You are on page 1of 114




The sub-prime crisis of the US economy led to the down fall of its major financial
institutions such as, Lehman Brothers, Morgan Stanley, CitiGroup, AIG & others. The lack
of risk management studies & policies in US are main causes of this down fall of financial
institutes. The public sentiments were badly hurt due to this & fear is generated which
affected raising funds from capital market. This in turn led to liquidity crunch around the
globe as American financial institutes pulled out their investments from world over. This
resulted in stock markets crashing around the world. To revive their economies, France
unveiled $33 billion stimulus package, Spain injected Euro 40 Billion, Italy announced an
Euro 80 Billion package, Japan injected $ 255 Billion to shore up their economy, while UK
announced Euro 23.6 Billion Fiscal stimulus package aimed at boosting consumer
confidence & stimulating demand.
In India too, government announced the number of measures to revive the economy amidst
fears of an impending slowdown. These included raising the plan expenditure, reducing
the VAT rate, announcing measures to support exports as well as lending a helping hand to
sectors in the economy facing a credit crunch.
If we see the change in the inflation, as measured by the wholesale price index (WPI), it is
dropped from 12.82% in August 08 to 6.84 % in December 08. The rapid decline in the
rate of inflation gives room for RBI to cut interest rates & for the government to step up
spending without worrying about stoking inflation. The lower interest rates would
encourage consumers & companies to borrow, which would provide immediate stimulus to
rate sensitive sectors such as construction. The 4% cut in the excise rate gets factored into
the prices of manufactured items in the coming weeks; inflation in this category would fall
The unprecedented fear generated by the ongoing global economic slowdown has directly
affected public sentiment & the ability to raise funds from the capital markets
Many companies are now adopting different strategies in this scenario. The Reliance group
is working on setting up a shared service center that will integrate core support functions –

HR, training, commercials & IT services – of all the group companies, into one unit in
Mumbai so as to ‘eliminate talent & competency overlap’ in the management of all group
companies. Some companies like Patni Computer System preferring to acquire captives
through strategic deals. Many companies who had hired expatriate executives when India
was on 9% plus growth rate are now looking within the country for inexpensive hires.
Indian companies will look increasingly towards private equity (PE) firms to meet their
capital requirements. However, increased pressure of liquidity, declining internal accruals
& the steep fall in valuations offer a good opportunity for PE funds to make investment.
Apart from money, PE investors bring management strength & access to a large
international network & export market.
The government is also taking steps for this. The funds are being sought within a fortnight
of the government announcing additional public spending of Rs. 20,000 cr. & cut in excise
duty to boost economy. In interim budget government spending are increased. GDP
forecast for the year 2008-09 is reduced to 7% compared to 9% in 2007-08
The primary objective of the study is to analyze the impact of global slowdown on Indian
construction industry. In particular:

Examine the global recession & its impact on Indian economy
Study the factors which leads to recession
Analyze the impact of that on construction industry- reduced demand, growth,

increase in unemployment, increasing in liability.
Study the strategies adopted by construction firms to tackle the slowdown.

The study reviewed all the available literature on global recession & slowdown in the
construction industry. Magazines, websites & dailies were scanned for the literature.
Infrastructure sector was studied for examining the effect of global slowdown along with
global scenario & effect on Indian economy.
A notable fact was that the companies in the infrastructure sector are not affected
much by the financial crunch. Real estate sector got affected more. Therefore the study

Even in such adverse condition some companies are able to drive demand by adopting projects on 4 . for case study.selected the two major companies in the real estate sector i. In the highway sector.4 IMPORTANCE OF THE STUDY: The global crisis has impacted the construction sector in several ways. The pace of activity in power sector particularly in generation has also decelerated.e. Major equipment manufacturers are cutting down production. about 60% of awarded national highway projects are yet to achieve financial closure.) & United Ltd. 1. There has been a decline in the demand for both residential & commercial properties. & by preventing investors in large projects with long gestation period. The demand created for housing during the boom period no longer exists.Private projects are getting delayed due to lack of funds. Real estate sector is the worst hit sector. The generation target of 78700MW for the 11th plan seems unachievable. (DLF Ltd. trimming the company size. either due to lack of funds or due to these becoming economically unviable. Construction companies have developed series of measures to cut down costs in the recent slowdown by different means such as cutting of salaries. Most construction companies have pushed back several big projects planned earlier. Moreover NHAI has seen a significant drop in number of bids received for national highway projects. Stalling of projects & lack of project finance due to global meltdown has led to a decline in the demand of construction equipment. In many cases projects have been stalled completed due to stagnation in demand of properties. The global crisis has slowed down construction activity & it appears that situation will begin to look up only by beginning of 2010. as in case of Tilaiya Ultra Mega Power Project (Jharkhand). Infrastructure projects are witnessing slowdown & real estate sector is in a slump. Delhi Land & Finance Ltd. Indian ports have witnessed a significant drop in cargo traffic due to reduction in global trade.

Scope and limitations: The study was on a very recent macro-economic problem faced by the whole world. gives an overview of the historical data of business cycles. As the confidence of market/investors is reduced the government is taking major steps & initiatives to ensure that all the infrastructure projects it has undertaken continue in full swing. with special focus on Indian economy and in construction and infrastructure development sector. It gives an overview of the study carried out. the study was conducted based on the available data and information available at the moment. Chapter five.Government Initiatives during Slow Down emphasis on the Government response in the form of monetary & fiscal policy and initiatives in Real Estate and Infrastructure sector. The last chapter presents the findings and conclusion of the study. The fourth chapter. The third chapter .Impact of the Global Slowdown examines the impact of the crisis on the Indian economy and the construction industry in particular stating the reasons for the meltdown. The second chapterLiterature Review. Scheme of the study: The thesis is presented in six chapters. RBI has made efforts to infuse liquidity in the market. The first chapter entitled – The Study is an introduction chapter. 5 .affordable housing rather than focusing on luxury or ultra luxury projects which had become a common interest for developers during the boom period. past recessions and unfolding of the present sub-prime crisis. Banks & financial institutes should significantly lower the interest rates to attract the customers. It still needs to induct more money in the market.Strategies Adopted and Its Impact on the Economy deals with coping strategies adopted by construction firms with some cases from the industry and overview of the Economy after recession. Since it is very recent and new.

In the mid- 20th century. French economist Clement Juglar identified the presence of economic cycles 8 to 11 years long. a Juglar cycle (often identified as 'the' business cycle) has four stages: (i) Expansion (increase in production and prices. 6 . and periods of relative stagnation or decline (contraction or recession)[1]. In 1860.BUSINESS CYCLE & RECESSION 2. These fluctuations are often measured using the growth rate of real gross domestic product. low interests rates). Despite being termed cycles. although he was cautious not to claim any rigid regularity [2] . around a long-term growth trend. * The Kondratieff wave or long technological cycle of 45–60 years (after Nikolai Kondratieff). * The Kuznets infrastructural investment cycle of 15–25 years (after Simon Kuznets). According to Schumpeter. Joseph Schumpeter and others proposed a typology of business cycles according to its periodicity.1 BUSINESS CYCLE The term business cycle or economic cycle refers to economy-wide fluctuations in production or economic activity over several months or years. * The Juglar fixed investment cycle of 7–11 years (after Clement Juglar). so that a number of particular cycles were named after their discoverers or proposers [3]: * The Kitchin inventory cycle of 3–5 years (after Joseph Kitchin). It typically involves shifts over time between periods of relatively rapid economic growth (expansion or boom).CHAPTER 2 LITERATURE REVIEW . these fluctuations in economic growth do not follow a mechanical or predictable periodic pattern.

contractions. the growth periods usually ended with the failure of speculative investments built on a bubble of confidence that bursts or deflates. business cycles vary from more than one year to ten or 7 . recovery and prosperity are associated with increases in productivity.1. A colloquial term for a crisis of this time scale is a "decennial crisis" (meaning one that occurs after about ten years). 2. In the cycles before World War II or that of the late 1990s in the United States. the nearest equivalent in time and intensity was the recession of 1958. Interest in these different typologies of cycles has waned since the development of modern macroeconomics. consumer confidence. however. which gives little support to the idea of regular periodic cycles. In this model. Automatic stabilization due to the government's budget helped defeat the cycle even without conscious action by policy-makers. followed by similarly general recessions. with the periods of contraction and stagnation reflecting a purging of unsuccessful enterprises as resources were transferred by market forces from less productive uses to more productive uses. iii) Recession (drops in prices and in output. Mitchell provided the now standard definition of business cycles in their book Measuring Business Cycles[4]: Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities. such as fiscal policy and monetary policy. in duration. Burns and Wesley C. After the Second World War. economists Arthur F.(ii) Crisis (stock exchanges crash and multiple bankruptcies of firms occur). and revivals which merge into the expansion phase of the next cycle. This phrase was used during the Great Depression due to its similarity with the Panic of 1825 in London ten years after the end of the Napoleonic Wars. and prices. high interests rates). Cycles between 1945 and the 1990s in the United States were generally more restrained and seem to follow political factors. (IV) Recovery (stocks recover because of the fall in prices and incomes).1 Definition of Business Cycle In 1946. aggregate demand.

For Milton Friedman calling the business cycle a "cycle" is a misnomer.though some economists use the phrase 'business cycle' as a convenient shorthand. they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own. because of its non-cyclical nature.1 Explaining fluctuations 8 . F. Much economic theory also holds that the economy is usually at or close to equilibrium. excluding very large supply shocks.2. 2.1. The economy of the western world is a system of closely interrelated parts.1. its commercial dealings. He who would understand business cycles must master the workings of an economic system organized largely in a network of free enterprises searching for profit. In the tradition of Slutsky. Friedman believed that for the most part. and its tangles of finance. business cycles can be viewed as the result of stochastic shocks that on aggregate form a moving average series. The problem of how business cycles come about is therefore inseparable from the problem of how a capitalist economy functions.[6] 2. Rational expectations theory states that no deterministic cycle can persist because it would consistently create arbitrage opportunities. Burns [5]: Business cycles are not merely fluctuations in aggregate economic activity.twelve years. The critical feature that distinguishes them from the commercial convulsions of earlier centuries or from the seasonal and other short term variations of our own age is that the fluctuations are widely diffused over the economy-its industry. These views led to the formulation of the idea that observed economic fluctuations can be modeled as shocks to a system.2 Cycles Or Fluctuations In recent years economic theory has moved towards the study of economic fluctuation rather than a 'business cycle'[citation needed] . According to A. business declines are more of a monetary phenomenon.

e. The amplitude of the variations in economic output depends on the level of the investment. wages tend to fall. so that they stop investing. whereas in periods of high unemployment. for when the economy is at fullemployment. interest rates are low and companies easily borrow money from banks to invest. Richard Goodwin accounts for cycles in output by the distribution of income between business profits and workers wages. Paul Samuelson's "oscillator model" is supposed to account for business cycles thanks to the multiplier and the accelerator. In an expansion period. Kydland and 9 . Banks are not reluctant to grant them loans. According to Goodwin. and the economy goes into recession. This process leads to firms becoming excessively indebted. If the economy is operating with less than full employment. because expanding economic activity allows business increasing cash flows and therefore they will be able to easily pay back the loans. for investment determines the level of aggregate output (multiplier). and is determined by aggregate demand (accelerator). This theory is most associated with Finn E. workers are able to demand rises in wages. The most commonly used framework for explaining such fluctuations is Keynesian economics. The fluctuations in wages are the same as in the level of employment.. then in theory monetary policy and fiscal policy can have a positive role to play rather than simply causing inflation or diverting funds to inefficient uses. In the Keynesian view. with high unemployment. Keynesian views have been challenged by real business cycle models in which fluctuations are due to technology shocks. Keynesian economist Hyman Minski has proposed an explanation of cycles founded on fluctuations in credit. when employment and business profits rise. the output rises. i. However. simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks. Keynesian models do not necessarily imply periodic business cycles. business cycles reflect the possibility that the economy may reach short-run equilibrium at levels below or above full employment.The explanation of fluctuations in aggregate economic activity is one of the primary concerns of macroeconomics. interest rates and financial frailty. In the Keynesian tradition.

most governments of developed nations have seen the mitigation of the business cycle as part of the responsibility of government. government policy is seen as making it more dramatic and thus more painful. business monopolies. pp. sunspots for S. such as the State or its regulations. Upper Saddle River. Sullivan. ISBN 0-13-063085-3. 57. New Jersey 07458: Pearson Prentice Hall. by delaying a crisis. Economics: Principles in action.2 Mitigation Most social indicators (mental health. In this view. L. 1. Jevons. Prescott. The crisis could also show up in a different form. only from an external shock.g. Worse. They consider that economic crisis and fluctuations cannot stem from a monetary shock. even according to Keynesian theory. there is often political pressure for governments to mitigate recessions. Moore) [7].310. planet Venus movements for H. when a recession occurs the government should increase the amount of aggregate demand and bring the economy back into equilibrium. firstly by increasing the money supply (expansionary monetary policy) and secondly by increasing government spending or cutting taxes (expansionary fiscal policy). This the government can do in two ways. Since in the Keynesian view. As periods of economic stagnation are painful for the many who lose their jobs. such as an innovation. managing economic policy to smooth out the cycle is a difficult task in a society with a complex economy. 10 . However. Arthur. labor unions. Karl Marx claimed that recurrent business cycle crises were an inevitable result of the operations of the capitalistic system. recessions are caused by inadequate aggregate demand. 2.1. Steven M. believe that this difficulty is insurmountable. Sheffrin (2003). for example as severe inflation or a steadily increasing government deficit. notably those who believe in Marxist economics. crimes.Edward C. Some theorists. or shocks due to technology or natural causes (e. and suicides) worsen during economic recessions. Following the tradition of Adam Smith and David Ricardo mainstream economists have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences. Since the 1940's.2. all that the government can do is to change the timing of economic crises.

A. Measuring business cycles. NBER. This agency was the Federal Reserve Board and it was to have been the loaner of last resorts for banks in order to prevent collapses as had happened during earlier depressions. 1954 4. IL. it's necessary to look at previous depressions and compare. 2. Lee. Burns.2. but it was clearly the worst. M. C. It is routinely cited as proof that unregulated capitalism is bad. W. The History of Econometric Ideas.OVERVIEW: The Great Depression is probably one of the most misunderstood events in American history. But as we'll see. A. there is good reason to believe that the Fed's actions explain a lot of the problems that lead up to the Stock market crash and the subsequent depression. History of Economic Analysis. "US Business Cycle Expansions and Contractions". What made it different than the rest? At the time of the Great Depression. The Great Depression was by no means the first depression this country ever had. What happens during business cycles: A progress report. Among the many myths surrounding the Great Depression are that Herbert Hoover was a laissez faire president and that FDR brought us out of the depression. 5. Richard D. Economic fluctuations. Retrieved on 2009-02-20. and that only a massive welfare state. London. F. Mary S. can save capitalism from itself. F. government intervention in the economy was higher than it had ever been and a special government agency had been set up specifically to prevent depressions and their associated problems. 1955 3. National Bureau of Economic Research. and other interventions. 7. Irwin.1 Recession. such as bank panics. Morgan. New York. Introduction. In: Wesley C. J. 2. Mitchell. George Allen & Unwin.2 AMERICA’S GREAT DEPRESSION . Burns and W. There are several explanations. National Bureau of Economic Research. New York.2. huge amounts of economic regulation. Cambridge University Press. Mitchell. 1946. The current Keynesian models rely on what is referred to as "sticky 11 . Depression and Business Cycles The exact cause of business cycles is one of the biggest problems in economics. Homewood. Schumpeter. What caused the Great Depression? To get a handle on that. A. 1991. 1951 6.

The Federal Reserve Board was created in 1913 and yet half of the worst depressions happened after its creation." Since it's been about 60 years since we've had a depression. 1907-08. In particular. The money supply actual increased by about 60% during this time. Throughout the years preceding the Stock Market crash. Under these models. one might think that the economy is being managed better than it used to be.wages" (or "sticky prices") to explain why the cycles occur. 12 . The Fed set below market interest rates and low reserve requirements that all favored the big banks. 1873-79. "business cycles are all alike. the Fed would be staffed with people from the industry that it was supposedly a watchdog over and who would most likely feel that what's good for banks is good for America. Although some conspiracy minded folks might weave elaborate tales regarding its creation. a bust is caused due to the mismatching of consumer and business goods. government efforts to manipulate the interest rate causes a boom and bust cycle because people over-invest ("malinvestment") when interest rates are low and when interest rates are raised to stave off the inevitable inflation. and 1937-38. The Austrian School explanation is that all business cycles are due to government intervention in the economy. Although depressions vary on length and severity. 1920-21. it was to act as the lender of last resort to prevent bank panics like the one that had occurred in 1907. There are six depressions in American history that are thought to be the worst since detailed records of economic data started to be kept (around 1867). the reason is rather straightforward. 1929-33. The big banks simply wanted government protection and bailouts and were more than willing to endure a little government regulation in return. The phrase "buying on margin" entered the American vocabulary at this time as more and more Americans over-extended themselves to take advantage of the soaring stock market.2 The Federal Reserve Board The Federal Reserve Board was created in 1913. Ostensibly. It's not clear why the economy is being managed better. 1893-97 (actually two contractions separated by an incomplete expansion). wages or prices fail to reach their market clearing level. 2. Like the Interstate Commerce Commission before it. the Fed did just that.2. the similarities are so profound that Nobel Laureate Robert Lucas has stated.

that money is lent out to someone else who then spends it.3 The Gold Standard 13 .2. There are several misconceptions about hoarding money. However. What was different? As we'll see. there were a number of policies enacted over the next few years that. the whole house of cards collapsed. this began the tumble.. First. 2. Indeed. such as money. 2. hoarding can even be seen as beneficial to those who don't hoard. from both a free market and a Keynesian perspective. i. hoarding. a stock market crash could cause people to increase their liquidity preference which might lead them to hoard money.2 Hoarding Money People hoard money because they have a liquidity preference. If I put my money into a savings account. Thus. The Stock Market crashed and the bank panics began. As long as prices and wages drop instantly to reflect the lower amount of money in the economy.4 Causes: 2. 2. by itself. Second. But what would make this depression worse than all the rest? There was a depression in 1921. First hoarding is not the same thing as saving. since their money will be able to buy more goods as a result of the lower prices. cannot cause a recession or depression. When it started to raise interest rates.e.2.2.1 The Stock Market Crash The Stock Market Crash in October of 1929 is often cited as the beginning of the Great Depression. people want to have their assets in a readily convertible form. When the Fed began to raise interest rates in early 1929. Over the next few years.4.2. the stock price for a particular company merely reflects current information about the future income stream of that company.4. the Fed would allow the money supply to contract by a third.So what went wrong? It was in 1929 that the Fed realized that it could not sustain its current policy.4. but did it actually cause it? The answer is no. then hoarding causes no problems. would do nothing to help America recover and do everything to exacerbate the depression. it is a change in available information that changes the stock price. but no one remembers that one.

S. As noted in the previous section on hoarding. 2. since the real effect of the increased tariffs was to increase prices and increase price rigidity." The act was passed in June of 1930 and increased tariffs to a tax of 50 percent on goods imported into the United States. professor Richard Timberlake argues that the gold standard was not responsible for the Great Depression. Is it possible that the Fed was actually responsible for the Depression? The answer is a qualified no. the money supply can drop drastically. there are indications that the economy was starting to cool off on its own in early 1929. in retrospect. one ounce of gold was redeemable for twenty dollars).4. the Council of Economic Advisors proclaimed that the Smoot Hawley Tariff Act was "probably one of the most damaging pieces of legislation ever signed in the United States.At the time of the Great Depression. it's hard to see how it could have caused it. If the Fed had been a little more careful in expanding the money supply. it is easy to see how the Act could have exacerbated the Depression. Enacting the tariff was exactly the wrong thing to do and about 1. Monetary Policy". Second. since the Federal Reserve had not been following a strict gold standard prior to the onset of the Depression. In "Gold Standards and the Real Bills Doctrine in U. This meant that all cash was backed by a government promise to redeem it in a specific amount of gold (at the time. Since this occurred after the onset of the Depression. Eventually. America had a 100% gold standard for its money. Because the amount of money circulating in the economy is wholly dependent on the amount of gold available. the money supply is very rigid. If people start to hoard money. 60 other countries passed retaliatory tariffs in response.4. this is not a problem as long as prices and wages drop instantly to reflect the lower amount of money circulating. it might have prevented the artificial Stock market boom and subsequent crash.000 economists signed a petition begging Congress not to pass it. 2.5 The Federal Reserve Board The Fed was ostensibly created to prevent bank panics and Depressions. were quite bad.4 The Smoot-Hawley Tariff In 1988. The Fed took several actions that.2. However.2. The first thing it did was to inflate the money supply by about 60% during the 1920's. thus making the interest rate hike in TBD completely 14 .

