Posted by: John Elliott | October 16, 2008

Vijay Mallya leads India into an era of cutbacks……

……as liquidity shortages and the US slowdown begin to bite

The growing world-wide financial and economic crisis is beginning to bite in India. The most obvious sign is that Jet Airways and Kingfisher Airlines, till now bitter rivals, have agreed to cut losses by combining some of their support operations and rationalising flights schedules.

Banks are reining in their loans, tightening the credit crunch and threatening companies’ liquidity. In the past few days I have heard about banks as august and stable as the State Bank of India (SBI) restricting lending and making life difficult for corporate customers.

Alongside airlines, real estate companies look the worst hit so far. Both sectors have expanded far too fast in the boom times that are now past, boosting fortunes, egos and political clout of many of their promoters. Now is the time of reckoning.

Property companies are having problems completing projects, especially where they have over-built – for example residential development in Gurgaon, the chaotic and ill-planned but till-now-booming satellite city of Delhi. I heard earlier this week about a property developer who could not afford to complete a building and didn’t know how to raise funds because his bank had refused to lend – there was nothing he could do apart from sell the prestige flat that he wanted for himself. There must be many others.

These sorts of cut-backs will grow, so it was silly and counter-productive for government ministers and bureaucrats to have tried, as the crisis hit, to try to pretend that India will escape much of the world economic turndown.

The global financial crisis has hit Indian stock markets hard. The Mumbai market is more than 50% down from its high in January this year, hit by an exodus of foreign institutional investors. The rupee has declined steeply to a six-year low against the US dollar because (according to an EIU report ) of global dollar liquidity shortage, heavy outflows from institutional investors (FIIs) looking to transfer funds home, and purchases of dollars by Indian banks to fund overseas operations.

The government has tried to offset global problems with a series of liquidity-easing measures, but the impact on the ground will grow, even though the economy overall remains relatively strong – with economic growth forecast to drop from around 9% to not less than 7%. Banks, even market-fixing-rumour-hit ICICI, are well regulated and look safe.

The Jet and Kingfisher moves are dramatic and sudden, with redundancies at Jet (quickly cancelled under intense political pressure), planes sold or returned to leasing companies, and other cutbacks. There has been too much expansion and too much competition in India’s airlines, even though that has been very good for people who have been able to fly cheaply around the country.

Vijay Mallya, who controls the Kingfisher beer-to-planes group, has been merciless in his attempts to beat Jet, just as he was merciless in the way he abolished Air Deccan’s cut-price base and identity after he persuaded Captain G.R.Gopinath, the airline’s founder to agree to a tie-up in June last year.

I warned at the time that Mr Mallya planned to get control of Air Deccan, even though Mr Gopinath said he was only a “strategic investor”, that it was “not a take-over”, and his low prices would continue. Mr Mallya won, and Mr Gopinath has finally given up (been pushed out of?) his executive role. At a Kingfisher board meeting yesterday, he became vice chairman and a non-executive director, with Mr Mallya as chairman and ceo. Now there are rumours Mr Gopinath would like to buy back Air Deccan, which however looks difficult since it has been subsumed in Kingfisher.

Which sectors will be hit next? Business process outsourcing and call centres certainly. The travel trade in general looks likely, with hotel prices coming down to realistic levels. The construction industry also, even if infrastructure building expands, with consequential impact on the steel industry – Tata Steel’s UK business, Corus, announced today that it is cutting crude steel production over the next three months by up to 20%. The autos industry is already slowing down: also textiles as US demand for yarn drops.

Then it will be time to look at how big ambitious companies are coping – especially a group like Tata, which has bought heavily abroad in steel, autos and other sectors, hoping for buoyant markets that are now fading.


  1. Vijay Mallya has got his eye set up on the bail out package the Indian government is supposedly providing to bail out public sector Airline Carriers.

    Apart from that, its his bid to secretly take over the Indian Airway industry and emerge as the biggest player in the market..Remember that Air Deccan and Kingfisher Deal?? Now, Capt Gopinath, even if he wants to buy back his stake from Air Decan, he cannot, becasue theres nothing as Air Deccan now, its all merged into Kingfisher..the once cheapest airliner of India is now over…What’s he gonna buy back? Nuts??

    Mallya, meanwhile should concentrate on powering the ForceIndia F1 team with a good engine and a good chassies…Its sad to find ‘India’ lagging behind in world competition..

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