A sputtering world economy, with the Eurozone crisis compounding matters, has affected economies internationally. Economic cross linkages and ever increasing inter-country trade and investments has inexorably created a spider’s web, where increased tension on even one strand of the web is transferred on to the others. The news reports of 1st June 2012 headlined the ‘so-called’ Indian economy woes with GDP growth marked down to 6.5%, the lowest in nine years. A contracting manufacturing sector amid slower growth in the services sector and inflationary pressure is creating a state of stagflation in the economy. Basic goods prices increased steadily as inefficiencies in supply chain logistics and distribution continued to be a concern. However, inflation also saw a decline to 6.7% by last quarter of 2011-2012, a drop of three percentage points over the fiscal year. So the situation is worrisome, though certainly not alarming.
The services sector contributes a lion’s share to the Indian GDP and its slow growth over 2011-2012 is a pointer towards offshoring firms struggling to get new business contracts and thus seeing their business plans being impacted. A sliding rupee has also been a source of concern. However, it is expected to have a positive impact on exporters and especially the Indian software and services exporters, thus in a way helping the services industry during times of tightening business margins amid competition from other Asian countries as an outsourcing destination. Currency volatility is something that services firms need to guard themselves against as it creates a misleading environment and affects business planning.
PE (Private Equity) funds are looking at a potential USD 3 billion worth of exits from real estate projects. Most of them entered the market in 2006-2008, when the rupee was significantly stronger against the dollar. As per Indian FDI regulations, a three year lock-in was mandatory. Keeping in mind asset lifecycles, funds plan their exits over a five to seven year period. However, a depreciating rupee will slow down planned exits substantially as funds will keep in mind the lower dollar amounts they will potentially receive during such an exit. But, with commercial property prices in most prime markets close to their historic peaks, exits will still allow PE firms to make healthy returns. A weak rupee may also spur new players to enter the real estate market at attractive valuations, as by investing a lower dollar amount they can seek to maximise profits when the currency stabilises. Such new players can also provide potential exits for existing players looking to call in their returns. With the RBI tightening money supply and trying to rein in inflation while not foregoing economic growth, some positive noise on the reforms front is needed to kick-start the economic momentum. A positive reform process can offer PE players new investment avenues in sectors such as retail, housing and infrastructure, where process development and capacity building are essential to spur sustained growth and progress. A silver lining after all, amidst the predicted dark clouds!