4. Hall and Ferguson also write that: But a further irony is the fact that the very existence of the Federal Reserve caused banks to wait for the central bank to act and not turn to the solutions they had devised in the face of the banking crises of the nineteenth century. 2.S.unnecessary and avoiding the subsequent crash. the country's gold stock was increasing at this point all on its own. The low interest rate cannot be sustained forever without an increase in inflation. so doing nothing would have increased the money supply and helped the recovery. 2. it is not clear that we can lay responsibility for the Great Depression at the feet of the Fed. This money is then invested in capital goods that would not be justified at a market level of interest rates. According to this theory. the investments that were "justified" under a lower interest rate must be liquidated. Specifically.2. the central bank (the Fed in the case of the U.7 Sticky Prices/Sticky Wages 15 . This view is held by very few economists. Hall and Ferguson write that: The Federal Reserve began expressing concern in early 1928 and at that time began a policy of monetary restriction in an effort to stem the stock market advance.4.) artificially lowers the interest rate. Ironically. so the Fed inevitably has to raise interest rates.6 Malinvestment "Malinvestment" is a term coined by the Austrian school of economics to sum up their explanation of the causes of business cycles. all business cycles are caused by government intervention in the market. flooding the economy with money. When this happens. Any prevention of this liquidation by further government intervention will simply prolong the re-adjustment and thus exacerbate the recovery. The third mistake the Fed made was in early 1931. The monetary restriction was carried out by selling $405 million in government securities and raising the discount rate in three stages from 3.2. But even with all that bungling. exactly the wrong thing to do during a contraction.5 percent to 5 percent at all Federal Reserve banks. The Fed raised interest rates. This policy continued through May 1929.

Since 82 percent of all dividends were paid to the top 5 percent of income earners. For example.2 percent of national income by 1929 (Soule 1947. When this happens.1 World War II The end of the Great Depression is often marked as December 1941. then prices and wages will tend to go up. people buy less and employers hire less. This change shows up as rising dividends.2.2." meaning that it often costs money to change a price. this clearly helped contribute to the change in income inequality (Potter 1974). 2.5 Cures: 2.Prices and wages change in accordance to the scarcity of goods and labor relative to the amount of money that is available to buy them. When the Fed does too much of this.2. though? It's useful to note that the economy had been in expansion since 16 . which suggests that corporate profits were rising. 2. prices and wages can "stick" at a higher level than the market clearing price or wage. may have experienced "the highest income inequalities in American History" .5.4. A good example is a restaurant that has to print new menus every time the prices change.S.3 percent of national income in 1920 and rose to 7. reflecting the fact that more money is chasing the same amount of goods and labor.8 Income Inequality In American Inequality: A Macroeconomic History (1980). thus causing cut backs in production and employment. Did World War II really end the Great Depression. 284). by Jeffrey G. it is called inflation. But what happens if the money supply goes down relative to the amount of goods and labor? Eventually. if the Federal Reserve Board increases the nation's money supply. Lindert. Hall & Ferguson write that: Wages grew more slowly than output per worker. But in the short run. the same time that America became officially involved in World War II. In The Great Depression: An International Disaster of Perverse Economic Policies. There are a number of reasons why prices and wages might stick. the U. One reason is referred to as "menu costs. which constituted 4. the price of goods and labor will go down as well in the long run. it is reported that the period of 1928 through the first three quarters of 1929. using any number of income inequality measures. Williamson and Peter H.

amatecon. prior to the end of the war.2. widely held by financial firms. Economy in the 1940s. Securities backed with subprime mortgages. became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. lost most of their value.3 UNFOLDING OF PRESENT SUB-PRIME CRISIS The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States.S. doing nothing often seems to be the correct response. 2007 2. mortgage delinquencies soared. entry into the Second World War and that the economy stopped expanding in February 1945. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the wellbeing of consumers deteriorated. even though the Federal government did virtually nothing in response. The crisis. two and a half years before U.2 Doing Nothing Amazingly. Robert Higgs argues: Relying on standard measures of macroeconomic performance.S. historians and economists believe that “war prosperity” prevailed in the United States during World War II. because it does not recognize that the United States had a command economy during the war. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages.June of 1938. refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates. others are conceptually inappropriate. which has its roots in the closing years of the 20th century. When U. house prices began to decline in 2006-07. December 28. After the war genuine prosperity returned for the first time since 1929. with major adverse consequences for banks and financial markets around the globe. 2.S. This belief is ill-founded. Approximately 80% of U. In “Wartime Prosperity” A Reassessment of the U. www.S.5. The Depressions of 1907 and 1920 were both over within a – Americas great depression. The result has been a large decline 17 .

However. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. Although they had been issued and traded for decades. and ARM interest rates reset higher. which are integral to funding business operations. up 79% from 2006. began to increase quickly thereafter. nearly 1. Governments also bailed out key financial institutions. once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U. but grew very quickly.. During 2007.S. These financial agreements and others derivative to them allowed financial institutions and investors around the world to invest in the U. Major banks and financial institutions had borrowed and invested heavily in subprime MBS and reported losses of approximately US$435 billion as of 17 July 2008.S. assuming significant additional financial commitments. Lax regulation. housing the capital of many banks and USA government sponsored enterprises. Defaults and foreclosure activity increased dramatically as easy initial terms expired.S. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favourable terms. home prices failed to go up as anticipated. housing properties were subject to foreclosure activity. housing boom. refinancing became more difficult.3 million U. The market for MBS composed of subprime loans developed late in the U. Subprime mortgages increased 292%. The liquidity and solvency concerns regarding key financial institutions drove central banks to take action to provide funds to banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets. greatly increased around the beginning of the 21st century. the amount of financial agreements called mortgage-backed securities (MBS). The crisis began with the bursting of the United States housing bubble which peaked in approximately 2005–2006. tightening credit around the world. deregulation of government policies and investment from the private sector greatly increased Wall Street's involvement in higher-risk lending. 18 . High default rates on "subprime" and adjustable rate mortgages (ARM). which derive their value from mortgage payments and housing prices.S. from 2003 to 2007.

with over 7. In the third quarter of 2007. mainly in the form of mortgages for the purchase of residences. higher-risk structure of the loans (such as "option ARMs"). These mortgages departed significantly from the usual criteria for borrowing at the lowest prevailing market interest rate.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter. corporations had suffered about $8 trillion in losses. Subprime lending is the practice of lending.5 million first-lien subprime mortgages outstanding. The departures in criteria pertained to "non-traditional".S. Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%. approximately 16% of subprime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender 19 . subprime ARMs making up only 6. Between 1 January and 11 October 2008.3 trillion as of March 2007. a key economic engine. credit history and other factors. and business executives. poor loan documentation. owners of stocks in U. low levels of collateral. These actions were designed to stimulate economic growth and inspire confidence in the financial markets. As of April 2009. central bankers. The value of USA subprime mortgages was estimated at $1. versus less than 10% in 2001-2003 and during 2007. economists. Losses in the stock markets and housing value declines place further downward pressure on consumer spending. in a process called foreclosure. Losses in other countries have averaged about 40%. If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm). By October 2007. as their holdings declined in value from $20 trillion to $12 trillion. the borrower's credit score.The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. the value of the collateral securing the mortgage drops and the risk of loss to the lender increases significantly. A variety of solutions have been proposed by government officials. Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. the lender may be forced to take possession of the property. many of the root causes of the crisis had yet to be addressed. Effects on global stock markets due to the crisis have been dramatic. When real estate prices fall.

Ten states accounted for 74% of the foreclosure filings during 2008. was US$9. By January 2008. owed by USA households to purchase residences housing at most four families. During 2007. Fig 2.84% of households The Mortgage Loans Expansion in the Industrial World Before: Fig 2. This increased to 2. and US$10.2% of all mortgages outstanding were either delinquent or in foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings.3 million in 2008. Nine states were above the national foreclosure rate average of 1. As of August 2008. Madras School of Economics.1 The Subprime Crisis ‐ Implications for India by Anand Shankar. lenders had begun foreclosure proceedings on nearly 1.3 million properties. 936. 2007. roughly triple the rate of 2005.had begun foreclosure proceedings. the delinquency rate had risen to 21% and by May 2008 it was 25%. 9.2 20 . the top two (California and Florida) represented 41%.6 trillion as of midyear 2008. an 81% increase vs. The value of all outstanding residential mortgages.439 USA residences completed foreclosure.9 trillion as of year-end 2006. Between August 2007 and October 2008. a 79% increase over 2006.

these banks are unwinding positions in developing markets hence causing down swing in these markets.Effects Firstly. A simple case in point was the intraday 1400 points fall on the BSE in January 2008 that was brought about by Citi Bank unwinding its position in many front line stocks in India. Secondly. Many big investment banks have been brought down to their knees and many others are finding it extremely difficult to stay on their feet. The subprime that was brought upon by the American financial system upon itself is spreading its tentacles around the world. the subprime crisis has led to near loss of confidence in the American Stock Markets. and this has accentuated the credit crunch. The Americans are known to live beyond 21 . the near recession situation in the USA has led to a loss of demand for Indian exports hence loss of export earnings for India. People who were not even remotely connected with the subprime crisis are being adversely affected. In order to consolidate their respective balance sheets in the United States.

there will be serious implications for the banking sector as well. This means that many jobs in India are at stake because these institutions have their BPO’s in India. If one more big financial institution fails there will be a collapse of the entire financial system of the USA. Fourthly. all their sources of credit have dried up. and AIG have been shaken from their very foundations. So the first jobs to go will be the low end Indian BPO jobs leading to increased unemployment in India. investment banks and other financial institutions are on a job slashing spree to cut costs. on account of the subprime crisis. Meryl Lynch who once inspired confidence amongst the investor class have now gone bust. the domino effect. Thirdly. Fifthly. The argument is this‐ people will be asked to provide collateral for the loans given to them. Freddie Mac and Fannie Mae are under the conservatorship of the US government. Anybody who is unable to furnish the collateral will be denied a loan. Morgan Stanley. The subprime has meant that the Indian banks have to follow stricter norms while disbursing loans to the people. leading to a fall in the growth rate of the Indian IT sector. Software development for many US firms takes place in India but as the American firms are facing an economic slowdown. The risk is. there is a risk of the financial contagion spreading to the entire world. they are demanding less IT products. However. Other giants like Citi Bank. Firms like Bear Sterns. Thus demand for imports is falling. but the IT sector is also feeling the pinch. and they are being forced to cut down on their expenditures. These tighter norms could prove to be counter cyclical. thus. 22 .their means. thereby affecting growth negatively. Not only is there a loss in the goods sector. Lehman Brothers. This policy will exclude a majority of the population from institutional sources of credit. which implies loss of revenues for countries like India.

Fig 2.3


President Address to US, www.


The Indian economy has been performing exceptionally well since 2003, with growth in
the five quarters until Sep 08 averaging 8.5% (Table 3.1). This period has seen some
substantial changes in the challenges that India faces as the Indian economy transited from
the high growth period of 2007 that threatened overheating to the deceleration period
evident in the later part of 2008.
Table 3.1 India GDP breakdown by industry & expenditure.

The year 2008 saw the Indian economy being subject to sets of forces. One was the lagged
impacts of the monetary tightening by the Reserve Bank of India (RBI) and the other was
the progressively greater impact of the global financial crisis. Consequently, India
experienced a reversal of important trends:


2 THE IMPACT OF THE CRISIS We summarise the main impact of the crisis on India in Table 3. FIIs sold a net of INR 43.2 : Summary . causing the Indian Rupee to reverse its earlier appreciation. putting pressure on the currency.• In the early part of 2008.2.1). • The fiscal consolidation that was evident in recent years suffered a setback as government raised subsidies to combat the earlier spike in inflation: with more fiscal stimulus packages likely. trade and remittances. which turned around later in the year as the global slowdown caused commodity prices to fall. India was plagued by high inflation. Table 3.782 crore in the Indian equity markets in 2008/09 as compared to a net purchase of INR64. capital inflows which helped to drive the economy in previous years turned into capital outflows.776 crore in the same period of 2007/08 (Chart 3. • As the global economy weakened. 3.2 – most of the impact will come through financial.Main Channels of Impact 3. fiscal deficits are likely to widen rather than consolidate. This extraordinary turnaround in capital flows reflected the increased integration of Indian financial markets into the 26 .1 Tighter financial conditions: key transmission route According to the Securities and Exchange Board of India (SEBI).

44bn in Nov 08 from its peak of USD134. At a time of rising risks and reduced risk tolerance among the major investment funds of the world.2 This phenomenon of ‘flight to safety’ is putting pressure on the Indian Rupee which has depreciated dramatically in 2H08/09.5/USD. RBI’s foreign reserves have fallen to USD123. India no longer provides the same level of diversification as in the past when India was more insulated from global financial markets.2 Difficulties in funding: higher cost of capital As capital flowed out of the Indian financial system.40bn two months capital market.2). With the increased correlation of Indian equity price changes with those in the equity markets of the developed world. credit markets experienced a reduction in liquidity. an intervention followed up in mid-December by the central government’s 27 . causing lending rates to rise until the RBI intervened in Oct 08 (Chart 3.1 CHART 3. CHART 3. foreign investors cut their exposure to Indian financial assets.4/USD and now trades around INR48.2. The Rupee started 2008 at INR39. 3. producing this substantial outflow.

Europe and some emerging market countries in Europe. Indian IT firms which have grown robustly over the past years are now expecting some slowing in their sector.4 As for merchandise exports. 3.2. growth in exports of refined petroleum products (which 28 . India is already suffering a slowdown. 23.993 crore in the same period of 2007/08. Despite these difficulties. CHART 3. Already some companies are feeling the heat.3 CHART 3. According to India’s Economic Advisory Council. The average size of public issues declined INR540.insistence that state-owned banks pass on a part of the RBI interest rate reductions to consumers and firms. We expect a contraction in volumes in the coming months. 432 crore in the same period compared to an inflow of INR1.3). The lack of resource mobilization is well depicted in the mutual funds market which indicates a net outflow of INR30. The tarnished reputation of the industry after the recent fraud scandals will also enforce a cautious approach to outsourcing in the short run.3 Trade in goods and services Indian exports contracted in Oct 08 and Nov 08 for the first time since Mar 02 (Chart 3.8 crore in the Apr-Dec 08 period. The National Association of Software Services Companies said that revenues are expected to grow about 17% from the previously estimated 21% for 2008/091. the Indian economy did not have to endure the banking sector travails evident in the United States.

spending on construction and related areas where overseas Indians work will fall and reduce the demand for such workers. overseas Indian workers are located in two regions: the Middle East and developed countries such as the United States. Weaker exports could also affect India’s current account – the current account is driven by a number of forces: 1 ‘India’s outsourcing growth seen to slow down’. Since then. Consequently.7bn in 1H08/09.5). non-jewellery exports are expected to grow at a slower pace of 12% but this is unlikely to offset the contraction in other exports. 29 . helping to stabilise the trade deficit in the last quarter (Chart 3. Development Prospects Group  Oil prices: The current account deficit ballooned in the first two quarters of 2008 because of a high oil imports (Chart 3.4). United Kingdom and Canada. According to the World Bank.6). an increase of 53% and 40. oil prices have receded. Broadly speaking. Remittances from overseas Indian workers stood at USD25. Non-oil. Migration and Remittances Team.account for approximately 15% of exports) is expected to slow to 6% lower than the amount registered last year2.1% in 1Q08/09 and 2Q08/09 (chart 3. India is the highest recipient of remittances across the world as of 2008 data 3. the Indian economy  is set to receive substantial relief on the current account balance. Companies in developed economies will have to retrench workers including foreign ones such as overseas Indian workers as weaker demand forces them to align their capacity with lower demand. Remittance outflows from the Middle East are linked to oil prices: as oil revenues fall substantially below expected levels. The workers in the Middle East are mostly unskilled labour employed in construction and oil-related services while overseas Indians in the developed countries include skilled labour in the banking and information technology (IT) industry. Remittances: Private transfers comprise 60% of total invisibles in the balance of payments. Financial Times. The declines reflect both lower prices as well as reduced volumes. 5th February 2009 2 In USD terms 3 World Bank. With the global recession putting substantial downward pressure on oil prices. it is almost inevitable that remittances will decline. The export of gems and jewellery is also expected to fall by about 10% in 2008/09.

Our view is that the impact of the global slowdown will be a material fall in the investment rate where the decline is likely to be greater than the decline we also see in India’s savings rate. While India’s long term fundamentals remain compelling for foreign investors. 3. FDI inflows to India in 2008 recorded USD36. 3. an increase of almost 60% from the previous year.CHART 3.4 Foreign Direct Investment According to UNCTAD. a 30 .7bn. the current account balance is driven by movements in the savings rate vis-àvis the investment rate.6 Ultimately. This means that the current account deficit/GDP ratio is likely to improve moderately in 2009.5 CHART 3.2. greater uncertainty as well as the difficulty that companies face in raising capital mean that FDI inflows may diminish for a period of at least one to two years.3 HOW RESILIENT WILL INDIA BE? We see several keys to resilience to such a major external shock. • The first is whether the structure of the economy allows for more shock absorbers in the system or whether structural weaknesses mean that there are shock amplifiers that far from softening the blow of external shocks actually magnify the initial impact. In many cases.

1 Financial sector: well-supervised and largely resilient The Indian banking industry was mostly not exposed to the derivative financial products that have caused the financial crisis in the United States. While Indian banks are relatively secure.4 provides an overview of the Indian banking industry with some key ratios. Table 3. Table 3. how diversified is the economy? Is it overly dependent on external demand with domestic demand playing a subsidiary role? Is its export and/or industrial base diverse enough? • Third. A robust financial sector with relatively strong banks makes for a more resilient economy. a sudden capital outflow especially from United States investors who stand claim to USD8. This shows that Indian banks entered the global crisis with a considerable capital cushion: a Risk Weighted Capital Ratio of 13% is substantially higher than the minimum regulatory requirement under the Basel norms of 8%. • Second.3.key absorber or amplifier is the financial sector.3: Key ratios of banks in India (2007/2008) 31 . This is because complex financial tools such as securitized securities were only recently introduced and had not caught on. how well-placed is the country to make a robust and effective policy response? 3.5bn of assets of Indian banks is a threat that has always remained and is now being realized.

CHART 3.7 CHART 3. While public sector investment will rise.8% over the same period in 2008. investment is bound to suffer.8 32 . increasing by 13. India is less exposed to external shocks than East Asian economies.1). with deceleration evident in the growth of both goods producing and service producing industries. • Investment: Private sector investment is about 30% of GDP.6% in 3Q08 (Table 3. Investment remained surprisingly strong in 3Q08.4 IMPLICATIONS FOR GDP GROWTH India economic growth remained reasonably resilient through 2008 as the global financial crisis turned into a global economic downturn. 3. India remains a largely rural country where the bulk of the population remains in rural areas.3. With the real estate sector cooling off rapidly.3. Tighter credit and lending conditions coupled with a drying up of informal credit will hurt the unorganised sector’s investment activity.2 Diversified economic base helps With a low trade/GDP ratio. Domestic demand is the key to Indian economic growth and here there are reasons for confidence because of some favourable factors operating on consumer spending: • Consumption: Domestic consumption is the largest contributor to the GDP (60% of the GDP as of fiscal year 2007/08). India’s GDP growth moderated to 7. investment in residential and commercial construction in urban areas is likely to fall.

