IMPACT OF GLOBAL FINANCIAL CRISIS ON

REAL ESTATE

Project Report
submitted in partial fulfillment (Requirements) of
Master of Business Administration Programme
In
(Real Estate)
Under the Supervision

Dr.Anu Lather
By
Niharika Yadav
Enrolment No.0241669008

)
University School of Management Studies

Guru Gobind Singh Indraprastha University

Kashmere Gate, Delhi-110006
June 2006

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Abstract:
The report is prepared in the head of the topic “impact of global financial crisis on
Real Estate”. It mainly concentrate on the general facts which are directly affecting
the Indian economy that is what all the financial crisis is about and what are the
poising factors affecting the Indian economy like the affect of the inflation,
banks, capital market, GDP, balance of payment, industrial growth, oil prices,
employment and the companies which are dependent on the down fall of the US Banks.

Executive Summary:
There was a time when India was discussed as the land of snake charmers,
black magic and epidemics but the revolutionary Indian growth story changed
everything. Indian economy at its height compelled the world to change its
viewpoint towards India. Out of the several factors which changed the face of
modern India, we are going to discuss the most roaring of them i.e. our share
market. The earlier reform procedures adopted by India gave India the two most
sought after world-class brands i.e. SENSEX and NIFTY. The magical figures
displayed by our market turned all the heads on India. And India became one of
the most favoured places for investment.
Now we are going to deal with the ups and downs in the share market since last
two years
i.e. since year 2006.our share market has went through many phases in there 2
years. We saw the investors getting overjoyed at 21K and we saw them crying
too when it crashed. We saw how the market rewarded the undervalued shares
and how the overvalued shares fell down to demonstrate the saying “everything
which rise more than expected, has to fall.”
So to analyze the saga of Indian share market, we had two indices to follow: BSE
sensex and NSE nifty. Though NSE nifty is a more advanced option and has left
BSE sensex far behind, still we call BSE sensex as the barometer of our economy.
That’s why we have followed the BSE sensex. It was not possible to track each and
everyday figure of the sensex since last twoyears. The performance of the sensex
is analyzed with the help of data and graphs collected from

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various sources and some of the most talked about movements of sensex starting with
the secondary market summary of each year, firstly year 2006 and then year 2007.
The global financial crisis, brewing for a while, really started to show its effects in the
middle of 2007 and into 2008. Around the world stock markets have fallen, large
financial institutions have collapsed or been bought out, and governments in even the
wealthiest nations have had to come up with rescue packages to bail out their financial
systems.
On the one hand many people are concerned that those responsible for the financial
problems are the ones being bailed out, while on the other hand, a global financial
meltdown will affect the livelihoods of almost everyone in an increasingly inter-
connected world. The problem could have been avoided,if ideologues supporting the
current economics models weren’t so vocal, influential and inconsiderate of others’
viewpoints and concerns.

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Certificate

This is to certify that the project entitled Impact Of Global Financial Crisis On
Real Estate is a bonafide work done by Niharika Yadav (Enrolment No.
0241669008) of MBA – Real Estate (June-2008-2010) in partial fulfillment of the
requirements for the degree of Masters of Business Administration of this
Institute.

Internal Evaluator External Evaluator Director

Name & Signature Name & Signature

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Acknowledgement
I express thanks and gratitude and indebtedness to Dr. Anu. Lather,
Dean M.B.A, Indraprastha University my project guide for her encouraging
support and guidance in carrying out the project. She constantly encouraged me
and showed the right path from day first till the completion of my project. My
grateful appreciation is also extended to Dr. Kuldeep Chandra, for his immense
moral support. I would also like to thank all those from whom I have collected the
primary data for this project for their valuable time and views

I would like to express gratitude to my father Prof. Ravinder

Singh Yadav, for his valuable advice and guidance without which this project
would not have seen the light of the day.

I thank Mr. Ankur, for encouragement and guiding me in

completing my project successfully. I would like to thank Mr. Anil Rawal for their
kind co-operation and guidance. I would like to thank my friends for being
supportive all the time, and I am very much obliged to them.
However, I accept the sole responsibility for any possible errors of omission and
would be extremely grateful to the readers of this project report if they bring such
mistakes to my notice.

Niharika Yadav
(0241669008)

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Contents
Introduction
Need and Rationale
Objectives of the Study
Research Methodology
Data Analysis and Interpretations
Findings
Recommendations
Annexure/Appendices/Questionnaires
Bibliography

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List of Figures and tables:

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Introduction:
A global recession is a period of global economic slowdown. The International
Monetary Fund (IMF) takes many factors into account when defining a global
recession, but it states that global economic growth of 3 percent or less is
"equivalent to a global recession.”
Informally, a recession in a country is a period of declining productivity. In a 1974
New York Times article, Julius Shiskin suggested several rules of thumb to
identify a recession, which included two successive quarterly declines in gross
domestic product (GDP), a measure of the nation's output. This two-quarter
metric is now a commonly held definition of a recession. In the United States, the
National Bureau of Economic Research (NBER) is regarded as the authority
which identifies a recession and which takes into account several measures in
addition to GDP growth before making an assessment. In many developed
nations other than USA, the two-quarter rule is also used for identifying a
recession.
Whereas a national recession is identified by two quarters of decline, defining a
global recession is more difficult, because developing nations are expected to
have a higher GDP growth than developed nations.According to IMF, the real
GDP growth of the emerging and developing countries is on an uptrend and that
of advanced economies is on a downtrend since late 1980s. The world growth is
projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009.
Downward revisions in GDP growth vary across regions. Among the most
affected are commodity exporters, and countries with acute external financing
and liquidity problems. Countries in East Asia (including China) have suffered
smaller declines because their financial situations are more robust. They have
benefited from falling commodity prices and they have initiated a shift toward
macroeconomic policy easing.

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Possibility of a global recession in 2009

According to the IMF’s World Economic Outlook, October 8, 2008, the world
economy is “entering a major downturn” in the face of “the most dangerous
shock” to rich-country financial markets since the 1930s. IMF expects global
growth (measured using purchasing-power parity), to come down to 3% in
2009, on the verge of what it considers to be a global recession.

The World Bank said in December 2008 that the global economy will enter a
recession for the first time since 1982. International trade will decline from
2007 levels. The bank said it expects global GDP growth to decline to 0.9%
in 2009 from 2.5% in 2008. Any global growth rate under 2.0% is tantamount
to a recession according to economist David H. Wang. Global trade is
expected to decline 2.1% in 2009, the first decline since 1982, on reduced
global demand and export credits.

Germany, Europe's largest economy, contracted by 0.5 percent in the third

quarter of 2008, putting it in recession for the first time in five years.

Japan's GDP contracted at an annual rate of 0.4 percent from July to September
2008, marking the second consecutive quarter of negative growth. Japan's
previous recession was in 2001, after the dot-com bubble burst in the
United States.

The Eurozone economy. made up of the 15 countries that use the euro
contracted by 0.2% in the third quarter of 2008 following a 0.2% fall in GDP
in the second quarter.In USA, GDP dropped 0.5% drop in the third quarter of
2008. A number of economists surveyed by Wall Street Journal expect gross
domestic product to decline at an annualized rate of 3% in this year's fourth
quarter and 1.5% in the following quarter.

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Despite the global economic forecast for 2009, the annual growth in greenhouse
gas emissions of 3% is only likely to slow modestly. It may even rise over the
long term because of the downturn's impact on global climate talks and the
funding of renewable energy projects.

Yet no one is entirely pessimistic. Experts and industry insiders believe that once
the storm blows over, demand is bound to rise for the same reasons it did
last time — a large, young workforce; gradual but consistent liberalization
reforms; and a high rate of consumer and private-sector savings. "The silver
lining is that once this phase ends, land and property prices will be corrected
to rational levels, speculators will be out, and the sector will have stronger
fundamentals," says Shukla. If everyone's prayers go right, the goddess will
eventually be propitiated and her blessings will issue forth once more.

The deadly global financial slowdown will have a very deep impact on the realty
sector in India, which is already fighting a desperate battle.

Realty sector watchers are of the view that the slowdown will carry a double
edge impact to it. One, as big-ticket banks

, financial institutions and companies are pruning their staff, the market will lose
some of the possible buyers of new houses.

And, secondly, the affluent NRI community will have second thoughts about
property purchases here in India.

According to an official of Assocham, it is most unlikely that companies in

India will start hiring people in a big way in the next one year or so. It goes
without saying that it will impact the realty sector and it won’t find many
buyers for high-end apartments.

