International | Dec 09 2008
By Greg Peel
As figures are released today showing a drop off in Australian tourism, spare a thought for India. Like every other nation on Earth, India’s economy has taken a turn for the worst in the global economic slowdown. But the attacks in the country’s business capital this month have now scared away foreign investment for a different reason.
Four of the world’s biggest pharmaceutical companies – Merck, Daiichi Sankyo, Glaxo and Sanofi-Aventis – have all abandoned business trips to India in the wake of the Mumbai siege, Bloomberg reports. This is indicative of a sudden realisation that while India may have seemed safe enough it is actually the scene of constant terrorist activity. Tourists are clearly now giving the subcontinent a wide berth. International sporting events have been cancelled. And it wasn’t lost on the business community just which hotels were targeted in Mumbai and why.
With an election looming, embattled Indian Prime Minister Manmohan Singh is under pressure to respond to the economic crisis. And so he did, last weekend. India joined Australia, the US, France and China, among others, in announcing an economic stimulus package. But at US$8bn it’s hardly going to move mountains. India’s big cousin in the highly-populated developing world – China – has pledged US$500bn over three years. The US is now up to about a gazillion, but it has reserve currency status to fall back on. France, with a population of 60 million to India’s billion plus has pledged US$50bn. Even little Australia has chimed in with around US$6bn in direct consumer stimulus, not to mention the US$15bn-odd budget surplus the government is prepared to sacrifice.
India cannot boast such luxury. While China has more surplus than it knows what to do with, India will be running a budget deficit of around 10% of GDP following the stimulus package. The Indian Minister for Commerce and Industry has ensured a disappointed business community that the US$8bn is only a first step of more to come, but come from where?
The Indian central bank has also joined in the world’s coordinated fiscal/monetary stimulus strategy and dropped interest rates for the third time in two months. The repurchase rate has fallen from 7.5% to 6.5% and the reverse repurchase (cash) rate from 6% to 5%. It is the first drop in the reverse repurchase rate since 2003. Indian rates had reached high levels as the country battled with soaring inflation earlier in the year as everyone else did, but the effects still linger. Inflation is still running at 8.4%, down from 12%.
In another move, the government dropped the subsidised cost of petrol and diesel by 6% and 10% respectively as an inflation fighter.
In general, the global slowdown looks like shaving up to 2% off the previous 9% estimate of 2008 GDP growth. Like China, India is heavily reliant on its export industry, which accounts for a quarter of GDP. Export growth fell year-on-year for the second quarter in September by a margin of 12%. This is the first year in seven that export growth has fallen at all. BusinessWeek notes that the country’s textile industry, which employs a mere 88 million people, is straining. The government had targeted US$30bn in revenue from textiles in 2008, but that now looks like being US$20bn. Consumers make up 60% of the economy, and while consumption in the September quarter was a globally healthy 5.5%, it was still a four-year low.
And now the downside risk to Indian growth has increased even further in the wake of Mumbai. Economists are expecting more monetary policy easing soon. India has relied heavily on offshore borrowings in its economic surge, but those sources have long since dried up. In the fiscal year ended March, 40% of funding for Indian industry came from either offshore borrowing or local stock market IPOs. The stock market is down 60% this year. The government is trying to encourage industry to access local banks for funding.
But it’s not that simple. While state-owned banks have been quick to pass on central bank rate cuts, non-state institutions have been sitting tight. There is no domestic credit rating system in India, and most small and medium business lending is conducted on the basis of familiarity between family businesses and their local banks. While this smacks of a more austere system of days gone by even in the developed world (when in Australia, for example, a business owner would form a close working relationship with his local bank manager), it just goes to show that like China, India has a way to go if its economic emergence is to be supported by a globally comparable local financial sector. Local banks have indicated they will pass on rate cuts, but not until those rate cuts are more significant.
They may not have to wait too long. Industrial production makes up a quarter of India’s US$1.2 trillion economy, and the October IP data are due out on Friday. It is anticipated they will show the first drop in 14 years. Motor vehicle sales are a good benchmark for Indian IP in general, and October sales dropped 14%.