8% in Aug 08 (chart 3. 33 . There are reasons to expect consumer spending to hold up reasonably well. A measure of consumer spending .10). Consumer spending will also be supported by a number of other factors. inflation in India is decelerating rapidly. The indications of the impact of weather on Indian agriculture are fairly positive for at least the first half of 2009. providing some support to consumer spending.8).3.4. the Sixth Pay Commission awards will continue contributing to boosting incomes in the public sector and sectors closely associated with it.7). the substantial deceleration in inflation will bolster consumer confidence. As global inflation cools.1 Consumption Consumption moderated in 3Q08 and should moderate further as the impact of the global slowdown feeds through to domestic households and businesses. This deceleration is also visible in the production number of consumer goods which is reacting to the slowing demand of durable goods (chart 3.dipped sharply towards the end of 2008 (chart 3. As of mid January 2009.motor vehicle sales . Third. as slower growth in India introduces more slack in the economy and as oil prices fall. given the phased manner of its implementation. the rural sector will benefit from the farmer loan waiver programme instituted by the government. Second. the inflation as measured by the wholesale price index has fallen to below 5% from a peak of 12. First. this is important in what is still largely a rural country.

 As argued above.2 Industrial production 34 . second.  A weaker exchange rate has two effects. But.10 The positive factors supporting consumption mentioned above will probably suffice to offset some of the headwinds emanating from the following:  As the revenues of domestic companies weaken.4. First.9). However. since Indian consumers do not rely heavily on imported goods.000. prospects for both outsourcing and remittances appear to be restrained in 2009.When incomes from outsourcing and remittances fall.000 and 1. the damage from currency depreciation is likely to be mild. a measure of domestic demand.9 CHART 3.000.CHART 3. Recent announcements by the Commerce Ministry project job losses from a protracted decline in exports could range between 700. have increased in 4Q08 due to higher currency costs (chart 3. household incomes and spending will be bound to be adversely affected. Non-oil imports. 3. a weaker Rupee increases the prices of imported consumer durables. companies will be forced to consider retrenchments and other forms of restructuring to reduce costs. it also offsets some of the benefits of lower US Dollar prices of crude oil. Job prospects in the two highly vulnerable industries – exports and financial services are already becoming clouded.

the worst performance since Mar 93 (chart 3. the most recent one being on 4th January 2009. The government has introduced two fiscal stimuli packages so far.0% Jan 09 (Chart 3. CHART 3. Manufacturing with an 80% weight in the industrial production index has been particularly hurt. 3.Industrial production has decelerated through 2008.0% in Sep 08 to 5.12).11).5% since Oct 08.7% in Nov 08. The RBI has also opened a special repo window under the Liquidity Adjustment Facility (LAF) for banks for lending to non-banking financial companies (NBFCs). 35 . releasing liquidity to the banking sector. These changes have only partially been passed on to borrowers.5% in Jan 09 and the reverse repo from 6.  Sharp reductions in policy rates: The repo rate has been cut from a peak of 9.11 CHART 3.4.0% in Nov 08 to 4.3 Policy response The Indian government. with all the main components affected. is using a three-pronged approach to alleviate the impact of the global crisis on India. falling 2% y/y in Dec 08 after falling 1.4 Liquidity infusion and rate cuts The RBI has noted in its last two statements that policy options have shifted from controlling inflation to supporting growth.4.  Improving liquidity: The cash reserve ratio has been decreased from 9% to 6. housing finance companies (HFCs) and mutual funds. in coordination with the RBI.12 3.

all ceilings on External Corporate Borrowing (ECB) were removed in the most recent measures. the government through its various regulatory bodies settled for certain regulatory adjustments. FII in corporate debt was also significantly raised.  The government fiscal balance sheet was under pressure even prior to the outbreak of the crisis.5 Regulatory changes To facilitate external financing. However. the government introduced another round of additional fiscal expenditure amounting to INR 556bn. the rural employment guarantee scheme and the energy subsidies. the government has still managed to introduce important off-budgeted fiscal changes described below:  Additional spending: Following the first supplementary budget which entailed additional expenditure of INR 2. Improve credit flows in trade finance: The RBI has also extended the period of preshipment and post-shipment credit for exporters and offered other counter cyclical adjustments to augment the presently abysmal situation of trade financing. because many of the additional expenditure items related to new commitments made by the government for other reasons (the Sixth Pay Commission pay increases for civil servants and the farm loan waiver programme are examples). the actual amount of discretionary additional spending is around 1% of GDP.4. 36 .  Export encouragement: The stimulus packages paid special attention to exports through refunding imported raw materials and financing facility as mentioned earlier.  Infrastructure development: Taxation incentives for the Indian Infrastructure Finance Company Limited which will help supply financing for infrastructure projects.4.6 Fiscal Despite having little room for manoeuvre in the fiscal balance given the already large fiscal deficits and the heavy burden of energy and other subsidies. 3. In addition.3tr in Dec08. weighed down by recent policy decisions such as the farm loan waiver programme. 3. For example. payouts recommended by the Sixth Pay Commission.

5X-1. Real estate construction can be sub-divided into residential. The multiplier factor between growth rates of construction and GDP has been about 1. construction as a percentage of GDP has increased from 8.6X. Within a particular sector also construction component varies from project to project. Broadly construction can be classified into 3segments – Infrastructure. construction component ranges between 15-20%. Centennial Asia Advisors PTE LTD Asian Development Bank. For industrial projects. catalyses employment generation in the country. Construction industry. irrigation. Industrial construction is contributed by expansion projects from various manufacturing sectors. Building of airports and ports has construction activity in the range of 4050%. Construction of houses and roads involves about 75% and 60% of civil construction respectively. ports.5% to the country’s GDP in FY 08. growth of the construction has followed the trend of economic growth rate of the country. Infrastructure segments involve construction projects in different sectors like roads. Over past few years.5% in FY08.0% in FY 06 to 8.The Impact of the Global Economic Slowdown on South Asia by Manu Bhaskaran. The construction activity involved in different segments differs from segment to segment. Industrial and Real Estate. power etc. rails. Over past 3 years. 37 .5 INDIAN CONSTRUCTION INDUSTRY Construction is an essential part on any country’s infrastructure and industrial development. malls/multiplexes etc. commercial. 3. Construction activity being labour intensive has generated employment for about 33 million people in the country. Construction is the second largest economic activity next to agriculture. Construction sector contributed about 8. with its backward and forward linkages with various other industries like cement. steel bricks etc.

In construction projects. Since these costs are different for projects in different segments. on an average.000 bn during Eleventh five year plan for infrastructure 38 . But the profitability of the construction projects varies across different segments. 14. Complex technology savvy projects can fetch higher profit margins for construction companies as compared to low technology projects like road construction. The primary steel requirements of the construction sector are long products like reinforcement bars/rods. Construction projects can be materialised through number of smaller contracts which mainly depends upon size of the project and diversified nature of activities to be carried out in the project. Almost all domestic cement consumption is attributed to the construction industry. administrative expenses and other operating expenses. Subcontracting is a common phenomenon in the construction industry. Various projects in Construction industry are working capital intensive. There are number of unorganised players in the industry which work on the subcontracting basis. cost structure of a particular construction company depends upon its order mix. Planning Commission has envisaged an outlay of about Rs.1% over past 5 years. The construction industry operates on the basis of contractual agreements. So any variation in the prices of these two basic raw materials has a direct impact on cost of the project and in turn margins of the companies. As a result. The construction industry to a great extent is dependent on the investments in infrastructure. Working capital requirement for any company depends on the order mix of the companies. raw material cost accounts for 30-50% of the total cost major and subcontracting cost accounts for about 20-40%. Consumption of steel by construction industry has grown at a CAGR of 16. structure. and annual requirements of funds and complexities of job. It mainly depends on the magnitude and nature of work. special design needs. To execute more critical projects.The construction industry in India is highly fragmented. Other costs include labour cost. Over the years different types of contracts have been developed. Major raw materials consumed by construction industry mainly include cement and steel. industrial and real estate sector. nowadays bids are increasing placed in consortium.

 Cost analysis with emphasis on overall cost structure. Along with this. delay in awarding of projects by government can hamper the revenue growth and margins of construction companies. prices of these commodities are expected to remain firm in the year FY 09. With rise in input prices for Cement and Steel industries. But the actual growth would be dependent on government infrastructure spending. Emphasis is laid on the following key subject matters to accomplish the report. construction companies will also have to tackle key challenge of input cost pressure. Public-Private-Partnerships. Similarly. 39 . This total investment would ultimately translate into an effective construction investment of about Rs. port. power. working capital intensive. Importance of Private participation and types of risk in a construction project. raw material cost. subcontracting cost and evaluation of aggregate total income and operating profit margin of the industry. Industrial and Real Estate. 1. 10. construction industry could also witness order inflow above Rs. labour intensive.000 bn in next 4-5 years. during the same period.)  Contract process along with different types of contracts has been covered. 1.  Explanation of Construction component and overview of construction intensive sectors – Infrastructure. scheduling of proposed expansion projects by manufacturing sectors and some macroeconomic factors which will govern investments in real estate sector. Real Estate segment also. Going forward.  Sectors influencing construction demand are discussed with special focus on subsectors within Infrastructure industry like road. These investments in different sub segments of infrastructure would be achieved through a combination of public. telecom etc.000 bn over next five years. fragmentation etc. Reflection of the same can be seen in bulging order book position of construction companies. throws opportunity of effective construction investment above Rs.500 bn on the back of investments planned by various manufacturing sectors.development in the country. rail. The Report elucidates facts about the Indian Construction industry supplemented by latest industry data and comprehensive analysis.  Brief on peculiar characteristics of industry (linkages with economy.

The Indian construction industry is an integral part of the economy and a conduit for a substantial part of its development investment. economic development and people's rising expectations for improved quality of living. 3. which would provide a huge boost to the construction industry as a power. With such bullish prospects in infrastructure. industrial sector and real estate based on construction component along with order book position of top companies. India is the second fastest growing economy in the world. €239. is set to exceed the 150-million tonne mark.6 CONSTRUCTION SECTOR-OVERVIEW: Today. roads. telecommunications. In India. bridges. capacity utilisation rose to over 100 per cent to touch 102 per 40 .36 billion by FY2010.  Challenges confronting the construction industry are discussed along with SWOT analysis. for the first time. Cement consumption. construction is the second largest economic activity after agriculture.  Operating & financial performance of top players in the industry along with future outlook. urbanization. Investment into this sector could go up to €93. affiliated industries such as cement are on a high.68 billion is likely to be invested in the infrastructure sector over the next five to 10 years . Research’s projection on effective construction investment emanating from infrastructure. ports. is poised for growth on account of industrialization. city infrastructure. Investment in construction accounts for nearly 11 per cent of India’s Gross Domestic Product (GDP). Reflecting the demand for the commodity. Construction accounts for nearly 65 per cent of the total investment in infrastructure and is expected to be the biggest beneficiary of the surge in infrastructure investment over the next five years. airports.

schools. It has witnessed a revolution. 3. driven by the booming economy.1 Industry segments Real Estate • Residential (Housing & Development) • Industrial (Industrial Parks. Shops. water supply and sanitation. favourable demographics and liberalised foreign direct investment (FDI) regime. universities. Plants.) • Corporate (Office. The second largest employing sector in India (including construction and facilities management).6.10 million tonnes as against the production of 14 million tonnes.) • Ports • Airports • Power Indian Real Estate Sector Real Estate is a €8 bn (by revenue) Industry in India. it has emerged as one of the most appealing investment areas for domestic as well as foreign investors. Showrooms. etc. foreign direct investment has been moving upwards. As opportunities in the sector continue to come to the fore. etc. Factories. real estate is linked to about 250 ancillary industries like cement. It is projected to grow to €34 bn by 2010.) Infrastructure • Roads • Railways • Urban infrastructure (improved housing. Growing at a scorching 30 per cent.cent in January 2007 with despatches touching 14. health and security. etc. Hotels.53 million in the first half of the current fiscal year. Research Centres) • Commercial (Retail: Malls. The real estate and construction sectors received FDI of €216. brick and 41 .

3 million new dwellings for self-living in urban India alone by 2015. Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry and organised retail. Similarly. Simultaneously. For example. In fact. this segment is likely to throw huge investment opportunities. the rapid growth of the Indian economy has had a cascading effect on demand for commercial property to help meet the needs of business. IT and ITES alone is estimated to require 150 million sqft across urban India by 2010. Table 3. a study by research firm. According to 'Housing Skyline of India 2007-08'. an estimated €16 billion investment will be required over the next five years in urban housing. modern attitudes to home ownership (the average age of a new homeowner in 2006 was 32 years compared with 45 years a decade ago) and a change of attitude amongst the young working population from that of 'save and buy' to 'buy and repay' have all combined to boost housing demand. warehouses. All-round Development Rising income levels of a growing middle class along with increase in nuclear families.4 Output of Construction Industry 42 . low interest rates. the organised retail industry is likely to require an additional 220 million sqft by 2010.steel through backward and forward linkages. says a report by Merrill Lynch. a unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. Indicus Analytics. hotels and retail shopping centres. Consequently. there will be demand for over 24. Consequently. such as modern offices.

Mar-02 Mar-03 14 1616082 2011-12 13 14019 1786526 1925017 209772689 22614 34 15 150337.Turnov er Output 22467.6 6 2003-04 7 375877 55996.9 5 2002-03 8 332382 44183.3 8 2005-06 2 601081 93616. no Year Mar-04 15680 6 Mar-05 21281 2 Mar-06 Mar-07 264616 319497 Mar-08 36694 6 6 7 8 9 10 Mar-04 25381 71 Mar-05 28777 06 Mar-06 327567 0 Mar-07 379006 3 Mar-08 43036 54 Mar-04 77564 7 Mar-05 10137 61 Mar-06 127195 3 Mar-07 148778 6 Gross capital formation (GCF) (at current prices ) Mar-98 38580 8 Mar-99 Mar-00 Mar-01 Mar-02 408109 506244 511788 520655 Mar-03 61948 5 Gross Capital Formation: Construction (at current prices ) Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 7349 8275 5504 9627 17370 18717 25120 33750 43018 50477 Global Majors With the significant investment opportunities emerging in this industry. a large number of international real estate players have entered the country.2 7 2004-05 2 441234 65964. 1129866.7 1 1998-99 9 203721 24402. 913174.1 1 2 427 5 13 2010-11 973 Mar-98 Mar-99 Mar-00140102. 15 2012-13 29 65 Sr.3 4 2001-02 0 306985 36450.1 2 1999-00 1 241873 28179. Currently.3 12 2009-10 81 (GDP) (at current 64 Gross domestic product at factor cost prices ) 129866.6 119631.0 3 2000-01 0 279464 33007. foreign direct 43 .2 GDP: 9 Construction (at current prices7(new 748397 2006-07 series)) Mar-98 Mar-99 Mar-00126765. 5 11 2008-09 65 840943. Mar-01 1057635. 985405. Mar-01 Mar-02 Mar-03 10 2007-08 13 905730 74999 88784 102007 111999 12086 135172 109396.

51 per cent FDI allowed in single brand retail outlets and 100 per cent in cash and carry through the automatic route. Bangalore. Dubai-based Nakheel and Hines of the US have tied up with DLF to develop properties in India.7 GOVERNMENT INITIATIVES The Government has introduced many progressive reform measures to unlock the potential of the sector and also meet increasing demand levels. 1976 (ULCRA) repealed by increasingly   larger number of states. a  part of Dubai World.  Jones Lang LaSalle (JLL).   100 per cent FDI allowed in realty projects through the automatic route. Full repatriation of original investment after three years. respectively.which would  invest over €3 billion over the next five years.Rakindo Developers . the minimum area to be developed has been  brought down to 10 hectares from 40 hectares. In case of integrated townships. UAE-based real estate company Rakeen and Chennai-based mineral firm Trimex Group have formed joint venture company . Kochi  and Indore for €243 million.investment (FDI) inflows into the sector are estimated to be between €3 billion and €3. Gulf Finance House (GFH) has decided to invest over € 1 billion in a greenfield site close to Navi Mumbai. DLF has also formed a joint venture with Limitless Holding.50 billion. Dubai-based DAMAC Properties would invest up to €2. Enactment of Special Economic Zones Act. the world's leading integrated global real estate services and money management firm. 44 . 3.9 billion to develop  properties in India. Merrill Lynch & Co bought 49 per cent equity in seven mid-income housing projects of India's largest real estate developer DLF in Chennai. Minimum capital investment for wholly-owned subsidiaries and joint ventures   stands at €9 million and €3 million. to develop a €9 billion township project in Karnataka. Urban Land (Ceiling and Regulation) Act. plans to invest around €646 million in the country's  burgeoning property market.

147 Freight wagons. 2300 Goodsheds. 11 are designated international airport.54 m Work force Ports • 12 Major Ports and 185 Minor Ports along 7. 1. 45 .3. FIPB approval required for FDI beyond 74% • Privatization of the Delhi and Mumbai airports is in progress. 700 Repair shops. 590 bn units produced (1 unit =1kwh).517 km long Indian coastline • 100% FDI under the automatic route is permitted for port development projects • Public–Private partnership is seen by the Government as the key to improve Major and Minor ports Airports • India has 125 airports.4 billion • New international airports . Expected investment of about €2. • 7566 locomotives. Compound Annual Growth Rate of 4. 222.the largest rail network in Asia and the world’s second largest. 300 Yards.6% over the last four years • India has the fifth largest electricity generation capacity in the world Roads • An extensive road network of 3.840 coaching vehicles.7. 6853 Stations.3 m km – the second largest in the world • The Golden Quadrilateral (GQ-5846 km of 4 lane highways) North-South & East West Corridors (NSEW-7300 km of 4 lane highways) Railways • The premier transport organisation of the country .1 INFRASTRUCTURE Power • Power generation capacity of 122 GW. of these. 37.Bangalore & Hyderabad are being built by private consortia – total investment of about €411 million • 25 other city airports are being considered for private investment. • 100% FDI is permissible for existing airports.

The government of India has permitted FDI up to 100% for development of integrated townships in India last year. organised retail and hospitality industries. the demand for all segments of the real estate sector is likely to continue to grow. built-up infrastructure and construction-development project. Water supply and sanitation projects alone offer scope for annual investment of €4. This calls for an investment of €54. much of infrastructure development and construction in the real estate sector was done manually.7. Foreign direct investment alone might see a close to six-fold jump to €19 billion over the next 10 years. Airports and Power. India has a large and growing middle class population of 300 million people. Given the boom in residential housing. It is estimated that there is a national housing storage of 41 million units.2 Opportunities With the economy surging ahead. 3.872 billion are coming up to develop Special Economic Zones. The Ministry of Power has formulated a blueprint to provide reliable. Before the opening up of the Indian economy. IT. and the entry of international majors.494 billion. Projects worth €1. Retailing is becoming the boom industry with organized retail being a market of €4. this industry is likely to see increased investment activity. But with the infrastructure and construction sectors undergoing dramatic 46 . • Allowing up to 100 % foreign direct investment (FDI) under the automatic route in townships.27 billion. The Indian real estate industry is likely to grow from €7 billion in 2005 to €58 billion in by 2015. housing. affordable and quality power to all users by 2012. Railways. There are a lot of opportunities that are sprouting up in the construction of Roads. ITeS.67 billion in the next five years. out of which a large section is need on new houses. India's booming infrastructure sector is fuelling demand for all kinds of construction equipment.Urban Development • India’s total urban population on 1st March 2007 was 285 million.

