Identifier
Created
Classification
Origin
08MUMBAI573
2008-12-05 13:02:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Mumbai
Cable title:  

INDIAN ECONOMY REELING FROM EFFECTS OF FINANCIAL CRISIS, NOT

Tags:  ECON EFIN EIND ETRD IN 
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RUEHNEH/AMCONSUL HYDERABAD PRIORITY 0011
RUEHCI/AMCONSUL KOLKATA PRIORITY 1774
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UNCLAS SECTION 01 OF 03 MUMBAI 000573 

SENSITIVE
SIPDIS

DEPT PASS TO EXPORT-IMPORT BANK FOR JESSICA FARMER
DEPT PLEASE PASS TO USTR AADLER/CLILIENFELD

E.O. 12958: N/A
TAGS: ECON EFIN EIND ETRD IN
SUBJECT: INDIAN ECONOMY REELING FROM EFFECTS OF FINANCIAL CRISIS, NOT
TERROR ATTACKS

MUMBAI 00000573 001.2 OF 003


UNCLAS SECTION 01 OF 03 MUMBAI 000573

SENSITIVE
SIPDIS

DEPT PASS TO EXPORT-IMPORT BANK FOR JESSICA FARMER
DEPT PLEASE PASS TO USTR AADLER/CLILIENFELD

E.O. 12958: N/A
TAGS: ECON EFIN EIND ETRD IN
SUBJECT: INDIAN ECONOMY REELING FROM EFFECTS OF FINANCIAL CRISIS, NOT
TERROR ATTACKS

MUMBAI 00000573 001.2 OF 003



1. (SBU) Summary. Market participants and corporate
representatives tell Congenoffs that the Mumbai terrorist
attacks may have a modest, short-term impact on markets and
economic activity, exacerbating the more serious and ongoing
deterioration of market conditions due to the global economic
crisis. Characterizing the current business climate as "bleak,"
interlocutors pointed to alarming declines in exports and
consumer spending in November 2008 as signs of a major economic
slowdown. Corporate India also displayed immense anger at the
country's political class and have called for security reforms.
Though they judged the chances of war with Pakistan as low, they
considered this the worst possible outcome. However, NASSCOM
remained optimistic, stating that India has a cost competitive
advantage that would continue despite the financial crisis or
the terror attacks. End Summary.

Terror Attacks Will Depress Weak Economy in the Short-Term
--------------


2. (SBU) Interlocutors in Mumbai largely agreed that while the
terrorist attacks might have a short-term impact on economic
activity, the larger, ongoing economic slowdown in India, caused
by the global financial crisis, was far more significant. Ritu
Kochchar, Director for Equities for JP Morgan, believes that the
attacks will dampen investor sentiment, but notes that foreign
investment in India was already waning, as foreign investors had
ended their focus on emerging markets, and stopped scouting for
deals in October-November 2008. Tushar Poddar, Chief Economist
of Goldman Sachs, believes that the attacks will have an
immediate impact on third order activity, such as hotels,
tourism, and travel, but that the economy was already slowing
considerably. Anu Madgavkar, Partner of McKinsey & Co, agreed,
but pointed out that the Indian economy was not dependent on
these sectors. She believes that the Mumbai economy would
temporarily dip but would bounce back soon. Madhav Bhatkuly,
Director of New Horizons Investments, believes that business
meetings will be postponed following the attacks, which in turn,

will lead to the postponement of economic activity in the
short-term. For example, he said that four current or potential
foreign investors had already postponed business meetings with
him.


3. (U) Madgavkar said that the threat of war with Pakistan
will hurt investor sentiment and business the most. However,
she believes that India's leaders would not let this happen.
Kochchar said foreign investors are worried about an Indo-Pak
conflict and political risk in general. Investors are uncertain
about the Indian government's next moves, although they expect a
focus on security rather than economic reform, particularly
since inflation figures are declining. Poddar said that a
possible Indo-Pak standoff will hurt the currency. During the
2001-02 standoff with Pakistan following the terrorist attacks
on the Indian Parliament, the Indian currency depreciated,
prompting RBI intervention. Unlike the present situation, there
was no financial crisis in 2001-02, so the impact this time
could be worse, he concluded.

