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Why India isn’t immune

Why India isn’t immune
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First Published: Sun, Apr 05 2009. 11 16 PM IST

Updated: Sun, Apr 05 2009. 11 16 PM IST
It is the Pearl Harbour of today,” Warren Buffett has been quoted as saying of the current economic situation. But have Indian policymakers and executives been able to assess the real impact of this situation—how deep, how long and how broad is the likely impact on the Indian economy?
Has the Indian government done enough to ameliorate the situation? What do people expect it to do? Are corporate chieftains rising to the occasion to understand the impact and to take remedial actions?
We find everyone, including economists, policymakers, academicians and business leaders, struggling to find cogent answers. “The Stern Stewart Mint Business Leaders Survey” is our attempt to provide clarity through an intelligent consensus (not a mass opinion poll) to such questions and more.
Also Read 23 February article by Sanjay Kulkarni that set the context for the survey, and to see the searchable database of 500 companies with mva and eva data
The emerging picture isn’t a rosy one, to say the least. The force and speed of the global downturn have sent most companies reeling, and many senior managers are yet to figure out exactly how to respond. Are some of us behaving like ostriches, our heads buried in the sand?
I distinctly remember interacting with the chief of strategy of a large business, and his sanguine, optimistic views puzzled me. However, even today, with the general election almost upon us and spin doctors working overnight to present things in better light, there is huge room for India to raise its head a little more and evaluate the situation.
Also See How the pain is being felt (Graphic)
Many organizations have been found wanting in their response, and not many have been able to size up the problem, let alone identify specific areas to address it.
Illustration: Jayachandran / Mint
The good news is that there are a few who not only have a handle on the situation, but also have specific action plans in place to best respond to the unprecedented situation.
The better news is that India stands to run along a unique trajectory that will help it come out of the slowdown faster and possibly help in its own little way to revive global sentiment.
The question is: Are we willing and acting enough?
The epicentre of this crisis lies in the US, although some are more specific to point at Wall Street, which itself changed irrevocably and virtually overnight in September. Thereafter, with the key economies reporting recession or worse, and an avalanche of bad news from companies worldwide, it seems the destructive action has moved to a different theatre—Main Street.
“Is it time for similar landscape changes elsewhere?” is another question that demands an answer.
To answer that, we must understand what caused this destructive global economic epidemic. Economies in bed with the US caught the illness almost unawares, while others which were sleeping with partners of the US caught it a bit later. In today’s relatively free and open environment, almost all economies seem to be affected with varied degrees of pain unless, of course, they are celibate. India too is affected. Why, how and to what extent, are the questions.
There are possibly two conduits. The first, a more indirect conduit, is an effect of portfolio allocation—if the US and other financial markets are dropping, companies have to sell their holdings in countries such as India in order to rebalance their portfolios. There is tremendous selling pressure, leading to the opposite of what one may have known as the “wealth effect”—people simply feeling poorer even though they may not be poor. Therefore, they are less willing to commit to spending, particularly on big-ticket items.
The other conduit is an outcome of the business relations that Indian businesses and the economy as a whole maintain with other businesses in other countries and with other economies. This affects revenue, costs and capital.
India has seen relatively less impact through this conduit than other economies. One possible reason is the limited ownership of our banking assets by foreign banks. For example, if Lehman Brothers Holdings Inc. in the US is in trouble, then in order to generate cash it will have to sell its assets, wherever they may be in the world. If it has a lot of assets in India, then it would sell those, which would drive down prices.
Fortunately, foreign banks do not own a significant proportion of banking assets in India. Most banking assets are in the hands of Indian banks. It is critical to look at how the Indian banking system is operating. Banks continue to lend money against reasonable collateral; the mortgage market is working quite well; and while the cost of money has been a question, there is enough liquidity and sources of credit in India.
The other possible reason is that while Indian companies have sourced financial capital directly through external markets, either through debt or equity, the foreign exposure is not significant enough to cause trouble. Companies have a healthy exposure to domestic sources as well.
Another possible reason is our limited exposure to exports and imports as an economy. However, companies that are more dependent on either exports or imports have been selectively, yet significantly, affected.
In the next part of this series, we will attempt to evaluate and segregate the impact on Indian industries through the direct and indirect conduits.
Sanjay Kulkarni is head of management consultant Stern Stewart’s Indian operations. Your comments are welcome at feedback@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Sun, Apr 05 2009. 11 16 PM IST