While in 2007 and the previous years. In contrast to the extreme volatility leading to freezing of money markets in major advanced economies.8 RBI RESPONSE TO THE CRISIS The financial crisis in advanced economies on the back of sub-prime turmoil has been accompanied by near drying up of trust amongst major financial market and sector players. money markets in India have been. However. During 2008. 3. This has been enabled by the appropriate use of a range of instruments available for liquidity management with the Reserve Bank such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) stipulations and open market operations (OMO) including the Market Stabilisation Scheme (MSS) and the Liquidity Adjustment Facility (LAF). Central banks in some cases have substantially loosened the collateral requirements to provide the necessary short-term liquidity. in view of some reversal in 47 . and thousands of kilometres of expressways and highways being laid across the subcontinent . The lack of trust amongst the major players has led to near freezing of the uncollateralized inter-bank money market. In response to these developments. large capital flows and their absorption by the Reserve Bank led to excessive liquidity. Large swings in capital flows – as has been experienced between 2007-08 and 2008-09 so far – in response to the global financial market turmoil have made the conduct of monetary policy and liquidity management more complicated in the recent months. the Reserve Bank has been effectively able to manage domestic liquidity and monetary conditions consistent with its monetary policy stance. For the construction equipment sector. albeit with some pressures. functioning in an orderly fashion.changes – with 60-storeyed sky-scrapers being built in cities like Mumbai. this is indeed good news. central banks in major advanced economies have taken a number of coordinated steps to increase short-term liquidity. which was absorbed through sterilisation operations involving LAF. which has adapted rapidly to the changed scenario. reflected in large spreads over policy and contractors are acquiring sophisticated equipment to execute the multi-million-dollar projects. in view of mounting losses and elevated uncertainty about further possible losses and erosion of capital. as it paves the way for an exciting future. MSS and CRR. by and large.

2008. The CRR which had been gradually increased from 4. The MSS operates symmetrically and has the flexibility to smoothen liquidity in the banking system both during episodes of capital inflows and outflows. Thus. in regard to SLR. thus. on September 16. however. 9 October 2008. For instance. is reflective of prudent practices. In view of this flexibility. fresh MSS issuances have been scaled down and there has also been some unwinding of the outstanding MSS balances. for a temporary period. The relative stability in domestic financial markets. This has imparted a sense of confidence in the market in terms of availability of short-term liquidity. temporary changes in the prudential ratios such as CRR and SLR combined with flexible use of the MSS. 2008 – the first cut after a gap of over five years – on a review of the liquidity situation in the context of global and domestic developments. for drawing liquidity support under LAF from RBI. purely as temporary measures. unlike central banks in major advanced economies. the Reserve Bank did not have to invent new instruments or to dilute the collateral requirements to inject liquidity. the Reserve Bank permitted banks to use up to an additional 1 percent of their NDTL.5 per cent in 2004 to 9 per cent by August 2008 was cut by 50 basis points to be effective October 11. provided adequate flexibility to manage the evolving situation. market sale of foreign exchange by the Reserve Bank has led to withdrawal of liquidity from the banking system. 48 . could be considered as a vast pool of back-up liquidity that is available for liquidity management as the situation may warrant for relieving market pressure at any given time. limited by the excess SLR securities held by banks. to meet the liquidity mismatches. as the very recent experience shows. While LAF and MSS have been able to bear a large part of the burden. The daily LAF repo operations have emerged as the primary tool for meeting the liquidity gap in the market. Global financial crisis and key risks – impact on India and Asia Remarks by Dr Rakesh Mohan. The existing set of monetary instruments flows. some modulations in CRR and SLR have also been resorted. despite extreme turmoil in the global financial markets. In view of the reversal of capital flows. Deputy Governor of the Reserve Bank of India. LAF repo operations are. strengthened reserves and the strong growth performance in recent years in an environment of flexibility in the conduct of policies.

The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF. There is no doubt that NRIs have lot of money and have enough reasons to send back monies into their country and invest in real property. cushioned the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions. However the developers only chose to cater to the demand of the high end customers and not the ‘budget customers’. 3.absorption. Indian developers have put ‘all eggs in one basket’ and their started building only ‘high end’ homes which can only be afforded by the NRIs or extremely rich people in the country. as and when the situation warrants. In view of the evolving environment of heightened uncertainty. Liquidity modulation through a flexible use of a combination of instruments has. using all the policy instruments at its disposal flexibly. to a significant extent. However. In the current situation of global meltdown. As a matter of fact.Active liquidity management is a key element of the current monetary policy stance. This has lead to a highly focused real estate industry catering to a singular stream of supply. This is clearly evidenced by the fact that 49 . liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead. However. a closer examination of the industry as it is organized in the country reveals that there are other reasons too. the excessive dependence on one market segment has made things difficult for the developers. the Indian real estate industry has completely chosen to ignore the middle income segment of the market.  Complete lack of addressal of ‘affordable options’: Over successive years.  Excessive dependence on NRI portfolios: Virtually all the real estate developers in the country have been focusing on NRI (Non Resident Indian) customers.9 REASONS FOR THE MELT DOWN IN INDIA It is often argued that the main reason of slowdown in India is the international melt down. Some of the reasons are as. volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets. there is a huge untapped demand in this segment.

On account of lack of appropriate risk allocation policy in place. real estate markets. there is an excessive supply in this sector. Every developer wants to put up in IT Park. neglecting other requirement of the market. risk. resource and business practices so as to steer the industry in a path of safe navigation. In the absence of the above.  Misplaced focus on ‘global retail’: Indian developers have also sucked into what is popularly referred as the ‘mall mania’. disorganized and incongruent manner. often ignoring the overall 50 . have been highly over leveraged. the state governments have chartered their own ways of handling the real estate sector by creating state level policies and partnerships. This has also led to a narrow focus of the operations. in an unstructured. given the kind of sales turnover that they get. rather than a multipurpose commercial complex as was being done in the decades. the focus on general commercial space/ office space has got reduced to a great extent. Business enterprises find it difficult to pay the high rents and maintenance charges. particularly developers. As a result. state and local stakeholders to appropriately structure policies.  Excessive dependence on IT/ITES sector: The Indian real estate sector has also been focusing more on the information technology (IT) and information technology enabled services (ITES) sectors.  Inappropriate state level real estate policies: In almost all states of the country. with too many malls.  Inappropriate / skewed risk allocation: The Indian real estate industry has been moving on the model of Inappropriate / skewed allocation of resources and as a consequence.  Absence of National Real Estate Regulator: India woefully lacks a national real estate regulator which can holistically see the entire real estate market and industry in a comprehensive manner and can advise national. A lot of efforts have been made in putting all energies into the shopping malls and today. real estate in India happens in as many ways as it can.when the prices have corrected and some developers have started making ‘smaller’ and ‘affordable’ homes. The recent melt down has clearly indicated that such a policy of ‘putting all eggs in one basket’ syndrome has led to a sharp fall when the assumptions failed. the takeoff have increased.

Real estate investment in India often mean only direct purchase of property and not in any other way and to that extent.  Orthodox urban planning systems: Although it is now a well accepted notion in India that centralized comprehensive town planning is a necessity for orderly. the activity of urban/town planning is given little priority. The near absence of products such as real estate mutual funds (REMFs) and the meager representation on the bourses have not given a significant opportunity for creating alternative investment opportunities in the real estate sectors for the small investors. state level. the successive reduction in key bank rate are expected to soften interest rate for the home buyers who have been faced with a difficult situation of high price and high cost of funds. healthy and sustainable development of human settlements. IT/ITES projects. related to taxation. As a result. do not have revisions in place. stamp duties. etc. 51 . renting. the market can be considered to be primitive. shopping malls. Most settlements do not have comprehensive master plans and those that have. often revised master plans take several years to get prepared and approved.  Lack of incentives for the right sizing the market: Policy itself is it national level. we have many state governments which promote luxury housing. which offer little incentive or conducive conditions for the entrepreneurs to participate in a meaningful manner.  Primitive real estate investment avenues: The financial and investment environment in the real estate sector in India has not adequately evolved despite talk of the same over several or social requirements and catering more to the narrow and short term interests of revenue mobilization.10 EFFORTS OF THE GOVERNMENT TO TURNAROUND THE MARKET The government of India has announced two major stimulus packages in less than two months to ease the liquidity crisis in the market. without taking a comprehensive view of the overall requirements of the city and the society at large. does not incorporate any incentive for a balanced market to thrive. For the domestic real estate sector. 3. There are a whole lot of policies.

is making available Rs.4. public sector (PSU) banks have also come out with a set of incentive that has affected the market positively. Developers are readying plans to enter what they call ‘mid-range’ housing in a big way. 000 crore refinance window to companies.N. 5-20 lakh category are now being offered at 9. India’s housing finance regulator. By professor Dr. there was a sizeable component for housing in the sub Rs. which are keen to extend loans not exceeding Rs.4.5 percent from 9.25 percent. The government of Andra Pradesh recently announced a major policy decision to lower the stamp duty on registration of the houses less than 1.In the two fiscal stimulus packages announced by the government. 20 lakh in size.20 lakhs. thereby reducing the transaction costs drastically. Banks which have claimed 65 percent of the Rs. In many cases.200 sft in size from 7 percent to 2 percent over a period of time.1 Issue-1.25 percent.S. The national housing bank (NHB). SPA.5 lakh have been dropped to 8. 00. Further loans in the Rs. processing fee and prepayment penalties have been waived. Rao and Head(Housing).000 crore housing finance market have gone ahead and announced special incentives for the ‘affordable’ segment. Interest rates for loans upto Rs.June 2009 CHAPTER 4 GOVERNMENT INITIATIVES DURING SLOW DOWN 52 . Nearly 80 percent of the banks’ home loans are less than Rs. New Delhi published in National Realty Vol.P.20 lakh category. In line with this package.

Second. even liquidity measures for mutual funds. There are. there was unprecedented policy activism.4. and (iv) The actual/potential provision of primary liquidity was of the order of Rs. unlike global trend. 53 . Fourth. For example: (i) The repo rate was reduced by 425 basis points to 4. in the process of liquidity injection the counter-parties involved were banks. because of release of earlier sterilized liquidity.75 per cent.1 MONETARY POLICY IN INDIA RESPOND TO THE GLOBAL FINANCIAL CRISIS As the crisis intensified.5 per cent of GDP). the Reserve Bank’s balance sheet did not show unusual increase. In a span of seven months between October 2008 and April 2009. (iii) The cash reserve ratio (CRR) was reduced by a cumulative 400 basis points to 5.25 per cent. NBFCs and housing finance companies were largely channeled through the banks. 5. Third. unlike the mortgage securities and commercial papers in the advanced economies. the Reserve Bank of India. however.0 per cent. despite large liquidity injection. and sharply reduced the policy rates.6 trillion (10. some key differences between the actions taken by the Reserve Bank of India and the central banks in many advanced countries: First. (ii) The reverse repo rate was reduced by 275 basis points to 3. took a number of conventional and unconventional measures to augment domestic and foreign exchange liquidity. like most central banks. availability and deployment of multiple instruments facilitated better sequencing of monetary and liquidity measures. there was no dilution of collateral standards which were largely government securities.

The increase in money multiplier ensured steady increase in money supply consistent with the liquidity requirements of the economy.Finally. leading to higher increase in broad money. Money Multiplier can be expressed as [(1+c)/(c+r)].3 in March 2008 to 4. Executive Director. While the Reserve Bank’s balance sheet did not show unusual expansion. A reduction in r leads to an increase in the money multiplier Chart 4. inflation and financial sector conditions. where. c is currency-deposit ratio (a behavioral variable) and r is reserve requirement ratio (a policy variable). the policy responses were adapted to domestic growth. the experience in the use of pro cyclical provisioning norms and counter-cyclical regulations ahead of the global crisis helped enhance financial stability. consistent with the objective of price and financial stability. 2009 4.1: Changes in Money Multiplier Source: RBI report on Global Financial Crisis and Monetary Policy Response in India 12 Nov 2009 Global Financial Crisis and Monetary Policy Response in India by Deepak Mohanty. RBI on 12th November. reflecting lowering of CRR (Table 4. By synchronizing the liquidity management operations with those of exchange rate management and non-disruptive internal debt management operations.8 in March 2009. particularly the expectations of more prolonged adverse external conditions in the face of no visible risks to inflation.2 HOW DID MONETARY TRANSMISSION WORK? 54 . The average money multiplier rose from 4. sharp reductions in CRR raised the money multiplier. The policy stance clearly reflected the forward looking undertone. While the magnitude of the crisis was global in nature. the Reserve Bank of India ensured that appropriate liquidity was maintained in the system.1).

especially the dominance of fixed term deposit liabilities in banks’ balance sheets at fixed interest rates. Chart 4. The money market rates moved in tandem with the policy reverse repo rate. transmission to the credit market was slow due to several structural rigidities in the system. Chart 4. As regards India. the transmission of lower policy rates to the credit market has improved with a lag (Chart 4. the changes in the Reserve Bank’s policy rates were quickly transmitted to the money and debt markets (Chart 4.3: Deposit and Lending Rates of Public Sector Banks Source: RBI report on Global Financial Crisis and Monetary Policy Response in India 12 Nov 2009 55 .3).2: Transmission of Policy Rates to Money and Bond Markets Source: RBI report on Global Financial Crisis and Monetary Policy Response in India 12 Nov 2009 As bank deposits contracted in the past at high rates have started to mature and banks have significantly reduced their term deposit rates. However.In the wake of the crisis. monetary transmission broke down in several countries as risk aversion gave rise to credit crunch.2).

56 .

i. restoring orderly conditions in the market and subsequently supporting the growth momentum emerged as the key challenges. In 2009-10 so far. exports declined. and moderating the dampening effects on growth. deceleration in industry and services sector also persisted over four consecutive quarters of the year.5 per cent from an average contribution of 5.4. The Reserve Bank had to contend with the challenges over two distinct phases during the year. The contagion from the global crisis. which necessitated an anti-inflationary policy response. government consumption demand increased by 20. and the contribution of government consumption expenditure to overall growth accordingly increased to 32. This required adoption of accommodative monetary policy stance. however. preserving financial stability. this involved temporary deviation from the fiscal consolidation process embodied in the Fiscal Responsibility and Budget Management (FRBM) Act. agriculture.e. Domestic aggregate demand also moderated due to sharp deceleration in the growth of private consumption demand. however. industry and services. The deceleration in growth was broad based across three major constituent segments of GDP. the financial system functioned without disruptions and credit conditions did not operate as a constraint to growth. Reflecting the contraction in global demand.9 per cent in the preceding five years. which warranted swift and appropriate use of fiscal and monetary policy measures with a view to ensuring orderly functioning of the markets. Reflecting the expansionary fiscal policy response to the slowdown in growth. Moreover. and decline in profits in last three consecutive quarters of the year. Corporate performance remained dampened.3 THE ECONOMY .REVIEW AND PROSPECTS The Indian economy exhibited significant resilience in 2008-09 in the face of an intense global financial crisis and the subsequent severe global recession. In the second half. which required contrasting monetary policy responses. and the deficient monsoon and the 57 . For the Government. emerging signs of recovery are yet to indicate any clear trend. posed the challenge of responding to the evolving risks and heightened uncertainties. Consequently. with significant fall in sales growth in the second half of the year. which was reflected in the provision of ample liquidity at lower interest rates.2 per cent. In the first half of the year. inflation firmed up under the pressure of hardening international commodity and food prices.

WPI inflation rose to a high of 12.1 per cent during the corresponding period. Fiscal consolidation and reforms unshackled the constraints to realization of productivity and efficiency driven growth. and accordingly the policy focus was primarily shifting to address the growing infrastructure deficit and make progress on remaining areas of reforms. while also ensuring that the growth process becomes more inclusive.7 per cent in 2007-08. the First Quarter Review of Monetary Policy for 2009-10 placed the projection for GDP growth at 6. and this transitory trend may not persist beyond few months. In the first half of the year. and there was a return of inflation after a phase of “great moderation”. which facilitated the step up in investment rate from 22. India’s ascent as a major emerging market economy with high potential for sustained robust growth was reflected in surges in capital inflows. the high growth trajectory was generally seen as the sustainable critical threshold.9 per cent in August 2008 and declined sharply thereafter to below 1 per cent by the end of the year.0 per cent. The currently observed negative inflation essentially reflects the impact of the high base of the previous year. The impetus for growth emanated from the upsurge in the domestic savings rate from 23. the world experienced simultaneous increase in both food and commodity prices. with an upward bias. Within WPI. recovering industrial production and more optimistic business outlook. Recognizing the balance of risks to growth. Dealing with supply side sources of inflation posed significant challenges for the conduct of Reserve Bank’s monetary policy. Global developments prominently influenced domestic developments in 2008-09. There were two distinct phases during which the transmission of global shocks posed different but significant challenges for the Reserve Bank. In the 58 .depressed export performance have to be seen along with the improving growth in core infrastructure sector.5 per cent of GDP in 2001-02 to 37. which were in excess of the external financing needs as conditioned by the country’s prudent emphasis on sustainable current account deficit as a means to stable growth. particularly in the face of emerging signs of cyclical slowdown on the one hand and the risk of spiraling headline inflation affecting inflation expectations on the other.8 per cent to 39. The inflation environment remained highly volatile during 2008-09. essential commodities continue to exhibit high inflation. Before the emergence of the global economic crisis in 2008-09. before turning negative since June 2009.

and thereby avoiding the risk of snowballing effects of financial stress on the real economy. After the balance of payments crisis in the early 1990s. recognizing the adverse effects of a volatile exchange rate on trade. as a matter of concerted policy effort. while falling asset prices and uncertainty about valuation of the traded instruments affected market liquidity. the extent of dependence on external finance for financing domestic growth has been limited to the sustainable level of the current account deficit. The gradual and sequential approach to liberalization of the capital account also prevented leveraging of the Indian financial system for taking positions in the troubled assets in the 59 . failure of leading global financial institutions and the deleveraging process tightened the market for funding liquidity. Despite significant pressures on India’s balance of payments in the third quarter of the year. the global financial crisis and the subsequent global recession changed dramatically the nature of the challenge emanating from globalization. The international transmission of liquidity shocks was fast and unprecedented. and capital flows in excess of the financing needs have resulted in comfortable foreign exchange reserves. developments in the financial systems of advanced countries revealed that irrespective of the degree of globalization of a country and the soundness of its domestic policies. since it was critical for preserving normalcy in financial markets. notwithstanding a phase of high volatility over a short period of time. India’s capacity to withstand the global shock better than many other emerging market economies was partly on account of the sound macroeconomic and financial sector policy environment that had been put in place in the post-reform period by careful assessment of the opportunities and risks associated with reforms. The reserve management policy also assumes importance in the context of the market determined exchange rate regime where the Reserve Bank aims at containing undue volatility.second half of the year. investment and growth. Given the growing risk of illiquidity cascading into solvency problems. PostSeptember 2008. liquidity management acquired priority in most central banks. The sharp swings in global conditions within the year were reflected in the fast slide of the world economy into a deep recession from a phase of high growth over the preceding four consecutive years. There was a sudden plunge to dysfunctional markets from a phase of growing market bubbles that had brought down risk premiums to historic low levels. the foreign exchange reserves facilitated Reserve Bank’s operations in the foreign exchange market to preserve orderly conditions. a global crisis could spread to every economy.

reliance on domestic demand and domestic savings for growth. however. given the overriding policy focus of maintaining a growth rate of around 9 per cent as the key means to ensure higher living standards for all in an inclusive growth process. thus. comfortable foreign exchange reserves. More importantly. A large domestic market.advanced economies. prudent management of the capital account and a sound and resilient domestic financial system. and prudential measures also limit the exposure of the banking system to sensitive sectors and asset price bubbles. and the overdrawn state of the banking system to sustain the credit disbursement.8 per cent during 2003-08 to 6. the provisioning requirements and risk weights were increased to prevent a buildup of asset bubble. Absence of any sovereign issue in the international markets for financing the deficit of the Government has also helped in limiting the effects of adverse external shocks on the macroeconomic policy environment of the country.7 per cent in 2008-09. the withdrawal of monetary accommodation had in fact started in 2004 with gradual increase in both repo and reverse repo rates. The deceleration in growth from an average of 8. adequate regulatory precautions have ensured that complex structures like synthetic securitizations do not contaminate the Indian markets. As the post- 60 . The Reserve Bank had taken measures to modulate the monetary overhang that was building on account of sustained expansion in money growth. Since April 2005 the Bank had also been expressing its concerns over the fast growth in credit. and the associated increase in the credit-deposit ratios for certain banks. warranted swift and comprehensive policy response. appropriate countercyclical regulations and provisioning requirements also contributed to preventing development of asset price bubbles in India. given the mismatches between sources and uses of funds. Despite significant financial sector reforms. hide interconnectivity of market operators and allow excessive use of leveraged speculation has been a notable aspect of the Reserve Bank’s prudence in regulation. Absence of structured products that could mask risk exposures. Recognizing the unprecedented credit growth to the real estate sector during 2004-07. Reserve Bank’s mandatory SLR requirement of 25 per cent (now reduced to 24 per cent) also appeared relevant in the context of sharp deterioration in asset quality that was experienced by the leading international banks and financial institutions. represent the key factors that helped in moderating the impact of the contagion on India in relation to many other countries around the world.

