THE INTERNATIONAL - International Indian

[ FINANCIAL CRISIS ]
has witnessed a double digit growth. The
automobile industry mirrored a decline
in the month of October and going by the
trends, is unlikely to see any significant
changes in the coming months. Realty
sector has also seen massive destruction in
demand with sales falling sharply. Prices
have not come down significantly as yet but
analysts feel that it will be a matter of time
before prices of this asset class also come
down sharply, especially in the urban areas
where prices have spiraled by as much as
300-500 per cent over the last five years.
As of now, realtors have tried to ringfence
their profit margins and resisted all
moves to cut prices. One leading realtor in
Mumbai reasoned, “Even if we were to cut
down the prices from Rs.18000 to Rs.14000
per square feet, there is no certainty that
demand will go up proportionately.”
The same could well be true of other
industries. The government may well pump
in money, offer reasonable interest rates to
borrowers but it cannot force consumers
to go out and buy goods, even if they are
available at lower rates. It is not money or
lack of it which is keeping consumers away
and slowing down growth in the economy.
Nor it is dwindling exports.
Exports after all account for less than 15
per cent of the GDP in the country. The
real factor which is keeping consumers from
spending is FEAR. Fear about what could
possibly unfold in the future. And Indians
being what they are, they would try and
save for a rainy day. Salaried people who
have fears of being laid off try to conserve
cash not knowing if the next month’s salary
will be coming or if it comes, will it come
on time or will it come in installments.
Small businessmen would similarly defer
giving goods on credit fearing further price
reduction and the fear that the buyer may
not honour his commitments.
And there have been stunning price
reduction in metals and chemicals. Sulphur
for instance which was quoted around
$846 per metric tonne has dipped to $46
throwing calculations of all chemical dealers
in Western India out of gear. Sulphuric acid
prices have come down from Rs 15.50 per
“
The real factor
which is keeping
consumers from
spending is FEAR.
Fear about what
could possibly unfold
in the future. And
Indians being what
they are, they would
try and save for a
rainy day. Small
businessmen would
similarly defer giving
goods on credit
fearing further price
reduction and the
fear that the buyer
may not honour his
commitments.
”
liter to Rs 1.50 per liter. Price decline in
crude oil and Naptha are too well known
to be mentioned here but it is this erratic
price movement which has instilled fear
in the minds of producers and consumers
alike. Project funding becomes difficult as
investors are spooked about the feasibility of
the project after it goes on stream.
In a metric of risk-returns if the
lender feels that the risk is unduly high
in proportion to the foreseeable returns,
he will either try to back out or if he does
go ahead with funding would demand a
much higher risk premium. The issue is
not about whether the government in such
times should look at changing itself into
a progressive welfare state or adopt a total
hands-off approach and restrain interference.
Both are totally unfeasible alternatives given
the gloom and doom situation fast pervading
every sector in the economy.
The root cause is fear. Fear about the
present and fear about the uncertain
future. Reports about companies going
in for massive layoffs, banks going bust,
stock markets continuously seeking lower
bottoms, projects being shelved, salaries
being cut: there are enough negatives to
provide naysayers with uninterrupted
fodder. When fear starts becoming the
universal currency, quickly replacing
trust, one can see panic building up
around the globe. And this could well
spur more protective tendencies amongst
governments as they try to protect their
own constituencies from getting hurt. If
this were to happen global trade could
shrink still further. And in the process hurt
emerging markets even more.
Thankfully rational individuals at the
helm of the affairs understand the problem
and may not allow things to get out of
hand. Right now, however, it is difficult to
see what the government can do to replace
the currency of fear. Talking to the public,
clearly does not work. Politicians neither
in the country or elsewhere command
the respect of the common people, and
are unable therefore to be able to instill
confidence in the economy.
There are certainly no world leaders. Even
if the promises were to be backed by actual
fiscal and policy changes and concerted
action were to be taken by the governments
acting in cohesion, it would take quite a while
before the effects start being felt. In such a
scenario one can only wait to allow the events
to play out its full course. Let us not fool
ourselves. Times are bad and may continue
to remain so for some more months.
Daksesh Parikh, the Executive Editor of
Business India, is based in Mumbai.
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