The year-long circus in the financial markets is nearing its climax. The main focus now shifts to the collateral damage that it will cause. Whilst surely the US will go into economic mourning, with a few cronies surviving, we have to start focusing on what it means to us. For India, the economic slowdown is not just this year, but it looks like the year after is going to be worse.
The first impact is the fear of lending. More than a credit squeeze, we are confronted with a liquidity crisis of a severe magnitude. The last few years of India’s growth has been fuelled by foreign capital. Domestic money cannot provide the platform for growth. How ever one cannot be sure on this aspect.
Investing in Indian enterprises now moves in to the ‘high risk’ bracket for global investors, for some time. Capital will be hard to come by and will be expensive. So, capital expenditure plans, acquisitions, etc, will have to be put on the back burner. Promoters, who have sold shares to some of these banks that have gone under/going under, will suddenly find the shares back on the floor of the markets, desperately seeking buyers. Those promoters who have money abroad, may find bargains by picking them up at low prices and then waiting for some time, to dump it on the next pool of capital that will come in. Those promoters who cannot will desperately approach domestic institutional investors to buy them or seek promoter funding and buy it themselves. If not, they can watch the share price falling. Foreigners were the only buyers whose actions made a difference. The shallowness of the domestic market will haunt us for some time to come.
We are enveloped by global slowdown. In addition, the last four to five years have seen nothing happening on infrastructure, as our government focused on staying on in power rather than calling the bluff of the leftists. It is too late to do anything to stimulate supply. Inflation has already taken care of that. As prices go out of hand, consumption is getting scaled down. Most businesses enjoyed abnormal profits and will now see them coming back to fairly reasonable levels. Two kinds of expansions get delayed. The genuine ones will get stuck due to lack of money and/or the unviable pricing. The grandiose ones, which were dependant solely on the largesse of a buoyant IPO market, would also get shelved. The supply crunch will worsen. Commodity prices across the globe should come down as demand melts away. Whilst this would help to cool off inflation, the real issue is one of shrinking demand.
Now, we are looking at a real deceleration in our economy. While most are down grading the current year growth to 6% or there about it is expected GDP growth may slow down to 5% or thereabouts in FY09-10. One can observe may be temporarily growth not happening across sectors. Five per cent may not be a bad thing in the global context, but it would sure be painful to accept. Now, everyone talks of a sustainable 8-9% growth. For this to happen, infrastructure has to take place. And if in the next election, we are again unfortunate to get a hotchpotch like what is now, then forget growth. For the next phase of growth to come, industry cannot manage on its own. The government has to provide the backbone. This fiscal cannot see anything happening, as the government moves in to election gear and keeps its guns trained on inflation.
Once you factor a slowdown in growth and earnings, markets even at today’s levels, begin to look expensive. In all likelihood, we will see a trending down market that would play out in four to five quarters. Only towards the second half of FY 2009-10 would our focus shift to the next fiscal. And let us pray that the intervening election results do not put the economy to rest and recuperation mode. For investors with focus and money, the next 12-18 months would perhaps provide better and better buying opportunities.