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Larsen & Toubro is one of the gilded stars of India's new economy and it hasn't made a wrong move in the last three years. The giant construction company has landed contracts to build everything from oil pipelines, airports and ports to special economic zones and townships in India. Abroad it has metamorphosed into a global player and is constructing hotels in Uzbekistan and cement plants in Oman, among other mega-projects.
So, it caught everyone by surprise when Larsen & Toubro (L&T) became an early casualty of the US sub-prime crisis. It has taken losses on international hedging contracts of anywhere between $25 million and $35 million. Inevitably, its stock, one of the bluest chips on the Indian market, tumbled.
L&T, started by two Danish engineers, isn't the only unfortunate victim with sub-prime losses showing on its books. ICICI, one of India's biggest banks has also taken a hit, although not a big one. Scores of other smaller companies are also stuck with losses and there's no clear indication yet about how the sums will tot up.
That's the US sub-prime crisis for you. Its impact is being felt around the world in countries as diverse as Australia, India and China, and nobody has any real idea of where or how it might strike next.
The uncertainty is being felt on India's stock markets which have gone on a steep downhill run and fallen by 28 per cent since January 1. "It has gone below the lower range of our December forecasts," says Deepak Lalwani, a director at Astaire & Partners, a London-based brokerage house.
Clearly there isn't enough blood on the floor yet because the buyers aren't yet sniffing about among the wreckage. There's no sign that the markets are going anywhere in the near future.
To complicate matters, inflation has suddenly clawed its way up to red alert levels at 5.9 per cent and is seen heading higher (it climbed nearly one percentage point in one week). In an additional twist to the economic whodunit, industrial production has also plummeted, partly because of interest rate hikes during the last 18 months that have pushed borrowing costs to near decade highs.
Adding to all that, exports have declined steeply and won't even hit a government target that has already been revised downwards.
"It's a very uncomfortable scenario and I would rule out an interest rate cut at this stage due to inflation," says Dharam K. Joshi, principal economist at Crisil, a leading Indian credit rating agency.
The economic doctors standing around the bed could argue that India's ailments are all imported from abroad. India's stock market had rocketed upwards, especially in the last three months of 2007, but its sharp fall is mainly because of the negative cues from the US.
Similarly, inflation is getting a push from the eye-popping global oil prices. And, if costly oil isn't bad enough, dizzying commodity prices on items like platinum, copper and iron ore are adding to the inflationary spiral - iron ore prices have doubled in the last three years.
Even more critically, food prices are rising steeply and that includes everything you can eat from wheat to soya bean - in a poor country, that can mean the difference between life and death for people at the lowest level of the income scale.
"Fighting inflation has a higher priority than growth. Inflation is felt immediately. The effects of economic growth take a long time to filter down," says Joshi.
Elections aren't far away in mid-2009 and the Government is determined to tackle inflation before voters turn against it. Last week, in an effort to control prices it moved into action and slashed duties on cooking oil imports and banned their export.
India's booming growth figures have pushed the country into the limelight globally during the last three years. But it's time to do a recount on the numbers this year. Predictions about growth for this year have already been slashed from 9 per cent to about 8.5 per cent, marking the first decline in growth in three years.
The new financial year starting in April looks worse. J. P. Morgan has cut its growth forecast for next year to 7 per cent, still fast by Western standards but too slow for India.
All these bad tidings come just when the economy has been getting ready to make an almost Chinese-style Great Leap Forward. Companies are putting in huge new capacities to make everything from televisions and cars to steel and cement.
The earlier mood of bullish optimism is reflected in the numbers that were doing the rounds in early January when shares were still rising. Prime Database, which tracks the new issue market, reckoned there'd be anywhere up to 150 issues worth $18 billion - nearly double last year's numbers. "There were three sectors looking particularly good - power, financial service and realty and all three are down in the dumps," says Prithvi Haldea, chairman and managing director, Prime Database.
Is there a brighter side to the picture? Some say India's conservative Reserve Bank has had the last laugh on its critics. Apart from keeping interest rates high, it has also insisted on banks raising cash reserve ratios. The result is most banks have healthy reserves and are in no danger of going under. Then, look at the Government. In February, Finance Minister P. Chidambaram announced a budget that cut taxes and still had enough for profligate poverty alleviation schemes, including a $15-billion loan waiver for small farmers. He was able to conjure up this money because there's more cash in the kitty than ever before - direct tax collections have climbed by over 40 per cent this year.
What's the way forward? One way to keep the economy ticking along would be to speed up giant infrastructure projects. "Given the short supply of infrastructure in India, that would make eminent sense if the Government wants to prime the pump. The zigzags of the economy will not affect infrastructure," says Pradip Singh, vice-chairman of IDFC Projects, an infrastructure financing company.
The moment of truth is upon us. For years the world has argued about what might happen if the US economy went into slowdown mode or a recession.
Now, the evil hour has come and it's clear that there won't be too many winners in this situation. Did someone say decoupling? What's that?
