Column : Slow speed zone

Font Size

Print

Feedback

Email

Discuss

: employ a large chunk of India’s younger workers. Barack Obama’s win could dash the career hopes of many such young Indians due to his fierce anti-outsourcing stance. Can we blame him? With the US economy now fighting unemployment, there would obviously be limited enthusiasm for sending jobs out of the country.

A significant portion of investments was financed by foreign funds, FCCBs and ECBs. It will be some time before these avenues once again become viable funding options. First, the global financial institutions are themselves in a de-leveraging mode. Anecdotally, even a large company from India could be able to raise funds globally at around 600-800 bps over LIBOR, a spread that is still not allowed by regulation even after significant relaxations in India’s ECB policies. Second, the whole definition of risk capital is likely to undergo a sea change with greater regulatory holds on global financial institutions. Thus it could be some time before capital moves back into emerging market economies such as India’s. Third, the overall savings potential of the Indian economy will be lowered by a higher fiscal deficit, lower private sector profits and lower levels of disposable income in the hands of the working population.

Thus investment demand is likely to suffer significantly. Projects not yet started will possibly be shelved while projects that are mid-way will create a huge pressure on the shrinking rupee resources. Even after large doses of monetary easing by the RBI, the borrowing rates of companies are unlikely to come down immediately. Further, risk-averseness will be the order of the day so far as lending activities are concerned. And this is likely to bring down capital expenditures sharply.

For the current fiscal, we could still grow at around 7%, (though with a downward bias), but bigger pains may be awaiting India in the coming fiscal. With elections around the corner, big bang fiscal decisions would have to be held back. But Indian companies today have better sizes and balance sheets to sustain weaker demand for longer than they could in the previous slowdown cycle of 1994-96. India’s reforms process has definitely led to structural changes that would prevent India’s GDP growth from dropping to 3-4%. A sustainable level appears to be around 6-6.5% for a few years to come.