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Bangalore is right in the cauldron

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What lies ahead? The chains that link India to the global economy threaten to create a backdraught that threatens to draw India into a deep recession.
What lies ahead? The chains that link India to the global economy threaten to create a backdraught that threatens to draw India into a deep recession.

V. Sridhar

The slowdown is not confined to IT. Small and medium-sized units are feeling the pinch of the global meltdown

Reduction of the CRR by the Reserve Bank of India may not improve matters much

Traders are postponing transactions speculating on further depreciation of the rupee

Bangalore: Bangalore, famed for its integration with the global virtual economy, is now preparing for a hard landing as the global economy goes through a tailspin. The reputation of being India’s IT capital rings a little hollow these days as companies — not generally regarded as being the most transparent of corporates — cut salaries, reduce perks and now adopt an increasingly strident posture while laying off a large chunk of their workforce.

The slowdown not confined to IT. The crisis, which originated in the collapse of the biggest investment banks and insurance companies in the U.S., has now spread far beyond the United States. Europe, Japan and the Asian economies have since then been enveloped in the biggest crisis since the Great Depression.

All these now mean that the crisis in India is no longer a sectoral one affecting either the world of finance or the IT industry. Much more is in jeopardy. The chains that linked India to the global economy now threaten to create a backdraught that threatens to draw India into a deep recession.

Feeling the heat

As interest rates increase as a result of a liquidity crunch, manufacturing units, which are generally off the radar screens of the media, feel the heat. Small and medium-sized units, particularly those in the engineering goods and automobile ancillary segments, are “feeling the pinch,” said D. Muralidhar, president of the Federation of Karnataka Chambers of Commerce and Industry (FKCCI). Overseas markets, which were fed by suppliers from Bangalore, have “simply evaporated,” he added.

For a manufacturer of alloys and abrasives for use in the automobile and construction industries abroad, Mr. Muralidhar said, even the depreciation of the rupee will not help because industries in the U.S. and Europe are experiencing a severe slowdown.

Poor turnover

An industry source reckons that the turnover in the second half of the current year is likely to be only 70 per cent of revenues earned in the first half. An industrialist, who prefers to remain unnamed, said the recent reduction of the Cash Reserve Ratio (CRR) by the Reserve Bank of India — that portion of deposits that banks must park with the central bank — may not improve matters much. “The funds released may not be enough to result in a reduction of interest rates,” he said. Moreover, there is apprehension that increased liquidity may result in higher inflation. “After all, with elections round the corner, the Government may not want to push inflation up further,” he added.

Rupee depreciation

The depreciation of the rupee vis-À-vis the dollar is not an unmixed blessing for those outside the IT sector. For instance, import of Chinese goods are more expensive because the Chinese currency is pegged to the dollar. As the dollar appreciates, so does the Chinese currency vis-À-vis the rupee, which means that imports from China — from toys to raw materials — have become costlier. Moreover, because of the steep and sudden depreciation of the rupee, traders are postponing transactions speculating on further depreciation of the rupee.

Although the depreciation is theoretically supposed to act as an incentive for exporters, Mr. Muralidhar reckons that the weakening rupee may actually make matters worse. “We (industrialists) used to claim that the Indian markets are in good shape even if the global markets are in crisis,” he said. “But we cannot now wish away our integration with the global economy.” India is a much more “import-oriented economy now,” pointed out Mr. Muralidhar, implying that merchandise imports are far greater that exports. “The ill effects of more imports are greater than the growth in exports.”

The belt tightens

Mr. Muralidhar said feedback from FKCCI members shows that there is a reduction in occupancy rates in hotels, lower turnover at the more trendy restaurants, and reduction in the number of business travellers flying. Airlines such as Kingfisher and Jet Airways have been cancelling flights in the pretext of “rationalisation.”

In the real estate business, there are reports that some of the smaller companies have had to borrow at 36 per cent interest. The higher cost of finance has impacted the vehicle financing and housing sectors. “The chips are definitely down now and the smaller businesses are facing great difficulties,” Mr. Muralidhar said. “If the situation continues like this for six months, they will be wiped out.”

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