What does this imply for us here in India ? The Government,
the Finance Minister and various other government functionaries have been rather
too quick to clarify that this will not affect India significantly, since Indian
banks and financial services companies have not over-extended themselves. While
the direct impact may not be as significant as in the US, even in these early
days after the eruption of the crisis in the US, one reads various reports
everyday about the indirect effects of this crisis in India.
One direct impact of course has been on the subsidiaries of
such companies in India, where bankruptcy/sale has created uncertainty about the
continuation of business by these entities. Employees of such subsidiaries are
suddenly left wondering whether they will have their jobs at the end of the
month or not. With job uncertainty looming, employees are hesitant to spend as
freely as before, impacting demand for goods and services.
Most infotech companies in India have had a high level of
exposure to the banking, financial services and insurance sector. The chaos and
turmoil in this sector will significantly impact their growth, and the frenzied
hiring by companies will definitely now be a thing of the past. Unrealistic
salary hikes may no longer be the norm for the next few years.
The second impact will certainly be on foreign direct
investment. Many of these entities had been investing directly themselves or had
been active in raising foreign funds for investment in India either through the
private equity route or through different types of funds. Such initiatives will
obviously now be significantly reduced, as these entities would focus their
energies on raising funds to ensure their own survival. Lending by these
entities would also be restricted, in order to limit their exposure.
Liquidity has almost dried up, particularly for risky
businesses and ventures. Banks and financial companies have become extremely
cautious in lending. Businesses which had based their expansion plans on the
basis of recent growth figures have started cutting back on their proposals to
expand. This is bound to affect growth of Indian industry and business — the
days of assured growth are over.
The real estate market, which had assumed the proportions of
a speculative bubble, has been particularly impacted in two ways. There are few
takers willing to splurge their liquidity on buying real estate, or renting real
estate at the prevailing unrealistic levels. Real estate developers have so far
been desperately holding on to their prices, hoping that the crisis will soon
tide over. However, the easy flow of money that fuelled the growth in real
estate prices has dried up, and not only that, money committed to certain
projects by some foreign investors is no longer forthcoming. Further, most of
the foreign capital in this sector which had been attracted on the back of
assured returns offered by Indian developers would soon start falling due for
payment, aggravating the liquidity crisis of Indian real estate developers.
There is bound to be a shakeout in this sector, with the highly leveraged
players forced to sell out to better capitalised developers. Hopefully, real
estate prices will now gravitate to more realistic and sane levels.
Our understanding of finance is undergoing a thorough
revision. Complex financial concepts such as value at risk, complex derivatives,
securitisation, which were once regarded as cutting tools of the financial
services business, are now shunned. Stand-alone investment-banking, so far
regarded as a money-spinner, is no longer regarded as a viable business.
Government intervention, which was sought to be minimised during good times, is
now welcomed.
All in all, the next couple of years at least should see
tightening of conditions on the economic front, with a natural fallout on all
services and businesses, including on our profession. Fortunately, the
Government still has scope for liberalisation of various sectors of the economy,
which can help improve efficiency and create opportunities for business, so that
we continue to see some growth, unlike the developed countries of the West,
which expect to see a decline.
As professionals, we also have the advantage of seeing newer
areas of practice emerging, which can help us grow in spite of the slowdown. We
need to prepare ourselves to meet this challenge, so that we are not caught
unawares by the slowdown. We also need to be extra careful in our audits, to
ensure that we are not blamed for business failures sought to be covered up by
managements.
There is however a silver lining. Major bankruptcies, such as
in the US, are unlikely in India. In the long run, new financial structures will
emerge. The US dominance may reduce with Asian countries emerging stronger. This
crisis may mark the beginning of a new phase in the world economy, with
opportunities for all of us in the long run.
