Indian Economy-What’s happening inside?

An excerpt from an interesting article…

As the global economic turmoil hits home, triggering trepidation across sectors, Outlook examines exactly where India stands..

 

 

Real Estate: Credit shortage delaying projects. Most affected: SEZs, townships, industrial parks.

Aviation: Airlines put off expansion plans, some resort to alliances and mull layoffs.

BPOs/ITES: Temporary setback here as US-based clients cut costs, some captive units are closed.

Infrastructure: Increased financing costs impacting projects. Slow growth seen in cement, steel.

Banks/Financial Services: Banks facing cash crunch. Low corporate earnings keep investors away from MFs.

Retail/Consumer Goods: Sagging stockmarkets, high cost of money act as deterrents. Only hope: festive sales.

Automobiles: Increased cost of loans, buyers pulling back purchase plans, likely to affect growth.

***

Where You Stand

Investments

  • Bank Deposits- Tops the list of concerns, but collapse of any bank highly unlikely. Stay put: while cash is king, keeping it at home is not a good idea.
  • Stocks- With high risk and volatility, tough to bet the market bottom. Think long-term; courageous investors should focus on liquid, large-cap stocks.
  • Mutual Funds- For equity, think long-term and large-cap funds; conservative investors should look at government securities or fixed maturity plans.
  • Gold- Volatile and rising, looks attractive in these uncertain times, but the upside may be limited.
  • Housing-Makes sense to wait as prices will fall further; desperate builders are not finding many buyers.

Housing Loans

  • Interest rates expected to come down, so wait a while; good time to pre-pay part of the loan if it is not tax-efficient.

Jobs

  • Increment- Big impact across the board, expect most companies to be conservative now.
  • Hiring- Some sectors will be hit; across the board, employees will take more time, seek to bring costs under control.
  • Placements- Too early to say, beginning to become a bit of a question mark.
  • Bonuses- Will be hit badly without doubt, particularly for services like consulting, banking and financial services.

Spending

  • Prices- Crashing commodity prices should reduce headline inflation over time, for now household essentials remain highly priced
  • Diwali- Spending sentiment is subdued, particularly for cars; but other consumer goods companies say Diwali is far from a washout.
  • Travel- With dipping business travel, this segment is a major casualty of subdued sentiment.

 

Is our banking system under threat?

 

 

The simple answer is no. “Thanks to conservative regulations,” says former RBI governor Bimal Jalan, “I don’t think Indian banks are at all vulnerable.” What he is saying is that the RBI controls the amount of money banks keep aside as safeguards as well as the amount of debt they can attach to a unit of capital.Yes, there are challenges. Trust, the cornerstone of banking, has been completely shattered worldwide. In India too, banks don’t trust each other, let alone clients and customers. “If we’ve reached our limits on sectors for the quarter, we’re not looking at fresh loans till the next quarter,” says a senior banker at a leading public sector bank. Remember, toxic assets and choking of liquidity are two reasons why banks fail. So the fears over inadequate cash to oil the banking system are very real

 

Are more jobs on the line?

Nothing gets people more scared than the dreaded R word—retrenchment. One only has to look at the shock waves that followed Jet Airways’ announcement that it would lay off 1,900 contractual employees. Reacting to protests galore, an “emotional” Jet Airways chairman Naresh Goyal was quick to reverse his decision. Interestingly, a senior labor ministry official says “the law doesn’t say anything about such a situation (retrenchment)”. And there are signs there’s more to come.

While the aviation industry is expected to lose $2 bn this financial year, the BPO industry, one of India’s largest recruiters, is also on the backfoot with recruitment down to half of last year. As no one is willing to take risks and expand, growth is down from 40 per cent to 19-20 per cent. The air of disquiet is visible in the dismal manufacturing sector figures for August as well. While many argue about the accuracy of these numbers, it’s a telling indicator that the funds crunch is hitting home in key capital goods sectors. Soon, jobs will be on the line here too, and if the September numbers for manufacturing are negative—as some bankers estimate—that could happen sooner rather than later

 

Are the stockmarkets over-reacting?

If you ask a broker to react to the current market situation, he’ll tell you that the light at the end of the tunnel only seems to be from an oncoming train. “Given that no one knows the dimensions of the problem, finding a solution to it is even more difficult. Every time the regulators make announcements to mitigate the situation, we’re all wondering if it’s enough,” says Aseem Dhru, CEO, HDFC Securities. The Sensex has lost over 50 per cent in value this year. Despite this staggering number, most market watchers feel it’s par for the course given the level of uncertainty and the extent of systemic issues the global crisis has thrown up. 
Some, like former BSE executive director M.R. Mayya feel the extent of reaction is unwarranted given that India is fundamentally sound and the banking system is well regulated. “We need to stop and see the big picture. Are we going to be impacted? Definitely. But is it going to take us under? Definitely not. We will recover,” he stresses. SEBI chief C.B. Bhave also emphasises that extremism at both ends of the market spectrum needs to be curbed. “At 20000 levels, the sky is the limit and at 9000-10000, it’s bottomless. The reality lies somewhere in between.” Either way, recovery isn’t going to be easy and will take time

 

Are real estate prices really falling?

 

Till a year ago, it was one of India’s most vibrant growth sectors. But in the last few months, that has changed completely Most players in the industry had taken huge exposures and invested in land at exorbitant rates, expecting to square that investment with sales at a high price. But demand from consumers has sagged because of high interest rates as well as buyers waiting for the market to stabilise. “A large segment of real estate in India is housing- and EMI-dependent. As the consumer is affected in the present financial crisis, the demand side is seriously affected,” says Arvind Nandan, director, consultancy services, with real estate consultants Cushman & Wakefield.

