Indian Market Sees Terrible Slump In Investment

Published: May 6, 2009 at 9:42 AM | Author: Administrator
News Source: Indian Realty News - May 5, 2009

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Not long ago, Indian leaders confidently predicted this country would emerge largely unscathed from the global economic crisis. It is now becoming clear that that view was too optimistic, nowhere more so than in this city south of New Delhi that was once the symbol of India’s economic boom. A few short years ago, construction sites here buzzed 24 hours a day, crews working through the night, cramming down food from onsite trucks during breaks in the twilight. Now real estate sites lie fallow. The once-booming art market has slowed to a crawl. India’s phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39 percent of the country’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

In a recent report, the International Monetary Fund said Indian companies were among the world’s most vulnerable, after American firms, because they borrowed aggressively during the boom. Using data from Moody’s, the credit rating firm, the I.M.F. estimated in a recent report that defaults among nonfinancial South Asian firms could climb to 20 percent in the coming year, up from an expectation of 4.2 percent a year earlier. (American firms are expected to default on loans at a rate of 23 percent.) The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing, infrastructure and even art, which was bolstered by demand from globalization’s nouveau riche here and abroad. In the last quarter of 2008, the economy’s growth rate plummeted to about 5.3 percent, the lowest in five years. While consumer demand, particularly in the countryside, has kept the economy growing, the sudden slowing in the flow of foreign funds will make it harder for the country to grow fast enough to pull hundreds of millions of people out of stifling poverty.

"If India wants to go back to the 8 to 9 percent growth rate, private investment and low cost of capital is essential," said Jahangir Aziz, the chief economist for India at JPMorgan Chase. Indian policy makers say they believe the country will grow at 6 percent in the coming year, but the I.M.F. forecasts growth of 4.5 percent. To help fill the gap left by foreign investment, the government is spending more on infrastructure and social programs. The Reserve Bank of India, India’s central bank, has slashed its benchmark interest rates, but the cost of private loans has not fallen by as much. After a wrenching 58 percent drop in the Indian stock market last year, the market is up 42 percent since its March low and some foreign money has started to flow into equities. But economists like Mr. Aziz say the government needs to do a lot more, though few expect bigger interventions until the current elections end and a new government takes power in late May or early June.

In the meantime, activity here in Gurgaon has slowed radically. Just off the highway from New Delhi, a giant hole in the ground sits where the country’s largest developer, DLF, had planned to build the nation’s biggest mall, aptly named the Mall of India. DLF officials say that they may reduce the size of the mall and add office space to replace planned retail space. In the boom, DLF built many of the earliest projects that transformed Gurgaon from a sleepy village into an expansive city that has become home to companies like Ericsson and I.B.M.

DLF turned to foreign lenders and investors like D. E. Shaw, the New York-based investment firm, because they provided money "at lower rates of interest and in larger amounts," said Rajeev Talwar, an executive director at New Delhi-based DLF. "Today, you have no choice but to go to the Indian banks." But domestic lenders have become more reluctant to extend credit, and the interest rates they offer have made projects unfeasible. Last week, DLF reported that its profits fell 92 percent in the first three months of the year. A subcontractor, Sunil Kumar Verma, who lays marble floors for builders in Gurgaon, said that business was so bad that half of his 40 workers had returned to their homes in Bihar, a poor eastern state where there was also little work for them. "All they can do is sit, eat and sleep," Mr. Verma said.