India’s global economic position

Thursday, January 08, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, investment, economy, global, India Watch, LSE, South Asia Group, aim, economic, Alex Wright, FTSE, Robert Beenstock

With the first quarter of 2009 now over, we have had the opportunity to develop a greater understanding of the global economic turmoil and the extent of its effects on India and the rest of the world.

India, although not suffering to the same extent as other emerging markets such as China, nevertheless continues to feel the impact of the global economic downturn. Major declines in the stock markets and commodity prices are weighing heavily on the Indian economy, Data from the Economist Intelligence Unit (EIU) now predicts that these declines are likely to continue for at least the next 6-12 months, with very little, it seems, that can be done in terms of prevention.

Domestically, Indian shares fell 3.2% in the period, reaching their lowest close in more than three months. Predictably, the poor performance of large Indian companies has led to further reductions in Foreign Direct Investment and, according to the Economic Times, overseas investors sold a considerable $1.7 billion of Indian shares in the first two moths of the year. The extent of the economic downturn in India this quarter can be seen not only through the state of the Bombay Stock Exchange’s benchmark Sensex index and commodity prices, but also through the performance of some of the largest Indian companies listed on overseas exchanges. In February alone, these companies lost a combined value of nearly $8 billion. The market capitalisation of Infosys, one of India’s largest BPO companies, fell by over $1.5 billion, and $1.8 billion was wiped from the value of Wipro Technologies, another of India’s largest BPO and IT service companies.

The Rupee also took further knocks against the dollar as it fell around 6%, mainly due to the continued downturn in global stock markets and the ongoing pursuit of investors to find ‘safer’ havens for their capital. According to Reuters Data, by March, the Rupee had fallen as low as 52 per dollar, with Barclays Capital saying it could fall to 56 per dollar in the next three months.

While in ‘normal’ economic conditions, a decline of the Rupee against the dollar would lead to increased exports, this has not been the case in these exceptional circumstances. The EIU reported last month that exports remained strong in the first half of 2008/2009, rising by 31% in April-September 2008. However, since then, the economic downturn has had a major effect on India’s export markets. A recent report by the Planning Commission to the Prime Minister, Manmohan Singh, stated that the best that could be hoped for would be for exports to register a growth rate of 6% in the next fiscal year. This outcome would be a significant decrease on the average 21% growth witnessed during the fiscal years 06-07 and 07-08. The Planning Commission’s report went on to say that, an export growth rate of 3% would be a more accurate estimate for the year ahead. Subsequent reports highlighted further issues with regards to India’s export market, which has fallen in every month since October 08 and which saw a dramatic 16% fall in January. The government now expects exports of only $170-$180 billion in the fiscal year 08-09, instead of the previously predicted figure of $200 billion.

In response to these recent events, the Government has introduced several policy relaxation measures with the intention of reducing costs and increasing trade flow. Whilst these measures may go some way to limiting the effects of the downturn, the underlying decline of external demand is something which cannot be easily rectified with governmental reforms.

On a separate note, the efficiency of some of the governmental stimulus packages may have been adversely affected by the National elections which have started this month. Many have suggested that there has been a degree of reluctance on the part of the incumbent government to initiate any drastic economic measures in the run up to the elections for fear of alienating voters. Once the elections have concluded, towards the end of May, India could potentially see a new government and subsequently a wave of economic reformations.

With a slowdown in capital markets and the decline in company valuations across the world in the past 8-10 months, there is now an even stronger focus on Private Equity (PE) as a major source of investment.  In India, PE inflow reached nearly $11 billion last year, and this year is also looking strong - considering the current economic circumstances - with experts predicting inflow of $5-$8 billion over the course of the year.

With the announcement of the G20 summit’s ‘historic’ $1 trillion economic boost earlier this month and with PE investors continuing to look at India for growth, there is an underlying feeling across developed markets that India remains a key destination for investment - with the potential for huge growth and significant returns. While a number of Indian companies listed on overseas exchanged have been effected by the global downturn, Indian companies listed on London’s markets, both Main and AIM, have out performed both the FTSE 100 and FTSE ASEAN indices this quarter and they continue to outperform the FTSE AIM All-Share, the FTSE AIM 100 and the FTSE AIM UK 50 indices since 1 January 2007. In a period of such unprecedented economic decline, the true meaning of these statistics becomes even more apparent.

Alex Wright
Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP

Robert Beenstock
Manager, Capital Markets, South Asia Group
Grant Thornton UK LLP