P K Jain, vice president of PNB Housing Finance Limited, feels that the ripple

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 effect of the US financial crisis is going to hit the Indian market as well. “We
were expecting good times for it during this season between Diwali and New
Year. Now we are not so sure about that,” he says.

"Indian economy is insulated from the crisis… The global financial crisis will not
affect us much," [Indian Finance Minister Palaniappan]Chidambaram said, at
first. Chidambaram went on in this vein until both he and his boss [Prime
Minister] Manmohan [Singh] had to reluctantly admit that no developing
economy could possibly remain immune to the global crisis. Still, it was
projected primarily as a financial crisis or at best a precursor to a mild
recession. But no financial crisis is ever a mere crisis of the world of high
finance alone. Just as the gloom on the trading floors soon spread to the
shopfloors in the factories, financial turbulence is just a symptom of the
turmoil in the real economy.

"The contagion is truly global in a globalised world. How can the high
priests of globalisation in India expect to insulate the country from
this all-pervasive crisis?"

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NEED AND RATIONAL OF THE STUDY:-
The Indian real estate market has been going through a bad phase since early
2008. It was hit by one and another factors through out the year like higher
interest rates, higher inflation rate followed by sub-prime crisis in United
States of America, job uncertainness etc. leading it to a chaotic market.
The volume in the Real Estate sector has dramatically fallen. There is hardly any
buying and selling activity in the sector at present. The market is in stand still
mode.
Is it the end of the growth story of Real Estate Sector in India? Was it a bubble
which has busted ? Or there is a ray of light on the other side of the tunnel?
Is the sector is going through RECESSION or it is merely CORRECTION which
was overdue?
How long will it remain? What is the broad future outlook of Indian Real Estate
Sector?

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Objectives Of study: -
To understand and analyze the Global Meltdown / Recession and its adverse
impact on Indian Real Estate Sector in the present scenario. Further to
understand and analyze the other factors in a broader view, which adversely
affected the Indian Real Sector and its future outlook.

Major Objectives:-
What is Global Meltdown / Global Recession ?
If it has adversely affected the Indian Real Estate Sector ?
If yes, then how deep the impact is ?
Is Global Meltdown / Global Recession is the sole factor for the slow down of
Indian Real Estate Sector at present ?
If not, then what are the other factors which have adversely impacted the Indian
Real Estate Sector ?
If the growth saga of Indian Real Sector is over or still there is scope for its
growth?
If Indian real estate industry is in recession mode or it's merely a correction ?
If Indian Real Estate Sector will ever come out of this recession or correction ?
How long it will take to come out of recession or correction ?

Minor Objectives:-
To study and analyse the impact of sub-prime crisis, slow down in global
economy, job uncertainness, liquidity crunch, govt. policies etc. on real estate
sector.
To study and analyse the behavior of general individual, Realtors, Developers,
Investors, HNI’S and people who are directly or indirectly are involved in Real
Estate Sector.

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Methodology Adopted: -

The methodology adopted for the present study was in two parts:

Primary Data:

(a) The methodology adopted for the present study was focus discussion,
interview and close observation through in-house study of Indian Real Estate
Sector post Indian globalization. Since the project is based on action
research it was necessary to build rapport to collect maximum information
from the consumers, investors as well as developers. Hence the researcher
spent considerable time with the people who keep investing in real estate,
actual users, HNI’s etc. and renowned developers. The main focus was to
assess the various factors behind the slow down of Indian Real Estate
Sector at present and its future outlook.

(b)

 Type of Research:- Descriptive.

 Sampling Technique:- Convenient Sampling Technique.

 Sample Design:- Collection of primary data from self constructed questioner

form consisting of 10 items and further 5 of them were sub-divided in to 30
items. Each question and its parts had five points namely Strongly Disagree,
Disagree, Neither agree nor disagree, Agree and Strongly agree which
carried 1,2,3,4 and 5 points respectively.

 Sample Size:- 50.

Secondary Data: The secondary data was collected from the real estate and
research based websites, magazines, journals and periodicals etc. The
objective of the study was to understand the real estate sector at large and

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 factors affecting it and further to analyse their reports / forecast with the past
and present market scenario.

“The new moon of the lunar month of Kartika marks Diwali, the Indian festival of
lights, when Hindus across the country worship the goddess of wealth, Lakshmi.
But divinities know full well the laws that govern finance, and Lakshmi may now
be a little tight-fisted about circulating her riches amid the ongoing global credit
crunch.”

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What Causes Recession ?

 An economy typically expands for 6-10 years and tends to go into a

recession for about six months to 2 years.
 A recession normally takes place when consumers loose confidence in
the growth of the economy and spend less.
 This leads to a decreased demand for goods and services, which in turn
leads to a decrease in production, lay-offs and a sharp rise in
unemployment.
 Investors spend less as they fear stocks values will fall and thus stock
markets fall on negative sentiment.

•
What actually is the global financial crisis and how it has occurred?
In 1997, the global economic community suffered a severe downturn
spurred by the widespread collapse of the currencies in East Asia. In 1998, global conditions
were further strained by a financial crisis in Russia. In 2001, the United States moved into
recession following the “dot-com” stock collapse. In 2008, the United States fell again into
recession following a rapid decline in housing prices and a consequent rapid contraction in
credit. Is the regularity of these events just bad luck? Partially, yes. However, there is a logic
that connects them, and understanding the current crisis requires a look back at earlier events.
Beginning…..
Extremely rapid economic growth
• Fed by low cost of capital
• Supported by large investment group
• Pushed by all round optimization
• Spread by globalisation
 Confidence in central banks and regulators
 A correction had to come
 The larger the bubble the steeper or longer the correction

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THE EXPANSION………
Everyone loves a bubble
• US sub-prime housing credits
• Indian real estate and construction boom
• Ponzi & pyramid scheme everywhere
• Europe, Asia, America

NO ONE WANTS TO BREAK A BUBBLE……

• 70% of US consumers felt Housing market will crash- WSJ ,April 10,2006
• most rapid increase in money supply in India for so long –ever

The correction or recession………

 The US sub prime crisis
 Only one sympton of all round correction
 Each had its own little bubble
 World economic growth to slow down from 5 to
2%
IMF Growth Forecast 2009
UK -1.3%

Germany -0.8%
US -0.7%

Russia 3.5%(5.5%)
China 8.5%(9.3%)

India 6.3%(6.9%)
World 2.2%(3.0%)

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The scenerio in India…..
International recessionary conditions
• International trade taking a big hit
• US,China,Europe
• No other big enough buyer
 Asset market bust /correction
• Financial
• Real estate
 Liquidity crunch
• Banks holding liquidity

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Parts of India most affected………..

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Indian Real Estate Sector – Will the phoenix rise again?
Indian real estate industry has witnessed a huge swing in its fortune in recent
time. Till December last year it was a darling of both domestic and foreign
investors. It received around $10 Billion in funding through FDI, Private Equity
and JVs. Everything was looking rosy and developers were busy acquiring lands
at exorbitant rates and launching new projects. Economy was growing at 9.5%
and corporate were looking for new real estate space to either expand or begin
new businesses. However, with the bust of real estate sector in the US, things
turned from good to worst. Investment Banks in the US crumbled and created a
mess called “Sub-prime crisis”.

Sub-prime crisis is the current financial crisis (considered as the worst ever since
World War II) characterized by acute credit crunch in the global capital markets.
At the core of this crisis lies “sub-prime housing loan market.”

How sub-prime crisis started?

The crisis began with the bursting of the United States housing bubble. A slowing
US economy, high interest rates, unrealistic real estate prices, high inflation and
rising oil tags together led to a fall in stock markets, growth stagnation, job
losses, lack of consumer spending, a virtual halt to new jobs, and foreclosures
and defaults. The sub-prime loans were given by FIIs at floating rates. With rising
interest rates in the US, EMIs for these individuals also started increasing (what
we see today in Indian market) and sub-prime homeowners began to default as
they could no longer afford to pay their EMIs. A deluge of such defaults
inundated these institutions and banks, wiping out their net worth. Their
mortgage-backed securities were almost worthless as real estate prices crashed.

The moment it was found out that these institutions had failed to manage the risk,
panic spread. Investors realized that they could hardly put any value on the
securities that these institutions were selling. This caused many a Wall Street
pillar to crumble. As defaults kept rising, these institutions could not service their
loans that they had taken from banks. So they turned to other financial firms to

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help them out, but after a while these firms too stopped extending credit realizing
that the collateral backing this credit would soon lose value in the falling real
estate market, resulting in this big “Sub-prime” mess.

