Posts Tagged ‘Business’

India’s growing pains

December 1, 2008

India’s growing pains
CNN) — To the litany of challenges that confront India’s path to a better life, we can now add subdued economic growth as a result of the global financial crisis.
A banana vendor stands on a flooded street as he waits for customers in Amritsar, India, on August 13.

A banana vendor stands on a flooded street as he waits for customers in Amritsar, India, on August 13.

After three spectacular years of 9 percent-plus annual growth, India will reach just 6.3 percent next year, according to the latest forecast by the International Monetary Fund in early November. The Reserve Bank of India is forecasting a more optimistic 7.5 to 8 percent.

While 7.5 percent may still sound a good result, it is barely enough for the economy to keep pace with the 10 million-plus young people who will join the Indian job market in 2009.

India’s major shortcomings in infrastructure, education, health care and environmental protection are well known, as are the constant problems of corruption, poor governance, rural poverty, communalism, domestic terrorism, child labor, discrimination against women and natural disasters such as floods and earthquakes.

But at least in recent years India could point to a strong economy as the platform on which it was making its push for higher living standards, social modernization and economic reform. Since May 2004, when Prime Minister Manmohan Singh and Finance Minister P. Chidambaram took on the reins of government, India’s economy has had a charmed run.

Strong growth in business sectors such asinformation technology, pharmaceuticals, automotive, financial services and retail have coincided with a better performing agricultural sector, and a housing and consumption boom driven by easier credit.

India’s young working men and women — more than half the country’s 1.15 billion people are aged 25 or less — have shown a much greater propensity to spend, compared to their thrifty, risk-averse parents and grandparents.

This willingness to go into debt rather than save has seen a massive rise in sales of consumer goods such as mobile phones, flat screen TVs, refrigerators, household utensils, motorcycles and cars. The same goes for spending on services, from tourism to healthcare to self-improvement.

Now the halcyon days appear to be over, as the international credit crunch flattens demand everywhere. Already the downturn is seeing job losses in sectors such as aviation, financial services, retailing and export industries, as companies tighten their belts and put expansion plans on hold.

The government admits things will get tougher, with Singh telling the nation on October 20 that “we must be prepared for a temporary slowdown in the Indian economy.”

Earlier that day, the Reserve Bank of India cut its key repurchase (short-term lending) rate by 100 basis points to 8 percent, saying it needed to ease the pressure on India’s credit markets and maintain financial stability. It followed that with another cut to 7.5 percent on November 1.
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RBI Governor Dr. D. Subbarao noted the global downturn could be deeper and the recovery might take longer than earlier expected. “Consequently, the adverse implications through trade and financial channels for emerging economies, including India, have amplified,” he said.

Economists and analysts have welcomed the central bank’s moves, which have included a 350-basis point reduction in the cash reserve ratio — the amount of money Indian banks must keep on hand — between July and November.

Tushar Poddar, head of Asian economic research at investment bank Goldman Sachs, said the RBI’s October 20 action was “well ahead of market expectations” and showed a bias towards growth and financial stability, against inflation.

Goldman Sachs had earlier cut its growth outlook for the 2009-10FY to 7 percent and has warned the figure could go lower if the international financial turmoil continues over the next few months.

But Poddar believes that India’s export drive — which has seen exports triple since 2003 to about $163 billion in 2007-08FY — may not suffer too greatly.

In a recent study, he found that about two-thirds of India’s exports go outside the United States and the European Union (the two trade areas most affected by the downturn) to China, Southeast Asia, West Asia and Africa. While Indian exports would slow, “the downside is limited,” he said. A lower Indian rupee would also help.

Foreign investment is slowing in line with the downturn. Morgan Stanley’s India economist Chetan Ahya noted recently that “adverse global circumstances” are weighing on India’s ability to attract overseas money. Unless there is a dramatic turnaround in the global credit markets, Ahya believes capital inflows could slow to $40-50 billion in the year ahead, compared with $110 billion in 2008.

On the broader political front, India has to deal with a range of internal and external risks that include domestic communalism-cum-terrorism and the constant threat of conflict with Pakistan over the disputed Kashmir territory.

Afghanistan, Bangladesh, Myanmar, Nepal and Sri Lanka all add to a difficult neighborhood, while India’s relations with China are cool at best, even as trade ties grow. Territorial disputes linger from the 1962 border war between the two.

That helps explain why India was named recently by Hong Kong-based Political and Economic Risk Consultancy (PERC) as the Asia-Pacific country with the highest political and social risk for 2009.

