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Home > Media > Lehman collapse: India's economic elephant is still on the move 12 months on

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Lehman collapse: India's economic elephant is still on the move 12 months on
The Daily Telegraph
16th September 2009

A banking crisis born in the west blew the confidence out of India's sails. But a year on Dean Nelson in New Delhi finds that belief and growth is returning.

This time last year Anil Ambani was sitting on top of a $42 billion fortune, the world’s sixth richest man, and was being tipped to become number one on the list within a few years.

What a difference a year makes. Twelve months later, the global meltdown had swallowed $32bn of his personal net wealth and relegated him to number 34 in Forbes magazine’s rich list. He had been its largest gainer in 2008 but the world’s biggest loser in 2009 as shares in his Reliance communications, energy and finance companies crashed.

His sense of shock was widely shared throughout the sub-continent – theirs was, and remains, a growth story, but a crisis made in the west had blown in from left field and swept India’s confidence away with it.

Throughout the country export-dependent businesses froze new recruitment, major private sector construction projects, the new glass and steel shopping malls which were springing up all over the major metros, ground to a halt and previously-soaring residential property prices went into freefall.

Around New Delhi, thousands of illiterate construction labourers from poor states like Bihar and Uttar Pradesh left their makeshift tents and returned to their villages as work dried up.

In Surat, the capital of the world’s diamond industry, the crunch became a life or death matter for the cutters and polishers whose sense of shock at the turn of events was greater even that Anil Ambani’s. In 2008, their local growth rate had been double the national 8pc, reflecting their 80pc share of the world diamond polishing market. But by September last year, when most Indians buy jewelry to mark the Diwali festival, workshops were closing, and many workers found they had loans they could not pay. More than 40 redundant diamond workers took their own lives in the first three months of this year.

They were among two million Indians who lost jobs as orders dried up in export industries like textiles and handicrafts, and investment in real estate slumped by 80 percent. Commercial rents dipped by more than 40pc in India’s capital New Delhi, and its 2008 growth of just under 15pc fell to 8.6pc. Manufacturing growth shriveled to almost a quarter of its 2008 figure.

The Congress-led government stepped in to cut interest rates, refund services taxes and announced measures to refinance the housing sector and help small and medium enterprises, but it has been India’s ‘backwardness’ and its strict regulatory control in sectors like banking and financial services which have been the saving of it. The Reserve Bank of India’s strict rules on investments and financial instruments protected it from the trade in toxic debts which hit bigger banks in the West.

While India’s growth has slipped from eightpc aiming for double-digits to just above six, confidence returned in June, when the country’s service sector, in particular its Knowledge Process Outsourcing industry, began rehiring and the strength of India’s rural demand reassured investors that its growth would continue.

A partner in a leading British accountancy firm in India said its continuing growth had kept it in a virtuous circle – Western firms looking to cut service costs could strike deals with Indian service providers and be confident they would still be thriving this time next year.

Service companies had been much more agile in picking up business from Western firms desperate to cut costs while redirecting their focus to growth areas like Latin America.

“India’s rural economy, its second tier towns and its internal domestic market, is still growing…the image of India as an elephant, slow to start but hard to divert is very apt,” he said.

Nitin Jain, Principal Investment Manager of Kotak Mahindra Bank, said he expected to see that growth rise to 7.5pc next year, fuelled by encouraging rises in exports and domestic demand for and small cars and motorbikes. Maruti, India’s largest motor manufacturer showed a 30pc increase in sales last month.

But the revival of the European and American banking sectors has played a big part in the return of confidence in India. “For the Indian IT sector, the biggest customers are the banking and finance sectors, and they have suffered massive pain post-Lehman. But India is now seeing the worst is behind it, there’s more stability, the customer is back,” he added.

The truth in his comment is reflected in the latest foreign direct investment figures which show a 56pc increase for July 2009 over July 2008.

But it is also there in the comeback of Anil Ambani. Despite losing more money last year than any man on the planet, he has bounced back with a series of major investments, including $325m for a 50pc stake in Stephen Spielberg’s Dreamworks studio.

The acquisition was, Anil Ambani said, “the cornerstone of our Hollywood strategy as we grow our film interests across the globe.” Slowly but surely, the elephant is on the move.

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