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Economic Highlights
Global Financial Crisis
BIG JOLT TO INDIAN FIRMS, INVESTORS
By Shivaji Sarkar
New Delhi, October 16, 2008
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 & Feature Alliance)
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