A report by PERC in late October assessed 16 countries in the Asia Pacific region, and assigned India the highest risk rating of 6.87, ahead of Thailand with 6.28. China was seventh with 5.33, behind Malaysia, Indonesia, the Philippines and Cambodia.

PERC cited uncertainties surrounding India’s coming general election — due to be held by May 2009 — along with rising communal violence and incidents of terrorism.

“The biggest risk is that a deterioration in political and economic conditions in neighboring Pakistan could aggravate social unrest in India further, and hurt national security,” it noted.

But it said India’s underlying attractions to foreign investors should remain, “no matter who wins the next election.

Prime Minister Singh, with six months of his government to run, is putting on a brave face. “It is when India is challenged that the Indian people rise to the occasion and convert the challenge into an opportunity. There is no place for fear,” he told the nation late last month.



Economic Woes

November 7, 2008

Forecast 2009: Your savings and credit

The prediction: Continued low interest rates on savings – but slightly easier credit

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By Ismat Sarah Mangla, Money Magazine staff reporter

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Where your rates are headed in 2009
Interest you’ll earn on savings will likely be a bit lower…
Bank money-market deposit accounts
Money-Market funds (taxable)
One-year CDs
…but you’ll pay lower rates on most of what you borrow.
New-car loans
Home-equity loans
Credit cards
Note: Rates are 2009 projections.
Source:Money Magazine estimates,, Crane Data, HSH Associates
Type Overall avgs
wrtBankRateLinkCdMma(‘mma’);MMA 2.44%
wrtBankRateLinkCdMma(‘mma10k’);$10K MMA 2.73%
wrtBankRateLinkCdMma(‘cd6mo’);6 month CD 3.03%
wrtBankRateLinkCdMma(‘cd1yr’);1 yr CD 3.50%
wrtBankRateLinkCdMma(‘cd5yr’);5 yr CD 3.89%
Find personalized rates:

(Money Magazine) — The good news: The government bailout plan that injects banks with capital will “help make credit somewhat easier to get” in 2009, says Mesirow Financial’s Diane Swonk.

The bad news: The difference likely won’t be dramatic. So don’t expect tough rules for getting the best interest-rate deals and the highest credit limits to ease up next year.

As for interest rates, the federal funds rate has dropped to 1%. That’s likely to slightly lower average yields on savings accounts, money-market funds and certificates of deposit.

On the bright side, the best rates available on credit cards and car loans are likely to fall a bit too (see the chart to the right). The exception: rates on home-equity loans (vs. lines of credit). HSH Associates projects them to rise from 7.9% to 8.3%.

In order to pay the bigger insurance premiums they now face, many banks will increase the fees they charge you for things like overdrafts and ATM withdrawals, predicts economist Mike Moebs of research firm Moebs Services.

By the way, more banks will almost certainly fail next year. Those most at risk are smaller ones that don’t benefit from the bailout, say experts.

The wild card
  • Consumer distress

Overwhelmed by mortgage and credit-card debt, Americans could default in droves. That could make banks even more skittish about lending.

The action plan
  • Check your coverage

No matter how shaky your bank is, remember that so long as your deposits are FDIC-insured (the new limit is typically $250,000 per institution), you’re protected.

To check, use the Electronic Deposit Insurance Estimator at

  • Shop for the best bank deals

Just because average rates on savings will be low next year doesn’t mean some places won’t offer slightly better ones.

Top-yielding savings and money-market deposit accounts provide returns that should almost keep up with inflation. GMAC Bank, for example, recently offered 3.75% on a savings account.

To find the best rates – and check for the lowest bank fees while you’re at it – click on the rate finder to the right.

  • Nab a good credit-card deal now

With more stringent regulation likely on its way and conditions tighter for lenders all around, dazzling offers like low-balance transfer rates for the life of the loan will all but disappear in 2009, says founder Curtis Arnold. “Take advantage of those while they’re still around,” he advises.

  • Shore up your credit

If you plan to borrow next year, see “Improve Your Credit Score.

From: CNN Business

Financial Crisis

October 29, 2008
A Pakistani money changer counts Pak rupees in Karachi, Pakistan on Friday, Oct. 24, 2008. Pakistan.

