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
- 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.
- 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.
- 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.
- 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.”
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..