Why did India market fall?

Once investments by the FIIs in the US turned bad, more money had to be
invested back, to maintain that fixed proportion i.e. to match assets and liabilities
on their books. In order to invest more money in the US, money had to come in
from somewhere. To make up their losses in the sub-prime market in the US,
they went out to sell their investments in emerging markets like India where their
investments have been doing well.

So they started selling their investments in India and other markets around the
world to maintain enough liquidity in the US economy and for their own operation.
Since the amount of selling in the market was much higher than the amount of
buying, the Sensex began to tumble. Additionally, crude prices were in the range
of $120-150 which caused inflation to rise in double digit forcing banks to raise
their interest rates. Thus, higher rates seriously affected real estate, automobile
and banking firms’ operations and their stock crashed. Moreover, there were
some rumors that even Indians banks had some exposure to these risky MBS
and hence, banking stocks were among the worst hits. The flight of capital from
the Indian markets also led to a fall in the value of the rupee against the US
dollar. The stock market will continue to tumble as long as there is huge selling
pressure from these FIIs.

Since most of FIIs who invest in India are based in the US, the stock market in
India generally closely follows the sentiments in the US economy compared to
that of Japan or European economy.

Stock market and real estate

Let’s explore how stock market affects real estate industry. Most of the real
estate developers are publicly listed companies and trade on these stock

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exchanges. This is because real estate development is capital intensive and
developers need cash to develop properties which is then sold or rented to
customers. Firms need to buy land, which is extremely expensive these days,
raw materials such as cement and steel, and hire manpower for the construction
activities. All of these require huge amount of money. Developers generally raise
capital either by borrowing from banks or issuing stocks. RBI has made
extremely difficult for the firms to raise debt in domestic market and through
external commercial borrowing (ECB) in order to check the incessant rise in
property prices. Hence, the best way for them is to issue stocks. The investors in
the stock market provide these developers cash for their projects by taking some
stake in the company or projects. Hence, the market to a large extent decides the
fortune of these companies.

A large number of financial institutions (Banks, Mutual Funds and Hedge Funds)
buy or sell these companies’ securities on the exchange. For the last few years
these FIs were extremely optimistic about Indian economy and real estate sector.
They made huge investments in these companies and got great returns. Hence,
their stocks went up through the roof due to heavy demand. If these FIs start
selling their investments heavily for one reason or other, it will negatively affect
companies’ stock price. The stock is an attractive currency for the firms in the bull
market. Firms may sell (issue) these stocks in the market to raise capital to fund
their expansion plan without the headache of interest payments that accompany
debt. So any downward movement in the stock market might decrease the stock
price of these firms and hence reduce their ability to raise sufficient capital; thus,
affecting their future plans.

Unfortunately, the global financial crisis has taken a heavy toll on the Indian stock
market. In less than a year Sensex has gone down from 21,000 to 9,500 levels.
Most of the real estate stocks are down by over 70% w.r.t to their 52-weeks high.
This is because of higher interest rates, global slowdown and heavy selling by
financial institutions, seriously cutting down these companies expansion plans.
They are stuck with their existing projects while investors have pulled out.

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Lehman had around $1.3Billion of investments in Indian real estate market.
Several developers such as Unitech had planned to raise money through Special
Purpose Vehicle (SPV) to fund their projects. Now, after the bust of Lehman,
firms may seek PEs help to raise capital.

Some macroeconomic factors such as inflation and economic growth also affect
companies and their stock prices. As we know inflation in India was around
11.5% (October 2008) which was quite high compared to last year’s figure of 3-
4%. Banks had to increase interest rates to counter high inflation. For real estate
companies higher interest rates environment is not suitable because customers
avoid taking home loans (due to higher EMI) which decreases the demand for
properties. A bad prospect of growth in the earnings of the firms gets reflected in
their stock prices.

Company Current Price* 52-weeks high % drop

DLF 304.65 1225 75
UNITECH 86.8 546.8 84
PURAVANKARA 123.95 535 77
SOBHA 132 1060 88
* As of October 16th 2008 Table 1

Mega deals - are their days over?

Indian real estate sector was a hot cake for foreign investors a year ago.
Everyone wanted a pie of it. Did you ever hear about mega real estate deals that
happened in Mumbai in 2008? If not here they are: London-based banking major
Barclays Bank created history in May when it took space at Cee Jay House, a
landmark office complex in Worli, for Rs. 725 a square foot (sq ft) per month.
Yesteryear movie star Vinod Khanna and his wife set a reality record in Mumbai
by buying an apartment in Malabar Hills for Rs. 30 crore after paying a
mindboggling Rs. 1,20,000 per square foot. But those days are over now. The
sub-prime crisis and negative economy outlook have taken their heavy toll on the
sector.

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Outlook just after sub-prime crisis
From the Table 1 we can see the outlook for these companies was not so good.
Over 70% of their market value was wiped out in less than a year; thus, putting
brakes on their expansion plans. They were looking for alternative sources of
capital or delaying their projects. The global financial crisis and recession in the
US severely affected a large number of industries such as IT/ITES and Financial
Services. Both these industries were creating huge demand for A-grade
commercial properties in Metros and Tier-1 cities. Now, that demand has
reduced by over 50% which might decrease further if the US goes into deep and
prolonged recession. So the next one year would not bring good news for the
firms in the realty sector.

However, the consumers having cash have great opportunities in this bear
market and high interest rate environment. With the decrease in demand for both
commercial and residential properties, prices/rentals have come down. We have
already seen a correction in the range of 5-10% across the properties and
believe prices may go down further by another 3-5% in the next 2 to 3 months.
Also, the prices in the secondary market have fallen more compared to that in the
primary market. We believe inflation might cool off by June 2009 which might
push the demand for residential properties. Though the long term outlook looks
good, the short-term outlook is bad for the industry. So if you plan to buy a
house, either buy now (only cash) or wait for couple of months but definitely
before inflation falls below double digit and banks gradually start rolling off hike in
rates.

What does 2009 holds for the sector?

Good news for both industry and buyers! Inflation has come down from its
October high of 13% to 8%. RBI since then has announced a series of rates cut-
Repo rate has been reduced by over 200bp, while Reverse repo rate saw a
100bp decrease. CRR too was reduced by 150bp to inject liquidity in the market.

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Today, which is December 15th 2008, as I write this article, public sector banks
hold a press conference to announce major rates cut and other measures to
boost real estate sector. The highlights of today’s meeting were:
• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
• Five-year fixed rate terms on up to Rs 5 lakhs home loans
• Banks to take 10% margin on home loan of up to Rs 5 lakhs
• No process, prepayment fees for home loans
• Home loan rate under package can fall if rates fall more, which is likely to
happen
• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
• India banks’ margin for Rs 5-20 lakhs loan will be 15%
• India state-run banks will offer free life insurance cover for home loans

These new home loan rates will be effective Monday, December 15, 2008 and
expire on June 30, 2009. This has come as good news to some developers while
rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs
housing segment, which is also called “Affordable Housing”. Those operating in
“affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech,
said “It is a big benefit — the rates coming down, no processing fees as well as
the fixed nature of it because a lot of people didn’t like the uncertainty with the
way interest rates were moving. So I think the fixed rate and also the only option
possibility of downward revision is a good thing for the sector and for us in
general.” This might force and encourage other developers to focus on affordable
housing. But the existing home loan borrowers felt dejected because these rates
are applicable to new loans only.

However, these measures may not revive the flagging sector conditions because
a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are
above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of
Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties
are sold first, developers may not launch new projects or finish the under

26
construction ones. To give a boost to this, developers are demanding an interest
rates in the range of 7-8% i.e. back to the days of 2005.

With falling crude prices and global recession, Inflation should come down to the
level of 5-6% by June 2009 end. So expect RBI to cut rates further by 100-150bp
which we will bring the interest rates in single digit. This will give the much
needed boost to the industry. Buyers, who are right now playing wait and watch
game, will go for cheaper home loans. Expect another cut in prices in the month
of January or February by developers who desperately want to flush out their
inventories. More so costs of construction have come down by 10-15% due to
decrease in prices of cement and steel. This cost should be passed on the
customers as well. I will surely bet my money on real estate companies,
especially bigger ones like DLF, Brigade and Unitech.

