Is India heading for a financial crisis?

Take 1. High Real estate prices. I was traveling to Bangalore last month and got a chance to meet a few entrepreneurs who are looking at the food services sector for new businesses. The thing which was stopping them was the prohibitive cost of real estate as part of their total operations cost. The slice of real estate expense could be easily between 20% – 30% which leaves little wiggle room for product pricing, labor costing and equipment.
Take 2. India Inc.’s overseas acquisitions. Indian companies’ appetite for acquisitions has increased drastically. In the first 6 months of 2007, India Inc. has struck more than 500 deals worth $55 billion. This started with $5 billion in 2005, $25 billion in 2006 and aiming to cross $100 billion in 2007. How are these buyouts funded? Simple, the companies leverage their balance sheet, the price of the equity in the stock market and a very positive credit rating for India. In the Tata-Crous deal, Tata Steel cobbled together a loan of £3.5 billion ($6.8 billion) from Standard Chartered, Credit Suisse, ABN Amro and Deutsche Bank. Smelling the success of past deals like this (a la Warburg Pincus making $700m from a $300m investment in Bharti-Airtel), big-name U.S. Private Equity firms like Blackstone Group, Carlyle Group and General Atlantic Partners, etc. have started pouring money in India. Only yesterday, Blackstone has coughed up $165 million for a 50% equity stake in Gokaldas Exports, which supplies to Gap, Nike, London Fog, etc.
Take 3. Inflation and credit crunch. Due to over-investment in non-organic areas, the money is flowing to non-core sectors like real estate and stock market further fuelling the cycle of increased cost of living and increasing salaries. The prices of essential commodities are rising faster than the rest of the developing countries. An upward march of rupee vis-à-vis dollar by 8% has curtailed the inflow. However, the flipside to the rupee appreciation was the wrath export units are facing with competition from other cheaper destinations like Pakistan and Bangladesh. To further control money supply, banks have increased interest rates — which have helped control inflation, but tighten the credit to businesses.
Take 4. Global subprime mortgage crisis. A lot of banks and Private Equity players are part of the subprime downward spiral in the US and Europe, also happen to be the players in India Inc.’s growth. The subprime losses are being touted at $150 billion in US alone. The clear outcome of the subprime crisis is a change in risk appetite of banks and FIIs who are pouring money in India and tightening of the money supply to cover their subprime losses.
India’s GDP is being pegged at around 10% but this has not made any dent for the common man. Government’s monetary policies are very cyclical without any insight into longer term plans for expansions and fiscal policy. This day all the factors are working in favor of India Inc. any cyclic change or even a 20% drop in stock market (it had a 200% run-up in last 2 years) would reverse India’s fortunes in the shorter term.

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