Wednesday, September 24, 2008
Financial Crisis - The Potential Impact on India
America's financial markets have been hit by a credit storm. Companies that once symbolized Wall Street have disappeared thanks to the tons of mortgage securities that were purchased by these companies. So how does this crisis impact India?
Interbank lending has been slow globally. This means that banks are lending to each other at high rates which further implies more expensive credit .In short, capital has suddenly become more expensive than a few months ago and, in many cases, it may not be available at all. Many consumers today in India are quite leveraged. More expensive money means that floating rate loans begin to get more and more expensive.
Real Estate Market
The big risk is a possible repeat of what happened in 1996.Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. The big sector that potentially could be hit would be real estate, where building projects are half-done all over the country and some developers who touted their 'land banks' find now that these may not be bankable.The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening.
Any uncertainty in global markets always proves to be a poison pill for the stock markets.The drop in real estate and stock prices robs a much larger body of consumers of the wealth effect, which could affect spending on a broader front. The stock market values can fall further if the foreign institutional investors start pulling out money in large numbers over a short period of time.
As I write this, a number of companies in India especially in the IT and financial sectors are downsizing to cut costs. More than the downsizing itself, these companies will not be hiring in the near future and that will change the complexion of the job market.
A financial crisis of this magnitude is bound to affect India and other emerging economies. The scale of damage will depend upon what the American Congress does to minimize the effect to the global economy