Emerging Economies Hit Hard by the Financial Crisis

A Pakistani money changer counts Pak rupees in Karachi, Pakistan on Friday, Oct. 24, 2008. Pakistan.
Shakil Adil / AP

Earlier this year, one of the great hopes for the world economy dodging the bullet of America’s subprime mortgage meltdown was the robust growth in developing economies — and the hope that the consumer markets they generated at home would take up the slack as Western consumers were forced to tighten their belts. But the financial crisis that started with homeowners walking away from mortgages on Main Street, U.S.A., has begun to roil the teeming bazaars of Islamabad, the old-world neighborhoods of Budapest and the gleaming office towers of São Paulo. Countries are now lining up, tin cups in hand, seeking bailouts from the International Monetary Fund (IMF). And the line is lengthening. Iceland got $2 billion; Ukraine, $16.5 billion. Hungary needs $12.5 billion, and then there’s nuclear-armed Pakistan, perhaps the world’s most combustible country, which needs up to $15 billion to stave off potential financial collapse. So dangerous is the situation in Pakistan that the government has to hold negotiations with IMF officials in Dubai — the IMF declared Pakistan off-limits for its personnel after a bomb ripped through the Marriott Hotel in Islamabad last month. Pakistan has just six days before its dwindling foreign-exchange reserves run out, the Foreign Minister told his German counterpart, Frank-Walter Steinmeier, on Tuesday. Steinmeier helpfully suggested that because the situation in Pakistan was so difficult, the IMF ought to expedite negotiations over the bailout that are set to conclude next month.

The massive global flight from anything but the safest investment — if, in this market, such a thing exists — started late in the summer, and has now crippled emerging markets. The speed with which this has happened has been extraordinary, and it took the IMF very much by surprise, fund insiders say. “A year ago, it was the emerging markets that were carrying the world,” says an IMF official. “Boy is that over.” In fact, countries like Russia and Kazakhstan that just six months ago were fat and happy on a diet of petro dollars are now burning through national “rainy day” funds and bailing out banks that had only peripheral exposure to subprime mortgages. Their problem now is foreign-equity investors — hedge funds in particular — stampeding for the exits.

But it’s not only sophisticated investors driving the crisis as they unwind their positions all over the world in order to repatriate dollars and meet margin calls. Consider the so-called yen carry trade, in which anyone could borrow money in the Japanese currency at extremely low interest rates (the key policy rate at the Bank of Japan is still just 0.5%) and invest in higher-yielding currencies like the New Zealand dollar, where interest rates were 6% or higher, and then pocket the difference. Unfortunately, the allure of the low-yielding yen also appealed to prospective home buyers in Hungary, where in the first quarter of this year, according to Budapest’s central bank, 5% to 10% of all new mortgages were yen-based loans. (You read that correctly: 5% to 10% of all mortgages written in Hungary earlier this year were yen-based loans.) Since then, the yen has soared in value against the dollar — reaching a 13-year high on Monday — as well as against most other currencies. That’s because investors all over the world are repaying yen loans or, in Wall Street’s jargon, “unwinding the yen carry trade,” as the flight to cash continues. That in turn has made the cost of a yen-based mortgage much higher for Hungarians, whose salaries are paid in forints, the local currency that has plunged more than 15% against the yen in the past six months, to produce a classic example of financial-sector turmoil trickling down to the real economy.

The financial crisis is now beginning to slow real economic activity — in some cases quite dramatically — all over the world. Consumer sentiment in Seoul, the capital of South Korea, has plunged to its lowest level in eight years, as the won, the local currency, has weakened sharply and stocks have plunged. Park Yung Tae is an office worker who was laid off earlier this year and invested his severance pay in the KOPSI, the Korean stock market. Big mistake. His life savings of $50,000 has been trimmed to just $10,000. Ship owners in Hong Kong say the rates for hiring the large container vessels that ship consumer electronics, toys and clothes to the West have fallen 40% in the past two months, amid a drastic slowdown in international trade. And across what had been the booming economies of Eastern Europe, growth has slowed sharply, economists say.

The real economic pain in emerging markets matters immensely to the economic prospects of the U.S. and other developed countries. Indeed, to the extent that that there was growth in the U.S. earlier this year, it was buttressed by strong exports. Now that prop underneath the world’s economy has buckled. Jonathan Lipsky, first deputy managing director at the IMF, says 100% of the global growth forecast by the fund for 2009 was to have occurred in emerging markets. “Now,” he says, “we have to make sure that potential is protected.” That’s plainly going to be an expensive proposition. The IMF is now ladling out cash as fast as suddenly bankrupt economies line up for it. The fund has $200 billion on hand and access to about another $50 billion to manage the intensifying global emergency. Chances are it will need all of those funds, and a lot more besides, before this is over.

With reporting by Stephen Kim / Seoul and Andrew Downie / São Paulo

From: Time