Global Financial Crisis Continues to Cause Indian Slowdown
--------------


4. (SBU) Poddar said that business activity declined
significantly in October-November 2008. Bhatkuly concurred,
characterizing November 2008 as the worst month that he had ever
seen in 16 years of watching corporate India. In a review of
200 Indian companies in which his company has an ongoing or
potential investment, Bhatkuly concluded that Indian industrial
activity contracted significantly in November 2008. He singled
out the auto component segment as experiencing serious stress
due to the global contraction of car sales. In addition,
companies engaged in the commodities business like Hindalco are
in difficult straits, as are highly levered companies like those
in the real estate sector. While Indian banks have withstood
the global financial crisis, they will soon start to see a rise
in non-performing loans, albeit not to alarming levels, he
continued. Vikram Shroff, Executive Director of agro-chemicals
company United Phosphorus, stated that his company, as an
agricultural-related business, has not been too badly hit by the
global financial crisis and the U.S. recession. Nevertheless,

MUMBAI 00000573 002.2 OF 003


he said that his company had halted expansion and is conserving
cash. He pointed out that United Phosphorus made five
acquisitions in the first half of 2008, but none in the second
half of the year.


5. (U) Mohan Nihalani, the President of the All India Importers
& Exporters Association, noted that Indian exporters are facing
"tough times" as their export orders have either declined or are
not being honored. (Note: Exports declined by 12.1 percent in
November 2008 as compared to November 2007, marking the sharpest
yearly fall in 10 years. End Note.) There has been a
significant decline of export cargo loaded at India's largest
container terminal port, the Jawaharlal Nehru port, he added.
He applauded the government's proposal to award concessions to
exporters, such as the refund of service tax and excise duties
and the extension of lines of credit as part of the financial
stimulus package for the economy. But, Nihalani points out,
"the government cannot generate export orders." In a separate
discussion, Muffadalal Yusuf of Tajir, a company which imports
almonds from the U.S. for processing and sales in India,
reported that he had received no new orders for almonds in
November 2008.

Financial Crisis and Terror Attacks Cannot Defuse India's Cost
Competitive Advantage
--------------


6. (U) Rajiv Vaishnav, the Regional Director of the National
Association of Software & Services Companies (NASSCOM),admitted
that the mood in the economy -- hit by the global financial
crisis, the recession in the U.S. and now the Mumbai terror
attacks - is low at present, but argued that the Indian
industry's cost competitive advantage will enable the economy to
withstand these shocks. NASCCOM has earlier revised its export
growth forecast for the IT sector for 2008-09 from 29 percent to
21-24 percent. Vaishnav said that this may be further lowered
to 20 percent. However, he believes that the slowdown in growth
is "temporary" and the mid-term or long-term looks bright,
especially for IT software and services. According to Vaishnav,
companies increase outsourcing and off-shoring during economic
crises as cost competitiveness becomes central to doing
business. Right now, orders are delayed and business decisions
are being deferred resulting in the slowdown in the growth of IT
exports. But once companies re-commence business operations,
they will choose the low cost option. Meanwhile, Indian IT
companies are streamlining their operations and gearing up to
cater to future needs. They are focusing on innovation and
customer servicing and attrition has gone down. The silver
lining to the current gloomy economic scenario is that Indian
companies are improving their productivity and efficiency, he
said. Rit Desai, Assistant Manager (International Marketing) of
Larsen & Toubro, agreed with Vaishnav and added that while the
Mumbai terror attacks will always be "at the back of the mind"
of potential investors, there is no denying India's cost
competitiveness in specific sectors. Foreign investors cannot
afford to ignore India, he argued.


