The United States' sub-prime mortgage crisis, and the role of hedge funds in the commodity and currency markets were the main reasons behind the global financial meltdown. The global meltdown put pressure on the Indian economy too.
Adding to India's woes is the strengthening dollar against the Indian rupee. The US is an open and transparent economy and therefore the truth has come out, says Amreek Singh Sandhu, chief financial officer of express cargo major Gati Ltd.
Here's what Sandhu had to say:
On oil prices
The price of crude oil has come down from $147 to $43 per barrel. There was no sudden change in supply or demand. It was the hedge funds that played a big role in the oil price fluctuation. Big money players in the equity and forex markets were causing the turbulence. Greed was the underlying cause.
When the oil prices were rising, Indian oil marketing companies may have agreed to buy oil at a certain price as there were predictions that it would touch $200. This did not happen. I think they may still be importing at higher prices.
On realty
Fundamentals have no meaning today. Big players are playing big games. Real estate players went overboard without looking into the valuations and affordability of the buyers.
On India
In India the situation is not as bad as it is in the West. Our business is linked to the country's gross domestic product. Movement of goods is always two to three times the GDP. There are two types of goods, basic goods and luxury goods. Demand for basic goods moves in the direction of the economic growth.
The pharmaceutical industry, food industry, FMCG, etc may not be affected too much, but sectors like automobile, IT, electronics and electrical industry, white goods, etc will be hadly hit. Our business too may be impacted marginally. Liquidity will be a concern because of cash crunch in the banking system. Customer payment will be lax. It's a vicious cycle.On inflation
Inflation will come down to around 6-7 per cent by March 2009 as there will be no buying power because of a liquidity crunch and price will crash further.
On new projectsAs far as capital expenses are concerned, we will divide them into two categories. If 50 per cent of the project is already completed, then it will be seen through. Other new projects will be analysed again keeping in mind a long-term plan. No new big initiative will be undertaken till the financial scenario improves.
On layoffs
Attrition rate in this industry is normally high, which is expected to come down now. Our assets are our people we don't foresee any reason to retrench people. We are looking at how to get best productivity and depute them in new opportunities.
Types of cargo services
We have transport, express and air cargo services. We are not in the transport sector. Express cargo is costlier than normal transport because its door pick up and time sensitive. Liquidity crunch makes businessmen use express cargo because the turn around time for the working capital improves.
Every one is looking at better inventory management and turnaround time to sell faster and collect money, which goes in favour of express players. Surface express cargo is is about 72 per cent of our express distribution business. We expect this to pick up. Air transport which constitutes about 10 per cent, may slow down if customers start looking at lower carrying cost.
The government role
The government has reacted efficiently to prevent a disaster. Almost Rs 2.5 lakh crore ($50 billion) have come into the system after the Reserve Bank of India announced cuts in cash reserve ratio (CRR), repo, reverse repo rates and SLR rates. This has helped maintain the dollar rate and the current account deficit.
But the money has not really come into the system for businessmen. The CRR cut effective from November 28 will bring some more liquidity in the system. We don't know how the dollar will behave in near future. The RBI is using foreign reserves to control the dollar whereas the dollar outflow is going up due to crashing equity markets and gap in balance of payments.
Who will benefit?
The common man who doesn't invest in the stock market will benefit. Commodity prices will fall further because when the demand is low, prices are bound to come down. However, power will get costlier because new projects may be delayed due to non availability of funds/financing impacting further power generation/production. Basic goods are always cheap in a 'recession'.
But some projects will be shut down due fall in demand. Prices will start rising in 2-3 years time. In the long run, the dollar will be weaker because US may take longer time to come out of crisis.
On the stock market & banking
Stock markets influence the exchange rates and liquidity. Foreign institutional investors have sold/withdrawn $12 billion from the stock market since January 2008 due to the economic crisis and crashing equity market. Panic and fear have been the biggest problems.
It has resulted in people moving their deposits from the private banks to public sector banks. Our banking system is strong. The fundamentals-deposits to loans ratio, non-performing assets ratio, capital adequacy ratio is good. Our savings-to-GDP ratio is 28 per cent and our investments-to-GDP ratio is 27 per cent, which is even better than many developed economies.
Is India safe?Indians believe in investing in gold, fixed deposits and real estate and a small percentage of the investors trade in stock markets. So we are safe from the economic crisis but this can't go on for long. The Index of Industrial Production (IIP), GDP figures, current account data, foreign direct investment and exports-imports data are very dismal. They do not show the extraordinary 9 per cent growth. Economists, policy makers and bankers have reduced India's growth rate from 9 per cent to 7-7.5 per cent. Even when other nations have entered into recession, India's growth rate is at 7.5 per cent. But in the end, India cannot escape from the economic crisis that has hit the world. In 3-4 months we will begin to see the effects of a slowing Indian economy. The only way out of this is a coordinated action plan by all the governments and policy makers of the world. A 'Brentten Woods' like action plan is needed, where policies and regulations were framed and implemented and new financial institutions were established. We need to think out-of-the-box to find a solution to this problem or else we may face a painful recession or a "depression" in the near future.
However, governments all over the world are aware of the crisis and take several steps to tackle the crisis. We hope as a developing nation, we will take this challenge and come out of it much stronger.