Company Current Price* November 01 Price

DLF 280.85 207.2
UNITECH 37.9 48.05
PURAVANKARA 46.45 47.65
SOBHA 107.35 111.85
* As of December 15th 2008

You may see above that most of these stocks have recovered from their October
lows and are moving north now. Thus, market too looks optimistic about these
companies and the sector as a whole. I am confident that economy will improve
next year and get back to 8-8.5% growth rate.

With the sudden collapse of world leading financial houses,the Indian real estate
players who were already facing the problem of lack of funds due to
economic slowdown and correction in prices would find it difficult to
raise further funds.

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Among the US financial houses –lehman brothers was very bullish on Indian
reality sector and had an investment in excess of US$
700mn( maximum amongst peers)
Layman PE investment in India :

Projects Amount/year
Hyderabad IT park project of Peninsula land 12.5 2008
Unitech ‘s mumbai pune expressway 175 2008
Hotel project of future capital 200 2007
DLF Assets pvt. Ltd. 200 2007
Anant raj industries 66 2006
Unitech’s mumbai projects 16 2008

• Lehman’s real estate investments at projects levels ( including the

big ones like DLF,Unitech& future capital) have been disbursed & it
will not affect the ongoing projects.
• RBI’S directive not to remit investments made by US financial
houses in India without permission is also a step in positive
direction & would restrict fight of capital
• However stocks of companies in which sunked financial institutions
have a direct exposure ( as FII investments especially Lehman)
would see selling pressures.
Stocks to get affected: Anant Raj Industries, Orbit Corporation, Ganesh
Housing, DSK Kulkarni Dev,
Ajmera Reality, Ansal Housing, Ansal Properties, Purvankara Projects

28
Infrastructure
• Adverse impact on the infrastructure companies as it disturbs the financial
atmosphere for the companies which are in the growth stage.
• Lately,after having raised money through IPO’s many Indian infrastructure
companies have gone in for QIP issues with the financial measures across
the world .
• Thus, the current situation might not affect the companies at the project
implementation level , however we might see heavy selling pressure in the
stocks of these companies by the sinking US financial which have an
exposure to
• these companies.
• Going forward, if there is no change in the scenario, fund raising by
infrastructure companies could become a problem.
• Stocks to get affected: Reliance Infrastructure, Prajay Engg, Triveni Engg,
Pratibha
• Inds, Unity Infra, BSEL Infra, Nagarjuna Construction, Sujana Tower,
Madhucon
• Projects, Jyoti Structures, Action Construction.

29
Background Issues
Since the early 1980s, the global economy has seen a rapid expansion in the availability of
savings due in great part to the rapid economic growth of East Asian economies. Because
the U.S. economy has historically been viewed as a financial “safe haven” – a safe place for
foreign citizens to bank their savings – foreign citizens have often moved their savings to the
United States The financial crises and dislocations of the 1990s enhanced the perception of
the United States as a safe haven. Important to the current crisis, the movement of savings
from abroad into this country significantly increased the financial base of the U.S. economy in
the 1990s and the early part of this decade.
During the 1990s, the United States was in a globally dominant economic position. This led
The federal government and the central bank – the Fed – to act as a global guarantor of
economic stability. This was seen in U.S. backing of Mexican debt in 1995 and with the Fed’s
significant injection of money into markets following global crises. Unfortunately, these tools
were blunt. While they aided the foreign community (and the U.S. economy through greater
global stability), these actions tended to again increase the financial funds available in the
United States. Also during the 1990s, and continuing into this decade, the United States ran
very large trade deficits. While the cause of these deficits is subject to various causal
interpretations, the consequence is clear.
Any continuing trade deficit must be balanced over time by a net inflow of financial capital from
abroad. These inflows again increased the availability of financial assets in the United States
Compounding the complexity of absorbing these financial assets was the significant move
Toward deregulation throughout the U.S. economy starting with the Carter Administration.
During the 1980s and 1990s, deregulation moved into the banking industry and allowed for
rapid changes in how banks did business. Two particularly noteworthy changes were the partial
revocation of the Glass-Steagall Act in 1980 and 1999, and the significant decreases in
restrictions on the formation of interstate branch banking operations. These changes increased
the range of activities banks were allowed to engage in and reduced the personal connections
between bankers and borrowers. While it would be foolish to conclude that these innovations
were universally wrong, the rapidity of their introduction did not allow for a sufficient period of
time to develop tools to manage new risks.
In retrospect, it is clear that downside risks were underestimated (first in dot-com stocks,

30
secondin housing, then in financial derivatives). The introduction of these innovative products,
combined with the increased monetary base to fund them, allowed for the consequences of
poor risk control to be significant.
Finally, the Financial Accounting Standards Board changed asset-pricing standards effective
November 2007. This change introduced “mark-to-market” asset valuation requirements on
Capital assets. As discussed below, the change in accounting standards served to worsen the
credit crisis during 2008.
Keypoints:
1. Foreign savings flowing into the United States made
borrowing inexpensive.
2. Loose domestic policies made borrowing inexpensive.
3. Banking consolidation allowed banks to increase lending.
4. Banking deregulation weakened oversight of banks.
5. Changes in accounting rules were implemented $>
during the early part of the crisis.

Housing Price Run-Up:

Throughout this decade, many people expressed concern about the rapid pace of
growth in housing prices. This was a legitimate concern. Between 1994 and 2006,
the average price of a single family home increased by almost 200 percent. The fuel
for this growth was:
(1) Inexpensive mortgage rates,
(2) Reduced adherence to banking rules in the mortgage industry, and
(3) Changes in consumer expectations. Consider these items in turn. For most
people, purchasing a house is a joint purchase – both a house and a mortgage are
purchased. Basic economic theory shows that when the price of one good in the

31
pair falls, the demand for the other good increases. Hence, the fall in mortgage rates
funded by the factors discussed above serves as the first impetus to rising housing
prices.
Further, deregulation of banks changed banking practices. Initially, this was seen in
the widespread movement to branch banking and bank consolidation. This has
important ramifications for banking practices. Fifty years ago, the neighborhood
banker was the primary source for credit. Further, that banker personally knew
many of his customers. This offered a casual information channel by which a banker
could assess risk. The introduction of larger branch banking institutions eroded this
information channel.

Unfortunately, as the casual information channel was being eroded, the incentive
structure within the financial sector further changed.Historically, the issuer of a
mortgage was likely to maintain anequity stake in that mortgage – it would remain
“on the books.” Financial sector deregulation changed that constraint. Banks and
other financial institutions introduced numerous financial derivatives (for instance,
Collateralized Debt Obligations – CDOs) that allowed mortgages (and other types
of debt) to be packaged and re-sold (and as time went by, re-sold again). This
reduced the need for lenders to practice quality oversight – if a loan went bad, it
would no longer belong to them. With the growth in foreign savings in the United
States and too much domestic money, lenders found many ready. buyers of this
repackaged debt. Mortgage turnover increased as lending practices became
increasingly weak.

More important for housing prices as mortgage debt

became more easily available, new buyers of housing
entered the market – the “subprime” borrower.

The influx of these new borrowers who would

traditionally not have had access to loans, further
spurred housing demand.

32
 Finally, consumer expectations changed as housing prices rose; consumers came to
expect housing prices to continue to appreciate at a high rate. This encouraged the
entrance of new real estate speculators into the market. These new buyers again
drove up housing demand and continued to propel the upsurge in housing prices.
This final speculative demand – when piled onto the other forces driving an
upsurge in housing prices – formed a housing price bubble.

If asset price bubbles never burst, they would not be of concern. Unfortunately, they
always do. The proximate cause of this downturn has not been determined, though
it is likely tied to the notable decline in the international confidence in the U.S.
economy starting in 2006. The fall in confidence dried up some of the foreign
savings and pushed some foreign buyers out of the housing market, which put
upward pressure on mortgage interest rates and likely started the downturn in the
housing market. However, regardless of cause, the effects are clear – since the
peak of housing prices in July of 2006, nationwide housing prices have declined
by 21 percent.
Key points:
. 1. Cheap mortgages drove up home prices.
2. 2. Banking deregulation allowed new
potential
3. borrowers to enter the housing
market.
3.Households began using real estate as a
speculative asset.

