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Sanctions will have negative impact on economy: CRISIL

A Special Correspondent

A Crisil Research and Information Services study warns of a negative impact on core projects as a result of international sanctions in the wake of the recent nuclear tests.

The hardest hit, warns the study, will be the power sector. At present, there are 15,000 megawatt worth of independent projects wherein power purchase agreements have been finalised, but which have not reached financial closure. Most of these projects have either promoters, or EPC contractors, domiciled in the United States. These vendors will now not get support from the US Exim Bank or the Overseas Private Investment Corporation. Cumulatively, thus, the sanctions are likely, the study says, to impact heavily on this sector.

The main problem for this sector, says the study, will lie in finding alternate developers, financiers and contractors.

Simultaneously, there will be a sharp hike in interest rates, thanks to the increased demand for rupee funds by corporates who will find foreign funding prohibitively expensive. Further, the government is also expected to borrow heavily locally, to support infrastructure and defence development, thanks to the reduction of foreign aid.

All this in turn spells an escalation in cost of funds, which in turn is expected to result in an upward escalation of projected power costs and tariffs.

Since fresh clearances will be required at each step of the process, the various power projects will not only become more expensive, but will slow down as well, thus in turn stunting infrastructural development.

A further impact on the power sector -- as also on roads, ports, irrigation and similar infrastructural development -- will result from Japan's decision to suspend aid through agencies such as the Overseas Economic Co-operation Fund, as also the withdrawal of USAID's support.

CRISIL does not foresee a major impact on the telecom sector, given that the majority of equipment vendors are located in Europe. However, here again the expected depreciation in the rupee will result in higher interest costs, given that telecom projects involve a high component of foreign debt.

Rupee depreciation is also slated to affect the two and three-wheeler industry, commercial vehicles, auto ancilliaries, cement, electronics (which will also suffer from increased cost of import of components), fertilisers, paints, paper, sugar and tractors.

Interestingly, the same factor -- depreciation -- could have a benevolent impact on segments such as petrochemicals, shipping, software exports, and oil.

The textile industry is poised, according to the study, on a high wire. While the depreciation of the rupee will enhance competitiveness of Indian textile exports in the international markets, US sanctions resulting in a trade embargo could cripple the industry -- especially given that the US is one of the largest importers of Indian textiles.

The CRISIL study, however, does not foresee a similarly drastic impact on the exchange rate. The thinking is that while the rupee is expected to slide, the long term effects will remain marginal as foreign inflow accounts for only 1.5 per cent of the gross domestic product, and further, that foreign trade only accounts for 10 per cent of the GDP. A beneficial fallout could lie in the fact that other Asian economies are not strong enough to attract foreign direct investments, some of which could by default accrue to India.

The equity market is expected to feel the impact, as foreign institutional investors are expected to go slow. A similar outcome is anticipated in respect of Global Depository Receipts. Indian companies, thus, will find it increasingly difficult to tap into the equity market, either domestic or international. OTHER STORIES OF THE DAY:
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