Also, with credit becoming both expensive and rare, many of the real estate giants are sitting on the land, calling off projects, or postponing them indefinitely. Recent housing projects—albeit small ones—by the large players to garner some liquidity have met with poor demand. It doesn’t help matters that NRI-fuelled demand has dried up completely. Funding agencies and private equity funds have become more cautious and are not ready to put money into new ventures. Experts believe that with demand falling, developers would start to squeeze margins, a move that will see a rationalisation of prices across the country.

 

Will prices come down soon?

In an election year, that’s the most important question. As the RBI takes steps to ease money supply within the financial sector, what happens to the government’s battle against headline inflation, currently down to 11.44 per cent? That’s still very much in double digits. Underlining that there is no cookbook recipe to resolve all issues, Shankar Acharya, Reserve Bank chair professor at the Indian Council for Research on International Economic Relations, says, “While people have not forgotten inflationary pressures, these problems—equity crunch, global slowdown—are looming larger.”

 

P.S:

In no way I claim credit for the article except for copy pasting from the link..I don’t know if there is any copyright issues involved,but my intention is just to spread the word and it was few days since I was trying to understand the whole scenario and when stumbled upon this article,thought of sharing..Pls read the article in complete by reffering to the link provided..

 

 

 

 

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  1. hey!! was about to fall down in awe of you for understanding all this complicated business. Then read your disclaimer and remained standing.

    Thanks for sharing the article though….speaks in a language that I can atleast understand. 🙂

    lol..cough cough ..though i am a management student,i am not much into these liqudity,debit credit circus..sorry,i can’t still follow it..

    speaks in a language that I can atleast understand

    true pinku..and thatz why i shared it..Without using much jargons,this article speaks in laymen’s terms and we get a real time picture of what is happening..Hope you read the whole article..Go to the link for more elaborate reading -Nimmy

    • najeeb
    • October 21st, 2008

    Some interesting info:

    “Surprisingly, India — still regarded as a poor country by many — has USD 1.5 trillion in Swiss banks, which is more black money than the rest of the world combined – an amount 10 times larger than India’s foreign debt — USD 155+ billion”

    “The USD 11.5 trillion of assets held offshore would generate a return of about USD 860 billion a year at a 7.5% rate of return, and a consequent tax loss of USD 250+ billion for sovereign nations”

    “The well known economist Professor Arun Kumar estimates black money generation in India to be currently 50% of the GDP”

    “It is further estimated by experts that one per cent of the world’s population holds more than 57 per cent of total global wealth, routing it invariably through tax havens”

    “ATCA’s preliminary investigation to analyse the Swiss banking chain and to assess Indian wealth in that single country, suggests that the number is much larger than the USD 1.4 trillion figure and is more likely to be near USD 3 trillion”

    “estimated cross-border flows of global dirty money in a range between USD 1.1 to USD 1.6 trillion annually, about half of which came from developing and transitional economies, and two thirds of which is commercial dirty money”

    “Through most of the 1990s, aid was running at about USD 50bn a year from all sources. It has edged up slightly in this decade. USD 50bn of aid in; USD 500bn of dirty money out”

    “every USD 1 that we [the West] have been generously handing out across the top of the table, we’ve been taking back some USD 10 of illicit proceeds under the table [via tax havens and other means]. There is no way to make this formula work, for poor or for rich”

    “The USD 500bn coming illegally out of developing and transitional economies is equivalent to 8% of their GDP”

    “Experts point their finger at the new investment environment of the last two decades which shunned state intervention and favoured massive deregulation. The retreat of the nation state ensured that the restraint exercised on capital to keep its greed in check was diluted and some amount of the black money went into the process of being legalised”

    Full article at
    http://www.intentblog.com/archives/2008/10/is_india_a_poor.html

  2. Hey this was good, and very well explained, thanks for sharing.

    • Milind Kher
    • October 21st, 2008

    India has been steadily increasing its commerce with the US. Therefore, what happens in the US economy WILL have an impact on the Indian economy, irrespective of how robust it is.

    We have to now start tapping other markets and reduce our dependence on the US.

    • Nimmy
    • October 21st, 2008

    Thanks for sharing Najeeb ..The reference to huge balck money is interesting and i will look into it more..thanks..

    Yes IHM,indeed a simple article…Thanks for visiitng..

    Milind..true,especially when it comes to IT..Those firms who were not over dependednt on US for projects,aren’t much affected directly…And yes,we need to manage our iternal resources more..Since we are agriculturally strong(supposedly) we won’t be much affected by ultra depression ,i guess from my small knowledge//But since we ae moving away from agriculture and just concentrating in high ed services,maybe we too will become an unsatble economy dependent on others..High end services are highly necessary,but i think we need to spent some money on modeernizing agricultural methods too..Maybe we can take this chance as warning…Thanks for your informative comment

    • Milind Kher
    • October 22nd, 2008

    Nimmy,

    What is important for any economy to grow is to build on its core competence.

    India’s mainstay has always been agriculture. It is only because we did not uniformly keep pace with technology (Punjab and Haryana are exceptions) that we got left behind.

    We need to again focus on this so that, not only will villages be prosperous, the massive influx into the cities will also be arrested.

    All this will require a strong political will.

    True Milind..As of now,I think agriculature is the only stable business or economy bcoz no matter how much depression happens,people have to eat to live and hence a demand for agricultural products is always there..The elite jobs like ITians are suffering for fear of getting pink slips -Nimmy

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