Credit Crisis
The credit crisis is a direct outgrowth of
the fall in housing prices that began in 2006. While many channels exist by
which the housing prices enter thefinancial sector, the core connection is
straightforward. Every bank or other financial entity in the United States is
required to have capital assets backing its loans. As a rough approximation for

33
every $10 in loans issued by a commercial bank, a bank must have $1 in capital
assets. With the introduction of financial derivatives, financial entities widely used
mortgage-backed securities as a share of the capital backing their operations. As
housing prices decline, the value of mortgage-backed securities decline. Because
banks’ capital assets are declining in value, they must issue fewer loans. The
tightening of credit conditions necessitated by this logic starts a downward
spiral.
First, tighter credit narrows the market for housing. The fall in demand begins
pushing housing prices further down. Recent buyers of houses begin to find
they owe more on a house than the house is worth (negative equity); this
encourages them to walk away from mortgage obligations and foreclosures
increase. As foreclosures increase, the value of properties next to foreclosed
houses declines. This pushes more homeowners into a situation of negative
equity.
Second, the continued decline in housing prices further reduces the value of
mortgage-backed financial derivatives. As they decline, credit conditions further
tighten. This becomes an increasing problem as variable rate mortgages begin
to reset. Those who were planning to refinance prior to the interest rate reset
find they are unable to do so; regrettably, some also find that they are unable to
afford the now higher payments. Another round of foreclosures ensues.
This cycle continues until the capital assets are fully re-priced (we are not
there yet), stopping the continued contraction in lending. This

34
contractionary cycle is made more severe by requirements to “mark-to-market.”
With
mortgage-backed derivatives falling in value, the market for these assets has
effectively disappeared, as such, the market value of these assets is close to zero
(though they can realistically be expected to rebound in value within five years).
However, if valued at zero now, the extent of the credit constriction must be more
severe.
Because the housing market and mortgage-backed derivatives were the early
locus of the problem, the discussion above broadly focused on those areas.
Unfortunately, the crisis spirals outward from those sectors. As credit
conditions tighten, consumer loans, loans for business operating expenses, and
loans for corporate expansion become increasingly difficult to obtain. This
drives down the sales of many items and forces many otherwise well-
functioning firms into failure. The effects of this broader downturn are currently
being seen in markedly higher rates of unemployment. If the collapse in credit
becomes significant enough, it could spiral the economy into a serious
economic downturn. For historical comparison, the last time credit conditions
became this poor was during the Great Depression (though the contraction
then was greater AND there were other contributing issues to the Great
Depression that are not currently present). Another way of looking at it, the
current credit issues are about three times greater in extent than the Savings
and Loan Crisis of the 1980s (though it will not be surprising if the extent of the
crisis grows).

Keypoints:

1. Falling asset values forced fewer loans to be issued.

2.Fewer loans reduced the demand for housing; this reinforced the initial
decline in home prices.
3.Reduced lending constrained production throughout the economy.

35
Fixes and Lessons
Fixing the credit crisis will not be easy. On October 3, 2008, the Emergency
Economic Stabilization Pact (EESP) became law.6 This law, along with the
earlier interventions, is directed at stopping the downward slide in loan
availability by shoring up the capital assets backing lending. Effectively, this bill
gives the Treasury Department the charge to buy capital assets that are currently
becoming worthless in exchange for government debt (though debt exchange
is not the sole option). Because U.S. government debt is effectively without risk,
a continued fall in capital asset values by financial institutions is avoided.
Unfortunately, this requires transferring these risky assets to the government,
which points to two key concerns with the legislation. First, will it work? Second,
how much will it cost? Neither question can be answered now. We will know if the
intervention worked two years from now – if it does, the economy will have
recovered. Answering the second question will take more time. The purchases
under EESP will total roughly $700 billion.7 But, the government gets
something in exchange – the risky assets. If these assets continue to fall in value,
the cost of the bailout will be close to the cost of the purchases (worse – this is
most likely to occur if the bailout did not work). However, if the assets begin to
perform again as the markets stabilize, the government should be able to recover
a significant portion of the $700 billion.
A final concern about the bailout links to the notion of “moral hazard.” Moral
hazard arises when offering protection from a negative outcome increases the
likelihood of future bad outcomes. To see this concern, consider the following
scenario. Suppose the bailout works and works well. Further, suppose that the
remaining financial firms come through the downturn with minimal harm. What
lesson will these firms have learned? First, that the government will shield them
from the cost of poor management of risk. Second, that the protection will
leave them without damage in the long run. If this is the case, what would a
business do that saw a great – though risky – chance for profits 10 years from
now? Would it be more likely to pursue this end? If so, the current bailout merely
sets the stage for future crises.

36
What lessons can be learned from this crisis? First, no single factor caused it.
Lenders, borrowers, and regulators are all at fault – lenders through poor risk
management, borrowers through excessive borrowing and overvaluation of
real estate, and regulators through lax enforcement of the financial sector.
Second, given that this is the second speculative bubble to have formed and
burst in the United States in the past 15 years, better financial risk management is
required. However, better risk management is not easy. The globally
interconnected economy is more complex than the economy of 50 years ago.
Until our management mechanisms improve sufficiently to better quantify the
new and little understood risks of this economy, households, businesses, and
government must tread more carefully. Perhaps twice burned will be sufficient to
teach this lesson.

Key point:

The value of assets held by banks must be restored so that they can resume
lending.

37
History v/s Present

Black Thursday 1929:

38
  Stock Market Crash
 Passive Federal Reserve System
 Ignorance of Keynesian Pump Priming
 Panic in the Banking Sector
 Unemployment Rate of 25%
 Complete Dominance of the US Economy in the World
 World Financial Market Illiquid

Black Monday 2008

39
 • Real Estate Bubble
• Proactive Federal Reserve System
• US Government Pump Priming
• No Panic in the Banking Sector
• No Crash in the Stock Market
• Unemployment Rate Manageable
• Countervailing Power of Emerging Markets
• Liquidity of Sovereign Funds
• Massive intervention of European governments

Growth Rates of Major Economies

40
 World Growth (GDP Growth Rates)

2001 2002 2003 2004 2005 2006 2007 2008F 2009F

US 0.8 1.6 2.5 3.6 2.9 2.8 2.0 1.6 0.1
Euro Area 1.9 0.9 0.8 2.1 1.6 2.8 2.6 1.3 0.2
Germany 1.2 … -0.2 1.2 0.8 3.0 2.5 1.8 0.2
France 1.9 1.0 1.1 2.5 1.9 2.2 2.2 0.8 0.2
Italy 1.8 0.5 … 1.5 0.6 1.8 1.5 -0.1 -0.2
Spain 3.6 2.7 3.1 3.3 3.6 3.9 3.7 1.4 -0.2
Netherlands 1.9 0.1 0.3 2.2 2.0 3.4 3.5 2.3 1.0
Japan 0.2 0.3 1.4 2.7 1.9 2.4 2.1 0.7 0.5
United Kingdom 2.5 2.1 2.8 2.8 2.1 2.8 3.0 1.0 -0.1
Canada 1.8 2.9 1.9 3.1 2.9 3.1 2.7 0.7 1.2
Australia 2.1 4.2 3.0 3.9 2.8 2.7 4.2 2.5 2.2

Threats to World Growth

• Financial meltdown in the U.S.
• High rates of inflation
• Tight credit despite lower interest rate

41
 • High albeit moderating food and fuel prices
• Slowdown in the EU and Japan
• The U.S. twin (fiscal and trade) deficits continue to cause concern

U.S. Economy:
Still no end to financial turmoil……
• Huge losses in the financial sector
• Still uncertain results of U.S. government bailouts of failing banks
• Real GDP growth to fall from 2.0% in 2007 to 1.6% or lower in 2008

Today’s Real Estate Market – Career-Ending Crisis or Golden Opportunity

for Agents?
It’s no secret that real estate agents across the country are struggling for their

42
professional survival. Due in part to the subprime mortgage meltdown of August
2007,many agents find themselves with unsellable listings or suddenly-uncredit-
worthy buyers (who would have qualified easily just a year ago).
The doom and gloom brigade has wasted no time predicting the downfall of the
residential real estate industry, some even gleefully so. Even within the industry
itself,the more cynical agents are warning of a mass forced exodus of all but the
most aggressive and knowledgeable real estate licensees.
It all sounds pretty grim for the average real estate agent, doesn’t it? Not
according to one industry insider. Jennifer Allan, real estate broker, author and
consultant, claims that the current “crisis” may in fact be an incredible opportunity
for the real estate sales community.
The real estate agents have bemoaned the fact that we are not respected as
professionals; that the general public doesn’t value our services much above
those provided by used car salespeople.”
However, Allan continues, “We have a golden opportunity to show the home-
buying and-selling public what we’re made of. And no, not with expensive ad
campaigns, but rather by doing what we were licensed to do - that is - Sell
Houses. If we, as an industry,commit to putting our prospecting efforts on the
backburner and focus on performing for our seller clients, it’s possible we could
turn this mess around. And in the process,perhaps change the perception of the
professional real estate agent forever.”
Which of course, raises the question, how does a “professional real estate agent”
sell houses in a lousy market?
“In today’s market, an MLS listing and a For Sale sign in a yard isn’t enough to
sell a home. It’s not even enough to create color home brochures, hold open
houses and demand price reductions at six-week intervals. We need to work a lot
harder than that, and to have the guts to tell our sellers what’s what.”

