India and the global financial Tsunami
11 December 2008
On Boxing Day, 26 December 2004, the world’s worst ever Tsunami hit many countries in the Indian Ocean area, causing massive and unprecedented destruction and the loss of hundreds of thousands of lives.
India, as were Indonesia, Thailand, Sri Lanka, and the Maldives was amongst the countries that suffered hugely. An Indian Air Force Base located in India’s Nicobar Islands, no more than 100 kilometres away from the epicentre of the initial earthquake that triggered the Tsunami was amongst the first places to face the onrush of huge Tsunami waves early in the morning.
The Commanding Officer of the Air Base was sitting on the terrace of his house having his early morning ‘cuppa’, still wearing his bed clothes and slippers. Looking at the onrushing huge walls of water coming straight towards the base he ordered all pilots to take off with their aircraft in whatever state of attire they were in. Almost all the aircraft and the flying crew survived but tragically most of the families who had to be left behind perished in the onrush of water.
Many of these aircraft and their crew were immediately deployed in rescue efforts in the Andaman and Nicobar Islands and parts of Thailand and it was only towards the end of the day that flight crews learnt about their own personal tragedies. At about the same time in the morning, the South Eastern coastline of India was being battered by the Tsunami.
What was to be a very happy day for our family, being the wedding day of our younger daughter, with family and friends from many parts of the world gathered in Delhi for the days ceremonies and parties, suddenly was becoming something quite different. My brother-in-law, then commanding India’s Navy, rushed to the situations room (not to leave for several days and hence miss his niece’s wedding) and literally within minutes had Naval Aircraft, Naval Ships and support vessels streaming towards the stricken areas, not just in India but also to Sri Lanka and Indonesia. That was to be the day that a new confident and strong India was born. It was able to not only take care of itself and its people (India did not accept any international aid) but was now tending to the needs of other countries as well.
So what does all this have to do with the latest ‘Tsunami’ that is now sweeping through the world’s financial community? As in 2004, sure India has been hit, albeit not quite so badly as other countries. Yet, India, with its banks, institutions and the economy having held firm has been very active in helping, in concert with China and Brazil, the International financial system to get back on an even keel. On a micro basis, India is extending help to the neighbouring countries (including, surprise, surprise, Pakistan!) by trade, aid, and interventions with the International Monetary Fund.
It has therefore not come as any surprise to Indians to now learn that many international leaders including President Bush, Prime Minister Gordon Brown and Chancellor Merkel have been consulting on almost a weekly basis with India’s Economist Prime Minister, Dr. Manmohan Singh, ever since the crisis started. The Prime Minister will now be attending the hugely important G-20 crisis meet in Washington DC where he will undoubtedly be one of the most closely listened to speakers as he indeed was during the recent ASEM (Asia – Europe Meeting) in Beijing.
One of the words most bandied about in these days of financial distress is ‘coupling’. It relates to the globalisation of the world’s markets and institutions. The 2004 Tsunami of course had the Indian Ocean ‘coupled’ with the Bay of Bengal and the Arabian Sea and hence what started with a deepsea earthquake in the Aceh area of Indonesia rapidly spread to all the adjoining waters and land masses. It is now evident that those countries, banks and institutions that have been highly ‘coupled’ into the US and European economies and banks are those worst off. Banks and financial institutions in these countries that acquired CDO’s (Collateralised Debt Obligations) and CDS’s (Credit Derivative Swops) even loosely linked to the origins of the Financial Tsunami in the US ‘Sub Prime Mortgages’ as a security instrument have been shaken to the core. With the economies of these countries rapidly speeding towards a ‘recession’, companies and countries most ‘coupled’ through their exports are beginning to take a hit as consumer demand and spending ‘tank’. The Reserve Bank of India, for years much derided in the international financial community for its Keynesian orthodoxy and conservatism to a fault, has suddenly emerged as the role model for financial regulation. At the time of writing, not a single Indian bank or financial institution has needed bailing out.
