I want to draw your attention to two bits of information that made big news in the local pink papers last week.

The index of industrial production (the IIP) for September came in at 6.4 per cent, a good three percentage points below market economists' expectation. Second, the chief economist of American investment major, Goldman Sachs, predicted that the net impact of the crisis in US mortgage markets would be a contraction of credit by two trillion dollars in the global system.

These may seem somewhat unrelated and indeed they are in a sense. The reason for mentioning them in the same breath is that they point to emerging risks for the Indian economy as we go into the next year. Let's take the risk of industrial slowdown.

While domestic economists were quick to point out that the September industrial growth number was perhaps an aberration, it might just be a trifle na�ve to dismiss the fact that it can be an augury of a slowdown. There is enough evidence at the micro-level that point to the possibility of considerable sluggishness in the domestic industrial and services sectors.

Aggregate sales growth for large samples of domestic companies in the organised sector for the second quarter of 2007-08 came off from the first quarter's levels. The situation in the unorganised sector (that also happens to be more export-oriented) is perhaps worse as news reports and anecdotal evidence seem to suggest.

The problem I have with some of the analysis that point to the risk of a domestic slowdown is that it sees this slowdown coming essentially on the back of slowing exports. This would follow from an appreciating rupee and slower global demand, particularly from the US.

The implicit assumption is that the momentum in "non-tradeables" (particularly infrastructure) would continue and set a floor to aggregate growth rates. Thus growth rates are likely to soften but not plummet. Besides, companies would continue to add capacity and the investment demand that results is unlikely to diminish much.

Demand for things like capital goods would remain somewhat robust. The composition of growth and resource allocation is likely to change with a rising share of non-tradeables in the pie.

My contention is that this is an incomplete analysis. If there is indeed a slowdown, it is unlikely to be confined to the export sectors and there could be problems in capital goods and infrastructure as well. This is where the Goldman Sachs report comes in. If there is credit contraction by $2 trillion, Indian companies would find it difficult to raise debt in the offshore markets.

Emerging market credit spreads have moved up sharply ever since the sub-prime crisis began to unfold and seems to have had a palpable impact on fund-raising by domestic companies. With a credit crunch of the magnitude predicted by Goldman, external debt will not just become more expensive for Indian companies -- it might not be available at all.

Will a shortage of external debt matter? I think it will. Over the last couple of years, Indian companies had become highly dependent on external debt to pay for their capital expenditure. In 2006-07, for instance, Indian companies borrowed over $21 billion from external markets.

Roughly 50 per cent of aggregate capital flows came through external commercial borrowings. Infrastructure projects need large amounts of long-term debt that domestic markets cannot supply. If there is a problem with external borrowings, it is bound to have an adverse impact on infrastructure investment and capex plans.

Besides, in the event of a sharp slowdown in the US, investors are likely to go easy on all risky asset categories. That, I am afraid, includes emerging market equities. Much that we want to believe that Asia has decoupled from the US, I do not think that these markets will be able to ward off a bout of serious risk aversion.

One just has to see the response of Asian equity markets over the last couple to any adverse news flow from the US to figure out that the level of investor conviction in the "decoupling story" is somewhat weak. Markets that appear to be a tad overvalued like India will bear the brunt of the asset reallocation. The impact of this is likely to be a draft on domestic liquidity. Some of this tightness has already set into the money markets -- with the repo window getting activated, banks have suddenly switched from being net lenders to the RBI to being net borrowers.

Clearly some of these risks lie beyond the realms of domestic policy. There is little, for instance, that the RBI or the finance ministry can do about a global credit squeeze or a large sell-off in the US dollar. What domestic authorities can do is to recognise the possibility of such a scenario and do their best to reduce the severity of its impact.

To be more specific, the RBI needs to prepare for a global credit squeeze and be nimble enough to ease domestic monetary policy quickly so that interest rates don't ratchet up sharply. It might help to start slow-shifting the monetary policy stance to a more dovish, accommodative one. Further, monetary tightening could send the economy into a downward spiral that would be difficult to reverse.

The silver lining is that if dollar flows come down, the rupee could take a bit of beating. I, for one, wouldn't be surprised at all if it touched 41 to the dollar in 2008. That will bring some relief to exporters and work as a check against a marked slowdown.

That said, a global financial crisis is likely to take some of the sheen off the India story.  In  an increasingly integrated world, no economy can remain an oasis of calm.

The author is chief economist, HDFC Bank [Get Quote]. The views here are personal.