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Monday, August 1, 2011

What if the US is downgraded?

The whole of last week finance sector professionals were agog with the Aug 2 deadline to raise the debt threshold in the US.Now that the event is behind us and the fine print is being read the next event is a possible "downgrade" of US by rating agencies.

My thinking is slightly different from the majority view that variously has been predicting a tsunami or a Lehmannish situation.A knee jerk reaction would certainly happen but would it be such a drastic event?I do not think so.

The National Association for Business Economics said its 47-member panel of forecasters increased its estimate for the 2011 federal deficit to $1.4 trillion from $1.1 trillion in its previous survey in November  and the statistics are GDP increase in 2nd quarter of 2011 is 1.3%.Core inflation is also expected to rise to 1.2% by end 2011.

Its been known for a decade that the finances of the world's sole superpower have been in disarray and this is but a last wake-up call.Let us now see where the spending cuts will happen.The Indian IT firms need another 3 or 4 years to develop business in South America,Africa so they will face revenue pressures,otherwise i do not feel a major impact as exports from India are not exactly hi-tech.

What will help is that Indian firms are into outsourcing and that is a cost-save tool not a cost-expend one.China with its total dependency on exports may rather have more to worry and as the example of Chinese engines failing and thereby almost halting the Pakistan railway system shows how much cost can you cut before quality gets affected?

That is the reason i do not worry about Chinese impact on India as the world moves to a more quality conscious,eco friendly environment.But that is another story...