India is about to complete the full cycle in the Post- Capitalization era. We have had an elongated bull run in the financial markets till the beginning of 2008. In the last 10 months the markets have fallen by more than 60% raising serious questions about the long term prospects of India as the preferred investment hub. The estimated growth rate of 2008-09 revised to 7% against 9.1% in 2007-08 does cause a lot of butterflies in the stomach most people including the seasoned professionals and finance gurus. Raising inflation, slackening demand, high interest rates, volatile markets all appear to be perfect recipes for the forthcoming disasters. And to top it all the worst is yet to come.

Lets us examine what this means to India and its folks. For 45 years after Independence, India was largely a socialist economy (economists classify as a mixed economy, but my assessment is that we were a socialist economy) with very slow growth rates and hence virtually ruling out possibilities of a slowdown in the true sense. I do remember the days of limited opportunities, unemployed youth, high inflation and interest rates, government jobs were considered as attainment of this birth. Yes we did have stock markets which used to display volatility, but nothing like what we see today. With the advent of Privatization and globalization, India has seen dramatic growth. We have moved for job seeker queues for jobs to Companies queuing up in campuses. So far we have exploited the positives of being a capitalist. Starting now we need to learn to equip ourselves with the negatives of capitalism. There will be significant job cuts directly impacting the employees. This time the job cuts are not only going to be the bottom performers. Even the average to the above average performers may be given the pink slip as positions are going to be eliminated and not the persons. To be fair we did see a couple of slowdowns in the past, like the dot com bubble, post 9/11, NBFC collapse etc. but this one is different for a couple of reasons. The previous slowdowns were sector specific and India’s exposure was limited as the economy was still in the process of Globalization.

So as we come to terms with the reality of recessions let us prepare to weather this storm to look for accomplishing greater heights. Let us analyze the impact of this global meltdown and prepare for the following.

India still has one of the best growth stories from a long term perspective. Investor confidence is low due to the global slowdown. But the fundamentals of the economy are still strong. Core sectors like infrastructure, manufacture, heavy electrical, engineering and power generation, Oil and not to forget agriculture domestically and we can expect moderate growth in all these sectors. By nature these sectors would continue to grow at a slow pace and is unlikely to face negative growth. The stabilizing commodity prices would help patch some of the cracks that had developed.

The sectors like Telecom, Pharma, BPO, KPO would get affected but to a very limited extent. The sagging demand will hurt the growth prospects in the short term, but the long term story should remain intact. Some of the slowdown would actually benefit the BPO and the KPO sectors.

The IT, Technologies and the internet sector would be significantly affected by this slowdown. With expected cancellation and deferral of new IT spends across the globe with most of the expected revenues in exports we can expected stunted growth. Sure there would be some relief with the depreciating rupee but that is only a small oasis in the desert. With the availability of credit drying up, we are in for some challenging times ahead. The upside in the sector would be the fact that we have been predominantly selling services rather than software which could somewhat soften the blow. The new technology sectors like nano tech, mobile technologies can expect to use this period to invest in solid R&D and Technologies. Most of them have raised funding to last for a couple of years and should sustain this period to get higher.

The FMCG, electronic goods, retail and auto and aviation sectors would face very stiff challenges and will have a lot of innovative marketing to do to remain in business. We will get to see a few consolidations happening in this space. However those with deep pockets are likely to survive this period.

The real estate sector will have a lot to worry about in the coming days. There has been intense speculation over the last few years and the growth has far exceeded the demand. With high interest rates, job insecurity, global slowdown, dropping demand and a huge number of under construction projects has left a huge bubble waiting to be burst. Even the established players will be running out of funds for the ambitious projects. The prices will start to drop once the liquidity crunch gets to the nerve. It is a matter of time before the oxygen runs out and they are on their own. We can expect to see a long period of lull in the real estate sector. The recent speculative buyers will have a handful to deal with for the next 3-5 years. The first time buyers can probably survive this if they manage to retain the jobs and the likely hood of falling interest rates.

These were the sector wise analysis of the impact of the financial crisis. Let us now look at the financial sector which started all of this. Banks and financial corporations will start to work with clipped wings which will starve all the above mentioned sectors of liquidity. Slow demand and high interest rates would stifle growth. However as the banks and the financial corporations are still well regulated by the Central bank we are unlikely to see large scale bankruptcies and their cascading effects. Money has become dearer to Private Equity funds as well as we see a definite slowdown in the midsize and the growth Companies. With strong fundamentals we can expect the banks to overcome negative growth scenarios. The banks may survive but the rate of growth and risk of employee cuts also looms large. We also need to see the impact of the defaults arising in the real estate companies and recent property owners. For slightly better off people we can expect some foreclosures. Hence the complete impact is yet to be seen.

We have to keep one more very important thing in mind. This is a period in which there will be loss of confidence, bruised egos, personal setbacks, loss of productivity, loss of morale, frustration which are extremely personal in nature. Financials and economics will get back on track in a couple of years. But in India we need to learn to emotionally deal with this situation. This has to be accepted as a part of the Capitalist economy. We will have to control greed and expedite growth. We have to emerge stronger after living through this phase and not get to desperation and let ourselves down. The morale needs to be high throughout this period. Financial setbacks can be handled if we are handling ourselves emotionally. The leftists have made this an opportunity to highlight their ideals. Given a choice between the condition of the economy till 1992, we would rather go through this phase rather than go back the phase in the eighties. We don’t stop driving because it could cause accidents. We merely need to exercise caution and accept the fact that there could be an accident due to somebody else’s fault. Warren Buffet’s flagship line has been “Be fearful when others are greedy and be greedy when others are fearful. Every common man has to agree with the former if not the latter. The fundamental reason behind this is Greed beyond means and the herd mentality. We know that the sensex is down by over 60%. A lot of people have lost money in the process. But did the sensex deserve to be at 21,000. The answer is an emphatic No. We have just followed the herd and crashed together. The start of every slowdown begins by overestimating demand in a frenzy rather than sound economics. In a capitalist economy every person is responsible for his or her own future. This is an opportunity and the responsibility for each person to exercise his or her own discretion in arriving at conclusions. But having said that there are also factors beyond the control of individuals. For example people would have been driven to purchase real estate given the high rentals and committed on a mortgage. Now with the falling real estate prices and the job insecurity has given them a handful to worry about. This is something we have to learn to live with and plan appropriately during good times.

As we learn to weather this storm let us remember the most importantly at this time we still have to keep our morale high and ensure we do not get emotionally affected. Financial setbacks could come and go, but the emotional setbacks would take too long to heal and some of them may be permanent. Let’s enjoy this period as much as we enjoy upturns be ready for the next turn of the tide.