These are the three main items that can mean the difference between
a listing that sits and a listing that sells:

43
1. Price is King. Properties must be priced more aggressively than their
competition to even be shown, much result in an offer. It’s not enough to simply
be “fairly
priced.”
2. Condition is Queen. A home that evokes a negative or even a neutral first
impression has little chance of selling. It’s the agent’s job to make this clear to
the seller and do whatever he or she can to help the seller get the home in
showingready condition.
3. Accessibility rounds out the top three. If a listing is hard to show, regardless of
the reason, it will be passed over. The seller needs to understand that once he’s
on the market, his life is no longer his own. He must be willing to accept
showings on short-notice and to vacate the home during showings. The key to
the front door must work easily in the lock and there can’t be barking dogs locked
up in the laundry room.

Anatomy of the economic depression in India

44
Real Estate Sector
•The key challenges faced by the industry now are inflation and the psychological
impact of the US crisis, leading the companies to hit the panic button.
•Bonuses, perks, lavish parties, and many other benefits are missing as
companies look to cut cost.
•India's IT export growth is also slowering down
•One of the casualties this time are real estate, where building projects are
half-done all over the country and in this tight liquidity situation developers find it
difficult to raise finances.

Layoffs and Unemployment

•Hundreds of workers have lost jobs in diamond jewellery, textiles and leather
industry.
•Companies in IT industry have stopped hiring and projected lower manpower
need.
•Firms attached to the capital market are laying off people and large companies
are putting their future expansion plans on hold.

45
An investment bank uses its propertiory book (own money) tom lend others
and invest, it started with the sub prime crisis banks like Lehman, buy
mortgage loans from the other bank, and then package them to sell bands
against the loan pool often they add cash to make the loan pool more
attractive so that the bonds can be sold at higher price. Suppose mortgage
was earning 6% these bonds are sold at 4%. The difference is the spread
which the invest bank earns by selling these structured banks it raises money
and frees capital. But when home buyers started defaulting these bonds lost
their value. It all began like this and then virus spreads across the markets al
over the world where India is one of the nation affected due to the giant
companies of the India invested in huge amount hence the problem persist.
(Source: anatomy of global financial crisis ET 17th Sept2008)

The International Economic Environment

The International Economic Environment Current Crisis
What causes CA deficits and surpluses? The origins of the US trade
imbalance Sustainable or Source of Concern? Impact on the $ Impact on firm
profits Bernanke: Why is the United States, with the world’s largest economy,
borrowing heavily on international capital markets — rather than lending, as
would seem more natural?

Recent Growth Trends in Indian Economy

India’s Economy has grown by more than 9% for three years running, and
has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with
60% of India’s 1.1 billion populations living off agriculture and with droughts
and floods increasing, poverty alleviation is still a major challenge.

The structural transformation that has been adopted by the

national government in recent times has reduced growth constraints and
contributed greatly to the overall growth and prosperity of the country.

46
However there are still major issues around federal vs state bureaucracy,
corruption and tariffs that require addressing. India’s public debt is 58% of
GDP according to the CIA World Fact book, and this represents another
challenge.

During this period of stable growth, the performance of the

Indian service sector has been particularly significant. The growth rate of the
service sector was 11.18% in 2007 and now contributes 53% of GDP. The
industrial sector grew 10.63% in the same period and is now 29% of GDP.
Agriculture is 17% of the Indian economy.

Growth in the manufacturing sector has also complemented

the country’s excellent growth momentum. The growth rate of the
manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The
storage and communication sector also registered a significant growth rate of
16.64% in the same year.

Additional factors that have contributed to this robust

environment are sustained in investment and high savings rates. As far as the
percentage of gross capital formation in GDP is concerned, there has been a
significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year
2006. Further, the gross rate of savings as a proportion to GDP registered
solid growth from 23.5% to 34.8% for the same period.

47
The poising factors affect the Indian economy

Stocks
GDP

Inflation

Consumers

Industrial Impact on Indian

growth economy

Banks

Employmen
t

Companies
B.O.P

Consistent increase in the inflation rate:

The market remain under pressure after inflation recorded fastest rise in more
than 16 years in early August 2008, increasing the likelihood of the Reserve
Bank of India (RBI) raising interest rates again. With no major key events
scheduled in the forthcoming week, the market will closely watch global stock
market cues. But it may turn volatile on account of expiry of August 2008
derivatives contracts on Thursday, 28 August 2008
The wholesale price index rose 12.63% in 12 months to 9 August 2008, above
the previous week’s annual rise of 12.44%, government data released on
Thursday, 21 August 2008, showed. Inflation for the week ended 14 June

48
2008 was revised upwards to 11.80% from 11.42%.

Rising inflation rate has dashed hopes of any relaxation in the monetary
policy. Market expects Reserve Bank of India (RBI) to raise the rates further in
its next monetary policy review two months from now.

On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly policy
review, raised repo rate by 50 basis points to a seven-year high of 9% to curb
inflation and dampen inflationary expectations. RBI also raised the cash
reserve ratio (CRR), the proportion of funds that banks must keep on deposit
with it, by 25 basis points to 9%.
Market will closely watch developments on the Indo-US nuclear deal. A two-
day meeting of the 45 countries of the Nuclear Suppliers Group (NSG) began
in Vienna on Thursday, 21 August 2008. A green signal by the NSG is
required for the deal to proceed to the US Congress for final ratification. As
per reports, nuclear supplier nations at a meeting on Thursday, 21 August
2008, proposed conditions for lifting a global ban on fuel and technology
exports to India, a step required to implement a US-India nuclear cooperation
deal.

A further rise in crude oil prices may act as a dampener for the stock markets.
Light, sweet crude for September 2008 delivery surged $5.62 to $121.18 a
barrel on Thursday, 21 August 2008 on the New York Mercantile Exchange
(NYMEX) on weaker dollar and worries about tightening output from OPEC
countries.

Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore in

August 2008 (till 20 August 2008). FIIs sold shares worth Rs 28,133.40 crore
in the calendar year 2008. Mutual funds sold shares worth Rs 886 crore in
August 2008 (till 20 August 2008).
(source: economy watch Friday august 8, 2008)

49
Industrial production:
Falling crude oil prices and improvement in south west
monsoon will provide some relief to investors. Rising inflation remains a major
worry for the markets in the medium term.

The government will release June 2008 industrial production data at 12:00 IST
on 12 August 2008. Reserve Bank of India’s recipe to contain inflation by
increasing the lending rates is expected to hurt industry, manufacturing sector
and the overall growth momentum. Industrial production grew at the slowest
pace in more than six years in May 2008, at 3.8%, as against 10.6% in the
same month of 2007, with manufacturing showing signs of acute deceleration.

Inflation remains a major concern for the central bank. Inflation based on the
wholesale price index rose 12.01% in 12 months to 26 July 2008, slightly
above the previous week’s annual rise of 11.98%, government data released
on 7 August 2008 showed.

Reserve Bank of India (RBI) on 29 July 2008, raised repo rate by 50 basis
points to a seven-year high of 9% to curb inflation and dampen inflationary
expectations. RBI also raised the cash reserve ratio (CRR), the proportion of
funds that banks must keep on deposit with it, by 25 basis points to 9%. The
central bank left its reverse repo and bank rates unchanged. Responding to
the RBI’s monetary tightening, top lenders HDFC and ICICI Bank and a
number of state run bank have raised interest rates.

The aggregate results of 2,988 companies showed 5.1% rise in net profit to Rs
63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June 2008 over
Q1 June 2007. The net profit growth is now in single digits the lowest in the
past 20 quarters. In the June 2008 quarter, a number of companies were hit
by mark-to-market (MTM) losses on their foreign exchange (forex) exposure.
Crude oil prices have declined sharply from record high $147.27 a barrel hit on

50
11 July 2008. Oil held near $118 a barrel on Friday 8 August 2008. India
imports 70% of its crude requirement. The rising crude oil prices affects the
fiscal deficit position of the country and its sovereign rating.