which started with the cyclical slowdown in the first half of 2008-09.1Economic Growth The deceleration in growth. besides the provision of ample liquidity to alleviate any fear of liquidity shortage in the Indian markets. the balance of payments came under pressure. increase in net foreign assets of the Reserve Bank. with the use of conventional and unconventional measures. that too in a forward looking manner in the second half of the year. 4. In the third quarter of 2008-09. The Reserve Bank had to more than offset the contraction in reserve money by expanding its net domestic assets (NDA) so as to ensure necessary growth in money supply consistent with the needs of economic growth. led to corresponding contraction in base money.September 2008 global developments affected the Indian markets through the global liquidity spiral and sharp spurt in risk aversion. 4. had become the dominant source for expansion of base money. The Reserve Bank ensured the necessary expansion in NDA through conventional open market operations (OMOs) involving outright purchase 61 . in anticipation of the adverse ramifications of the global crisis on the domestic growth.4. the Reserve Bank had to operate in several markets simultaneously.8 per cent in two successive quarters in the second half of 200 8-09 represented the weakest growth in recent period. however.2 Liquidity Management In recent years up to the first half of 2008-09. the deceleration in services persisted in all successive quarters of the year.4 ASSESSMENT OF 2008-09 4.4. more importantly. which was delivered swiftly. while industrial growth turned negative in the last quarter. and the reserve drawdown that became necessary to finance the deficit in capital inflows. given the overriding aim of restoring orderly market conditions and preserving smooth flow of credit for all productive purposes. The sharp moderation in GDP growth warranted appropriate fiscal and monetary policy response. got magnified in the second half due to the contagion from the global crisis. reflecting the surges in capital flows. Deceleration in growth to 5.

of government securities in the secondary market. 4.1. banks face the constraint of reducing the cost of lending in a phase of economic slowdown since their cost of funds remains high because of term deposits contracted earlier at higher rates. 4. As a result.25 percentage point reduction in the repo rate. the administered interest rate structure for small savings restricts flexibility on deposit rates for the banks. while reassessment of risk was one of the factors constraining the transmission of monetary policy.00. But in the midst of a sudden reversal in risk perception.000 crore of liquidity to the banking system. as well as provision of liquidity through acquisition of securities by repos under the LAF. as a result. it implies higher money multiplier.3 Monetary Transmission Despite persisting with the expansionary monetary policy stance in the post-September 2008 period. depositors often lock their deposits at the high interest rate for longer term during a high interest rate phase.75 percentage point reduction in reverse repo rate and several other conventional as well as non-conventional windows for access to liquidity (resulting in the availability of more than Rs. This was experienced in several advanced economies. the transmission of monetary policy became a matter of concern.4. as small savings could potentially compete with deposits depending on the relative difference in the interest rates offered on both savings instruments. In India. Second. the risk premium could increase significantly to often more than offset the magnitude of fall in the policy rates. First. despite significant fall in the policy rates.000 crore of additional actual/ potential liquidity to the system by the end of the year). reflecting heightened risk aversion. the cost of funds may not decline for the customers. there were several other structural factors in operation as well. The reduction in CRR by 4 percentage points released Rs. Another instrument which allowed the Reserve Bank to expand liquidity was the unwinding of the MSS securities. 2. which leads to higher increase in broad money. or may even increase. Till 62 . The complete transmission of monetary policy takes place with long and variable lags. While the first round immediate impact of a reduction in the CRR leads to corresponding fall in the reserve money.60. Since moderation in reserve money growth was the result of a deliberate expansionary policy action.4. where the yield spreads increased significantly at some stage. which was reflected in 400 basis points reduction in CRR. the Bank had to emphasise the “adjusted reserve money” indicator to communicate the monetary developments to the public.

4. Fourth.the term deposits become due for maturity.90. and they have to prevent shifting of such deposits to other banks. Third. besides the usual reduction in CRR. as a public institution. greater access under the LAF through repos. several concessional administered loans to sectors like agriculture and exports are linked to the BPLR.12.68. the volume under the LAF repo window of the Reserve Bank (which is used on a day-to-day basis by the banks for accessing liquidity) increased from around Rs. the deposit and lending rates have started to moderate in response to the significant reduction in policy rates and sustained ample liquidity in the system. CPI inflation at the retail level continues to be high. which works as a disincentive to revise the BPLR downwards even in the face of falling policy interest rates and use of moral suasion by the Reserve Bank to emphasize the need for lower lending rates as one of the means to support recovery in growth. and further to Rs. 4. 2008. and unwinding of the MSS securities. Since the last quarter of 2008-09. In the conduct of its policies. at which stage the deposits could be renewed at the lower rate. which creates the associated pressure to delay the revision in interest rate to the extent possible. With sharp increase in the overnight call rate in India to 13 per cent on September 16.000 crore in the second half of the month. which though is a universal concern and not specific only to India. several 63 . 2008 and further to a peak of 19. and inflation expectations also have not receded at the same pace as the WPI inflation. besides the Reserve Bank’s constant emphasis on bet External Contagion and Financial Markets In the post-September 2008 period. banks often compete to mobilize bulk/wholesale deposits. Despite significant moderation in WPI inflation to below 1 per cent by the end of 2008-09 and then to sub-zero level.8 per cent on October 10. monetary policy effectiveness continues to remain a challenge.4 Reserve Bank’s Responses to the Contagion For enhancing the availability of domestic liquidity. In view of these reasons. has to also remain sensitive to the interest of the depositors.000 crore in early October 2008.500 crore in the first half of September 2008 to Rs. the banks experience structural rigidity in their balance sheet. given particularly the role of high domestic savings in India in the high growth phase of 2003-08 and the relatively higher degree of insulation of Indian growth compared to most other countries during 2008-09. the major concern for the Reserve Bank was to deal with the knock-on effects of the global financial crisis. however. the Reserve Bank.

provisioning and credit conversion factors. The additional liquidity that was made available exceeded Rs. NHB and EXIM Bank. (ii) strengthening of systems for monitoring large un-hedged foreign exchange exposure of corporates. Besides the actual intervention sales in the foreign exchange market.5 per cent of NDTL for meeting the liquidity needs of NBFCs. (v) reviewing the appropriateness of the current supervisory 64 . advance release of money at the request of the Government to the banks towards Agricultural Debt Waiver and Debt Relief Scheme. To ease the demand pressure from oil importing companies during the high and rising phase of international prices.000 crore (by the end of the year). (iv) reviewing supervisory framework for monitoring the activities of Special Purpose Vehicles(SPVs) and trusts set up by banks. including allowing NBFCs and housing finance companies to borrow in foreign currency. 00. the Reserve Bank also undertook a number of other regulatory initiatives. and special refinance facilities for specialized financial institutions such as the SIDBI. in view of depressed international asset prices. the Reserve Bank also opened the forex swap facility for the banks. (iii) enhancing cross border supervision and consolidated supervision of bank led conglomerates. and raising the interest rates on NRI deposits. housing finance companies and mutual funds. Notwithstanding the demand pressure in the forex market.4. With a view to further strengthening the domestic banking sector.9 per cent of GDP. such as a second LAF window providing access to liquidity in the afternoon as against the normal LAF access in the morning. the Bank had already started special market operations in the secondary market through commercial banks involving direct supply of forex liquidity against the oil bonds of the public sector oil marketing companies. special 14 days repo facility using SLR eligible securities up to 1. relaxing further the external commercial borrowing policy. The policy measures that aimed at improving the supply of forex liquidity included permitting banks to borrow from their overseas branches within prudential limits. which is unprecedented and amounted to 7.other conventional as well as unconventional instruments were also used depending on the nature and expected magnitude of the demand for liquidity. increase in export credit refinance limit for commercial banks. the corporates were permitted to prematurely buy back their FCCBs at prevailing discounted rates. which include: (i) review of prudential framework for off balance sheet exposures of banks covering issues like risk weights.

each individual bank was above the minimum 9 per cent capital adequacy requirement prescribed by the Reserve Bank. While the capital adequacy level for the banking system was at 13.40. With the setting up of National Investment Fund (NIF). (vi) issuing guidelines on managing maturity mismatch for addressing liquidity risks in the very short run. Reflecting the measures taken for improving the availability of forex liquidity. (vii) discouraging the practice of excessive reliance on call money borrowing by linking the borrowings to banks’ capital. Stress-testing findings of the Committee on Financial Sector Assessment (CFSA) also suggested the resilience of the financial system and the adequacy of capital levels.framework for monitoring the overseas operations of Indian banks. the Indian banking system remained sound and resilient. 4. mobilization of resources through disinvestment has been highlighted in some quarters.6 Disinvestment In the context of options for faster return to the fiscal consolidation path. the average exchange rate of the rupee which had depreciated sharply from Rs.51. Despite the risk of contagion from the global financial crisis. indicating the surplus liquidity conditions in the system since November 2008.02 per US dollar at the beginning of April 2008 to Rs. The 10-year benchmark government securities yield also softened from the October 2008 levels by the end of the year. all the proceeds from disinvestment of Central Public 65 .4. asset quality and profitability for 2008-09. 4.48. and (viii) modifications to guidelines on restructuring of advances. has appreciated since then to around Rs.2 per cent at the end of the year. the transmission of the Reserve Bank’s policies to the money. despite significant increase in market borrowings in the second half of the year. Thus. forex and the government securities markets has been effective. the inter-bank call rate reverted to within the LAF corridor or around the ceiling by the end of October 2008 and the LAF window also moved from net injection to net absorption mode. as evident from the soundness indicators like capital adequacy.5 Impact of the Reserve Bank’s Actions Responding to the large and comprehensive domestic liquidity measures.0 per US dollar in the first half of August 2009.23 per US dollar in March 2009. thereby ensuring speedy restoration of orderly conditions over a short time span.4.

Sector Enterprises (CPSEs) are required to be routed to it. The Eleventh Five Year Plan envisages stepping up of the gross capital formation in infrastructure from 5 per cent of GDP in 2006-07 to 9 per cent of GDP by end of the Plan period in 2011-12. This has added to the subsidy burden of the Government.8 Infrastructure India’s high growth trajectory has exerted significant pressures on the available physical infrastructure.4. The high fertilizer prices prevailing in global commodity markets during the first half of 2008-09 and the enhanced minimum support price for wheat and rice led to sharp increases in fertilizer and food subsidies in 2008-09 (RE) by Rs. respectively. There is a need to step up disinvestment for greater resources mobilisation. in 2008-09 so as to compensate for under recoveries. both physical and social. could be sacrificed as an outcome associated with higher subsidies. accelerating the pace of public expenditure for infrastructure could become difficult. which are explicitly provided for in the Budget. over the budget estimates.849 crore and Rs. Apart from these subsidies. In attracting private investment to infrastructure projects.10. needs for greater public investment in infrastructure.75. 4. implicit subsidies provided for by way of issue of special securities to oil and fertilizer companies amounted to Rs.4.7 Subsidies Management of subsidy has posed a persistent policy challenge.960 crore. Public investment continues to dominate the infrastructure sector in India and when the Government is expected to go through an exit phase to revert to the fiscal consolidation path. Moreover. and this could be critical to achieve the 9 per cent growth. besides the 66 .44. Without explicit mandated provisions to cap expenditure on subsidies. 4.000 crore. respectively.20.863 crore and Rs. and infrastructure deficit is widely recognized as a major constraint to attracting foreign investment and promoting efficiency in production in India. the challenge is to make the investment attractive enough in terms of expected return on capital while also being fair to the consumers and actual users of the infrastructure. which is maintained outside the Consolidated Fund of India. The large financing requirement that is necessary to almost double the investment in infrastructure has to be also seen in the context of challenges for investment in both public and private sectors.

there are other medium-term issues associated with globalization as well international initiatives on revamping the architecture for promoting financial stability. Thirdly. notwithstanding the usual dynamics of any credit market which may not respond to monetary policy actions. the costs of any delay in withdrawal of monetary accommodation and fiscal consolidation could increase. it increases the risks from external demand and capital flows. while withdrawal of monetary accommodation entails the risk of weakening recovery impulses. Finally. which could worsen the actual inflation situation over time while also putting upward pressure on interest rates. 4.4. domestic monetary and liquidity conditions and overall macroeconomic and financial stability. For the Reserve Bank. Better monetary policy transmission that could enhance the demand for credit is a key challenge. which poses a complex dilemma on the appropriate stance of monetary policy. sustained accommodation and the associated protracted phase of high money growth can only increase inflation in future.9 Policy Challenges The macroeconomic conditions in 2009-10 so far and the expected outlook for growth and inflation suggest that there are clear policy challenges for the Reserve Bank as well as for the economy in the near as well as medium-run. private sector credit must grow. In such conditions. Swings in capital flows and sudden stops can have a significant impact on exchange rates. While openness offers a number of benefits. for any early signs of recovery to gain momentum. with the return of capital inflows to the pre-crisis period and revival in demand for credit from the private sector.current focus on growth. 67 . large borrowing programmes and high fiscal deficits complicate the challenge even further by accentuating inflationary expectations. Secondly. improving the quality of life through provision of modern physical and social infrastructure should also be given greater importance. A major near-term challenge for the Reserve Bank is to deal with the unpleasant combination of subdued growth with emerging risk of high inflation.

are expecting a big boost to revive growth and put them on the path of recovery.5 BUDGET EXPECTATION The infrastructure sector and the recession-hit real estate sector are looking forward to the Union budget with great expectations. and the future approach to financial sector reforms may have to be based on lessons from the recent crisis. Both the sectors.C. Chakrabarty ( Deputy Governorv). Greater flexibility could be given to the India Infrastructure Finance Company Limited (IIFCL). The budget is expected to give a big push to Public-Private Partnership (PPP) projects. The single mandate linked to inflation objective has often been highlighted as a necessity for ensuring a better inflation environment. particularly on roads and ports. the budget will give impetus to investments in the sector. plagued by bottlenecks with slow movement in the development of ports. roads and airports. Usha Thorat (Deputy Governor) . Shyamala Gopinath (Deputy Governor) . However. Double the capacity According to the 68 . Subbarao (Governor ) 4. the new international initiatives in response to the global financial crisis have to be monitored and examined. which require huge investments. the operational relevance of an inflationcentric mandate has to be examined carefully. RBI Annual Report for 2008-09 by Alpana Killawala Chief General Manage 27 Aug 2009 Summary of the Annual Report of RBI for the year ended June 2009 on 27/08/2009 by S. It is estimated that India will require $500 billion over the next five years in the sector to sustain the growth momentum. Raghavan( Chief General Manager) . it is expected that apart from granting industry status to infrastructure. to deploy funds. The President’s address to Parliament has sought to give a big boost to the infrastructure sector. which has been set up as a refinancing facility for infrastructure projects. but given the importance of other objectives for a country of India’s size and diverse needs. D. with an emphasis on country-specific relevance.V. Global consultant Goldman Sachs expects a leap in infrastructure spending.For promoting financial stability. K.

roads. The Royal Institution of Chartered Surveyors (RICS) said the government should increase the housing loan interest deduction limit to Rs.Planning Commission. 30 lakh. and rationalisation of stamp duty and registration charges. developers are facing acute liquidity crunch and facing difficulties in servicing debts. He feels strict norms should be introduced to control the prices of steel and cement to stabilize the industry. According to Rohtas Goel. India may need to nearly double its capacity of ports. The RICS expected re-introduction of concessions under Section 80IB (10) of the Income Tax Act. Saviour Builders director Sanjay Rastogi says the budget should lower interest rates and recognize real estate as an industry. which will give a boost to the housing sector and generate demand. 3 lakh per annum and lower interest rates to 7. further relaxation of the external commercial borrowing and Foreign Direct Investment norms. Goel said. Real estate developers want interest rates lowered to make cheap loans available. both via equity and debt.5 per cent for loans in the range of Rs. It expected waiver or reduction in stamp duty. Omaxe Limited. wherever required. encouraging construction of small units at affordable prices. value-added taxes and other government taxes for economically weaker sections and lower income group housing. further restructuring should be allowed. power. telecom and airports to keep pace with its growth. As the recovery is likely to take more time. Companies engaged in infrastructure development are expecting some relief for lenders to enable them to achieve financial closure of much delayed projects. 5 lakh to Rs. which has been reeling under the recessionary trend for the last few months.” Mr. CMD. rebates and easy finances. The real estate sector is looking forward to relief for the housing sector. 69 . restoration of tax holidays for low-cost housing projects. Group housing and integrated township development should be brought within the definition of infrastructure and incorporated in the explanation under sub-section 4. 2. “The housing sector should be granted the status of industry for all concessions. This Section allows tax exemption for investments in infrastructure.5 lakh or Rs. Restructuring allowed up to June 2009 has provided immense relief. There is an expectation that the proposal to restore tax exemption under Section 10 (23G) could be introduced in the budget to be presented by Finance Minister Pranab Mukherjee on July 6.

58 6592.41 -31.8 70 Net Profit for 9 months ended Dec. 1 Company Housing Development & Infrastructure Limited Net Profit ( Quart er ended) Decem ber 2008 1848.9 Change over 9 months ended Decem ber 2007 (%) -6.11 .6 INITIATIVES IN REAL ESTATE SECTOR 4.2 : Financial Results of Major Real Estate Developers(Rs. Million) No .4.1 Slowdown in real estate Table 4.Decemb 07 er 2008 Change Over quarter ended (%) Sep08 -30.6.

33 -42.3 -88.69 -1.06 8.38 49.47 -76.82 -26.89 -94. Company press releases Table 4. Purvankara Projects Ltd.21 -90.11 -13.82 -62.7 3827.9 0.01 1025 324.37 75 67.99 1.28 1122.6 7363.32 994. Unitec Ltd.5 195 190.17 -95.61 -45.14 -48.63 28. 1780.71 -73.01 -49.8 147.37 -94.85 88. Sobha Developers Ltd.35 -95.41 -94.31 -90. Parsvnath Developers Ltd.9 -72. Mahindra Lifespace Developers Ltd.72 -98.Bombay Stock Exchange. India Bulls Real Estate Ltd.87 -66.64 -91.78 53.78 -39.78 -70.61 -87.65 21. Alchemist Reality Ltd.5 146.02 -77.61 Source .3 644. Omaxe Ltd.1 100.91 1099. Company Net Profit ( Quart er ended) Decemb er 2008 (Rs.2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 DLF Limited Anant Raj Industres Ltd. Peninsula Land Ltd.5 1298.41 113.7 -94.48 -35.04 277.05 -74 44700 2012.31 52. Brigade Enterprises Ltd.6 -25.5 -17.28 -80. Millions ) 71 Change Over quarter ended (%) Sep08 Dec-07 Interest Earnings growth over 9 months ended (%) Dec-08 Dec-07 . Akruti City Ltd Phoenix Mills Ltd.16 322.34 -96.07 -61.5 1135.52 7.85 -68.2 -22.55 -14.1 -84. Ansal Properties & Infrastructure Ltd.6 657.21 1330.98 1.43 1.3 Financial Results of Housing Finance Companies No.

