Managing director and CEO, Ican Investments Advisors Pvt. Ltd
I don’t think we are pushed to live on the edge, but definitely there will not be much of room to manoeuvre. The Indian economy, between late 2008 and early 2009, will slow its pace of growth and we will begin to see a perceptible slowdown because of external as well as internal factors.
We must realize that Indian markets are very much aligned to the global markets. There are enough indications to suggest that the US, which is 25% of the global gross domestic product, will go through a slowdown, if not a recession. If the US economy contracts even by 1%, it will have a domino effect in many economies, including India. There is no such thing as decoupling for a large economy like India.
Largely, the euphoria of the feel-good factor will go down. The whole euphoria in India is on account this factor and when it is missing, people will become overtly conservative. In this context, the flight to safety of the capital...will begin to happen in 2008.
Between September 2008 and March 2009 there will be general elections and this makes the next year’s Budget the last by this government. We have seen in the past that the Congress is the most insecure party as far as political drama is concerned. So, the next Budget will be for the ‘aam aadmi’, political populism replacing the economic realism.
As far as Indian corporates are concerned, they cannot go unaffected when these factors affect the real economy.
(As told to Anup Roy)
Managing director and CEO, Crisil Ltd
For the manufacturing sector, the key challenges are managing large capacity expansions and successfully integrating acquisitions, especially overseas acquisitions, besides maintaining profitability in view of increased input costs. Increasing delinquencies in retail assets are the key challenge facing the financial sector. However, these challenges are largely manageable and may not result in sharp deterioration in credit risk profiles of Indian companies.
Indian corporations’ global ambitions and intent to grow faster are the key drivers for the recent spate of acquisitions and capacity expansions. Indian firms have, over the last few years, strengthened their financial profiles on the back of sustained economic growth. Strong financials, however, can support increasing leverage and vaulting interest costs only to a certain extent. Beyond this, aggressive investment plans will impact their creditworthiness. Successfully managing growth and integrating acquired entities and prudent funding pattern for acquisitions and capacity expansions are the major factors that will drive credit quality of the corporate sector in the year ahead.
The ability of corporate India to pass on increased input costs of fuel and commodity prices will be critical to maintain profitability going forward.
On the financial sector, there are apprehensions in the market of deterioration in the asset quality of retail loans in India. Indeed, there has been some deterioration because of rising rates and increasing exposure to customers at the lower end of the risk spectrum.
The proportion of the riskier segment of retail finance, that is, unsecured loans—personal loans and credit cards receivables—has increased from 17% of total outstanding retail loans in March 2007 from 6% in 2004. This may result in gross non-performing assets (NPAs) in retail loans rising to 4% over the next two years from 2.7% as of March. However, the challenges are manageable.
Chief economist, Aditya Birla Group
India turned many a corner last year. Direct taxes now exceed indirect taxes, surely a sign of maturing tax structure. The trade ratio now exceeds that of even the US, signifying a comfort with openness. Employment growth, both organized and unorganized, is quite a bit ahead of population growth. And the rupee rose by about 12% against the dollar. These are all important and meaningful trajectory changes, not counting the unprecedented rise of the Sensex.
One consequence of the disruptive rupee rise has been an accumulation of $100 billion foreign exchange reserves in just one year alone. As we cross these important milestones, unaccustomed to an overdose of good news, we are entering what may be called “precipice” territory.
After four consecutive years of strong growth, do we brace ourselves for a cyclical downswing? What if there’s sudden contraction of US housing and stock markets? What if the rupee rises another 10%, threatening the entire tradeable sector of the Indian economy? What if oil continues to flirt with $100 price level? What about resource bottlenecks which are becoming acute? What if there’s a slump in Chinese demand?
These nagging questions, all of which are real possibilities for 2008, will be pitted against the inherent strengths of our economy (such as demography, savings, exports and a resurgent entrepreneurial class) and will determine the course of this year. A full-blown subprime meltdown will be bad news for the world, but may throw up big opportunities for Asian funds to buy cheap US assets. This then may be the year to boldly declare our sovereign fund intentions. Since this year will see a new leader in the White House, as also new regulators on Mint and Dalal Streets, we might witness big directional changes in policy. This is also the first year of the 11th Plan, which will to move into a high gear. And finally, the year will attract some election-induced fiscal push, too.