Sensex seems to be balancing itself after falling to 13000 levels recently. There is a constant talk about the direction of the Sensex. Some analysts anticipate a fall to 12,500 levels. Two factors that augur in favor of decline are problems of our exporters and outflow of portfolio investments. But this may be only temporary. The central question is whether the lack of demand from the US is part of a larger global phenomenon; or it is a stand-alone event that may actually lead to an increase in demand from other countries. Weak demand from the US that we see today is the result of lower wages and lesser purchasing power in the hands of its consumers. This is because wages of workers across the globe are moving towards a uniform lower level.

Textile factories in the US have almost wholly closed down because they are unable to compete with low cost production from developing countries like China and India. The wages of an unskilled worker in the US are about Rs 4,000 per day at present. The corresponding wage in India is Rs 150 per day. Both are moving towards a common middle level of, say, Rs 250. Wages in developing countries are moving upward. The upward movement is small but the numbers involved is large hence the total impact may be somewhat similar.

Another argument in favor of decline in sensex is that the share of developed countries in the world income is about 80 percent. Recession in this huge area will impact the developing countries just like a flood uproots the small plants in the garden. Some adverse impact on India cannot be denied. However, the depth of this impact will depend upon the rate of growth of new markets.

The share of the developed countries will speedily contract while that of the developing countries will rise. India and China accounted for nearly one-half of the world income in the seventeenth century. Now the reverse is happening. The present crisis in America may see speeding of this trend. The development of new markets may compensate for the losses in US markets. Indications of opposite effects of the slowdown on US and India are available. Businesses are moving from America to developing countries. Manufacture of cars has largely shifted and that of textiles, shoes and toys almost wholly so. Banking and finance is also moving. Jobs are being cut in the developed countries while new appointments are being made in India.

This is sufficient indication that the decline of the US is more in the nature of readjustment of the global economy and is not an indicator of an all-pervasive decline. Indian share markets are impacted in two contrary ways by the decline of United States. The immediate impact is negative. India will emerge as a desired destination. The rupee is rising which means that global investors would be well advised to sell dollar-denominated stocks and buy rupee-denominated stocks. The remittance by American banks should be assessed in this backdrop. It may take some time for the new inflows into the Indian economy to establish but it is likely to happen. The Sensex will rebound slowly but surely.