 Full repatriation of original investment after three years.36 -15.  Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at US$ 10 million and US$ 5 million.7 12.35 15. Company press releases 4 4.2 New Government Initiatives to Boost Real Estate Sector in India At the Government level many new policy initiatives have been taken recently to boost the real estate sector in India.29 5 Gruh Finance Ltd.1 LIC Housing Finance Ltd.13 -8. respectively.Bombay Stock Exchange.42 8.21 . Also. These policy decisions will lend a stimulus and impetus to the industry.3 3. As part of the Government initiatives to boost real estate boom sector India. 3 Diwan Housing Finance Compnay Ltd.37 6 Can Fin Homes Ltd. 28. RBI has declared concessional schemes for the real estate sector.6.16 4.49 232.08 9. Such initiatives include:  Urban Land (Ceiling and Regulation) Act. the Reserve Bank of India (RBI) has taken a definitive step whereby banks are allowed to devise new schemes beneficial to the property sector.03 GIC Housing Finance 100.73 15. 118 43.71 3. 2 Housing Development Finance Company Ltd.31 Source .  In case of integrated townships. along with the stimulus package announced by the Government.54 26. 77.4 -33. 1976 (ULCRA) repealed by increasingly larger number of states.25 Ltd. the minimum area to be developed has been brought down to 25 acres from 100 acres. 72 5.69 16.62 5468.23 1.73 12.  51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-andcarry through the automatic route.82 13.29 8.3 2. It is beyond doubt that the new initiatives will unlock the potential of the sector.32 -0.1 5.53 14. 1343.

Further. 382. New Government initiatives to boost sector of Real Estate India include granting a tax holiday on profits from initiates in the financial year 2007-2008. 100 per cent FDI allowed in realty projects through the automatic route. Again. the government has announced several concessions in the Budget 2008-2009. In order to avail this benefit. in its endeavour to initiate new policies to boost the real estate sector in India. the interest rates for project financing operations rose to14% -16% from 9%-11% before the summer. This of course will delay the realization of the government's ambitions to fast track highway construction through the National Highway Development Programme. Government of India. the housing projects should be of the affordable housing unit type of 1000 to 1500 square feet. In order to enjoy this benefit. the cost of the home should not be above US$41. Further. thanks to strong activity by both private and public sources. has taken steps to reduce the time taken to develop special economic zones (SEZs) by simplifying the procedures to get the tax-tree industrial enclaves notified. Another condition is that such projects should be completed by March 1. 2012. with 2006 and 2007 witnessing real construction sector growth of 20% and 14% per annum respectively. India's infrastructure sector has registered strong growth in recent years. According to a report in late October in India's daily Business Standard. Now developers can easily get their land classified as an SEZ at the outset itself by producing title deeds to prove their ownership. which in turn represent approximately 40% of projects that have been approved by the National Highways Authority. 4. the Ministry of Commerce and Industry. the first phase. This development has been spurred by a virtuous cycle of strong economic growth. which has begun to pull the under-developed infrastructure sector up 73 . This jeopardises the financial viability of highway projects worth over US$2bn. the Finance Ministry has allocated US$ 207 million to grant 1% interest subsidy on home loans up to US$ 20.7 INITIATIVES IN INFRASTRUCTURE SECTOR The global financial malaise has had a significant feed-through effect to India. rising government revenues and foreign investment. It is believed that these initiatives will be add further impetus to the real estate sector in the country.the multi-billion dollar ‘Golden Quadrilateral’ programme. 691.

India was granted anew US$3bn loan from the World Bank for infrastructure spending. flows to the country its bootstraps. 74 . Our core global scenario envisages a recovery in most key markets in 2010. but the outlook is extremely uncertain & this scenario is by no means guaranteed. But the government's ability to fund such projects has its limits. For 2010. this progress is now threatened by the global financial crisis and economic downturn. Much depends on how prolonged the recession in developed markets lasts. compared to just over 14% in 2007. However. undermining economic growth and government revenues. Risks to our forecasts are very much to the downside. multilateral support is significant. we have revised down our forecast for real growth in India's construction sector to 5. future funding for infrastructure from both the public sector and the private sector is very much threatened. which has seen foreign investment. As such. One proposal is for the government to subsidies loans by effectively setting a ceiling lending rate and absorbing the costs of the higher rates. and whether the financial crisis will resurface. Indeed. On the plus side. and the economy as a whole. further starving India of export revenues and capital to finance its infrastructure development. according to the rating agency. We estimate real construction sector growth in 2008 to have been just under 9%. As reported in December 2008.7% in 2009. given its own significant (and growing) fiscal constraints. rating agency Fitch has expressed considerable concerns about the outlook for the infrastructure sector. especially given that many key projects require imminent refunding. the US (and other economies) could remain in recession in2010. from a previous forecast of over 10%. there is a particularly severe downside risk to our 2010 infrastructure forecasts. just at a time when major projects are due to be refinanced. we currently forecast that real construction sector growth will rebound to 9%. As such. This pending refinancing and debt re-structuring could not have come at a worse time. For the time being. The government is attempting to find ways to underpin the infrastructure sector. Exports are also under pressure. In this context.

The impacts of the global crisis on the Indian economy have been more severe than initially anticipated. The Indian Government has reacted promptly and effectively to the crisis.7. but even more to lay the foundation for strong future growth.India Infrastructure Report Q1 2009 February 2009 Published By: Business Monitor International 4. New infrastructure projects have run into delays caused by problems in securing the necessary financing. accompanied by a series of monetary and financial measures to inject liquidity and support credit growth through the banking system. decline in external commercial borrowing.5 billion committed for infrastructure sectors in FY 09.9 billion for infrastructure in the region in FY2009 and $2.2 billion in the first quarter of FY2010. The growth outlook of South Asia has been nearly halved from a peak GDP growth rate of 9% in 2006 to nearly 5 % in 2009. the Bank approved $1. There is now widespread recognition that an expand program of investment in much needed infrastructure id the appropriate response not just to sustain the domestic economy at a time if reduced global demand. The operations implemented under the infra platform have used the full range of World Bank tools and instruments ranging from development policy loans to additional financing. and an increase in spreads. These have created difficult conditions for undertaking large infrastructure investments. There has been tightening of credit markets as seen in portfolio outflows. Three fiscal stimulus packages were announced.1 Summary of Key Infra Projects The infrastructure recovery and assets (INFRA) platform is design to support countercyclical spending on infrastructure and project existing assets and priority with the intention of providing the foundation for rapid recovery and job creation and to promote long term growth.2 billion to infrastructure sectors in India in the first quarter of FY2010. and there has been a reversal of capital flows into India. the demand for export has fallen. Key interventions include: 75 . To help maintain credit growth and continue infrastructure investments. the Bank has committed in $2. The South Asia economies have also been negatively impacted by global crisis. following the $0.3 billion in the first quarter of FY 10. Towards mitigating the impact of the crisis on infrastructure sector. the bank has already committed another $4.9 billion committed in FY2009. domestic credit is constrained. Building on the $17. Some key interventions have taken place in India.

(IIFCL) (September 2009) to catalyze private financing to publics private partnerships in (PPPs) in infrastructure and stimulate the development of a long term local currency debt  financing market $1 billion for the Fifth Power System Development Projects (September 2009) to help address India’s acute deficit of power.100 thousand crore in infrastructures. Combined with the steps that are taken to increase public investment in infrastructure. the Government has decided that IIFCL will refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next fifteen to eighteen months. $1.2 billion for the India infrastructure finance company Ltd. The loan will help strengthen five transmission systems in the northern.600 villages across 6 districts of the state. The IIFCL and Banks are now in a position to support projects involving a total investment of Rs. 4. The government proposes to ensure that IIFCL is given greater Infrastructure flexibility to aggressively fulfill its mandate.2 Budget 2009-10 lays major emphasis on infrastructure The budget has laid major emphasis on infrastructure development. This will facilitate the transfer of power from energy surplus regions to towns and  villages in under. to improve water supply and sanitation services in 2. The project aims to provide piped water to Highway and Railways The allocation during the current year to National Highways Authority of India (NHAI) for the National Highways Development Programme (NHDP) is being stepped up by 23 per 76 .2. this will provide a big boost to such investment.1 million people and extend sanitation services to 1 million people who currently do not have access 4. To ensure that infrastructure projects do not face financing difficulties arising from the current downturn. $150 million for the Andhra Pradesh Rural Water Supply and Sanitation project (September 2009).served regions of the country. western and southern region of the country.

is intended to make the country slum free in the five year period.2.200 crore in Interim BE to Rs.7. Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA) was initiated in 2007. the allocation for this scheme is being stepped up by 87 per cent to Rs.3. a new scheme announced in the address of the President of India.5 Gas With the recent find of natural gas in the KG Basin on the Eastern offshore of the country.2. the indigenous production of Natural Gas is set to double with natural gas emerging as an important source of energy. 080 crore. A sum of Rs. This includes the provision for Rajiv Awas Yojana (RAY). 77 .2. This scheme.7.973 crore in the current year’s budget. 4.cent over the 2008-09 (BE).500 crore to expedite the completion of the project. LNG infrastructure in the country is also being expanded.15.3 Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA) To address the problem of flooding in Mumbai. the parameters of which are being worked out. allocation has been enhanced for housing and provision of basic amenities to urban poor to Rs.4 Power The Accelerated Power Development and Reform Programme (APDRP) is an important scheme for reducing the gap between power demand and supply. 887 crore in the current budget. 800 crore. Allocation for this scheme has been increased to Rs.2.7. 800 crore made in the Interim Budget for 2009-10 to Rs. 4. Allocation has been enhanced for this project from Rs.10. 4. The entire estimated cost of the project at Rs. 200 crore is being funded through Central assistance. a steep increase of 160 per cent above the allocation in the BE of 2008-09.1.7. Allocation for the Railways has been increased from Rs.500 crore has been released for this project upto 2008-09. In recognition of the role of JNNURM.2 Urban infrastructure The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has been an important instrument for refocusing the attention of the State governments on the importance of urban infrastructure. 4. To improve the lot of the urban poor.12.2.

Government proposes to develop a blueprint for long distance gas highways leading to a
National Gas Grid. This would facilitate transportation of gas across the length and breadth
of the country.

Budget 2009-10 lays major emphasis on infrastructure published on July 6, 2009 Assam Gas Cracker Project
The Assam Gas Cracker Project sanctioned in April 2006 is being executed at a cost of
Rs.5,461 crore. The capital subsidy of Rs.2, 138 crore for the project is to be provided by
the Central Government. The outlay for this project is being stepped up suitably.
4.7.3 Government increases infrastructure funding
Infrastructure development continues to be a priority area for the United Progressive
Alliance (UPA) government with Finance Minister Pranab Mukherjee increasing public
investment in this sector. The investment in infrastructure for the growth of economy is
critical that have made the policy makers in the central and state governments to remove
policy, regulatory and institutional bottlenecks for speedy implementation of infrastructure
projects, To ensure that infrastructure projects do not face financing difficulties arising
from the current downturn, the government has decided that IIFCL will refinance 60
percent of commercial bank loans for PPP (public-private partnership) projects in critical
sectors over the next 15 to 18 months.”
According to Finance Minister, IIFCL (India Infrastructure Finance Co Ltd) and banks are
now in a position to support projects involving a total investment of Rs.100, 000 crore.
The minister also increased by 23 percent the allocation for National Highways Authority
of India (NHAI) for road development in the country. Also, the budget allocation for the
railways has been increased from Rs.10, 800 crore made in the interim budget to Rs.15,
800 crore.
In order to step up urban infrastructure, the finance minister increased allocation for the
Jawaharlal Nehru National Urban Renewal Mission by 87 percent to Rs.12, 887 crore in
the current budget. Apart from that, Finance Minister has also proposed to enhance the
allocation for housing and provision of basic amenities to urban poor to Rs.3,973 crore in

the current year’s budget. Similarly, allocation for rural roads scheme raised by 59 percent.
The government has also decided to raise the allocation to Bharat Nirman, a rural
infrastructure development project, by 45 percent.

Newsletter: Government increases infrastructure funding published on July 6th, 2009

4.7.4 World Bank approves $4.3-bn loan for India
The World Bank has approved $4.3 billion in loans for India to help finance infrastructure
projects and support its economic stimulus programme. Of the total loan, World Bank said
it would provide $2 billion to India’s banking sector designed to expand the volume of
credit available to firms. The bank also sanctioned $1.2 billion for the India Infrastructure
Finance Co for financing public-private partnerships in infrastructure and to stimulate the
development of a long-term local currency debt financing market.
In addition, the World Bank approved $1 billion to address India’s acute power shortages
by assisting the Power Grid Corp, the national electricity distribution company, with its
investment programme after a freeze in overseas lending. The bank also provided $150
million to Andhra Pradesh to improve water supply and sanitation services for 2,600
villages across six districts. The loans are part of the World Bank’s $14-billion crisisrelated lending for Asia’s third-largest economy over three years through 2012.
4.7.5 World Bank gives $320 million loan for better roads in Andhra
The World Bank has approved a $320 million loan to India, designed to improve quality,
capacity and safety of roads in the state of Andhra Pradesh. The loan from the International
Bank for Reconstruction and Development (IBRD) with a maturity of 30 years, including a
grace period of 5.5 years. It would help finance the Andhra Pradesh Road Sector Project
designed to upgrade about 429 km of priority state highways and finance long-term
maintenance of over 6,000 km of the state’s core road network.
Road transport is vital to Andhra Pradesh’s economy, accounting for more than 80 percent
of freight and passenger traffic, the Bank said noting the State Government has invested

heavily to improve its transport infrastructure. The project will help strengthen the state
government’s ability to leverage its own resources with private sector financing for road
infrastructure. This will help the state attract private sector participation in financing,
development, and management of selected high traffic density corridors. It will also
support measures to reduce road accidents, including ‘demonstration projects’ on selected

Newsletter: 1.World Bank approves $4.3-bn loan for India published on September 23rd, 2009
2. World Bank gives $320 million loan for better roads in Andhra published on October 16th, 2009

4.7.6 ADB to provide $700 mn loans for Indian infrastructure projects
The Asian Development Bank (ADB) will provide India up to 700 million U.S. dollars in
loans to accelerate its rollout of infrastructure projects through public-private partnership
(PPP) initiatives. ADB's Board of Directors approved the multi-tranche loan for the
Second India Infrastructure Project Financing Facility. The loan will be released over five
years to the state-owned India Infrastructure Finance Company Ltd. (IIFCL), and is
follow-on of the first-stage facility of 500 million U.S. dollars, approved in 2007.
After the first-stage facility has proven to be effective in facilitating PPP
infrastructure. ADB is committed to assist India in promoting PPP projects, especially in
the transport and power sectors, since infrastructure investments lead to higher farm and
non-farm productivity, increases employment opportunities and incomes, and reduces
poverty. India's economy has grown strongly in recent years. However, to expand, or
even maintain, infrastructure in the face of a rapidly growing population, fiscal constraints,
and the recent global financial crisis, is a major task requiring the support of the private
sector, ADB said in a news release.
Although the government has carried out broad financial sector reforms to create a
market environment for long-term and innovative financing required for infrastructure
projects, products and market, the appetite from private sector investors for long-term
finance for infrastructure is still limited. The new loan will help India meet its
infrastructure investment target of 514 billion U.S. dollars under its current 11th Five Year


IDBI Bank. oil and gas. Infrastructure Leasing and Financial Services. medical equipment. which provides for medium. and continue support for the government's effort to move forward the infrastructure agenda.7.and medium-term transactions and projects and provides for expedited processing and minimizes documentation. It has also approved nine Indian financial institutions. for purchases of American goods and services. State Bank of India and ICICI Ltd. 81 . IDFC Bank. Power Finance Corp. Punjab National Bank.45 billion under the India Infrastructure Facility. With Ex-Im Bank’s loan guarantee. these being India Infrastructure Finance Co. Ex-Im Bank assists US exporters by guaranteeing term financing to creditworthy international buyers. Indian Renewable Energy Development Agency. heavy equipment sales and leases. services and energy.2 billion in sectors such as aviation. both private and public sector. international buyers are able to obtain competitive term financing from lenders when financing is otherwise not available or there are no economically viable interest rates on terms over one-to-two years.” Ellis said at a meet organized by the Federation of Indian Chamber of Commerce and Industry (Ficci).Plan. The Ex-IM Bank has a current exposure to Indian borrowers of $7. telecom. dollar loans to Indian borrowers. to fund infrastructure projects and capital goods purchases. 4.and long-term financing of guaranteed.7 US Ex-Im Bank loan for India’s infrastructure sector The Export-Import Bank of the US has committed $2. The facility is available for long.

US Ex-Im Bank loan for India’s infrastructure sector published on August 10th. it will be a while before India’s real estate industry witness similar buoyancy. However.Newsletter: 1. 2009 CHAPTER 5 STRATEGIES ADOPTED AND OVERVIEW OF THE ECONOMY 5. While cost cutting has been the mantra across the board. Therefore while the other asset classes are experiencing improved fortunes. real estate is typically the first victim of an economic downturn & the last beneficiary of an upswing. & certain strategies that might represent a long term paradigm shift in India’s real estate market. India’s real estate market has begun showing signs of stabilizing. concerned efforts have been made by all parties to ensure that stagnation does not set in. The result has been a series of short term adaptive measures. 1. 2009 2. One of the root causes of the real estate sector slump has been a lack of financing for the supply side that adversely impacted existing & planned 82 .1 STRATEGIES ADOPTED BY REAL ESTATE INDUSTRY As has been the case with the rest of the economy in recent times.ADB to provide $700 mn loans for Indian infrastructure project published on July 1st. the real estate industry has shown signs of stabilization following a period of consistent decline. & the flexible approaches & coping strategies adopted by all players have significantly restricted the scale of damage suffered by them.

focus on reducing their interest burden through rescheduling its debt & de-leveraging whenever possible. Qualified Institutional Placements (QIP) – Funds are raised through the sale of shares to qualified institutional buyers (QIBs). 5. a few major developers have taken to asset sales as a means of countering immediate funding shortfalls.ft. the renegotiation of lease agreements & relocation to cheaper locations was a key priority of tenants of commercial space. Article: Economy and Real Estate at a Glance Research knight Frank Q1 2009 published in National Realty Vol. especially in the city’s western suburbs. Better debt management . 4. 6. reduction in margins 7. These flats were priced at Rs. The need for affordable housing.100 per sq. June 2009 Last year Jaypee Greens had launched flats along the same expressway in the range of Rs.2 STRATEGIES ADOPTED IN INFRASTRUCTURE SECTOR 83 .500-6000 per sr. To skirt this issue. Some companies exited the new deals & projects. decrease in unit sizes & c. Recently. 5. reduction in costs. were booked on the day of launch. forced by market conditions. 2. two housing projects in the NCR were fully booked within days of being launched. During the height of the slump. Putting projects on temporary hold or postponing the plan – many companies postponed their new projects execution & stalled their next phases of the project. some developers are converting premium projects into affordable ones for the lower income group.In Mumbai. have converted premium projects to affordable housing projects in a bid to boost sales.ft. 4. the new Jaypee Greens project on the Noida-Greater Noida expressway. 3. b.developments. which prior to the slump was grossly neglected. Companies are utilizing the funds raised from QIP partly to reduce the debt burden & partly to launch new projects. The demand for such housing has been supplemented by the fact that developers. 3300 flats in ‘Aman’. More focus on maximization of construction volumes than on maximization of project realization. This it intends to do through a.1 Issue-1. has now come to the force. 2.

This shows the scope & opportunities in power sector.800 crore) from overseas investors. Though there are problems in fund raising.    Order Book increases by 61. the effect of recession is less severe.9 %.400 crore.5% to Rs 16. mainly endowments & pensions. 84 . As there are huge opportunities in this sector & government is helping to maintain the growth of infrastructure by implying various policies. The fund is aiming to raise $ 1 billion (around Rs 4. Such funds include. This can be seen from the annual reports of the various infrastructure firms. many infrastructure organizations are maintaining their profit & order booking.3 % respectively. The funds in the process of raising funds for the sectors are     India Infrastructure Advantage Fund Q India PE Fund Eredene Capital India Infrastructure Fund Alcazar Capital India Fund There are other emerging markets & Asia focused infrastructure funds for which India is an important investment destination.2. Power Sector Projects constitutes 51% of the order backlog. Turnover & PAT grow by 13.3 % & 15. Operating Margin improves to 13. to invest in early-stage green-field infrastructure projects. a clutch of private equity (PE) players are rushing in to raise funds for the infrastructure sector.The impact of recession on infrastructure sector is less as compares with the real estate & other sectors. In the report it is highlighted that in the total order. The highlights of annual report 2008-09 of Hindustan Construction Company (HCC) are as. 5.1 PRIVATE EQUITY: Sensing huge opportunities. Various steps have been taken to help infrastructure sector by Government & Private Parties through fund raising policies & other policies as there are huge scope in this sector.0 % from 11.

