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?

Credit Markets

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.

Stock Market

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.

Employment Market

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

Tuesday, September 23, 2008

India benefits the American worker


There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all.

A number of hi tech jobs have moved to India from the US and people often wonder whether this trend benefits the US in anyway. So, how does a developing India benefit the American worker?

Outward Indian FDI

The increasing number of home-grown Indian firms (e.g. Tata Group, Infosys,Ranbaxy) and their improving ownership-specific advantages, including financial capability, are among the key drivers of outward FDI. In addition, the growing competitiveness of Indian firms involved in providing outsourced business and IT-services to foreign clients has provided a push for these firms themselves to go offshore to operate near their clients and to look for new markets. All this requires considerable investments and hiring local candidates who understand the market.

Examples

  • The Tata Group that operates 16 companies in the US -- from luxury hotels and beverage business to manufacturing, telecom and IT consulting -- employs over 5,000 Americans.
  • Ranbaxy is creating jobs and stimulating the economy in North Carolina, New Jersey and Florida
  • Mahendra & Mahendra is planning to launch a car in the US.
  • Infosys and other IT companies are employing US workers for their American operations in search of newer markets.
Some of the Indian companies with a strong US presence include Bharat Forge, Essar Group, HCL America, ITC Kitchens of India, Jet Airways, Mahindra USA, Ranbaxy, Tata Group, Thermax and Wockhardt USA. Together these companies are in industries as diverse as steel, airlines, pharmaceuticals, auto parts, healthcare, hotels, chemicals and information technology.

According to one study Indian companies have created 30,000 new jobs in the US.

India - US Nuclear deal

India plans to import eight 1000 mw nuclear-powered reactors by 2012 and the US hopes to win at least two contracts, which it feels will significantly boost its atomic industry. The envisaged sale of at least two reactors, to what it calls ‘lucrative and growing Indian market’, would create 3000-5000 direct jobs and 10,000-15,000 indirect jobs in the US nuclear industry, the US Department of State has said.

Government support

The Indian government's adoption of liberal measures and various monetary relaxations paces up India's economic progress. Indian companies are now increasingly being encouraged to open units in the US and other developed nations. The same Indian companies that were blamed for "outsourcing" are now providing large-scale employment opportunities in the USA giving rise to a ''reverse outsourcing'' trend.

Increasing US Exports

Over the last five years, U.S. exports to India have more than doubled, helping to create better-paying jobs in the United States. The United States and India agree that trade is essential to promoting global economic growth, development, freedom, and prosperity. A richer India will have a greater purchasing power to buy US goods indirectly impacting job growth in the US.

Trade will always be a two way street and the India- US trade relations is only the beginning. With the growing strategic ties between the US and India coupled with people to people contact both countries are poised to mutually benefit from this cooperation. In years to come, USA is likely to receive more investments leading to job creation in the USA. Hence, the American worker should not view India as a threat but as a partner.