Thursday, March 5, 2009

Who slowed down whom?

Economic slowdown affects stakeholders differently...

The Indian economy has been slowing down for sometime and now with the 3rd quarter GDP growth rate for the financial year 2008-09 standing at 5.3 per cent, the fact gets further concluded. Well, one doesn’t even need to look at the Central Statistical Organisation (CSO) results to feel the pinch of the slowdown. Forget about having any positive growth rate on a year on year basis, given the manner in which almost all the sectors are finding it difficult to maintain their respective top-lines of the previous year. Till about six months back, the sectors like real estate, IT, core sectors like steel and cement as well as the investors’ darlings like the Pharma sector were wielding enormous clout within the investor community. Suddenly, the fairy-tale was over.

It just took one shakeout in the US economy to burst the speculative bubble that was building around most of the sectors, specifically real estate. In spite of the fact that for a country as big as India where there’s still an incredible amount of latent demand waiting to be tapped, it’s unfortunate that simply because some sectors in India that were heavily dependent on foreign investment or foreign demand are seeing a downturn, the sentiments have turned so much against that some of the other sectors which have been and would have continued to do well are also suffering. So while the IT and the Pharma sector were dependent on the demand from especially the US market, the real estate sector was simply catering to the speculators demand, which was fuelled by NRI money or that of the High Net Worth Individuals (HNI). As such India’s real estate sector was never willing to cater to the housing demands of the common Indian and things got worse as more and more investments started pouring in, making real estate acquisition almost out of bound for the end user. And interestingly not just private investors but most of the Indian Banks' exposure (both Public Sector Units and private) in such sectors have been exponentially high. The real estate exposure of Indian banks as per RBI data for the financial year 2007-08 has been an incredible Rs 5,99,670 crore.

Now that real estate has been hit by the ongoing slow down and there exists an impending fear that the sector is yet to bottom out, most of the banks as well as the private investors and financial institutions have been continuing to pump in more money. Even for those cases who stand to be highly leveraged. One prime reason for this is that if banks stop lending the much needed working capital, then the companies would completely sink and along with them would sink all the previous lending that have been done for years now. As a result of this most nonperforming companies in the most risky sectors are in the most privileged environment. And the ones who hold a promise to perform are facing the brunt, for not just investments have dried up, but also investors have become over cautious with respect to their investments. A case in point is healthcare: availability of affordable health care is still a major problem in this country and yet the exposure of banks in this sector is still nowhere near the exposure the banks have in real estate sector. The same holds true for lot many other sectors as well.

All in all, economic slowdown undoubtedly affects every stakeholder of an economy, differently. But unfortunately, the ones who are instrumental in creating such slowdowns are the ones who remain the most pampered, even in the worst of times. For them in certain measures, it's still the best of times!!


1 comment:

  1. Dear Sir,

    At the onset I am enlightened by your perspective on the cause effect analysis of the present economic fiasco. Veritably informative, and refreshingly different from the magnum opus of reviews and analysis proferred by pretentious rating agencies of the Goldman, S&P, razzmatazz. Whose quitessential claim to fame being that they conveniently decided to do a Rip Van Winkle while the world was battered black and blue by the sub prime crisis.

    That not withstanding, I was perplexed after reading in your column that our banking system is sitting prettied on pools of liquidity and choking out precious littles to the parched industries. So I decided to dig up a few facts of my own:-

    And VOILA!!! Here is what I dug up....
    In an endeavour to maintain domestic macro-economic and financial stability amidst turmoil in the global financial markets, the RBI cut CRR, Repo rate and reverse repo rate by 400 bps, 350 bps and 200 bps respectively during Oct 08-Jan 09. Add to it the recent monetary policy cuts.

    With reverse repo at 3.50% surely the credit freeze would thaw. I mean SBI's BPLR is the lowest among nationalised banks, and yet at 12.5% compare that to 3.5%. It seems to be a Hobson's choice. But fathom this, Banks deposits with the RBI ibn October 2008 was 2,24,171 cr. a figure that had risen, though deterred by rate cuts, to 2,32,509 0n 26,December 2008.

    Shouldn't it be the other way round? Any plausible explaination or should we send it of Mulder and Scully of the X Files under "The Lehman Effect" dossier