The jewellery group Pure Gold has put the Indian element of its Dh1 billion expansion on hold as fears grow that the nation's credit rating will be downgraded.
India junk-bond fear hits Pure Gold
The jewellery group Pure Gold has put the Indian element of its Dh1 billion (US$272.2 million) expansion on hold as fears grow that the nation's credit rating will be downgraded.
The decision was revealed after Standard & Poor's said India could become the first Bric nation to be downgraded to junk status.
"I'm not very confident now until we see some stability in India," said Firoz Merchant, the chairman of Pure Gold, which is based in Dubai. "For the investor and investment, it looks a little bit uncertain."
The company operates 25 stores in India and plans to launchfive more there in the next three months. But plans beyond that for expansion in India have stalled, Mr Merchant said.
This is part of a Dh1bn, five-year expansion plan that Pure Gold has outlined for the Middle East and India.
"There is a new expansion plan which will be on hold [until we] see the stability in the rupee/dollar and see a new direction in the country," Mr Merchant said. "I lost my confidence also because of the last six months [with] the devaluing of the rupee. If I send some money from here to India and it devalues, I lose my money."
The company was moving ahead with its plans for the Middle East, he added.
In a report titled "Will India be the First Bric Fallen Angel?", S&P cited slowing GDP growth and political hurdles to economic policymaking as just two factors contributing to the risk that India could lose its investment-grade rating.
Economic growth fell to a nine-year low of 5.3 per cent in the first quarter of the year. At the same time, inflation and interest rates both remain high.
"Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," said Joydeep Mukherji, a credit analyst at S&P.
The rupee declined to a record low of 56.52 against the United States dollar at the end of last month.
"The risk is real," said Shaji Ul Mulk, the chairman of Mulk Holdings, a multinational conglomerate based in Sharjah. "The problems with the Indian economy are pretty clear, and it's time that India actually acted. I think today India's problem is basically the lack of decision."
Still, he said, India's fundamentals remained good and the company's investments in the solar industry and manufacturing in the country were moving ahead "full steam".
"We haven't seen any slowdown in the real estate market, which is the basis of our second industry," Mr Mulk added.
Although a decline in the rupee could mean lower earnings, investment could still translate to a profit, he said.
"The earnings are there. That's pretty different from many other countries of investment, where guaranteed earning is a question mark. India, in our opinion, still has guaranteed earnings."
Low operating costs in India were also working in its favour, especially amid weakness in European economies, he said.
But he added that new investors were likely to be deterred by the ratings warning.
"These are the kind of investors who will take a back step and watch," said Mr Mulk.
Others also highlighted the positive attributes.
Mr Merchant also remains confident in the country's economy in the longer term.
"Whatever happened is only temporary," he said. "The only thing is that the government has to choose the direction and has to come up with a policy to support and help the foreign investment and how to stabilise the economy.
"It has to come up with something to control the rupee/dollar volatility. The volatility is huge in the rupee/dollar - sometimes in a day it's 2 per cent to 3 per cent up and down. The rupee/dollar is a huge setback for India and it is very bad for the foreign investment."
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