Get the fundamentals right

Twenty - one months after Greece triggered financial and political turmoil by admitting it was broke, the Eurozone still can't fix its debt crisis. And the US just added to the woes of the world economy. As a result, markets went into a tailspin and are likely to affect exports from India and moderate the flow of capital into the country.

With speculation rife over a double-dip recession in the US and its negative impact on Indian businesses, the downgrading of the US sovereign rating by Standard and Poor's has further underlined those fears.

More than the downgrade what will impact India and the rest of the world will be the slow pace of recovery of the US.

Uncertainty in the world can also result in less capital flow to the developing economies like India. However, India's growth will be maintained at 8.2% despite uncertainty in global economy.

India is the 14th largest creditor to the US with an overall exposure in the world's largest economy's debt estimated at $41 billion. The overall national debt of the US is nearly $15 trillion of which it owes $4.5 trillion to foreign countries holding government debt securities.

The Indian IT industry, where US accounts for half the revenues, expressed confidence that it would be able to weather the storm even if US were to slide into recession again.

According to finance minister Pranab Mukherjee, India's macro-economy was moving in a positive direction despite rising inflation. The Goldman Sachs has, in fact, upgraded India to market weight. That means the basic fundamentals are strong and macroeconomy recovery is in right direction.

As the US got downgraded to AA+ from AAA rating, which is, very strong capacity to meet financial commitments, with the ‘+’ indicating a relatively better score than other AA, it will ideally have to pay a higher interest rate on its sovereign paper.

As a result, other countries too will have to pay a higher return on their sovereign debt as well. The US downgrade is not going to hurt India very much – the Reserve Bank of India has already raised policy rates to levels that are far higher than its global rating. And the reason is rising inflation with excess spendable income and skewed demand-supply ratio.

But considering the problems of high unemployment rates and huge debts faced by the US, tackling inflation seems a tad “doable.”

Fortunately for India, the growth is driven by domestic consumption boom and not merely exports like China.

The country continues to attract high capital investment leading to more job creation. As long as the focus is on building real economies, India will emerge a winner.

The US sure has some lessons to learn here. Instead of our “forever interest” in politics of other countries we could focus solely on our woes first and set our economy right. And for that it is a must to get our fundamentals right first, especially with the changing world order.