Market men will keenly watch the development of India’s nuclear deal with US.
The Board of Governor of the International Atomic Energy Agency (IAEA) on 1
August 2008 unanimously adopted the India-specific safeguards agreement, a
key step in operationalization of the Indo-US nuclear deal.

Foreign institutional investors (FII)’s bought shares worth Rs 1,527.90 in the

first few days of August 2008 (till 7 August 2008). FIIs sold shares worth Rs
25,774.20 in the calendar year 2008, till 7 August 2008. Mutual funds sold
shares worth Rs286.10 in the month of August 2008 (till 7 August 2008).

Balance of Payments
Balance of Payments Anything that we buy or sell to the rest of the world must
be paid for. The current account (CA) tracks the flow of goods and services
between the US and the rest of the world and Net Exports of Goods and
Services, Net Income (from investments and wages) and Net transfers The
capital & financial account tracks the payments for those goods & services
(KFA) and records the purchase and sale of financial and non-financial assets.
It includes Official international transactions which central banks collect as
reserves.

Investors reaction
Most investments conversations in India obsessed about precisely picking the
bottom while this may be worthwhile past time for a few professional investors
for most others it exposes the exact opposite which is to say they remain
under invested when things began to work again. India never did shine as
brightly as people thought in 2006 nor is as dull as the people are thinking now

51
the truth is in the middle and there is money to be had for the long term
investors in recognizing that.

Impact on the nuclear deal.

US administration and the congressed bogged down over the financial crisis in
the country.The focus has shifted to bail out the country from the economy
turmoil and administration is trying hard to iron out the parameters and
specifics of the nearly 1 trillion dollar package that is being put through
stabilize frighten markets one of the legislative strategies being discussed
recently is that of attaching the financial package to continue in resolution that
is needed to fund the government the end of the month. Some are hoping that
the civilian nuclear deal will also be attached to this resolution so that the
congress can pass one omnibus major prior to its adjournment for the season.

Indian BPO Companies

India’s outsourcing story has become the un Intended victim of the collapse of
some of the most venerable wall street firms such as Lehman brothers & Meryl
lynch since the subprime crisis began to unrevealed idea can no longer claim
that the BPO or KPO operation will escape unscathed from troubles of the Us
financial sector already hundred of jobs have been lost following the
downsizing of the operation and closing down of back offices in India the tall of
the collapse of Lehman is reportedly about the 2200 jobs several other global
financial services companies to have been force to cut the strength of back
office operations in India. Laying of people across various functions as their
incomes were hurt by crash of stock market software majors such as TCS
Infosys, Wipro & satyam that earn a significant portion of their revenues from
the banking. Financial services and insurance sector would njedd to be
prepared for loss of business needless to say the loss of several well paying
jobs would dampened demand in some product segment as well as the real
estate which is already suffering door to the sluggish sales. Indian companies

52
which have partnered this institution for business collaboration or funds would
have to be prepared for a change in the partners an even the stake sale by
distressed institution.
However that is not to say the collapse of the financial sector would make the
outlook for India and its market more gloomy their have been a few positive
developments over the past couple of weeks for instance the industrial
production for july 2008 looks healthier rising 7.1% over the same month last
year. In particular the robust growth of the capital goods sector [albeit over a
low basin July 2007]and consumer durable [perhaps in anticipation of the
festival season of demand] are definitely encouraging the decline in the global
commodity prices particularly crude oil now inching close q$90 a barrel should
spell good news for inflation control beside the first quarter GDP growth at
7.9% although slows in 3 years. Reflects that the fundamental of the economy
still varies from that should inspire confidence in the performance of our stock
market.

Banks wants to be safe:

Even Indian banks have started tightening the news the noose on the credit
most banks have started going slow on proposals and are looking not only at
the best possible returns but also at the safety factors because of the sub
prime collapse financial cost of these for these banks have also gone up
drastically in past few month most Indian banks not tapped the international
debt market. Financing cost for the more corporate have gone up to 5 times in
the past one year. Financing coming under pressure fees on loans have
atleast doubled in the past one year. Most Indians and foreign banks feel that
the prices could last till next year and they now want to play safe.

Stock market:
One often wonders why the Indian stock markets reacts more than the US
markets and an American financial institution goes burst. Close look at the
extreme volatility off course markets will lead to one to conclude that the

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Indian markets provides neither adequate liquidity nor value share efficiently.
The result is that the very purpose for which exchanges are constituted and
shares are listed is defeated low floating stock and low public share holding
result in extreme volatility forcing retail investors to shy away from the market.

Gross domestic product:

Earlier projection of 8% no they are predicting it as 7.4% . the multilateral
lending agencies has revised country’s growth projection dur to current global
financial turmoil and weekend investment outlook the bank revised its growth
projection for the developing Asian economies as a whole to 7.5% this year &
7.2% next year from earlier projections of 7.6% & 7.8% respectively. These
economies posted the fastest growth of 9% in nearly two decade in 2007
(source: Asian development bank)

Rupee v/s dollar:

The issue concerning the rupee exchange rate to the case of either near zero
volatility or sudden excessive volatility it is unfortunate that we have never
witnessed orderly moves on the exchange rate base on pure economic macro
or micro fundamentals this makes the task of managing the exchange rate risk
very difficult for the market participants who run a multicurrency balance sheet
having either import or export or foreign currency lending or borrowing ideally,
rupee(against dollar) should depreciate by inflation adjusted interest rate
differential added to that is the trade gap (on the current account) and net
flows through the capital; account (debt & equity) while the inflation adjusted
interest differential and the negative trade gap would guide rupee depreciation
the flows in the capital account will cushion the rupee depreciation hence
flows in the capital account
( through FII/FDI/PE/VC/ECB/FCCB/DR etc) are very critical to guide rupee
exchange rate.)
the three core issues to be addressed to guide orderly exchange moves are to
move in to current account surplus by boosting exports and other receivable to

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build long term capital account flows to minimize the risk from volatile short
term flows and to hedge risk on crude oil prices at appropriate levels to
address the said issues rupee exchange rates should remain attractive
through exporters should not give exchange rate benefits to short term foreign
investors and to reduce volatility in the oil import bill, gradual rupee
depreciation by 2-4% per annum will be in order and to undue the recent
damage rupee reversal (the mid point of 39 & 47) 43.00 should help the Indian
economy.
I would look forward that the rupee to settle in the range of 43-43.80 by march
2009 with the support of the RBI. Till the said core issues are addressed yes
as rupee appreciates to much to 39. Now it has depreciated too much at to 47.
mainly ion volatility in trade gap and capital account flows it is time for market
participants to move away from windfall gains and to focus on students risk
management practices to arrest the downside.

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On the issue Mr. Manmohan Singh suggested –
“A coordinated fiscal stimulus by countries that are in a position to do
so would help to mitigate the severity and duration of the recession”

“It would also send a strong signal to investors around the world.
Resort to fiscal stimulus may be viewed as risky in some situations,
but if we are indeed on the brink of the worst downturn since the
Great Depression, the risk may be worth taking,” he added.

