Global Economics

World Financial Crisis: India's Hurting, Too


Despite reassuring words from India's Finance Minister, the country is clearly feeling the shock waves of the global crisis

It's been one action-packed week in India. The Bombay Stock Exchange Index, or Sensex, tumbled 6% to a two-year low. For the first time in five years, the central bank cut the cash reserve ratio—the amount of funds that banks have to keep with the Reserve Bank of India—by 50 basis points, to 8.5%, on Oct. 6. The same evening, the Securities & Exchange Commission of India eased some restrictions on foreign portfolio investors—such as registering in India before buying shares and limits on offshore derivatives—it had imposed in 2007. And finance minister Palaniappan Chidambaram made yet another television appearance that day to say that India was safe from the global turmoil, and "the only fear is fear itself."

There's no mistaking that the global financial crisis has found its way to India's shores at a time when the country is in no shape to weather it. The stock market is choppy, there's been a credit squeeze, interest rates are up, and banks continue to rein in loans as inflation hovers at 12%. Growth has slowed from the heady 9% of a year ago to 7.9% for the three months ended in June, and it's forecast to grow only at 7.5% for the fiscal year ending next March. Meanwhile, an already weak currency ended Oct. 8 at 48 rupees to the dollar, its lowest level in 5 years. The rupee has taken a 21% dive since January. The central bank's rate cut, which the bank statement calls "ad hoc and temporary," is likely to infuse $4 billion in domestic liquidity and shore up the rupee by selling dollars.

As the global financial crisis began unfolding in the first nine months of 2008, foreign institutional investors pulled out close to $10 billion from India, dragging the capital market down with it. The liquidity crisis, coupled with the credit squeeze and a weak currency, is already hurting various sectors. Banks have reined in retail financing, affecting home and auto loans. Car loans account for 70% of consumer auto purchases now, down from 85% a year ago. Meanwhile, consumers are deferring other purchases while financiers have been logging a drop in loan disbursal rates. "We are tightening our lending norms to certain customer segments," says N.R. Narayanan, general manager of vehicle financing at ICICI Bank (IBN), India's largest private-sector bank. Industry insiders say ICICI expects a 35% dip in disbursals this year, far underperforming the industry average of 16%. Narayanan says it plans to increase auto loan rates by 75 basis points to 100 basis points soon, which will further crimp sales. In August, industrywide sales fell 5%.

Corporate Money-Raising Efforts

The corporate sector is struggling, too, as expansion plans and merger activity are pushed to the back burner. With the capital markets drying up, and curbs imposed on external commercial borrowings, corporate India has been looking at alternate routes to raise money. Private equity players say listed and unlisted companies are approaching them for finance, offering 20% to 30% returns from the first year. And big Indian conglomerates such as Tata Group and Birla Group are looking at rights issues to raise money.

The weak rupee is of little help to exporters. Just last November, the textile and apparel industry was reeling from an 11% appreciation of the rupee, as U.S. and European clients were negotiating contracts and looking for cheaper alternatives to source garments. This time, though, the rupee has depreciated 21% in the past nine months, but the industry is still struggling. "What can we do when we are struck by a triple whammy?" asks Rajendra Hinduja, managing director of Bangalore-based Gokaldas Exports, India's largest apparel exporter, which was bought out by Blackstone (BX) in August 2008. The gains from a weak rupee are offset by rising input costs—cotton prices have increased 30% in the past year—the high cost of borrowing, and the financial turmoil in their main export markets, the U.S. and Europe. Gokaldas' clients include Nike (NKE), Reebok, adidas (ADSG.DE), and Tommy Hilfiger.

The IT sector, which should have been a beneficiary of the weak rupee, is also concerned about the future. The U.S. still accounts for more than half of the global revenues for major players such as Tata Consultancy (TCS.BO), Infosys Technologies (INFY), and Wipro (WIT), with banking and financial services pitching a major chunk. But the Wall Street crisis and the U.S. slowdown are expected to delay client orders and defer long-term project decisions.

Lakshman covers India business for BusinessWeek.

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