It took $500 billion in asset write-downs to bring the more than $13 trillion-dollar American economy to nearly a grinding halt with a list of casualties that would have been the envy of any asset manager in happier times. Bear Stearns, Lehman Bothers, Fannie Mae, Freddie Mac, Merrill Lynch, and insurance big boy AIG. Naturally the American economy which lives on leverage (borrowing more than it earns) looks to be in a deep mess.

Since the economic liberalization in 1991, India has seen staggering GDP growth backed by relaxations in FII and FDI norms, catapulting the benchmark market index to 21000 levels in January 2008. The market is down nearly 50% and the mood remains apprehensive and pensive.
But despair is the time when true character is revealed, be it of any organization or individual - when pushed to the corner, its time for the champion boxer to take one more up his chin and still stand his ground.

Will India survive?

The point here is to know can there be a simple way for a small investor to instill confidence back on the street.

As markets across the globe are looking to pack their bags for a long time, in this entire mess one investor segment just might prove to be the saving grace: you and me. On 2nd April 2007, the BSE Sensex closed at 12455.37. on 31 March 2008 it stood at 15644.4, returning a cool 25.8%, year-on-year. RBI data for 2007-2008 suggested that only 10.5% of household savings found its way into the equity and debt markets amounting to Rs 77000 crore, the rest probably cooling its heels in the banks as currency or currency equivalents (Gold). This means that domestic households have matched the $15-17 billion brought in by FIIs for FY ‘08. Now with FIIs deciding to retreat and having already pulled out just over $9 billion from domestic markets since January ‘08, they would be rethinking about their equity allocation for India in the future. This makes way for a huge opportunity to Indian households who by increasing their share of investment in the domestic markets can hope to turn its tide as well as their own. As an individual investor, every incremental investment shall improve his/her long term (>1 year) returns. At the same time, incremental investment in gold would hedge him/her against any inflationary pressure and any unforeseen down turn.

50 million people in India are at present in the middle class category. This is expected to balloon to 583 million by 2025 according to a study by McKinsey & Co. This represents the real buying power. Even if we assume that these 50 million actually only save and their savings find their way into the banking system, imagine what a higher percentage of investment will do to the economy if they decide to flirt a bit more with the investments to savings ratio. We need to realize that FIIs are like mercenaries who will flee their camps first when the chips are down and that domestic investors are the real face of the investment community.

Like a drunkard who is wandering alone on the street trying to find a foot hold for his slippery feet, the Indian markets are no less choppy since the first month of the New Year ended the 3 year bull run party. When the 100 year old BSE Sensex hit 21113.13 on January 9th 2008 India was been viewed from Dalal Street to Wall Street as someone who has just driven at 100mph from 17000 to 21000 ,and with 25000 in touching distance. Anticipation seldom turns into reality, come 16th July 2008 BSE Sensex was 12514 a yearly low and 40% down from the top. With IPOs claiming to be multi-billion dollar projects in next five, ten and fifteen years and garnering over Rs 700000 crores, peons, school children, taxi drivers, the what nots, and the who’s who of the Indian economy wanted to apply. The only companies who would have made money would have been paper manufacturers, while Mother Nature was at receiving end for all the paper required to make 200-page red herring prospectuses (RHP).

With equity as an asset class going for a long random walk into oblivion, foreign institutional investors (FIIs), the usual market makers, who had put in close to $17 billion for the FY07, now, in the first six months of the CY08, have pulled out close to $7 billion. Usually bad follows bad but evil follows worse; the American housing bubble woes relentlessly made lives of economists, governors of central banks and heads of states lose sleep over deepening credit crises. The U.S. of A, which prides itself as John Rambo in the Middle East and central banker to the world, has already lost $500 billion in asset write-downs. Simply put, the things that were not affordable were made affordable to people who could not afford them; in other words, the houses for which the loans were taken turned bad value as borrowers defaulted and the subsequent MBSs (mortgage-backed securities) and ABSs (asset-back securities) markets who leverage themselves over these loans also defaulted. Then, with home loan default rising, interest rates rising, and slowing consumer demand, the unfaultable investment banks of Wall Street were getting jittery over their exposure to complex derivates products. Ultimately $500 billion in assets were written down on Wall Street with repercussions felt across the globe.

The regular oil and inflation shock has started to generate fewer tremors as their pace of growth has come off recently. Oil in last couple of weeks has been hovering at sub $110 levels and domestic WPI inflation at sub 13% levels. The booming GDP growth made India hit the $1 trillion economy club, with fiscal year 2007-2008 hitting 9.1% growth. Certainly now with the equity markets off hugely, capital expenditure for India Inc has become a huge question - rising interest costs will make longer-term capital intensive projects in the infrastructure space unviable. The IPO market, also the primary market to raise equity, has also dried up as investors have lost confidence to invest in new unlisted companies.

Estimates of $350-$400 billion have been made for lessening India’s infrastructure woes, and the bill is to be footed via the PPP (public private partnership) route. What remains to be seen is whether the big boys of India Inc ready to participate and does the FDI still hold India in high regard. The nuclear deal has been signed, which comes as a good sign for an energy-hungry country which according to government estimates will require an installed capacity of over 200,000 MW by 2012 to meet its electricity demand, 60 percent more than what the country currently has. India envisages providing electricity to all households including 234 million families living below the poverty line and electrifying around 115,000 villages by 2009.

Certainly all this looks a daunting task to accomplish and only strong jolt of foreign capital flows, relaxed government policies, and wish to take India global with domestic companies a lot of dope is required to put India back on track.

Anurag Sharma is a Research Associate at Padmakshi Financials Services Limited.