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Impact on the Real Sector

Readjustment of the currencies would also have implications for the real sector. Significant readjustment of the currencies and rise in interest rates could slow down the global growth. This would entail a reduction in export opportunities and reduction in investment demand for EMEs, in general, many of which depend on export demand to sustain their growth. Rise in interest rates, by slowing down spending, may have a negative impact on the global economic growth. Thus, readjustment of the currencies may affect several EMEs in a significant way.

The impact of any slowdown on India may be assessed with reference to two factors. First, India's economy is largely domestic-demand driven. While India's exports constituted 11.5 per cent of GDP, its share in the world trade is only 0.8 per cent. Second, India's exports basket is fairly diversified.

Some concerns arise with regard to the implications for employment in case of a slowdown in the exports sector, especially with regard to the significant specialisation in BPO/IT Enable Services. Rapid job growth that absorbs the huge supply of agricultural labour into its industrial work force is necessary for socio-economic stability in India. Any negative impact on employment resulting in substantial decrease of real earnings and widening income inequality is likely to reduce overall welfare and increase the cost of structural adjustments required, especially in the absence of meaningful social safety nets.

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