Global Meltdown: Impact on India

Tsunami has struck, not the poor east, but the rich west in the form of sub prime crisis and housing market collapse. This financial fury claimed mortgage leaders like Freddie Mac and Fannie Mae, high profile investment banks like Bear Sterns, Lehman Brothers and one of the most venerable insurers in the world, the American International Group.

The collapse of subprime mortgage market and housing bubble lead to destruction of wealth worth trillions of dollars across the world. And since, most of the United States companies do business in India and with companies in India; It is sure that India wont go unscathed from this crisis. The impact is already visible in the form of volatile sensex, layoffs and depreciating value of Rupee.

Most economists think that current financial crisis is the worst since the Great Depression of 1929. Many believed India was sufficiently decoupled from the western financial markets. We have no subprime mortgage crisis like many nations in the west. For example, India has witnessed rapid growth and wealth creation in recent years. There was increased western investment in India.

However this financial crisis has shown that in an increasingly inter-connected world, there are always knock-on effects as a result, India has increased exposure to problems stemming from the west. Bombay stock exchange suffered huge losses and rupee value underwent a suffering.

A slowdown in wealthy western nations means risk of job losses. Companies like Lehman Brothers, Merrill Lynch, AIG and Morgan Stanley, to name a few, have their captive research units, brokerage arms, investment banking arms in India employing several hundred thousands in what are popularly called as BPOs and KPOs.
Lehman Brothers’ Powai unit itself employed about 2,200 people, most of whom will be rendered unemployed unless some company buys out Lehman’s India operations, but except the rumors about a possible deal with Nomura, Japan’s top brokerage group, its future is in doldrums.

Now as all the top financial giants have been either sold out, have filed bankruptcy, or surviving on Fed’s bailout, It would be difficult for them to maintain profits and to just cut even they will start downsizing their workforces. Layoff news is becoming quiet frequent in India nowadays. Sectors like real estate, aviation, IT have already started downsizing. There were news reports about DLF and Kingfisher reducing their staff strength by 300. Technology giants like TCS and IBM had removed more than 500 people citing poor performance even before the Lehman Brothers filed for bankruptcy.

In the end October 2008, a major meeting between the EU and a number of Asian nations including India resulted in a joint statement pledging a coordinated response to the global financial crisis. However as Inter Press Service reported, this coordinated response is dependent on the entry of Asia’s emerging economies into global policy-setting institutions. There is good news for consumers, if experts are to be believed real estate prices in India are likely to come down by 10-15 pc in next few months. The reason is simple mathematics, as most of the US companies that had bought stakes in Indian real estate companies, and now are facing a cash crunch. The outcome could be real estate developers lowering prices to lure buyers to fulfill liquidity gap.

Another area of concern for Indians is the rise of gold prices. We, Indians are very fond of jewellary, whether its marriages, festivals or family functions, jewellary is second to none – but because of financial problems in the United States global investors are losing their faith in Dollars as the store of value. They are turning towards Euro or Yen. In that case, they fill flock to ultimate source of value called Gold. The prices have already hovering around 13,000 for quiet sometime.

Indian growth story has been investment-driven and a decline in foreign investment will impact the growth prospects in the equity market. Though the spreads have lowered in recent days because of numerous policy measures, they are still high compared to 2007 levels. The Reserve Bank has been effectively able to manage domestic liquidity and monetary conditions consistent with its monetary policy stance. This has been enabled by the appropriate use of a range of instruments available with RBI such as the Repo I Reverse Repo rates, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR), the Market Stabilisation Scheme (MSS) and the Liquidity Adjustment Facility (LAF). So everyone is keeping fingers crossed and expecting this Tsunami does not lead to any major destruction in India.