7. (SBU) Bhatkuly also pointed out some pockets of growth in
the economy. He noted that the hike in salary levels of
public-sector employees will boost consumption. The loan waiver
to farmers has helped the rural economy, but he pointed out,
this will still not compensate for the problems in the
industrial sector. Another bright spot that he noted was that
Alok Industries, a fabric exporting company, was seeing an
uptick in orders; this was a result of the vendor consolidation
on the part of large global retailers like Wal-Mart, which was
shutting down business with marginal suppliers and giving more
business to larger suppliers. He acknowledged that this would
not help small and medium enterprises in this business.

Mumbai Attacks Not a Factor in Market Activity
--------------


8. (U) After remaining closed the first day after the attacks,
the Bombay Stock Exchange's SENSEX - a barometer for Indian
stock market performance -- closed up one percent when it
re-opened on Friday, November 28, while anti-terrorist
operations were on-going. However, on December 1, markets

MUMBAI 00000573 003.2 OF 003


dropped three percent, in reaction to declines in the U.S. and
Asia, as well as negative information on exports and auto sales
in India. According to market participants, three key factors
cushioned the Indian markets from the impact of the terrorist
attack. First, India's unfortunate familiarity with terrorism
means that markets have grown accustomed to these tragedies, and
react modestly, if at all. Second, markets have anticipated an
RBI rate cut, and these attacks have raised expectations for
further economic relief. Third, with an over 50 percent decline
in the SENSEX since January, and the deterioration of credit
markets, there wasn't much room to fall. External credit
markets are already prohibitively expensive, commercial paper
markets blocked, and investment plans on hold.

Shocked and Angered Corporate Mumbai Blames the Political Class
--------------


9. (SBU) Rajiv Lall, the Managing Director of Infrastructure
Development Finance Corporation, stated that India was facing a
crisis of governance. He condemned the failure to protect
Mumbai's residents as being emblematic of the politicians'
failure to build or maintain India's decaying institutions.
United Phosphorus' Shroff said that bad governance in India is
the reason why the majority of Indians working overseas do so
well, while the majority of Indians in India barely survive.
Madgavkar was saddened that she could not expect much out the
current group of leaders running India and the state of
Maharashtra.


10. (SBU) Bhatkuly was disappointed with the economic reforms
of the Congress-led United Progressive Alliance (UPA) government
but was even more unhappy with its neglect of security. While
not a fan of the rival Bharatiya Janata Party (BJP) either,
Bhatkuly believes that the BJP was more pro-active in office,
and initiated economic reforms earlier this decade that enabled
the Indian economy to grow. During the past four years of the
UPA-government's rule, India was awash with excess liquidity
that was sweeping the globe. Bhatkuly believes that this
inflated India's growth rate and allowed the economy to surge
without reforms. Even easy reforms which no one would oppose or
object to -- like unclogging the nation's courts - were not
carried out. Instead, he added, the reform process has moved
backwards. He pointed to the Finance Minister's statements
asking the Reserve Bank of India (RBI) to cut interest rates;
the central bank responded by taking this action the next day,
bringing the independence of the RBI into question.


11. (SBU) Pradeep Bhargava, Managing Director of Cummins
Generator Technologies and Head of the Maharashtra Council of
the Confederation of Indian Industries (CII),said that CII is
planning to push the federal government to implement internal
security reforms, including establishing a single coordinating
agency to respond and defend against terror attacks. CII
spokespersons are also trying to boost investor sentiment and
restore confidence in investing in India, but Bhargava believes
that instead of meaningless platitudes, it would be more
effective if foreign investors can see improved security
measures in place to protect the country against senseless
terrorist attacks.


12. (SBU) Comment: In the past, many corporate leaders have
told Congenoffs that India grows despite the government, not
because of it. Business contacts agree that the impact of the
attacks will be mild, but will exacerbate a longer term decline
in sentiment and activity caused by the global financial crisis.
However, corporate leaders in Mumbai are shaken by the attacks,
and angry at the inability of their government to prevent them.
The Indian government is likely to announce new measures to
help Indian industry through the financial crisis, but it may
take longer to relieve the public desire for deep reform.
Perhaps, even corporate India has reached the end of its
hands-off approach to the country's political class and
governance. The alternative - especially in neglected,
misgoverned Mumbai - is not clear. End Comment.
FOLMSBEE