“This is the last thing India needs,”says Sir Gulam Noon, the British-based multimillionaire. Last week’s terrorist attacks on Mumbai targeted tourists and the financial district. Both are central to India’s “growth and international standing”, as Una Galani points out on Breakingviews. Throw in the scope for mounting tension between India and Pakistan in the wake of these attacks and India “has its work cut out” showing that it’s “still an attractive place to do business”.
India had already been looking less and less attractive to foreigners before political risk flared up again. This year foreign investors have sold a record $13.4bn of equities, having scooped up a record $17.4bn in 2007. This has helped send the benchmark Sensex index down by almost 60% since January. Global risk-aversion has played a key role, but it has also become clear that India, while far less exposed to the global economy through exports than most Asian countries, is hardly immune to the worldwide downturn.
Growth slowed to 7.6% year-on-year in the third quarter, a four-year low, as previous rate hikes and high inflation cut consumption growth to a five-year low and exports tumbled. Worse is to come. Investment is set to slide, as much of it has been funded by borrowing from abroad. Around 40% of new corporate debt was raised abroad this year, twice as much as in 2005.
With local banks also clamping down on credit, overall growth is heading for just 5% next year, reckons Capital Economics. This means that the flurry of earnings downgrades that started in August still has some way to go, making further share-price falls likely. Merrill Lynch sees profit growth slumping to zero or below in the year to March 2010 (following six years of 25% growth), which will hit valuations further. In fact, in early 2009 the Sensex could well reach 7,000, says Merrill – implying downside of another 20%. While India still looks compelling over the long term, it’s too early to jump back in.