Meltdown

Last Sunday I was returning from CR Park around 1030 pm to my Blue Den in Sheikh Sarai. Auto drivers usually demand 50/60 bucks though the distance is little less than 3km. After hard bargaining they settle for Rs.40. However, to my surprise, this particular guy asked just 30 bucks. On the way, I enquired him how his auto business was going on. He sounded quite pessimistic. He says his daily turnover is steadily falling. He used to earn 500-600 rupees on an eight hour shift. But nowadays even though he remains on road for 10-12 hours, it is becoming difficult to reach his target turnover. He made an interesting observation that waiting time at the Chirag Delhi crossing on the BRT corridor is coming down. Given the slowdown in sales, falling incomes, and increasing lay-offs, traffic on Delhi roads will further come down. A blessing in disguise indeed!

Financial turmoil, which began as a subprime housing crisis in the United States of America last August has now blown out as a deep recession affecting the economic activities across the world. Today’s headlines read Citi Bank is mulling the option of auctioning off all or parts of it. Nobody would believe this piece of news had it appeared a few months back. Citigroup is a symbol of global capitalism. It is now affected by the financial storm that has changed the face of Wall Street, forcing the sale of giants like Bear Stearns, Merrill Lynch and bankruptcy filing of Lehman Brothers and insolvency of automobile behemoth General Motors.

The impact on the real economy is now clearly evident. Latest data indicate that the number of jobless claims in US hit 16 year high. Industrial payrolls have fallen 10-straight months, pushing the unemployment rate to 14-year high of 6.5% in October. Federal Reserve says that a forecast for the end of 2009 is 7.1% to 7.5%. Independent forecasters say it might go as high as 8%. This translates to lower consumption in coming months. Imports to US will further go down. The situation is no different in Europe. Some European countries like Poland, Hungary etc are entering recession mode. UK is no exception. Japan and Singapore are also slowly slipping into recession. Union Commerce Secretary states that there would be five lakh job losses in textile sector in India in the next five months due to sharp decline in apparel exports.

Occasionally I look at the Baltic Dry Index to see the trends of shipping prices. This index tracks the price of shipping bulk cargo. It is one of the oldest indexes in the world. The index is an unparalleled barometer of global trade in basic stuff like iron ore, coal and grain. It closed at 836 on November 21, 2008. It was 11,793 on May 20 2008. In six months, it is down by more than 90%. To put it simply, the cost of shipping has dropped through the floor. Transporting a tonne of iron ore, say from India to Brazil would cost you $110 in May 2008. Now it will just cost $9. The scale of change in rates is utterly shocking.

Wheels of international shipping are greased with ‘letters of credit’ issued to buyers of bulk cargo by their banks. These guarantee the value of the shipping once it is transit but before it is delivered. The credit crunch in the banking sector is taking its toll on the availability of these routine instruments. Cargos are sitting in dockside because the finance is not available to ship them. In some cases, the imported cargo is lying in ports unclaimed. Importers are ready to forego the advance paid and the collaterals mortgaged to banks for letters of credit. Banks have turned choosy in honouring letters of credit in some parts of the world, fearing default by the issuing banks. So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been less affected because there is less reliance on letters of credit. Trading has reportedly come down to standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks. So there is no market value out there for companies' capital investment in their ships. Story of VK Sheth reportedly selling his stake in Great Offshore Ltd comes as no suprises.

Where will crude oil price head except down, when economic activities, be it shipping, aviation or surface transport, come to standstill?

Various estimates have downgraded India’s GDP growth to 6.5 from 9. Achieving this might be an uphill task given these developments. Government expenses are not coming down but tax collections are expected to fall below the budget estimates. There will be less money for asset creation. Private sector has already stopped/withdrawn from bidding for national highway projects. On-going projects have failing in obtaining financial closures.



IT and ITES have been badly hit due to the disappearance of financial giants from the US. With lay offs and salary cuts in certain sectors i.e. construction, textiles, aviation, tourism, capital goods, financial services, and some labour-intensive industries, there will be lesser disposal income with the households. The current turmoil is going to affect the incomes of every participant in the economic activity. The impact will be felt not only on Delhi roads but everywhere in coming days.