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Worst showing since 1990 - Views on News from Equitymaster
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  • Apr 1, 2009

    Worst showing since 1990

    India battling twin deficits
    The RBI has released a report on India's balance of payments developments during the last quarter of 2008. With December being one of the worst quarters in recent memory, needless to say that the report does not make for a good reading. The country's current account deficit, a measure of how much more it imports than it exports, has climbed to US$ 14.7 bn. Never since 1990 has India raked up such a huge number. Furthermore, this time around, even the capital inflows have not been able to offset the same. Infact, even they have witnessed a net outflow of US$ 3.2 bn, meaning that the twin deficits put together have depleted our forex reserves by US$ 17.8 bn. While the development is indeed sad, we are in a lot better position as compared to the balance of payments crisis of 1990 because unlike then, we are sitting on huge forex reserves of more than US$ 200 bn and could easily fund many more months of such deficits. Furthermore, the deficits were caused by sharp fall in exports and drying up of capital inflows, both of which are likely to improve in the coming months. Hence, no reason to press the panic button yet. However, if the scenario does persist, it may cause further downward pressure on the rupee.

    At what rate will India grow?
    There is more bad news for India. Just as India's current account deficit has ballooned to its highest level since 1990, the country's GDP growth is also likely to slow to an 18-year low of 4.3% in the calendar year 2009. This prediction was put forward by the Organisation for Economic Co-operation and Development (OECD). However, the institution has added that it has more to do with the global slowdown than India's own economy. Incidentally, another economic body, the Asian Development Bank (ADB) has also come out with a report on India's GDP growth, predicting the economy to grow by 5% in the same year. Important to add that these numbers are sharply lower than the one being spoken of by the country's planning commission of 6.5%. As per ADB, while India will grow at 6.5%, it will happen only in 2010 while OECD is of the opinion that even in 2010, India's GDP growth will remain at 5.8%.

    GM, Chrysler bankruptcy to affect few Indian companies
    Just as odds of bankruptcy at GM and Chrysler continue to rise by the day, there are a few Indian companies who are feeling jittery as well. Because at stake are deals worth nearly US$ 1 bn annually, ranging from outsourcing of IT services to supply of some critical auto components. As per a leading daily, in IT services the worst hit could be TCS, which counts GM amongst its top 10 clients and had also signed US$ 150 m contract with Chrysler last year. As far as auto components are concerned, few of them are already feeling the heat as orders from the two US companies have dried up. Furthermore, payments are also getting delayed on account of the two companies facing severe liquidity problems. While the situation is indeed dire, some are expressing hope that just as American banks were deemed to be too big to fail and were eventually rescued by the US government, even GM and Chrysler are too big to be allowed to go bankrupt and hence, not all is lost yet.



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