Even with export oriented sectors in India such as garments, leather goods, gems and jewellery, and auto ancillaries being affected (a 15% reduction) by the decline in the traditional markets in the western countries, the Indian economy still maintains a GDP growth of at least 7.5% (down from 9%) perhaps slowing to 7% next fiscal. While crude prices dropped by around 60% from peak and about a 50% correction in metals and agro commodities, the Indian stock market has fallen by some 27% which is a lot better than Korea (- 29%), Japan (-35%), Hong Kong (-37%), and Singapore (-39%).
The most recent J.P. Morgan global manufacturing survey says: “With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. With the survey for Chinese manufacturing also showing a contraction, all the other big global engines of growth are contracting.” So clearly, it is India’s high local demand, a very high (35%) domestic savings rate along with an economy structure more focused on meeting domestic demand rather than exports with small value addition coupled with a very strong and efficient financial regulatory system that is helping the country through these turbulent times.
Contrary to some brave noises being made it is now clear that the contagion is already beginning to hit the global electronics business. I have it on authority from friends and other contacts in large international electronics companies operating in USA, Singapore and Hong Kong, that redundancies and voluntary retirements have already started there in considerable numbers. Unless there is a reversal in sentiment during the Christmas shopping season starting in the US on ‘Black Friday’ (the day after Thanksgiving) on Friday 28 November 2008, I believe it is safe to predict somewhat gloomy days ahead for the Global Electronics industry.
Compare this to a reasonably healthy growth of 20%+ in the Indian consumer electronics sector over the festive Diwali season and a 30% growth year-on-year. But the ‘big ticket’ item in India is of course its growth in the telecoms sector. While it took 14 years for the first 250 million mobile phone subscribers in 2007, about an equal number will now be added within the next four years to take the total subscriber base to over 500 million by the year 2010. It may be noted that as I write, India has already surpassed 315 million registered subscribers. This pretty much ensures that the handset manufacturers in India such as Nokia and their supply chain entities have a rosy future ahead despite the international ‘gloom and doom’.
Yes, there have been some redundancies in the BPO and call centres, principally those serving as back offices for global financial institutions. These numbers could well grow if 'President elect’ Obama goes ahead with his election rhetoric of penalising ‘offshoring’. There could also be a reduction in the numbers employed in the numerous chip design companies with the slowing down of the global semiconductor business (Freescale, Magma Design and Nvidia have already made such an announcment).
But as dark clouds gather elsewhere, India seems to be hitting a bit of a ‘purple patch’. It has recently signed an unprecedented agreement with the Nuclear Suppliers Group (NSG) and the US Government, which will open up a huge market for Civilian Nuclear Power Stations with all the downstream requirements of electronics, instrumentation and control systems. Furthermore, India has just had a successful launch of its first moon mission; ‘Chandrayan I’, wholly designed and built in India and carrying payloads of many countries including NASA from the US. Further missions have already been announced so the space sector will have a healthy growth. As an example, the Indian company Astra Microwave, which is deeply involved in India’s space programme, has just announced increase in profits of over 50%. An interesting aside to this programme is the sudden spurt in foreign scientists and engineers applying for positions in India.
Electronics in India always gets a big boost during the time of elections because India is perhaps one of the very few if not the only country in the world which has totally electronic voting, hence no ‘dimpled' or 'hanging chads’. The election season in the country will soon kick off, first with the states going to the polls followed by National General Elections any time before July 2009. With literally thousands of voting machines required, there will be substantial electronics manufacturing activity.
Then of course India’s Defence programme continues to juggernaut ahead. With a very substantial percentage of systems and parts being made locally, this ensures a steady supply of work to the electronics industry. And then of course Team India has just humbled (some say ‘mauled’) the mighty world champions, the Aussies, in the recent cricket test series. This of course ensures an increased viewership for the coming series against England and hence a substantially increased sale of TV sets and Satellite dish antennas, set top boxes et. al.
Sadly though, there has not been a similar increase in viewership after an Indian became the World’s Chess champion beating his powerful Russian opponent. Sadly, chess is not a viewer sport, but who knows what the Chessboard of International Finance will bring next?
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