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Corrective Steps to Check Recession
•RBI needs to neutralise the outflow of FII money by unwinding the market
stabilisation securities that it had used to sterilise the inflows when they
happened.
•This will mean drawing down the dollar reserves which is important at this hour.
•In the IT sector, there should be correction in salary offerings rather than job
cutting
•Public should spend wisely and save more
•Taxes including excise duty and custom duty should be reduced to lighten the
adverse effect of economic crunch on various industries

•In real estate the builders should drop prices, so as to bring buyers back into the
market.
•Also, the government should try and improve liquidity,while CRR and SLR must
be cut further
•Indian Companies have to adopt a multi-pronged strategy, which includes
diversification of the export markets, improving internal efficiencies to maintain
cost competitiveness in a tight export market situation

Opportunities in India due to US recession

•US recession may be a boon for Indian offshore software companies

•The impact of recession is higher to small and medium sized (SMEs) enterprises
whose bottom lines get squeezed due to lack of spending by consumers
•SMEs in the US are under severe pressure to increase profitability and business
margins to survive. This will force them to outsource and even have M&A
arrangements with Indian firms.
•India is going to be a great beneficiary of this trend which will minimize the
impact of the US recession on Indian industry

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•By March 2008, India had received SME outsourcing deals worth $7 billion from
the US as against $6.2 billion in the previous year
Good News…….
Agriculture growth up
Two years of good monsoons
Rural growth to pick up
Govt. wages and salaries increase
Demograpic dividend continues
Basics unaffected…food,FMCG,Education,Health
Prices under control
How to deal with this crisis?
 Communication
• Simply
• Timely
• Accurately
• Repeatedly & consistently
• Credibly

Communicating & Action

 Acknowledge the problem
• It wont go away easily and will require effort
 Assure but state continued concern
• Although we are not out of wood yet
 Confidence v/s uncertainty
• Confidence in ability but uncertainty for outcomes
 Action for self protection
• You must do X
• You should do Y
• You can do Z

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THE FUTURE ………

2008-2009

• India and world well into the downward phase

• Probable worsening

2009-2010

• Some improvement in India on account of rural demand multipliers

• Recessionary condition internationally

2009-2010 and beyond

• India in the 6.5% growth range

• World should start to emerge again from lowpoints

Government current-stance………..
• Will be unable to do much
• Some reforms
• Some announcements
• Some increase in infrastructure allocations
• Will try for international funding
• Fiscal deficit will be about 10-12%
• Don’t depend on it for much

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What the government should do?
 Fight pessimism
 Many reforms have political consensus
• Financial inclusion
• Domestic transport
• Laws affecting internal trade
 Ramp up IT spending within the government
 Get the banks working again
• Manufacturing sector credit
 Trade wit hneighbours ( balance argument)
 Political consensus

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Conclusion
Arise, Awake and be Alert. “Financial emergency” has stepped in our country.
Sharp fall in revenue deficit as well as fiscal deficit stopped Government from
announcing further concessions. Do not expect much from RBI also. Those of
us who hoped for further sops from Budget are feeling dis-appointed. But this
is the time to stand on our own. Consolidate your position and be fully
prepared to face an even worse year 2009.Expect good times in 2010 only.
Merciless Professionalization, Outsourcing “Marketing & HR functions”,
Consolidation of Business and giving top most priority to ‘Cash’ and Cash
Flow’ can only help in such situation of crisis.
We lead leadership – in the era of economic uncertainty” that “credit” is the oil
of the economic engine, and credit ultimately is a creation of confidence. Until
all players are confident about the “intentions” and “strength of others”,
There can only be stag nation. The economic peace of past generation is
over. We are in a war for survival,be set by fear uncertainty and doubt.
Conditions now demand for a seriously different kind of leadership. Leaders
must be prepared to make strategic, structural, financial and operational
changes in a hurry and with information that is at best incomplete.
themselves best to their environment. However Mr. Ram Charan, the noted
management guru opines that “
It is not the strongest species that survive, nor the most intelligent, but the
one most responsive to changes.”
The hope from Interim Budget has vanished. Door of Central Govt. is closed
for next few months till next government assumes office and is a stable
government. Developers are now looking to State governments for help.
Though the activity in sector is gearing up slightly – The wait and watch
attitude of buyers continues. It seems the sector is heading towards more
price correction during march. Availability of cash and its rotation has

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assumed importance in real estate sector which is forcing Developers to be
more end user sensitive and revise their business model soon.
Ability to confront reality is always important, but now it is absolutely critical.
We must use our “ground-intelligence” and have the “GUTS” to act. We must
be prepared to reverse earlier decisions that no longer make sense – look to
DLF move in Bangalore. Be decisive about the future too. Yes, forecasts and
predictions seem all but meaningless at the moment.However, at some point
there will be a recovery, and we need to prepare for it by making the most
intelligence guess as we can. Aggressive measures and decisive actions
build optimism and confidence which is essentially needed at this moment of
crisis.
Looking ahead, anticipating what is coming intelligently and moving quickly
and decisively to adjust to the new realty is the only mantra in this time of
sharp slowdown. Tendency among many of us to say to ourselves, “This will
end soon, and we will be back to normal” is not going to work. You have to
act and act faster than others not only to grow but even to survive. Paying
special attention to the people who are interacting with customers, monitoring
cash flow daily and keeping a finger on the pulse of external environment may
definitely help all of us during this period of unprecedented crisis.
Extra ordinary times require extra ordinary leadership. It is true for every
sector including that of real estate sector. Government is doing their own
piece of work but it is the time when Developers should take lead. Clearing
old inventories even at lower price is a good option since market for Premium
Housing is not expected to spur in near future. It may prove more costly to
hold on the inventories than disposing them atreduced price.
Global trends point out reversal of the process of Globalization. U.S.A has
started the process of protectionism by refusing grant of H – IB Visa. Such
steps may start the process of de-migration specially from Gulf and European
Countries. This may further impact our economy.However, earlier signals of
revival of economy and real estate sector is still to be seen. Meanwhile Real

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Estate Sector has to put extra effort to make them transparent and
trustworthy so that customers haveconfidence in it.
Any episode like satyam may kill the confidence of customers and can make
revival very difficult, hence this is a period of patience and extra caution.
Fantastic win of 8 Oscars by Slum dog Millionaire is to be celebrated because
it is a story about HOPE,Optimism and Dreaming the impossible. Rahman
Says “All my life I had a choice of hate and love. I choose love and I am
here.” Yes, it is time to love. Love your customers and you will win. Explore
his needs, his affordability and build according to that and you will not only
remain in business but will grow even in deepest downturn.
Govt. of India has given final round of stimulus to industry by cutting down
excise duty & service tax by 2% at the cost of increased fiscal deficit. This is
like short term gain for a long term pain. Increased fiscal deficit has made
S&P to reverse India’s outlook from stable to negative which may make
foreign investment more costlier and more scarce.
DLF initiative to cut prices of its Bangalore & Chennai projects by 32% to 17%
respectively appears to be a right step in right direction to boost demand and
increase cash flow. Increased competition between Developers will force
them to cut their prices on the line followed by Market leader DLF. However, a
collective action by all Developers would have been better in prevailing
circumstances.
IT and ITES were the prime drivers of Real Estate Industry in the past. These
services flourished on the basis of outsourcing from USA and European
countries, which are now suffering from slowdown hence there is obvious
reduction. Now, Barrack Obama’s official protectionism policy to not provide
tax sops to those industries who outsource activities, is a direct blow to future
growth of such companies. Though cheaper labour cost during past has
promoted such activities but State intervention will slowdown outsourcing
hurting Indian real estate also by reducing the demand. The requirement for
office space, retail space, hospitality space and premium housing will get

63
reduced. Developers may not find good growth in these segments and
therefore should focus more on domestic demand like affordable housing and
infrastructure linked real estate development.
Banking sector were prompt in rescheduling the debts of developers but were
slow in loan disbursal to individual buyers.Buyers are also in wait and watch
mode and both – banks & buyers are waiting for the developers to cut down
prices. However, nobody is sure that demand will pick up, if developers
reduce their prices. Nobody is sure about quantum of reduction of prices.
How much reduction will be sufficient is a guess. Reduction by individual
developer will definitely force other developers to bring down prices but it will
not end demand for further reduction. Only collective decision, based on
location, may work.
Right now there are only bad news. Sensex at lowest point in three years
while rupee touched historically lowest valuation. The stimulus package
announced by Government of India was more dependent on infrastructure
spending which has a long leg effect and may not show results soon. The
solution lies only in reviving domestic demand but, in such a scenario people
prefer to save rather than spend. FII operating in Asia Pacific region are
giving more weightage to China in comparison to India and are risk averse.
The silver lining, however, is that in India fundamentals are very strong.
Growing population, demographic dividend of having younger and educated
population, continuously rising urbanization will make Indian economy recover
faster than others. However, the strategy adopted by Sobha Developers and
is DLF is worth appreciating in such testing times and expected to bring more
cash flow.
Banks did not respond adequately. Unwillingness of Banks and
their risk-averse attitude towards aggressive lending is the greatest bottleneck
in spurring demand, which is at rock bottom presently. For aggregate demand
to boost, the interest rate environment has to change. For that to happen,
Banks have to be shaken out of their present mindset. With overseas debt
market dried up, FII pulling out, primary market almost dead and

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 Governments on holidays, it is the aggressiveBank lending that can make the
difference.

BIBLIOGRAPHY

http://www.asia-pacific-action.org/node/210
www. Google.com
www. 4shared .com
Articles in times of India

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