Economic Highlights

New Delhi, 29 May 2010

Euro ‘Bush Fire’

INDIA MAY NOT GO UNSCATHED

By Shivaji Sarkar

The Eurozone sovereign debt crisis or the “bush fire”, as it is being dubbed, may not leave India unscathed. The fears have been expressed by none other than Finance Minister Pranab Mukherjee and his chief economic advisor Kaushik  Basu.

The rising gold prices, accentuated by the Europe situation, signals further trouble. It might make fund availability and lending dearer.  It could trip the fundraising plans of Indian companies at home and abroad and dent confidence, while the euro's weakness will hurt exporters selling in the currency. 

Clearly, it has started impacting the equity markets worldwide and companies may be forced to defer fundraising. This would translate into stymieing of future growth pattern not only of individual corporate houses but of many nations.

Many companies have started treading with caution. Recently, 28 companies received approval to issue initial public offers (IPO). Most of these have deferred the plans, including Reliance Infratel and Emaar MGF. Another 45 companies have applied for new IPOs with the SEBI. The Essar Group called off its $750-million bond issue. Such moves are denting the corporate confidence. That explains the anxiety of the finance minister and his economic advisor.

Conditions are not being seen as stable. The CMD of Prime Database Prithvi Haldea says that institutional investors are driving a hard bargain. The Euro crisis would impact markets, including India, he asserts. This is in sharp contrast to the Wipro CMD, Aziz Premji’s remark that India would not be affected and that his company had been the least hit. The very next day his company lost heavily at the stock market.

A weaker euro has added to the anxiety of exporters. The euro tumbled to a 14-month low against the dollar, reeling from escalating concerns that Greece's debt crisis may spread to other euro zone states. Spain, Portugal and Ireland are on the list already. France and Germany, which along with the IMF came out with a $ 146 billion assistance to bail out Greece, fear that they also might be dragged into the crisis.

West Asia has started feeling its impact led by Saudi Arabia and Abu Dhabi. Oil prices are coming down at the height of the recent sovereign debt crisis in Dubai. This has a more direct impact on India as plummeting fortunes of the Gulf region might affect its exports, business and the job market. The European problem would certainly delay recovery of Dubai and there are chances of it hitting other Gulf states.

As West Asia and Europe plunges into trouble, the happiness in India might remain fragile. Fortunately enough exports do not have a large share in the economy. But whatever little it has it might lead to problems that might be difficult surmount as euro goes on losing its sheen against the dollar every day. Since most international deals are made in dollar terms it makes Indian exports expensive in the European market, which also faces the problem of its people losing purchasing power owing to the impact of the recession that hit it two years back.

The European Union Energy Commissioner, Guenther Oettinger, has warned that the rescue package for Greece is the only beginning of the battle. It would not be over till the European governments draw up their budget next year when they have to reduce the huge piles of debt that many EU member States have racked up. What he indicates should cause concern. Some of these countries have over 90 per cent of debt. It would not be prudent to expect them to clear it up in the course of the next nine months. The indication is clear, the Eurozone crisis would continue. In fact, it has already engulfed some of the erstwhile East European countries as well. Some of them have become members of the EU and some others are waiting in the wings.

One would have expected the US to come in support of the EU. India too would like that. Though the Obama administration for record’s sake is showing interest in solving the crisis, the US per se would not like that. It is now a battle between the dollar and the euro. A stronger euro is an anathema for a weakened US economy. It might give it lip sympathy but would prefer to do little.

Meanwhile, the Mannmohan Singh government has to play its card well to come out unscathed. It is difficult. The economy and corporate are too globalised. The banking sector owing to domestic opposition had the fortune of the proposed reforms not happening. It has partially saved the day. But it is not in a position to meet the demands of the finances being made by the government and the large corporate borrowers.

The Euro crisis is drying up fund flows. Large budget deficits have strained the banking system. Corporate growth is being are planned on debts. So are many infrastructure projects. This is a critical area. New investments to banks are slowing down as the uncertainty continues in the international market and high prices cause concern in the domestic area. The investors of late have started avoiding the banks and the stock markets. A survey by brokerage firm Indian Infoline Ltd (IIFL) found that about 35 per cent investors showed interest in buying jewellery, 27 per cent in gold exchange trade funds and 12 per cent in coins and bars.

The stock market is being avoided for its volatility and banks are being shunned as there are apprehensions. The investments are clearly going into gold. It is not productive investment but a safe tool that protects the principal and as the gold prices are surging ensures safe and often high return. The flip side is it might make finance dearer particularly in the wake of the Rs 68000 crore 3G deals. The telecom companies do not have that money. They are depending on the banks to finance it. It might further add to the finance crunch.

Indeed, this has a risk. Apart from the scarcity of funds that might stall many deals and projects, it is likely to make lending expensive as interest rates might rise. An economy that is witnessing almost 20 per cent rise in prices would end up further with higher inflation. Apart from losing on the international front, if this is not managed well, it might lead to a euro type crisis in the domestic sector. That would mean more job losses and slipping on growth target, which now officially is pegged below 7.5 per cent. New policy formulations are required to fight the seemingly unseen. Let us not waste precious time. –INFA

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