Sectors most affected by the slowdown in the Indian economy
Everyone’s talking of the slowing down of the Indian economy. For us, so used to robust growth of around 8-9 percent, anything less is hurting. So how badly has the global financial meltdown really hit us? I am presenting an overview/summary:
- The sectors least affected (directly) by the slowdown are Pharmaceuticals, Oil & Gas, FMCG, Media & Entertainment
- Those which will feel a moderate impact of the global crises are Power, Automobiles, Retail, Hospitality and Tourism
- The sectors most severely affected are Banks, Financial Services, Real Estate, Infrastructure and Information Technology
Lets take the severely hit industries first.
Banks have suffered losses, including some public sector banks like Punjab National Bank, Bank of India, State Bank of India and Bank of Baroda as they had an exposure to the instruments issued by Lehman and Merrill Lynch. It wasn’t just the private bank ICICI, although the latter posted the maximum losses due to their exposure.
However, if we take the overall the Banking sector in India, there is nothing to worry as heavy regulation coupled with the tendency of banks to be cautious (more than regulations stipulated) has protected the Indian banking industry. Even ICICI can easily handle the loss it has suffered. What it might impact is ICICI’s future plans to expand, but deposits are safe. For details check here.
Ongoing projects may not be affected but future ones might, by both private companies and the government. For example in Mumbai the future phases of the Metro might get hit. Many such future plans of all cities in India will get delayed and/or stalled. Stocks of infrastructure companies will take a hit.
Strangely it is those top IT companies with a lot of business abroad and in the US which are a safer bet because all their eggs are not in one basket. They also (usually) have more reserves. However the impact of loss of business will continue to be felt over the next one year as business of IT companies will reduce…financial institutions in particular will reduce their IT spends. Consolidation (abroad) of companies and Integration of their IT processes might mean more outsourcing (and more business for IT cos), but there is no guarantee that this outsourcing will go to Indian IT companies. The negatives for Indian IT is that two sectors, Manufacturing and Retail, will drastically cut their IT costs.
Indian employees on clients’ projects abroad would have to be relocated and/or issued pink slips.
The industry has taken a hit, with builders begging the government to reduce interest rates and give them other sops. But the sluggishness has been good for buyers. Housing prices have dropped 5 to 20 percent in all major cities. Retail rentals have also dropped.
When it comes to a slowdown in the housing market, one of the reasons put forward is that now speculators are wary of entering the market for short-term gains and this has reduced demand. Genuine buyers are more picky and hunt for bargains. Sellers have no choice but to give discounts…and this situation is expected to continue for at least a year.
As to how much further the real estate prices will decrease is a tricky question because even now there are some areas where the prices have hardly fallen at all. Clearly real estate at some prime locations is likely to remain more stable. With builders facing liquidity problems, their expansion plans have been hit and their present projects are being delayed. The minute the oversupply situation is corrected the real estate prices will stabilize. Maybe a year, maybe 18 months. No one really knows for sure.
Other sectors which have had a moderate effect of the economic meltdown
This sector, like the real estate sector, was already facing problems due to increase in interest rates and the auto sector more so due to increase in fuel costs, but now the demand for automobiles has sunk further due to an overall slowdown in the economy. The auto companies bottomlines will suffer as their exports will take a hit, but even then as compared to other countries Indian Auto companies will suffer less as their sales from exports is less.
Overall, exports are down. And this affects all industries with any export component, particularly textiles, jewellery and so on.
Hospitality, travel and tourism
Not only are travel budgets of companies being slashed, tourist flow from foreign countries is set to reduce. This will continue for at least 6-9 months. Hotels, as they face greater competition, will see their profitability affected as they slash rates and give discounts.
There will be an indirect impact on all industries. For example, FMCG (Fast Moving Consumer Goods) companies will be affected indirectly as consumer spending will reduce. High spenders are believed to be those from the IT sector and this will effect spending, particularly of luxury items.
Note: Thanks to Axinia for passing on to me the Dawnay Day AV Report from which I summarized most of the points. I have added more from current news reports.
(Photographs are all copyrighted to me.)
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