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India Challenged as Mumbai Terror Strikes & Satyam Lies
At a time when the world’s second-fastest growing economy is seen by many economists to be pivotal in reversing the global recession, two events negatively rocked India. The country’s commercial capital Mumbai was attacked by terrorists on November 26, 2008. That was followed on January 7, by a shocking revelation of a $2 billion fraud by the founder of India’s fourth largest IT Services company, Satyam Computer Services Ltd.
Mumbai is one of the world's top 10 centres of commerce and contributes about 5% of India's GDP, 25% of industrial output, 40% of maritime trade and 70% of capital transactions to the economy. Its per-capita income is almost three times the national average, though wide disparities exist among its 14 million population.
Each time the city has been targeted, however, it rebounds strongly and resolutely. Some view this as an apt representation of India’s underlying strength as a culturally-rich democracy and increasingly capitalist economy. On the first day of trading after the attacks, the Bombay Stock Exchange’s benchmark Sensex Index closed three quarters of a percent higher at 9097.92.
The Satyam incident, involving the misreporting of accounts, has put a dent in an otherwise widely acknowledged and respected corporate governance, quality and value of Indian companies. While India has a well-knit regulatory framework and institutions to ensure compliance, it is clear that they have been insufficient in preventing what is being dubbed as “India’s Enron.”
India: Power House of Global Growth
India is predicted to register GDP growth of about 7.5% this financial year, a drop from 9% that the country achieved last year. In contrast, however, global economic growth is projected to have shrunk to 3.7% in 2008 from about 5% the previous year, according to estimates of the International Monetary Fund. An earlier study by the Economic Intelligence Unit suggested India will contribute more than 12% toward global economic growth by 2020 from approximately 5% in 2006.
This is also a reflection of the ‘Decoupling Theory’ for the emerging markets, particularly in Asia, which are less dependent on developed markets. Growth deceleration was much less marked in emerging markets in the first half of 2008 than in developed markets, according to Morgan Stanley, the U.S. based global financial services firm. It forecast developed market growth to slow to 1% in 2009 from 2.5% in 2007 while emerging markets to slow to 6.6% from 7.8% for the same period.
Foreign companies invested more than $12 billion in acquiring Indian companies in 2008, slightly less than the $15 billion a year earlier. Indian companies reciprocated by investing a near similar amount in acquiring companies overseas. See Mega Deals section for ‘Top 20’ Deals of the year 2008.
Outlook 2009
India is among the top 10 countries with an optimistic economic outlook for year 2009, according to a year end poll conducted by a global market information company TNS Gallup International. Two out five people expected the coming year to be better than 2008.
The optimistic outlook mirrors the expected growth in the various sectors including India’s Information Technology sector, which is on track to achieve its aspired target of $60 billion in software and services exports and $75 billion in overall software and services revenues by 2010. Consumer finance sector at $45 billion in India that grew by 28% last year is expected to maintain its growth with the revival of the housing loans segment owing to the government's initiative of extending lower interest rates. The healthcare sector is expected to grow to about $75 billion by 2012 from the present $35 billion market size. The sector growing at 42% annually, accounts for 5.2% of the GDP, making it the third largest growth industry in India.
The $34 billion Indian automotive sector is expected to continue to grow at more than 15% as oil prices dip and companies announce the launch of new vehicles. The world's fastest-growing mobile phone market that adds more than 9 million new customers each month is driving the $31 billion telecom industry to be worth $54 billion in 2012. Please see our ‘Special Report’ on the Indian Telecommunication sector.
Domestic growth is expected to attract and benefit from foreign direct investment (FDI) of $40 billion in the next financial year, which is twice the amount received during the first half of the current financial year.
Such growth forecasts, however, are accompanied by challenges that might just derail the country from its growth trajectory. These include internal pressure groups as in the case of the Indo-U.S. nuclear agreement that witnessed intense opposition by the Left Parties within India’s ruling coalition government called the United Progressive Alliance (UPA). Similarly, the delay in the small car project of Tata Motors’ ‘Nano’ due to widespread unrest from a regional political party led to the project being scrapped from its original site in Singur, in the east Indian state of West Bengal compounds existing impediments of slow infrastructure development, widespread illiteracy, poverty and corruption - impediments India must overcome if it wants to sustain and accelerate its economic growth.
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