India will need $1. suggesting higher returns on capital. These includes issues by     Hindustan Construction Company GVK Power GVK Infrastructure PTC India Infrastructure deals still form small part of the total PE deal flow. railways & irrigation. India’s over all ROE (return on equity) has been higher than the region. According to Grant Thornton’s half –yearly deal tracker.   JP Morgan Asian Infrastructure Fund Babcock & Brown Asia Infrastructure Fund Challenger Mitsui Emerging Markets Infrastructure Fund According to a Goldman Sachs report. Some Prominent financial institutions that have invested in infrastructure funds are         Orix Capital Corporation Indian Overseas Bank Punjab National Bank Asian Development Bank General Insurance Corporation Union Bank of India The CDC Group & Various Pension Funds 85 . which is 14.000 crore).5 per cent of the total deal flow of $2.” said the report. Some recent deals in infrastructure were QIP (Qualified institutional placements) by listed infrastructure players in which a number of PE funds participated.3 million (around Rs 2.89 billion. power. The combined value of such deals was $420. “The large supply-demand mismatch in infrastructure implies that there is a significant scope to increase capital.7 trillion over the next decade for infrastructure & the major area where this spending will happen are roads. only 11 out of a total of 93 deals related to the infrastructure sector.

with real estate being among the most severely affected.11 527.22 0.39 12039.14 2534.34 3.42 212.73 2454.91 224.53 54.83 572.65 3070.54 1161 2143.68 138.3 739.22 ­17.99 285.2 0.89 98.7 2420.34 324.38 17.21 0.88 132.75 2600.66 1819.8 5.81 1373.92 1397.56 8.56 282.2 953.56 4273.87 69.58 97.66 150.27 1365. enterprises    PBDTA    PBT    PAT Net worth    Paid up equity capital (net of forfeited capital)    Reserves & surplus Total borrowings Current liabilities & provisions Total assets    Gross fixed assets    Net fixed assets    Investments    Current assets    Loans & advances    Total income    Total expenses    PBDITA   Mar 2004   Mar 2005   Mar 2006   Mar 2007   Mar 2008   Mar 2009  12 mths 12 mths 12 mths 12 mths 12 mths 12 mths 2969.84 45.07 144.79 21.33 107.11 65.43 106. 29 September 2009 5.27 7076.74 72. While some developers have been offering heavy discounts on their existing projects to spur buyers’ interest.82 2859.77 166.98 1954.13 2292. others are scouting for opportunities to monetize assets.24 14.07 28.11 ­11. UNITECH Ltd.17 16630.34 54.08 4.24 649.29 128.18 102.3 CASES FROM THE INDUSTRY The current market slowdown has taken its toll on most sectors.27 0.35 54.52 644.83 10.08 374 494.76 136.24 1418.52 298. Developers are struggling to raise funds & trying hard to improve their liquidity position.03 31.63 86 .56 1437.36 1064.83 655.49 12.05 9.15 17147.49 162.66 22.61 1345.24 1884.01 6516.16 85.51 0.85 1915.52 100.82 ­4.71 1349.98 533.15 26.1 2446.26 44.69 173.34 14.26 7207.7 193.13 984 1030.PEs smell gains in core sector by Vandana.57 42.19 674.05 998.34 13100.52 3.34 57.69 295.89 11.61 98.47 130.38 518.64 14.24 66.34 37.51 23.21 159.49 12.74 153.93 839.92 13.16 3298.12 0 57. Business-standard.8 168 20.68 20.12 311.45 739.51 1845.05 83.65 133.69 329. of indl.71 966.18 9014.99 73. Total income    Sales    Income from financial services    Raw material expenses    Compensation to employees    Indirect taxes    Selling & distribution expenses    Other operational exp.68 324.71 83.56 12.97 27.21 8111.71 2810.47 110.36 0.19 84.99 6371.92 382.54 31.37 778.38 0.15 853.2 161.28 1890.13 956.85 3575.

36 30.45 29.71 million in March 2008 to Rs. 87 .92 24. total assets    PAT/Avg.5 1. it is important that Unitech uses its funds in a judicious manner.47 2.04 15.96 0.05 3.47 12 5.41 142.38 29.43 17.35 8.02 1.1 13.49 1323. net worth    PAT/Avg.41 417.15 23.93 105.81 0.93 9. net worth    PAT Net of P&E/Avg.34 2.4 1913. decrease in unit sizes & reduction in margins.35 34.89 1.02 1321.33 37.04 66.69 0. 2454 million in March 2009.55 1.17 1.04 8.89 29.71 62.34 35.55 0.3.4 36.  Finally. Also the profit of the company dropped from Rs.39 3.21 33.  It plans to launch new projects in “affordable” housing to ensure future cash flows & payments of debt.2 4.28 1638.35 151.39 133.78 4. total assets    Total income / Compensation to employees 32.17 0.74 1.11 8. dropped from Rs. in the crisis period.24 8.95 2. 2969 million I March 2008 to Rs. Here we are studying the measures adopted by Unitech Ltd.71 84.74 783.41 77.01 1.66 57.08 9.31 4.9 1.49 ­28. Unitech Limited has chosen to experiment with the nearly forgotten route of private placement.08 0.29 55.08 SOURCE: CMIE From the past financial data which is presented above we can observe that under the influence of real estate market crash the income of Unitech Ltd.28 28.88 3. -28 million in March 2009.38 1.57 4.52 3. This it intends to do through reduction in costs.89 4.01 15.91 1113.37 0.38 62.01 34.67 18.28 3.26 21.05 36.7 3. 4.69 2.19 15.06 173.98 58.79 2.95 21.11 74. total assets Liquidity ratios (times)    Current ratio    Debt to equity ratio    Interest cover    Debtors (days)    Creditors (days) Efficiency ratios (times)    Total income / Avg.   PAT    Net worth    Total assets Profitability ratios (%)    PBDITA Net of P&E/Total income net of P&E    PAT Net of P&E/Total income net of P&E    PAT Net of P&E/Avg. It plans to focus more on maximization of construction volumes than on maximization of project realization.23 30. It plans to launch 40 projects under this segment over the next 12 months with a built up area of 30 million square feet.6 139. 5.65 84.1 UNITECH TO FOCUS ON AFFORDABLE HOUSING: Considering the liquidity crunch in real estate.63 0.44 43.32 10.81 54.76 9. Unitech plans to continue its focus on reducing its interest burden through rescheduling its debt & de-leveraging whenever possible.  Thus the company is now reviewing its strategy.66 3395.42 39.7 2.

Global Asset Management arm of HSBC Group. For instance. of Singapore 2. June 2009. New Delhi.5 billion ($325 million) The funds raised from the issue will be utilized partly to reduce the debt burden & partly to launch new projects.5 per share. 2009 on the Bombay Stock Exchange. the company adopted various strategies. it offered some of its hotel projects & its office complex in Saket. 16. QIP by Qualified Institutional Buyers (QIB) Final issue Price Three largest foreign investors Unitech 1. 16. About 90% of the issue was subscribed by overseas investors & financial institutions & remaining by domestic institutions. the company sold 60% of stake in its telecom arm. Prudential Financial Incorporation 3.1: Qualified Institutional Placement by Unitech Ltd. commercial space & undeveloped plots reserved for schools & hospitals. raising Rs. Govt. Unitech Wireless. The company recently completed a successful qualified institutional placement (QIP) issue.25 Rs. for sale. 61. Article: Real Estate. 88 . May 2009 Table 5. Halbis Fund Raised Rs. 38. which was an 11% discount over the closing price on April 17.  In November 2008.2 billion. Successful QIP Issue published in Indian Infrastructure. The final issue price was Rs. 38. to Norway based Telenor Group for Rs.25 billion ($ 325 million) through the sale of shares to qualified institutional buyers (QIBs).  To repay its debt. 15 billion from sale of hotel. Article: Grappling with the Slowdown by Manmeet Singh Loomba published in Indian Infrastructure. It had also planned to raise Rs.

28 365.29 577.04 3753.41 400.43 294. in the crisis period.64 1030.34 478.4 62.34 16.12 259.99 ­33.28 769.92 10928.87 348.58 317.28 109.56 64.4 40.83 144.16 12374.18 78.42 3213.07 89 .15 8386.72 472.09 3481.89 6769.72 million in March 2008 to Rs.77 305.53 3200.13 59.92 442.72 1626. 3880 million in March 2009.65 11.97 339.53 63.11 1838.41 33.83 479.06 3880.4 993.75 11287.36 78. 6062 million in March 2008 to Rs.03 0.27 173.01 630.51 7042.85 5026.6 67.03 5.94 1130.12 1285.98 112.24 ­9.78 1146.08 19.98 7.28 11.03 3143.86 44. fuel & water charges    Compensation to employees    Indirect taxes    Selling & distribution expenses    Other operational exp.48 67.58 5.74 129.59 35.8 15.5 24.91 28.74 24.49 3759.18 1839.44 314.5 90.19 86.63 85.76 159.08 11.43 68.69 50.19 82.07 96.96 6069.97 1155.78 ­3.75 59.31 997.95 28.19 13.39 352.06 633.93 693.53 3626.47 3118.2 3093. net worth   Mar 2004   Mar 2005   Mar 2006   Mar 2007   Mar 2008   Mar 2009  12 mths 12 mths 12 mths 12 mths 12 mths 12 mths 6062.14 1430.3 237.95 25148.12 116.62 3315.57 5. From the past financial data which is presented below we can observe that under the influence of real estate market crash the income of DLF Ltd. Here we are studying the measures adopted by DLF Ltd.34 488 1129.69 228.87 47.38 1337.71 242.19 3473.97 247.75 1.23 0.83 3.66 26.69 1.42 412.19 12035.74 517.51 37.78 20.65 71.81 7.35 0.41 2300 0.03 27. dropped from Rs.82 383.09 915.93 131.31 380.55 453.82 1397.04 3923.89 122.22 2041.98 21.89 1.93 652. 532.95 14.22 122.25 177. Also the profit of the company dropped from Rs.04 23441.86 999. -38 million in March 2009.13 4.81 33.76 1722.88 340.31 1402.DLF Ltd.51 532.39 561.47 43.47 107.93 644.93 ­18.36 495.04 505.52 19.61 3256. enterprises    PBDITA    PBDTA    PBT    PAT Net worth    Paid up equity capital (net of forfeited capital)    Reserves & surplus Total borrowings Current liabilities & provisions Total assets    Gross fixed assets    Net fixed assets    Investments    Current assets    Loans & advances Growth (%)    Total income    Total expenses    PBDITA    PAT    Net worth    Total assets Profitability ratios (%)    PBDITA Net of P&E/Total income net of P&E    PAT Net of P&E/Total income net of P&E    PAT Net of P&E/Avg.21 ­35.08 3013.76 44. Total income    Sales    Income from financial services Total expenses    Power.73 9.64 536.46 374.83 10.04 64.82 2956.04 1015.42 607.52 406.03 1949.51 3.91 323.39 4.69 7977.73 42.04 983.1 10733.7 11205.59 1577. of indl.94 46.71 138.54 1358.91 2574.13 1830.28 9614.43 565.05 277.9 31.61 19.99 621.98 48.23 42.06 1.8 11269.42 ­38.62 5530 2826.97 2362.83 99.66 20.16 346.

2: Quarterly Financial Results Comparison of DLF Year Q4. In last financial year (FY 2008-09) has seen it struggling to cope with a drop in sales & an increase in debt.18 62.77 billion in corresponding quarter of 2007-08. 2008-09 DLF %Change (Decrease) Total Revenue 43. total assets Liquidity ratios (times)    Current ratio    Debt to equity ratio    Interest cover    Debtors (days)    Creditors (days) Efficiency ratios (times)    Total income / Avg.66 672.44 427.96 0. net worth    PAT Net of P&E/Avg.78 2. 2007-08 Q4.72 billion 13. is also putting a proactive debt management strategy in place.44 73.51 0. the largest Indian real estate player in terms of sales.79 2.07 Source: CMIE.29 3.76 4.16 0.56 5.3.36 6. total assets    Total income / Compensation to employees 11. It also slashed prices 90 .06 3. Total revenues decreased 69 % to Rs 13. through a combination of measures like asset sales at reduced prices & also private placements.07 19.15 2.44 0.51 billion 69 Profit 21.19 14.  On a consolidated basis.  By March 31.01 43.15 6.99 36. DLF reported a net profit of Rs 1.51 billion from 43. Table 5.74 4.57 0.7 % compared to a net of Rs 21.35 41. 163.34 3886.42 6.31 68.77 billion 1.2 DLF RESTRUCTURES: Most major real estate companies are restructuring to reduce gearing.22 14.24 32.77 6. 2009 (Q4.65 4.86 14.16 36.   PAT/Avg.59 billion for the quarter ended March 31. It has also stalled or exited projects which are not expected to yield revenue in the short to medium term. 2009. total assets    PAT/Avg.73 1.07 44.17 1.97 0.72 billion in Q4. DLF Limited.85 796. DLF’s gross debt of Rs.25 1.7  DLF has been forced to cut prices in many of its residential projects. a decrease of 92.49 1.71 5 5.18 31.91 0.22 1352.39 0.67 3.58 billion had increased 33 per cent over that at the end of the previous fiscal year.39 0.59 billion 92.86 13.07 0. In February 2009. 2008-09).91 1.04 2.37 2.29 23. 2007-08. 5.34 6.23 45.42 10.26 959.35 48. DLF froze two of its biggest residential projects – New Town Heights in Gurgaon & Express Greens in Manesar.

The promoters sold 168 million shares at a price of Rs 230 per share. DLF has met most of its debt obligation. There has been a drastic reduction in DAL’s contribution to revenues. It also requested the state government to refund its Rs 2. is a major concern. near Kolkata.  In April 2009. funds are raised against expected future rentals.  In another significant move. DLF has aggressive restructuring plans in place for the current fiscal year. It also plans to focus on affordable housing projects & Sale of its commercial complexes.7 billion equity participation. 91 .  The promoter-owned associate company. Plans to list DAL on the Singapore Stock Exchange as a real estate investment trust in 2008 were also withdrawn. Under the LRD mechanism.6 billion. citing the global economic slowdown. It has taken recourse to raising long-term debt to enable it to meet short-term debt obligations. DLF Assets Limited (DAL). This includes the sale of its wind power business for Rs 9 billion.  DLF is planning to divest non-strategic projects & assets & thereby raise Rs 55      billion to further reduce debt.9% stake to raise Rs 38.  What is more. DLF’s promoters sold 9. Better Debt Management  Despite the slowdown. An exit from Delhi Convention Centre Project & The sale of some hotel properties. it withdrew from the Rs 50 billion Dankuni township project. DLF & DAL together raised Rs 11 billion from HDFC Bank through the lease rental discounting (LRD) of commercial its affordable housing projects in Chennai up to 19 % to counter a demand slump.

The impact of the slowdown has been broad-based in nature.1% in 2008-09. strong corporate performance and good tax buoyancy were largely undone by the global financial and economic crisis in the second half of 2008-09.18 trillion in 2008-09 by the Central Statistical Organisation (CSO) in its advance estimates (AE) of Gross Domestic Product. in the previous two years. Gross Domestic Product (GDP) Gross Domestic Product (GDP) at current market prices is estimated at USD1 1. Table 5. but suffered a major decline in 2008-09 on account of the global financial crisis.GDP at factor cost at constant 1999-2000 prices is estimated by the CSO to grow at 7. Growth in Industrial and Agricultural sectors moderated significantly during the year.3: Rate of Growth of GDP at factor cost 92 .9% last year). The factors responsible for rapid expansion of the economy from 2003-2008: robust investment growth.4 OVERVIEW AFTER RECESSION The Indian economy had moved to a high growth phase during 2003 to 2008. high rate of domestic savings. The services sector managed to minimize the effects of the slowdown with a 9. DLF Restructures by Manmeet Singh Loomba . This represents a deceleration from the high growth rates of 9.7% and 9. Merchandise exports grew by a mere 5.7% during 2008-09 as compared to a 26% growth during last year. The outlook for the Indian economy continues to be subdued with recovery expected only in the second half of 2009-10.published in June 2009 Indian Infrastructure. respectively.0%.Article: Real Estate. 5.5% growth (compared to 10.

decelerated by about 4.95 / USD) Includes Forestry.4: Yearly WPI 93 .8% during August 2008.6% in 2008-09.1 2 Taking average USD-INR exchange rate for April 2008-March 2009 (INR45.6 percentage points to a 6. Inflation The Wholesale Price Index (WPI) touched double digit growth rate in the month of June 2008 and peaked to 12. Logging and Fishing  Agricultural growth decelerated to 2. After having grown between 8-11% in the preceding 4 years.2% in 2007-08.  Manufacturing which grew at 8.4% in 2008-09.5% growth rate in 2008-09.  The Index of Industrial Production3 suffered its worst year in 2008-09. it witnessed a growth of only 3. This prompted the Government to take action on the monetary policy to curb rising prices. Table 5.1 percentage points in 2008-09. The Construction sector also slipped by about 3.

inflows under Foreign Investment were USD 15. Minerals and non – food articles 5 Manufactured products include Textiles. After a slight moderation in December 2008. 2009. Index of Industrial Production (IIP) represents the status of production in the industrial sector for a given period of time as compared to a reference period of time. The crash in commodity prices (especially crude oil.55 billion as compared to USD 63.4.2009 (April 2008 – January 2009).8%) to 0.1 FOREIGN INVESTMENT INFLOWS During the year 2008 . the WPI came down from the high of August 2008 (12. Machinery and machine tools. Chemicals and food Products 6 Measured as % growth of overall price index over previous year 3 5. and electricity sectors only 4 Primary articles include Food grains. manufacturing.27% during the week ending March 14.Within a span of seven months. metals and agricultural commodities) in the international markets has been largely responsible for such a steep fall in inflation in the domestic economy.4 % in October – November 2008) in January 2009. It needs to be highlighted that most of the FDI is routed through Mauritius 94 . The general index of industrial production compiled in India currently includes mining. it went back to its previous level (10. The Consumer Price Index (CPI-IW) has been relatively rigid as compared to the WPI.5 FDI in INDIA The sharp fall has been on account of withdrawal of more than USD 13 billion from the Indian markets by the Foreign Institutional Investors (FII) during the period April 2008 – January 2009. The relative rigidity is on account of the higher weight of food items (46%) in the index whose prices have remained relatively high.76 billion in the previous financial year (April 2007 – March 2008). Table 5.

7 Includes FIPB (foreign investment promotion board). Automatic and Acquisition routes.on account of tax exemptions. and Equity capital of unincorporated bodies 8 April 2000 to December 2008 9 does not include Equity Capital of unincorporated bodies Services sector. Computer software & hardware and Telecommunications were major sectors for FDI inflows during 2008-09 followed by Housing & Real Estate and Construction. Table 5. Table 5. USA.6: Country wise breakup of FDI * April to March. Singapore.7: Sector wise breakup of FDI 95 . UK. Netherlands and Japan are the other key contributors of FDI inflows in India. ** April to December.

5. Total number of sectors covered in others 10 11 April Table 5. chemicals. housing and real – estate. mining.4.8: Primary Market instruments 96 . power.2. Does not include Equity Capital of unincorporated bodies 2000 to January 2009 12 Financial and non – financial services 13 radio paging. The total amount of funds mobilised by the corporate sector were merely 13% of the amount mobilised last year for the same period.2 DOMESTIC FINANCIAL MARKETS 5.4. basic telephone services 14 Includes roads and highways 15 Indicative list of other sectors are drugs & pharmaceuticals. The number of issues also declined from 152 in 2008-09 to only 44 during 2008-09.February 2009.1 Trends in the Primary markets The primary market witnessed a decline during the period April 2008. cellular mobile. petroleum.

