The greatest risk comes from the still-unfolding events in financial markets, particularly the potential that deep losses on structured credits related to the US sub-prime mortgage market and other sectors would seriously impair financial-system capital and initiate a global de-leveraging that would lead the current credit squeeze into a full-blown credit crunch".


The Likely World Scenario

If the oil producing countries have tasted blood by charging US$ 140 a barrel, they would have also smelled as to what the world powers (basically, the US, the superpower, but could be joined in by others like UK and France, and economic superpowers like Germany and Japan, the latter does not produce any oil at all) can also do to avoid a crippling blow to their economies, which are heavily dependent on oil. In fact, it is not the developed countries alone, but even developing countries, whose economies would be exposed to and jeopardized by the senseless and sharp rise in oil prices.

Even the oil fields in Iraq could trigger a war; depose a regime and then set things in motion which could favour American interests (of course for a price) and any reckless and incessant soaring of oil prices could bring the comity of nations, developed, underdeveloped, developing and others, if any, on a common platform to force the oil producing countries to see and adopt logic and reason in the matter of production and prices of oil.

This deterrent, to that extent, is expected to hold back the evils of senseless and unjust oil price rise, though other factors may continue to point towards an impending peril, which, however, needs to be made serious note of by World Trade Organisation and other world bodies together, who need to salvage the situation before it becomes volatile for all countries, including India.

Impact on India

The impact of slowdown of the US and the EU economies is already seen in the Indian export market. Indian exporters face a double whammy, when we add up the damage that the appreciation of Indian Rupee has caused to their export competitiveness and therefore earnings.

First, let us see where Indian garment exporters stand today.

India has not remained immune to the US recessionary signals. In fact, there has been a marked decline in the orders from the international buyers during 2007. Indian suppliers (or call them exporters, if you wish) have started feeling the heat on account of reduced orders from international retailers like Wal-Mart, Target and Gap. New orders are difficult to come by. Britto M Joseph, Managing Director of JVS Group, who are suppliers to Wal-Mart Stores Inc. and Target Inc. in the US and Tesco, UK's largest retailer, acknowledges that the business is down by around 15% since the recession has set in. Explaining the reason for smaller orders, he says, "They are facing lower demand from consumers and so are hardly placing new orders. Apart from smaller and fewer orders, he alleges that he is under pressure to reduce prices of his products, which is extremely difficult in view of rise in costs, particularly the prices of cotton have gone up by 25%".

Almost in a similar vein, Rajendra Hinduja, Managing Director, Gokaldas Exports says that Gap Inc. has ordered lesser than what it did last year. He repeats what Joseph had said that Gap has also been negotiating for a lower selling price. "They are ready to buy the same volume, but want it at a lower price than last year".

Yet another exporter acknowledges that the orders are down by at least 20% as a whole from large US retailers; and so are the profits. However, some part of the losses could be made good by exports to the European Union at the previous pricing or even slightly higher; but how long will the European buyers continue to pay the same price or buy the same volume, given the growing recessionary tendency, could be anybody's guess.

The appreciation of Indian Rupee, which earned lot of verbal sympathy of the ministers, who made loud proclamations about "doing something" to help the harassed Indian garment exporter due to appreciation of Indian rupee, had seriously blunted the edge that Indian products had had over their competitors. Indian exporters had been counseled to explore and sell in newer markets and learn to live with appreciation of Indian Rupee. The Government has not only failed to provide incentives to promote competitive edge of Indian garment exports, but has also failed to fulfil their repeated promises of "not exporting taxes" by refusing to withdraw irritants like service tax, excise and Customs duty. There is growing shortage of power and prices of raw materials are shooting up. Inflation has overtaken the economy, both at macro and micro level. How can Indian exporters compete with their counterparts like Bangladesh, or others like Vietnam.


Will China's Loss be India's Gain?

I find there are some new straws in the winds. During the current calendar, Indian exports to both the US and the EU have moved northwards, Chinese exports have headed downwards. The figures for Jan. March 2008 show an increase of% in Indian exports to the US and% increase in exports to the EU, in contrast to the... % decline in Chinese exports to these countries. Some of us have seen this quickly as a U-turn for the better in Indian exports in these figures, which, I personally believe, cannot be relied upon to be taken as a trend. It is true that some of Indian exporters have received some orders or higher orders or others see a new hopeful trend emerging in Indian garment exports. D.N. Sood, of A.I.E. is credited with the view of Chinese garment prices going up 50%, there is some drift in the sourcing pattern. He said "This season around, 20% of the orders that China was doing have come to us". Even an optimistic Sood, however, did qualify his statement, by adding that it is difficult to say whether this is going to happen in the long term or it is just for a short period of time. Another buying house located in New Delhi, however, appears to be more realistic on the issue of "diversion of sourcing from China to India" when he said "China may lose on its share for sometime, but the kind of systems China is equipped with, will help it in getting back its share soon". Further a mere increase in Indian exports and corresponding decline in Chinese exports does not, in any case, establish any firm inter-se relationship nor can it granted the status of a trend. Since the figures are quite tentative and span over a very short period, these cannot be depended upon for establishing trends.

Will Appreciation of Indian Rupee Help Exporters?

In short-run, yes. One can observe a streak of lightening in the dark horizon otherwise. It is in terms of the recent tendency of Indian Rupee to depreciate, not because of any help from the Government; in fact, it is in spite of the Government. The credit for Indian Rupee registering a small appreciation vis--vis US dollar must go to the spiraling crude oil prices, which caused heavy purchase of US dollars by the Indian oil companies and since the price of crude oil is likely to grow with no signs of any abatement, and prices of crude oil have already crossed $ 140 a barrel and have been projected to go up to $ 200 per barrel - and the oil producing countries having tasted the blood, the depreciation of Indian Rupee is likely to continue. In a more recent development, Saudi Arabia, the biggest oil producer has promised to increase its production from July 2008, but it has not only attracted criticism from OPEC, but also does not stand a chance to bring about any substantial decline in the oil prices. However, a meeting has been called by Saudi Arabia of all the stake-holders to take a view on the spiraling oil prices, but how far can this help, is a matter to be seen.

To sum up:

Notwithstanding the negatives like the crisis that the world is gravitating to, which seems a relentless ascent without any immediate hopeful signs and the positives like Chinese internal problems blunting their competitive edge and consequent "assumed" US and EU orders drift to Indian exporters or the recent acquired strength of Indian Rupee, the situation today is still fluid. True, the flow of orders has somewhat picked up and the pall of gloom that was in evidence some months back is no longer there, yet the quantum of orders and the regularity with which it needs to flow, is still lacking. The present situation has not enthused Indian garment exporters nor can we see any distinct turn of events. The greatest comfort that Indian garment exporter can draw, at present, is that there is a positive improvement over the situation than what it was a few months back.

The straws in the wind are showing the direction; and we are right into the Monsoons, waiting for a rainbow to show up.

About the Author:

The author is associated with The Stitch Times, New Delhi.