• APRIL 28, 2009

A tale of two countries

While the causes and effects of the global economic meltdown have been adequately documented, some key developments in recent times have brought out the differentiating factors between what is happening in India and China.

Growth not for the sake of growth
The World Bank and the IMF have rejected all possibilities of the Indian economy growing anything in excess of 6% this fiscal. While this may sound distressing considering the 9% YoY GDP growth clocked last fiscal, there are other facets to be looked into. The central bank in India (the RBI) is worried about insufficient private investment in infrastructure. At the same time, however, although lending by financial institutions is picking up, risk aversion is still forcing them to seek higher collateral while sanctioning loans. As per a business daily, the NBFCs have in certain cases, such as promoter funding, not just doubled the collateral requirement but also sought more securities to cover themselves against the risk of default. Infrastructure and vehicle financing NBFCs, which used to take collateral of up to 90% of the loan amount earlier, are now asking borrowers to place higher collateral either in the form of cash, equity or direct equity participation for availing loans.

On the other hand, China, our neighbouring country which proclaimed to have overcome the slowdown impact is now seeing red with the record high sums lent by some of its biggest banks. As per the Wall Street Journal, the explosion in China's bank lending this year as compared to the sharp contraction in credit in the Western countries, has been crucial to shoring up its economic growth. The Chinese government is nevertheless concerned with the size and unusual structure of the lending so far this year. In the first three months of 2009, China's banks have disbursed 4.6 trillion yuan (US$ 640 bn) worth of loans, which was nearly equal to the entire lending for 2008 and equivalent to around 70% of the nation's GDP for the quarter. Further, nearly 30% of these were working capital loans, which the government suspects that companies have borrowed and invested in stock and property markets.

India's resilient 'consumption' story
As the full year FY09 result season sets in full swing, investors are keen to know which are the companies that have been resilient to the slowdown and which are the ones worst affected by the same. The companies that are linked to the India's consumption potential, particularly in buying goods that do not require financing, have emerged triumphant. In fact, even global FMCG companies are eyeing this market to minimise the slowdown impact on their P&L. For instance, as per the Wall Street Journal, Coca Cola's sales in India climbed 31% YoY in 4QFY09, its 11th consecutive quarter of growth in the region. We had earlier spoken of McDonalds India having enjoyed similar fortune. Coca Cola, meanwhile, is so enthused by the opportunity that it plans to invest 20% more (US$ 250 m) in India this fiscal.

Transparency anyone?
During the difficult times in the past fiscal, neither the Indian government nor Indian companies have, however, been particularly transparent with regard to their operations. Leaving the Satyam episode aside, even excessive leveraging, pledging of shares by promoters, cancellation of orders and fiscal mishandling were shoved under the carpet for too long. At such times, it was interesting to come across a detailed track record of the US government's bailout programme on CNN's website. Probably we need to take some lessons here.

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