Raise a toast for a happening India Inc

After the fabulous partying in 2007 — the Sensex shot up from 12,500 to over 20,000 —prepare for a hangover in 2008. Optimists believe the party will continue right through 2008, and there is a modest chance they may be right. But in all probability, the Indian economy will slow down in tandem with the world economy, corporate profits will decelerate, and the stock market will cease defying gravity.

Yet the global slowdown should create new opportunities for Indian corporates to take over western ones. The creditworthiness of Indian corporates will continue to be relatively strong through a global slow-down. Perhaps, Orient Express Hotels will suddenly become amenable to a Tata takeover.

Commodity prices should fall sharply in the event of a global slow-down. Industrial raw materials will fall most, and oil and gas should drop too. But world food stocks are exceptionally low, so food prices may remain stubbornly high next year. That does not bode well for in-cumbent governments that have to face voters at the polls.

The US economy is heading for a slowdown, and maybe a recession in 2008. Home prices continue to fall, housing starts are the lowest for two decades, and foreclosures of mortgages are rising fast. Credit card defaults are also rising, mirroring the problems arising from mortgages. Oil and food prices are sky-high.

And the subprime mortgage crisis has led to a credit crunch not only in the US but also Europe. The biggest banks, including Citibank, are preparing to take further hits of billions of dollars on their balance sheets, and banks have become afraid of lending to one another. The problem has spread from the US to Europe. So has the housing collapse — it has spread to the UK, Japan, Spain and Australia .

Not even all these negatives put together necessarily add up to a global recession, provided US consumers continue their spending spree. Household consumption has exceeded income in the US for years, and has led to record US trade deficits of almost $800 billion per year.

This has unleashed a tsunami of dollars into the world economy, lifting all economic boats and stock markets too. IMF estimates that the world economy, which has grown 5.2% in 2007, will continue at a very healthy 4.8% in 2008 in purchasing power parity terms. Such optimism has led stockmarkets across the world to break records this year.

However, many other analysts predict a significant slowdown, if not outright recession in the US. What will this mean for Indian corporates? Flows of trade and FDI will diminish. Yet, if the “decoupling” theorists are half-right, portfolio investments may continue unabated into emerging markets. In the event of a global recession, emerging markets will grow faster than developed ones. So, the latter may no longer be viewed as safe havens.

However, US purchases from the rest of the world will slow down, hitting exports from India as well as other countries, and squeezing profit margins as competition increases for a shrinking export market. Software products will be hit worse than software services. Textiles, leather goods and jewellery are among the consumer goods exports that will suffer. So will auto exports and components.

It is worth recalling that when the Asian financial crisis struck, India’s GDP growth fell from 7.5% to 5.5%, a fall of just two percentage points. Yet, that was enough to wreak havoc in Indian industry, with major companies teetering on bankruptcy and banks reeling under loan defaults.

Indian banks and industry are much stronger today, and more prudent. They will withstand a downturn much better than in 1997. But if a downturn comes, some sectors will feel a lot of pain, make no mistake. You can hope for the best for 2008, but gird your loins for tough times.