Contracting industrial output, rising inflation rates and slowing GDP growth –India’s growth story currently seems threatened due to weak macro-economic fundamentals and the free-fall of the Indian rupee has added another dimension to India’s woes. Industrial output contracted by 5.1% y-on-y this October, and the government’s forecast for 2011 GDP growth has also been scaled down to 7.25-7.75% from 8.0% a while earlier and 9.0% before that. Meanwhile, inflation soars high at approximately 10%. The proxy for investment rate, the Gross Fixed Capital Formation (GFCF), has exhibited a severe decline in growth. India today finds itself precariously balancing over a stagflation rut. Where do property contractors stand in the midst of all this mayhem? Property contractors have had to face challenges such as escalating material costs and transportation charges due to rising crude prices, rising costs of imported materials due to the depreciating rupee, as well as fewer project sanctions and diminishing source of finance from banks and other non-banking financial institutions. The contraction in industrial output, coupled with a higher interest rate regime, has also made the cost of borrowing steeper. The question on everyone’s mind now seems to be – where is India heading from here? A skeptic might say that the current situation may still worsen in the coming quarters. However, let us take a look at the new realities that exist today, because India is currently undergoing some significant changes.
At the offset, it must be borne in mind that these different macro-economic fundamentals are closely linked, not only with each other but also with those forces that shape global commerce. Where India is concerned, we see that initially global investors were pouring capital into nascent markets on the basis of the theory of decoupling, and the idea that these emerging economies are capable of withstanding weaknesses in developed countries. This theory has not proved to be wholly accurate. It has also demonstrated that these nascent economies sometimes take a bigger hit because their basic underlying fundamentals are not as resilient. On that note, we see that it is not just the INR but currencies worldwide have been affected as investors fret over the health of European countries.
That being said, the Indian government has undertaken a number of policy initiatives to set right the current scheme of things. The RBI has put into practice various measures to bolster the rupee such as dropping the net amount of U.S. dollar-versus-rupee trade that sanctioned foreign-exchange dealers can hold. Another measure is to limit the amount of currency hedging by importers, especially those who typically buy dollars. Within the purview of the Indian real estate industry, new projects, in all probability, would be stalled for a while as most contractors would turn their attention towards the successful completion of existing projects. Added to this, Indian banks are now approaching project financing more cautiously than ever before. Even if the lender is willing, the terms are now onerous. Supporting documents are now called for in advance as banks try to ensure that the money goes into the right hands. There is a stringent verification process in place including cross verification of documents with local authorities. In the midst of wavering macro-economic fundamentals, the risk associated with the property market has also gone up and, in general, cash has emerged as the definite preference. The volatility and uncertainty that pervades the investment climate has made investors seek a safe haven in cash. However, commercial property will re-emerge as a favoured asset class once India weathers this quasi-downturn. Lastly, India is still well placed in terms of risk v/s reward situation compared with the mature economies and other emerging economies. Furthermore, in spite of its fluctuating fundamentals, India’s status quo would seem attractive to foreign investors on the hunt for bargains.
About the author
Ankita Satnaliwala is the Senior Analyst, Research and Real Estate Intelligence Service for Jones Lang LaSalle in India., based in Kolkata.