DARE - Because Entrepreneurs Do

This is a continuation of my earlier post  - The Dubai debt repayment crisis. What is it? How will it play out? This post looks specifically at how the crisis will affect the Indian economy and Indian companies.
 
The Government of India as well as the Reserve Bank have stated that there  is nothing to worry. Major banks have followed suit, quantifying their exposure in Dubai and major real estate firms have followed suit. Does that mean that there is nothing to worry? While in a macro economic sense, this may be correct, at a more on the ground level, the truth is far worse; there are very real reasons to worry. Let us understand the sectors that will be negatively impacted in India and this is key - IF, repeat IF the crisis becomes bigger and goes beyond Dubai World and affects the region at large.

1. Foreign inward remittances - down

The gulf region is the major contributors to foreign inward remittances into India. This is not corporate income or FDI (Foreign Direct Investment). The bulk of these inward remittances are the aggregation of monies Indians working in the region keep sending home, month after month. The last couple of years have been hard on these people, given the general economic situation. Any region specific monetary crisis  could well end up as the straw that broke the camel's back. 

2. Family incomes - down

A direct result of the above foreign remittance coming down dramatically would be that the incomes of the families depending on these remittances month after month would take a huge hit. Directly affected would be tens of thousands of families, particularly in the states of Kerala, Andhra Pradesh and Bihar, amongst others.

3. Specific state economies - down

Given that the consumption (and investment) economy in states like Kerala is very much dependent on this regular inflow from the gulf region, a sudden closing of the tap could have a devastating short term, if not long term impact on the economies of these states (Kerala, Andhra Pradesh, Bihar). 

4. Real estate investments - down

Real estate companies have been busy declaring the extent of their exposure to the Gulf markets in general and to Dubai World in particular. And that is not even half the story! In the last few years, significant investments have poured into the Indian real estate and construction sectors from investment vehicles based in the Persian Gulf.  These are not necessarily investments into the real estate firms themselves, but mostly take the form of specific joint ventures for executing specific projects. This would mean that the investments are in projects currently in execution or just announced. Now, add the fact that the investments tend to come in tranches based on progress of individual projects and we have to consider the possibility of these projects going off schedule as promised funds do not come in.

A large number of real estate players have been preparing for either an IPO (Initial Public Offering) or for PIPE (Private Investment in Public Equity) or QIP (Qualified Institutional Placement)  investments. Now, if the stock markets take a long term hit, all these plans will  have to be revised if not delayed.

5. Infrastructure projects - down

Any impact on the real estate sector as discussed above will have its reflection on infrastructure projects in the country. In addition to that, may companies from the region, including Dubai World itself are executing several large scale infrastructure projects in the country. Any impact of the current crisis beyond the current deferment or any significant restructuring of Dubai World could impact the schedules of these projects and could throw them also out of sync

6. Gold prices  - up

This is the only item on my list of ten that is likely to move upwards as a result of this crisis, and that is no good thing. Gold has been seeing a wild  upward swing in its prices as investors across the world scurry for safer investment options. This crisis will only accentuate the preference for gold, driving  prices up even further.  Another interesting tidbit to be kept in mind is that the Gulf region is a major hub of the gold trade. How the crisis will impact gold trade itself remains to be seen. 

7. Manpower placements - down

Though overshadowed by manpower placements in foreign countries by the IT industry, the Gulf region is still a major market for manpower, particularly for skilled and unskilled labour. Any shake up in the region leading to job cuts or people refusing to work in the region will significantly impact this sector. Similarly, other services exports to the region will also be significantly affected.  

8. Local consumable items exports - down

Many items of local consumption are exported in large quantities to the expatriate population in the Emirates. These largely include food items and cultural items. A major change in employment levels in the region will leave their immediate impact on these exports.

Now, there is a possible silver lining here that  the lack of export markets could bring local prices of these items down, cooling down the local markets, which seem to be on fire as far as prices go. But then, the purchasing power may also have vanished from the markets, re-establishing status quo.

9. Spices exports - down

The Emirates region is a significant market for Indian spices. Any financial shakeup in the region could adversely affect the market for these items. 10. Stock markets - down

Finally, the most obvious impact- on the stock markets. Stock markets the world over are no longer isolatable from events that occur far away and which seemingly have no impact on on local businesses. The mildest tremor elsewhere can be felt in stock markets across the world, with varying amplification. The stock markets have just started to recover from one down cycle when this has happened. The impact on the day after the announcement was bad, but not disastrous. It is almost as if the markets ar awaiting more clarity, which can be expected in the coming days and months.   If the news in the coming days is not good, the markets could be in for another tail spin and that cannot be good for any one, including for investments expected into  sectors not directly affected by the Dubai crisis.