Economic Highlights

New Delhi, 10 October 2008

Global Financial Crisis

BIG JOLT TO INDIAN FIRMS, INVESTORS

By Shivaji Sarkar

The global financial crisis has clearly started affecting Indians. According to modest estimates, the quick withdrawal of investment by foreign institutional investors (FIIs) at the Bombay Stock Exchange has cost the investors at least Rs 40,000 crore.  

This raises vital questions about the role of the regulator, SEBI. The FIIs have emerged as ‘fly-by-night operators’ by pushing the market up and down artificially. In both the cases, the profits go to the FIIs and the losses to indigenous investors. Indian IT companies too, are in deep trouble. The collapsed Lehman Brothers used to outsource Rs 700 crore worth of business to the IT giants. In all likelihood, this would impact balance sheets and even lead to job losses.

The Indian companies listed on the US bourses – New York Stock Exchange (NYSE) and Nasdaq, have lost close to $ 10 billion in a fortnight alone. The 16 Indian firms listed there saw their capitalization dip to $ 78.9 billion from $ 88.7 billion. While Infosys witnessed the maximum erosion of $ 2 billion, Wipro shed $1.69 billion, Satyam Computer saw a drop of $938 million and Patni Computers $ 72 million. Besides, outsourcing firms such as Genpact, WNS, EXLService, and Rediff.com dropped between four and 12 per cent.

Both the ICICI Bank and HDFC Bank saw their US market cap plunging by near $ 2 billion. Tata Motors lost $ 489 million and Tata Comm shed $ 266 million. In fact, the ICICI Bank has borrowed funds at very high rates over 300 basis points, leading to anxiety about how it would fund the operational base in a downturn market. This apart Indian firms have started encashing their carbon credits as their prices continue to fall. .

Contrary to official claims, the US turmoil has jolted some other big Indian corporates. According to an official assessment, the crisis has resulted in huge losses to some and raised cost of operations for others. Notwithstanding an official denial, a telecommunication giant has lost foreign exchange of nearly $ 100 million in its deal with Lehman Brothers through the UK’s Barclay Bank. However, it has not yet been reflected in its books.

A realtor firm, reportedly the mega DLF, has been borrowing funds at 35 per cent, keeping officials guessing how any company can do this, as the realty sector has plunged into further crisis. The Indian hotel industry too is jittery about the global crash. The largest tourist inflow is from the UK--16.5 per cent and the US--15.7 per cent. The figures are expected to fall sharply as most of the inflow is for business purposes. The US, for example accounts for 11 per cent business of the Oberoi group and 20 per cent for Leela Palaces.

The crash at the BSE, it is estimated has affected many individuals, whose investments have dipped by 70 to 80 per cent as the Sensex plummeted to around 11,000 mark from a high of 21,000. However, the extent of its impact on the mutual funds, pension funds and financial institutions (FIs) is yet to be estimated. Whatever the Finance Ministry may say, the impact is bound to high.

As is well-known, Mutual funds depend on investment at the stock exchanges. Its investors are a concerned lot, as the mutual fund equity schemes have given negative returns in the past one year-- since the Sensex started falling. A number of shares, such as Sahara Growth, ING Dividend Yield, Birla Sl Asset Allocation, IDFC Imperial and Premier Equity, HDFC Growth, UTI Dividend Yield, DSP Merril Lynch Top 100 equity and HDFC Top 100 have registered 19 to 23 per cent losses. This means that those investing in these funds have lost even on their capital investment. According to modest estimates the mutual fund losses would be at Rs 15,000 crore!

Interestingly, so far the nationalized Indian banks are not known to have logged in any major hit in the present crisis, except possibly in the retail sector, that includes credit card operations. They may have suffered losses in some mutual fund operations, but are yet to come out with a statement. They have, however, taken steps to stem the retail operations, which may save the banks but consumer-based industries would be hit hard. This in turn, would further affect the growth projections.

Clearly, the present crisis calls for a review of the policy of global integration. The Great Depression in 1929 started with the collapse of the NYSE and the stock prices fell to 20 per cent of their value. At that time, 11,000 of the 25,000 banks in the US went under red. Reduced spending and closures took its toll on the industry--production dropped and unemployment rose by 30 per cent. European countries with strong trade links with the US suffered fuelling unemployment in both Germany and the UK. Economists believe that like the present crisis, the Great Depression too was caused by lack of proper regulation and unreal expectations.

At that time, India fortunately did not suffer much thanks to poor exposure to the international market. However, since the opening up of the economy, it has been hit by two major stock scams and the collapse of the UTI. Recall, that the UTI had lost Rs 64,000 crore some years back. Again, it seems that India has not learnt from the earlier meltdown of the Southeast Asian Tigers, which had started from the realty sector, according to the World Bank.

In all, the world situation looks grim, according to the International Monetary Fund (IMF) warning. In fact, it has also cut its forecast for India’s GDP growth. The Composite Business Optimism Index for India, prepared by global market tracking services, Dun and Bradstreet (D&B), has fallen by a record 28.1 per cent in the past quarter. The index, which indicates the pulse of the business community, has fallen from 193.2 to 138.9 in a year. In fact, it also indicates subdued demand conditions.

Importantly, the situation demands a thorough review of both the economy and policy of integration. The SEBI needs to look at whether FIIs should be allowed such exposures at the stock market, and if so, how are they to be put on a leash? On its part, the RBI needs to look at the external commercial borrowings by Companies. Apparently, its conservative approach has saved most of the banks. As for the finance ministry, it needs to study whether it should further liberalise or take recourse to a conservative mode? Yes, the Indian economy has been hit. How hard, needs to be fathomed. ---INFA

(Copyright, India News and Feature Alliance)