FICCI has said the outlook for India’s exports is already tempered on account of factors such as rising interest rates in India, rising raw material prices and rising cost of petroleum and petro products. The closure of the DEPB scheme by end September 2011 has also been cited as one of the factors that would undermine export growth going ahead. It has suggested diversification of India’s exports to new markets in Asia, Africa and Latin America.

On Friday, the S&P downgraded the long-term sovereign credit rating of the world’s largest economy, US for the first time since 1917 from its top AAA by one notch to AA+. In 1917 S&P granted top credit rating of AAA to US. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the US debt burden by more than $2 trillion.

According to S&P the fiscal consolidation plan which the US Congress and the administration recently agreed to fell short of the necessary measures to stabilize medium-term debt dynamics. But other credit rating agencies like Moody’s Investors Service and Fitch Ratings have not yet downgraded US. They warned that if the US dose not cut its spending it would face the downgrade option.

“it is a grave situation for the world economy. We will have to analyse it,” said the Indian Finance Minister, Pranab Mukherjee.

Just a day before the S&P’s announcement, there was a turmoil in the global stock markets including those in Asia. In India, BSE Sensex dipped more than 700 points before recovering partially with investors selling across the board.
The Dow Jones industrial average fell 699 points, the biggest weekly point drop since October 2008 (beginning of the global financial crisis).

Describing the volatility in BSE, Mukherjee said : “The cause is not domestic. It is substantially due to external factors. Stock markets fell due to global factors like weak recovery in US and spread of debt burden in Euro Zone. However, the current volatility is temporary.”

According to the SEBI Chairman, UK Sinha the market regulator was watching the situation carefully and putting in place adequate risk management system. However, the Reserve Bank of India said that India would have to learn to live with volatility in the global economy.

The US President Barack Obama in his weekly address said the Congress can take number of measures right now to spur growth and create jobs. These include extending tax cuts for working and middle class families, cutting red tape to encourage new businesses to grow, passing trade deals that will support tens of thousands of jobs, and giving out-of-work construction workers opportunities to rebuild the infrastructure.

According to FICCI Survey US economy is expected to grow by about 2.5% in year 2011, slightly lower than the IMF projection of 2.8%. Moderation in government spending is also expected to weaken growth momentum in US in the months ahead.

The Euro Zone would register a growth of about 1.9%, slightly higher than the IMF projection of 1.6%. FICCI analysts feel that within the Euro Zone, economies are expected to witness significant growth disparities. Western Europe is estimated to grow at a modest 1.5% in 2011, but with significant variability. Germany, the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) along with Benelux countries (Belgium, the Netherlands, and Luxembourg) are expected to perform at the higher end - above 2% - while UK and France are likely to see growth in the range of 1.5 to 2% due to budget cuts and less help from exports. Most of Southern Europe and Ireland are expected to see growth of less than 1% or may even contract.

Japan’s growth rate is projected to fall to a negative 0.5% in 2011. It may be noted that the estimates for the growth of Japan in the current year vary the most from the projections provided by IMF and which have pegged Japan to grow by 1.4%. The lingering impact of tsunami, earthquake and the nuclear crisis is expected to lead to a contraction in the Japanese economy.

With regard to China, the FICCI opine that growth in 2011 would moderate only slightly to about 9.5% as the Chinese economy settles onto a gradually slowing growth trend. The growth moderation will be to a smaller extent only if there are no major negative impacts from inflation or overvalued assets.

The sluggish nature of growth in these major economies would contract consumer demand, shrink market and adversely impact India’s export earnings.