RISK MANAGEMENT
Commentary:  Challenges for India
December 17, 2008
Christopher Bjorke

The chaos and violence carried out by terrorists in Mumbai last month shocked people around the world as they followed news of India’s financial hub paralyzed by gunmen over three days.

In addition to the shaken sense of security, India faces declining economic confidence as the effects of the U.S. recession and credit freeze begin to be felt in one of Asia’s growth engines. Together, the security and economic concerns combine to make for a troubling situation.

Growing uncertainty

Last month, the International Monetary Fund lowered its projections for India’s growth in 2009 to 6.3%, reflecting the impact of the worldwide economic downturn. The new estimate is down from the 7.9% growth in 2008.

A beneficiary of globalization, India has based much of its growth on its position as a leading destination of outsourced business functions from the United States and Europe. With those economies now faltering, multinationals are cutting back on their back offices and customer service investments in India, the New York Times reported this week, hurting the part of the country’s educated professional class that has prospered on such jobs.

Showing the constraints that the credit crisis has put on companies’ ability to raise money, Tata Motors has turned to publicly financed loans in lieu of other financing while feeling the pressure of its highly leveraged position. The company used a $3 billion bridge loan to finance its purchase of the Jaguar and Land Rover car lines from Ford, according to Bloomberg, but now is facing a frozen credit market following the financial meltdown in Western countries.

In response to the growing bad news, the India government has been hinting at a stimulus package similar to China’s $586 billion dollar effort announced in November. Indian media reported that a $15 billion plan was in the works to stimulate growth by funding infrastructure and extending refinancing aid to small businesses.

India’s economic concerns have been building over the past few months in tandem with the deepening turmoil in the West and in East Asia. Now on top of issues of growth and credit, the terrorist attacks create fears of country risk during a time of weakening foreign investment.

To make matters worse, the events have increased tension between India and its longstanding enemy Pakistan, which is accused of bearing some responsibility for the attacks. The situation heightens the always volatile relations between the two neighbors and puts the entire South Asia region on edge.

While Asia is bracing for the fallout of the U.S. recession, India’s security concerns are bad news for the region unless confidence is restored.

Copyright © AsiaPacificForum 2008