000 mark in January 2008.3 Trends in the Secondary markets The Bombay Stock exchange (BSE) Sensex which touched the 21. 16 IPO: Initial Public Offering FPO: Follow on Public Offering 18 QIP: Qualified Institutional Placement 17 97 . This fall in market indices was not only due to the global economic recession but also on account of slowdown in the Indian industry and eroding corporate profitability during the year. funds raised by the corporate sector through debt issues witnessed a growth of 60% over the amount raised last year during the same period (April . the National Stock exchange (NSE) Index NIFTY after having touched 6100 levels in 2007. The number of issues also increased from 872 to 1011 during 2008-09.4. The equity market movements largely followed the global cues against the backdrop of weak domestic indicators from the economy.5. closed at 2764 in February 2009. Table 5.2 Private Placement of corporate debt In contrast.February). Similarly.2. witnessed progressively sharp decline during the year and reached 8160 in the second week of March 2009.4.9: Private Placement of corporate debt 5.

Thailand and Taiwan Both the BSE Sensex and the NSE 50 Index have shown marginal recovery in the month of March 2009.10: Market Trends The stock markets reflected the state of the Indian economy and registered negative return to the tune of 38% during the year 2008-09. which was the highest amongst the select emerging market economies such as South Korea.5 times at end of February 2009.11: Import –Export Comparison 98 .4. Table 5.4 FOREIGN TRADE Merchandise exports were significantly impacted by the global economic slowdown. Merchandise imports also reflected the economic slowdown in the country with only 21% growth as compared to 29% in the previous year. the market observers are sceptical about the sustainability of the capital markets given the further slowdown expected in the economy. The value of exports was USD 168 billion during 2008-2009 registering a meagre 6% growth as against 26% last year. the valuation of Indian stocks as reflected in P/E multiples was around 12. 5.Table 5. However. On the positive side.

4. 5.4.19 Includes quick estimates for March 2009 by the Ministry of Commerce Trade deficit increased by about 50% during 2008-09 to touch USD 119 Billion. mainly in the developed regions viz. it exhibited the slowest growth among the categories.October 2008.October 2008. Table 5. The trade deficit is expected to narrow during the next year on account of falling cost of crude oil and other commodity prices.12: Commodity Exports Growth % 5.2 Commodity Imports During the period April . gems and jewellery and leather had been adversely affected under the impact of demand recession.13: Commodity Imports Growth % 99 ..4.4. manufactured goods were the most important commodity in India’s export basket contributing 64% share. Table 5. the European Union and the United States.1 Commodity Exports During the period April . Petroleum products and related materials were the most important commodity (in terms of value as well as growth) in India’s import basket contributing more than 50% share. Petroleum. This was because the exports of labour-intensive sectors such as textiles. However.

6 Billion in the last week of February. The general strengthening of the dollar against emerging market currencies also contributed to the depreciation. 50.5.95 per USD on March 31st 2009. Machine tools and transport equipment in total imports due to difference in months for which data is reported 21 Difference The high growth in Petroleum imports during the above period was largely due to higher international crude oil prices that prevailed during May-August 2008.4.2 Duty reductions:  Central value-added tax (CENVAT)23 reduced by 4% from 14% to 10%  Service tax reduced by 2% from 12% to 10% 100 .3 Exchange Rate The exchange rate of the Indian Rupee was Rs. 5.4. Euro and the Japanese Yen but gained vis-à-vis the British Pound.4. Key measures taken are outlined below.1 Fiscal Policy Changes With the objective of stimulating the economic growth. Table 5.5. the government declared three fiscal stimulus packages during the period December 2008 to February 2009.5 Government Policy 5. 5.20 Includes Machinery – electrical and non – electrical. 5.4. The rupee weakened vis-à-vis the US Dollar.14: Change in Exchange Rate The Rupee weakened against the UD Dollar on account of net FII outflows to the tune of nearly USD 0.4.

3 Incentives for the automobile sector:  Accelerated depreciation of 50% will be provided on commercial vehicles bought on or after January 1. 22 23  Excise duty24 reduced by 4% for cement. Manufacturers may offset duty paid on materials used in the manufacturing process by using that duty as a credit against excise tax through a process known as Central Value Added Tax Credit (CENVAT Credit).5. 2009 upto March 31. an excise tax is levied on the manufacturer of goods when those goods leave the place of manufacture.5. steel and by 2%on items that currently attract the 10% rate  Export duty on iron ore fines withdrawn and on ion ore lumps and pallets reduced to 5%  Import duty on naphtha for use by the power sector reduced to zero  Exemptions from counter-vailing duties (CVD) on TMT bars and structurals.5 Incentives for infrastructure sector:  India Infrastructure Finance Company Ltd (IIFCL) 25 authorized to raise USD 2 billion via tax-free bonds by March 2009. Formerly called the Central Excise Duty.4 Incentives for housing and infrastructure sector:  Loans less than USD 0.8 billion re-finance facility for National Housing Bank (NHB) 5. 2009  SPV created to provide liquidity support to NBFCs for financing Commercial Vehicles 5. with approval to raise an additional USD 6 billion 101 .4. textiles.4. The offsetting process was formerly known as Modified Value Added Tax (MODVAT).4.Exchange rates at the end of the year. In India.04 million granted by banks to be classified under priority sector  USD 0.5. this tax is now known as the Central Value Added Tax (CENVAT). and CVD and Special CVD on cement 5. household appliances.

leather.6 Incentives for exports:  Interest subsidy of 2% for pre and post-shipment export credit till March 31.5. but also softening of lending rates of the banks by about 250 to 350 basis points for many class of borrowers.  Interest rate ceiling on external commercial borrowings (ECBs) scrapped under RBI approval route.4. 2009 for labour-intensive exports like textiles.7 Monetary Policy changes The RBI has been easing its monetary policy stance over the last two quarters.4. It has made the following changes:  Reduced the Cash Reserve Ratio (CRR)26 by 4% (from 9% to 5%) – this has facilitated a release of huge liquidity through the banking system  Reduced the Repo rate27 by 4% (from 9% to 5%)  Reduced the Reverse repo rate by 2.5%) The above measures have resulted in not only in release of liquidity to over USD 76 billion. IIFCL to refinance 60% of commercial bank loans for PPP projects involving an investment of USD 20 billion over the next 18 months 24 Central Excise duty is an indirect tax which is levied and collected on the goods/commodities manufactured in India 25 IIFCL is a dedicated institution purported to assume an apex role for financing and development of infrastructure projects in the country 5.5% (from 6% to 3. 102 . 5. marine products and SME sector.5.

26 CRR : The portion (expressed as a percent) of depositors’ balances banks must have on hand as cash or with the Reserve Bank of India 27 Repo-rate: Discount rate at which a central bank repurchases government securities from the commercial banks. depending on the level of money supply it decides to maintain in the country’s monetary system Table 5.15 Impact of fiscal and monetary changes on select sectors 103 .

104 .

5.5. have been postponed indefinitely on continued uncertainty on base price for the auction. The auctions are now likely to take place only post the central elections scheduled during April-May 2009. However.5. which were scheduled to be held during the last quarter of 2008-09. 5. The MNP implementation will first focus on the larger metropolitan service areas before moving into rural locations.2 Guidelines for transfer of ownership and control of Indian companies in sectors with caps The Department of Industrial Policy and Promotion (DIPP)28 has made it mandatory for Indian companies to seek Foreign Investment Promotion Board’s (FIPB’) 29 approval.5 OTHER POLICY DEVELOPMENTS 5.5.1 Daily foreign newspapers allowed 100% FDI Owners of the daily foreign newspapers would be allowed to make up to 100% FDI in their facsimile editions published in India. 5.5. 28 The DIPP is the body responsible for facilitating investment and technology flows and 105 . if it intends to transfer ownership or control to a foreign company in restricted sectors such as telecom. air transport services and broadcasting.5. up to 26% of FDI would be permitted.3 Implementation of Mobile Number Portability (MNP) likely in 2009 The Department of Telecommunications (DoT) has selected two companies (Syniverse and Telecordia) to implement MNP services in the country in 2009.4 3G auctions postponed indefinitely 3G auctions. Government's prior approval for publication of facsimile edition will be required. defence production. These companies will provide Indian operators with number portability clearing house and centralized database solutions. Earlier. For the publication of Indian editions of foreign magazines dealing with news and current affairs. the facsimile editions of foreign newspapers were allowed FDI up to 26%.

Net sales declined sharply (by 17%). longer processing periods and adverse financing conditions. aluminium and rubber would help the manufacturers improve their margins. Renewed focus of Public sector banks and manufacturer tie-ups with vehicle financiers are expected to improve the availability of vehicle finance. robust farm income and new product launches by the manufacturers. coupled with weak consumer sentiment due to uncertainty over income growth were responsible for the slow growth during the large part of this period.6. reduction in prices of key raw materials like steel. the sector has witnessed a gradual pick-up in demand for the affordable housing segment in certain regions.7% growth. with reduction in the number of transactions as well as sale prices. Since February 2009. after a very healthy performance of the previous four years (2004 to 2008). substantial increase in\ interest rates (during September to December 2008) and risk aversion by banks on the exposure towards the real estate sector negatively affected the developers. Easing monetary policy and excise rate cuts are expected to drive the demand improvement in 2009-10. In addition.1 Automobile Sector The automobile sector in India. However. grew by only 3% (in volume terms) during 2008-09. Stringent credit disbursement norms. The sales volumes witnessed a revival on account of government’s stimulus package. Overall weak sentiment. Mortgage rate cuts by lending majors and the debt rescheduling / restructuring window presented by RBI have prompted renewal of construction activities by the developers 106 .monitoring industrial development in the liberalized environment 29 FIBP is the body to consider and recommend foreign direct investment (FDI). the sector exhibited initial signs of recovery in the last quarter of 2008-09 (14% QoQ volume growth) after a dismal performance in the third quarter (-20% QoQ volume growth). Indeed.6. low affordability. 5. the domestic sales received a setback with a mere 0.6 Sector overview 5.2 Real Estate Sector The real estate sector experienced a substantial slowdown in 2008-09 after registering buoyant growth in the previous 3 years. which do not come under the automatic rout 5.

Monthly additions averaged 14. and selection process for third-party Mobile Number Portability (MNP) operator has been concluded.during the last quarter. the second largest IT player in India. The top five IT companies in India renegotiated almost $1. the commercial.5 billion worth of outsourcing contracts since September 2008 at around 15% lower rates. Subscriber net addition momentum accelerated during the last quarter of 2008-09. It grew by about 50% with more than 120 million mobile subscribers being added in 2008-2009 to the subscriber base of 261 million at the end of March 2008. The prospects of the IT sector is dependent on clients lifting their freeze on IT spends and adopting offshoring to cut costs. Furthermore. However. thereby increasing their costs. Infosys. On the regulatory front. The appreciation of the rupee in the early part of the year led to lower realizations for the IT companies in India.6. 5.6.3 Telecom Sector The telecom sector in India managed to keep itself insulated from the economic slowdown and exhibited robust growth.4 IT Services sector The IT services sector. The large IT players would need to spend more on their selling and marketing efforts in order to garner business. termination charges have been cut by 33% effective April 1 2009. The global economic slowdown prompted the IT consumers across various sectors (especially BFSI30) to cut IT budgets and freeze non-discretionary spending during 2008-09. 3G auctions (originally scheduled for the fourth quarter of 2008-09) have been postponed. after a remarkable buoyancy of the previous nearly two decades.7% (in dollar terms) during the period April 2008December 2008. underlined the domestic IT industry’s vulnerability on the 107 . The increase in net additions was well distributed across regions. paving way for likely implementation by end of 2009. there had been price cuts across the board. retail and premium housing continue to remain under pressure with no signs of demand pick-up in the near term. The cut in service tax from 12% to 10% is expected to impact the sector positively. 5. grew by at a moderate pace of 9.5 million during January-March 2009 v/s an average of about 10 million during second half of 2008.

global developments with a forecast of a fall in revenue and earnings (in dollar terms) for 2009-10. expected recovery in crude oil prices and expectations of low foreign capital inflows into the country. Financial Services and Insurance 5. the services sector is also expected to witness sharp moderation in growth rates. 108 . 30 Banking. given the current scenario of zero inflation.6. strong corporate performance. The inflation rate would start picking up during the latter half of the year as demand recovers. The inflation rate (WPI) is already close to 0% and is expected to enter negative territory during the first half of 2009-10 since international crude oil prices are expected to remain at a relatively low level due to global economic slowdown. This is on account of the expanding trade deficit. The rupee is expected to depreciate further by 4-5% during the first half of 2009-10. acceleration of exports and good tax buoyancy have been affected adversely by the global financial and economic crisis in the second half of 2008-09. Even so. The crisis. The continued fallout from the global economic slowdown is also expected to pull down the growth further in 2009-10. we expect India’s overall real GDP growth to remain fairly high in 2009-10.5 Outlook for 2009 – 2010 The factors that were responsible for rapid expansion of the economy in the last five years: high private consumption expenditure. robust investment growth supported mostly by high rate of domestic savings. The business and industry are expecting further softening of interest rates. and it would continue to be the second fastest major growth economy in the world after China. which started with high default rates in sub-prime mortgages in the US. The main driver. Industrial growth is expected to remain weak due to slowdown in demand – both in exports and domestic markets. spread to financial markets around the world and led to a global economic recession in 2008-09.

properties Launched affordable housing. suffered from global meltdown. raised to buy more land without beginning construction  of projects Diversified into non-core segments such as power.Taking account of global developments and the Indian factors. The study analyzed the two largest companies in the real estate sector i.e.5% for the previous year. Asia Business Generator Project Indian Economy Annual Report (2008 – 2009) CHAPTER 6 CONCLUSION OF THE STUDY 6. changed project formats Sold non core asset such as land. telecom. Home prices got unrealistic Took customer advances. as compared to likely revised estimate of growth rate around 6. The results of the study are presented in this chapter. 6.6% in 2009 -10. The main focus of the study was on construction industry. warehousing Corrective measures they took during the slump    Started giving huge discounts to buyer . hotels and  retail. stalled luxury projects 109 .5% .2 LESSONS FROM RECESSION – A MACRO VIEW Mistakes Realties Company committed during boom    Amassed large land banks at outrageous prices Raised funds and took short-term debts at high rates to buy more land Ignored real. especially real estate sector. DLF & Unitech along with the whole construction industry.1 INTRODUCTION The Indian Industry like its counterparts in other countries. we expect India’s overall real GDP growth rate to decelerate to 5. middle-class homebuyers and focused on luxury housing.

 gathered construction finance Deferred capital. Capital outflows diminish financial market liquidity. 4.3 FINDINGS The present study examined the different aspects of the financial meltdown and the consequent recessionary trend in the economy and the construction industry. Effects on construction industry 110 . The major findings of the study are presented below. raising the cost of capital and reducing the incentive to invest. slowdown in GDP growth. decrease in investor and consumer confidence.intensive projects such as shopping mall. 2. pay cuts. stake-sale to repay debt. All this leads to stock market collapse. Reasons for meltdown in construction industry:           Excessive dependence on NRI portfolios Complete lack of addressal of ‘affordable options Excessive dependence on IT/ITES sector Misplaced focus on ‘global retail Inappropriate / skewed risk allocation Absence of National Real Estate Regulator Inappropriate state level real estate policies Lack of incentives for the right sizing the market Orthodox urban planning systems Primitive real estate investment avenues: Effects on Indian economy 1. depress the valuations. FDI in India falls sharply. Raised money through qualified Institutional placements. Export oriented industries such as garments and gems/jewellery take a hit. 3. Focused on budget residential projects 6.

4. 111 . 1. More focus on maximization of construction volumes than on maximization of project realization. reduction in costs. Asset sales as a means of countering immediate funding shortfalls. The need for affordable housing Qualified Institutional Placements (QIP) Better debt management . reduction in margins 6. Real estate market collapses overnight causing a serious damage to real estate developers such as DLF and Unitech 2. Bharat Nirman. decrease in unit sizes & c. This it intends to do through a.1. 3. Liquidity crunch increased the cost of capital creating difficulties in project financing 3. Government initiatives such as JNNURM. b.focus on reducing their interest burden through rescheduling its debt & de-leveraging whenever possible. Putting projects on temporary hold or postponing the plan These are the strategies adopted mostly by both infrastructure & real estate firms in India. 2. 5. Large infrastructure projects remain largely unaffected due to the slowdown except few exceptions 5. etc help infrastructure sector remain afloat Strategies adopted by different construction firms in India The major strategies adopted by the construction firms are listed below. Real estate industry downsizing its dwelling units and creating more affordable housing 4.

www. Madras School of Economics. "monetary business cycles (imperfect information). SPA.Bibliography 1. "monetary business cycle models (sticky prices and wages). May 2009. Rao. 2nd Edition: a. Asian Development Bank Report : The Impact of the Global Economic Slowdown on South Asia 6. Financial Times. From (2008) The New Palgrave Dictionary of Economics. 5th February 2009 – Americas great depression December 28. Dr. McGrattan "real business cycles." b. Indian Infrastructure. 4. Indo Italian Chamber of Commerce & Industry: OVERVIEW OF THE CONSTRUCTION INDUSTRY IN INDIA. Indian Real Estate Market – Understanding the Slow Down & Intitiatives for a Turnaround by 7. 8.N. The Subprime Crisis ‐ Implications for India by Anand Shankar.S. http://www. Global financial crisis and key risks – impact on India and Asia Remarks by Dr Rakesh Mohan. Christian Hellwig. Professor & Head (Housing). P. 2007 3. Successful QIP Issue: Unitech to focus on affordable housing by Manmeet Singh Loomba. Christopher J. New Delhi. ‘India’s outsourcing growth seen to slow down’. 9. Ellen R. 10. 9 October 2008. Deputy Governor of the Reserve Bank of India.amatecon." c. Erceg.researchandmarkets. 112 ." 2.

com/real-estate-articles/New Government Initiatives to Boost Real Estate Sector in India 16.Third quarter review by Reserve bank of published on 2009-11-17 editor Wang Guanqun 22. PEs smell gains in core sector by Vandana.magicbricks. Securities and Exchange Board of India (SEBI) Bulletin (March 2009) 113 . 2009 14.11. 27.thaindian. Economy & Real Estate at a Glance.thaindian. www. June 2009 by Research Knight Frank Q1 2009. Business-standard. June article World Bank approves $4. 12.thaindian. National article US Ex-Im Bank loan for India’s infrastructure sector on August 10th.rbi. Indian Infrastructure.Published By: Business Monitor International 17.Osaka International Business Promotion Center 24. Macro-economic and monetary developments (2008 – 2009) . www. www. Reserve Bank of India Bulletin (March 2009) 26. article World Bank gives $320 million loan for better roads in Andhra October 16th.articlesbase. Summary of the Annual Report of RBI for the year ended June 2009 date 27/08/2009 by Alpana Killawala Chief General Manager article Government increases infrastructure funding 19. 2009 by IANS 21.chinaview. Centre for Monitoring Indian Economy (CMIE) 25. 2009 by IANS 23. 29 September 2009. Asia Business Generator Project Indian Economy Annual Report (2008 – 2009). I Issue-I. www. www.3-bn loan for India on September 23rd. India Infrastructure Report Q1 2009 Published Date: February 2009. 2009 20. Vol. Submitted by admin on July 6. 13.thaindian. DLF Restructures by Manmeet Singh Loomba. www. Monthly review of the Indian Economy. 32. www.28. India 30. reports by IDFC-SSKJ Securities Ltd and First Global Securities Ltd 33. http://www. FDI Statistics from Department of Industrial policy and promotion. .com/finance-articles/Hard Lessons to Learn from This Recession 31. Advance Estimates of National Income – Press Note by Central Statistical Organization(CSO) 29. http://www.Impending recession: India unlikely to escape its impact by Arun Kumar 114 .business-standard.articlesbase.