Risks in Indian economy

I. FII Movement
Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Indian stock market has tumbled down mainly because of reversal of foreign institutional investment in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009,

II. US Dollar
Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. However, in my opinion there are severe short-term risks from the US dollar. At the end of the day – the service sector is the largest component for Indian GDP and Indian software firms get up to 60% of their revenue from the United States. If Indian firms are not able to counteract meaningful decline in the US dollar with efficiency gains internally, that could have a material impact on the whole growth story.
III. Liquidity crunch
To large extend Indian market sentiment are run through FII movement whether positive or negative. Hence if FII trend negative we will experience negative movement in domestic player as well

IV. Reduction In Export
Large number of Indian export includes export to developed economy, and due to credit crunch in developed economy Indian export badly affected. Same we have experience, during 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.

V. Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.

Some Other Important Risk
1) Lower domestic participation in stock market – Only 1% of people invests in stocks. Rest put in banks or gold. Stock market dependent on foreign capital: Give FII as a % of total market cap of the SENSEX. I guess roughly 26%. This makes total market prone to movement of FIIs
2) Inadequate infrastructure: Compare with China. Transportation cost highest among all emerging economies. leading to in competitiveness
3) High fiscal deficit compared to all emerging economies.
4) Time taken to enforce legal contracts (courts)
5) Labor problem – Frequent strikes, no clear policy
6) Land acquisition problem – POSCO, TATAS – sending global signals
7) Power
8) High dependency on imports for fuel