Economy in Eclipse

For most Indians, the global financial crisis has been more of a spectacle so far. They have seen and heard in amazement how several till recently high and mighty financial institutions of the western world have evaporated. They have seen how the US and Europe, the financial citadels of the global economy, have been grappling to keep their financial systems up and running. But the crisis hasn’t hit home in any significant way—notwithstanding scares and rumours about a bank or two. There have also not been any widespread job losses or income cuts specifically due to the financial crisis. That’s for two reasons: The Indian economy was already in a slowdown, the impact of which was being felt by consumers and producers alike.India is also one of the least globalised economies among the emerging markets, notwithstanding the all you hear of India’s rip roaring exports and successes in outsourcing.
Before the financial implosion began on Wall Street, the problem was more of managing the slowdown—cooling down the raging growth in credit to dampen the inflationary trend. Beginning September, the fall in commodity prices, most notably of crude, was expected to tame the double-digit inflation, just in time for the impact of a good monsoon to kick in. That would have meant an end to the cycle of interest rate hikes—good news for consumers and producers.
The eruption of the global financial crisis has suddenly stalled this possibility—at least for now. “It is, perhaps, the most intense upheaval in the global financial sector ever. And the linkages to India are quite complex and still unanticipated. Things will get much worse before they get better,” says Abheek Barua, Chief Economist, HDFC Bank.
The question now is how much will the financial crisis hurt the real economy and for how long? Will it prolong the slowdown and make it more painful?
The story in numbersLet us check the latest available numbers from the real economy. In the first quarter of 2008-09, the economy expanded by 7.9 per cent, against 9.2 per cent in the corresponding period of 2007-08. The cumulative value of exports for the period April-August, 2008 was $81.23 billion (Rs 3,89,904 crore), up 35 per cent over the figure for the previous year. During the same time, imports clocked around 38 per cent growth to around $130 billion (Rs 6,24,000 crore) over the same period last year.

Is Something wrong with ICICI Bank?

Last month, Mahalakshmi Mahajan (name changed) rushed to the nearest ICICI Bank ATM in Mumbai’s Dadar area to withdraw whatever little savings she had maintained for the last five years. Like Mahajan, there were many more jittery folk amongst the bank’s 27 million customers, nervously enquiring about the bank’s health. The trigger was the London subsidiary’s exposure of e57 million to Lehman Brothers of the US, which had filed for bankruptcy.This loss of Rs 375 crore was too big for small depositors like Mahajan to digest. What these depositors perhaps didn’t know is that ICICI Bank has a net worth of Rs 47,000 crore, an asset base of Rs 4.84 lakh crore and a comfortable capital adequacy ratio of 13.4 per cent (9 per cent is mandated).
Pankaj Namdharni, Senior Investment Analyst at SPA Securities, says: “ICICI Bank has a strong balance sheet as of now to handle any such crisis.” Global credit ratings major S&P, while maintaining that ICICI Bank’s credit fundamentals continue to be sound, can’t foresee a scenario in which ICICI Bank will go under.
That’s because “we also consider ICICI Bank to be systemically important and hence is expected to receive extraordinary systemic support in the event of any financial distress”, is how S&P analysts put it in a recent report.
The bank, for its part, filed a police complaint against Tirupurbased sub-brokers associated with Motilal Oswal and couple of websites for spreading rumours, which it thinks are responsible for the almost 50 per cent erosion in the share price in a month (although at the time of writing, the stock did recover and is now down by 33 per cent since last month). But at a time when blue-blooded investment banks have gone bust, is it really unthinkable that an Indian bank could go the same way? Marketmen point out that the aggressive selling on the counter could simply be a result of foreign institutional investors (FIIs)— who are anyway in sell mode— offloading ICICI Bank stock. The FII holding in ICICI Bank stood at 67 per cent as on June 30, 2008. However, to sound the death knell for India’s second-largest bank may be a bit too premature.