1. Current global
crisis: Is India
vulnerable
too?
An analysis of
effects on Indian
economy by global
recessional waves
2. Contents:
World into an economic cyclone 3
Nobody (Emerging Economies) is immunised 3
We (India) are neither thrashed nor safe 4
Markets (Capital) are getting tougher to sustain 5
Economic BPR (Business Process Reengineering) 8
Conclusion 9
Bibliography 10
Vivek Sharma Page 2
3. World into an economic cyclone:
The global financial situation continues to be uncertain and unsettled. What started off
as a sub-prime crisis in the US housing mortgage sector has turned successively into a
global banking crisis, global financial crisis and now a global economic crisis. Text book
economics often cite housing as a prime example of a non-tradeable good. It is
paradoxical that a quintessentially non-tradable good as housing has triggered a crisis
of global dimensions. By far, the most dominant FAQ today is whether the worst in
terms of the financial sector meltdown, in particular failure of financial institutions, is
behind us. No one is really willing to take a definitive call on this, which is a sign of the
increasing number of unknown unknowns.
The global economic outlook has deteriorated sharply over the last two months. Many
economists are now predicting the worst global recession since the 1970s. In its World
Economic Outlook, published in early October, the IMF forecast global growth of 3.9 per
cent in 2008 and of 3.0 per cent in 2009. The IMF has since revised its forecast for
global growth downwards to 3.7 per cent for 2008, and 2.2 per cent for 2009. Notably,
advanced economies, as a group, are projected to contract by 0.3 per cent in 2009. If
this gloomy outcome were indeed to come true, 2009 will mark the first year on record
when emerging economies will account for more than 100 per cent of world growth.
Nobody (Emerging Economies) is immunised:
Emerging economies may be the sole contributors to global growth in 2009, but they too
are hit hard by the crisis. Ironically, even as late as six months ago, it was intellectually
fashionable to subscribe to the 'decoupling theory'– that even if advanced countries
went into a downturn, emerging economies will at worst be affected only marginally,
and can largely steam ahead on their own. In a rapidly globalising world, the
decoupling theory was never totally persuasive; given the evidence of the last few
months - capital flow reversals, sharp widening of spreads on sovereign and corporate
debt, and abrupt currency depreciations - the decoupling theory has almost completely
lost credibility.
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4. Growth prospects of emerging economies have most definitively been undermined by
the ongoing crisis with, of course, considerable variations across countries. The IMF
revised its growth forecast for emerging economies for 2009 from its early October
figure of 6.1 per cent to 5.1 per cent. Clearly emerging economies have a painful
adjustment to make.
We (India) are neither thrashed nor safe:
India too has to weather the negative impact of the crisis. Even as consumption and
domestic investment continue to be the key drivers of our growth, India's integration into
the world has been on the increase. Going by the common measure of globalisation,
India's two way trade (merchandise exports plus imports), as a proportion of GDP, grew
from 21.2 per cent in 1997/98, the year of the Asian crisis, to 34.7 per cent in
2007/08. If we take an expanded measure of globalisation, that is the ratio of gross
current account and gross capital flows to GDP, this ratio has increased from 46.8 per
cent in 1997/98 to 117.0 per cent in 2007/08. These numbers are clear evidence of
India's increasing integration into the world economy over the last 10 years.
India’s merchandise exports plunged 21.7 percent in February, the steepest annual fall
in at least 16 years, as the global slump hit demand for oil and diamonds. Exports of
goods totaled US$11.9 billion in February, while imports shrank 23.3 percent, to
US$16.8 billion, the Ministry of Commerce said yesterday. India hasn't seen double-digit
declines in exports since the Asian financial crisis in the late 1990s, said New Delhi
economist Saumitra Chaudhuri. quot;It's rare you've had negative growth,quot; he said. India
relies less on exports to drive growth than China does, but merchandise exports still
account for about 16 percent of gross domestic product. Exports have been falling since
October. The country's trade has suffered from the sharp fall in global oil prices and
collapsing demand for diamonds and gold, Chaudhuri said.
However Indian banking system is not directly exposed to the sub-prime mortgage
assets. It has very limited indirect exposure to the US mortgage market, or to the failed
institutions or stressed assets. Indian banks, both in the public sector and in the private
sector, are financially sound, well capitalised and well regulated. Even so, India is
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5. experiencing the knock-on effects of the global crisis, through the monetary, financial
and real channels.
As credit lines and credit channels overseas went dry, some of the credit demand
earlier met by overseas financing is shifting to the domestic credit sector, putting
pressure on domestic resources. The reversal of capital flows taking place as part of
the global de-leveraging process has put pressure on our forex markets. Together, the
global credit crunch and de-leveraging were reflected at home in the sharp fluctuation in
the overnight money market rates in October 2008 and the depreciation of the rupee.
Rupee to USD exchange rate trend (Jan 2008 to Apr 2009):
Markets (Capital) are getting tougher to sustain:
In the wake of the global slowdown, foreign institutional investors (FIIs) withdrew nearly
$13bn last year and, for the first time in 11 years, there was a net outflow of FII money
from India. The BSE Sensex (Bombay Stock Exchange Sensitivity Index) has
dramatically slumped from its peak of 21,000 in January 2008 to sub-8500 levels at the
beginning of March 2009.
On the domestic front, the auto and manufacturing sectors have witnessed a slowdown.
The Indian economy, which grew at an average 9% in the past four years, is now
expected to grow at about 5%.
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7. 25000
20000
15000 Open
10000 High
5000 Low
Close
0
1/1/2008
2/1/2008
3/1/2008
4/1/2008
5/1/2008
6/1/2008
7/1/2008
8/1/2008
9/1/2008
10/1/2008
11/1/2008
12/1/2008
1/1/2009
2/1/2009
3/1/2009
4/1/2009
India's monthly WPI (Wholesale Price index); Base Year 1993-94=100
Month/ Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008 224.6 230.6 235.9 238.6 241.9 243.9 248.7 249.3 252.2 251.5 250.9 247.3
2007 214.2 215 214.6 219.2 220.9 220.6 224.5 223.8 226 223.8 223.9 222.5
2006 194.8 192.9 191.9 195.8 200.6 205 202.8 204.9 211.7 213.3 214 213
India's CPI (Consumer Price Index) comparison between Jan 09 and 08
Group Weight (%) Jan-09 Jan-08 % Change
1. Food, Beverages, Tobacco 47.13 585 513 14
2. Fuel and Light 5.48 637 590 8
3. Housing 16.41 582 550 5.8
4. Clothing, Bedding, Footwear 7.03 464 453 2.4
5. Miscellaneous 23.95 567 517 9.7
General Index (All groups) 100 574 520 10.4
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8. Economic BPR (Business Process Reengineering):
First of the two Fiscal Stimulus Packages by the Central Government focuses on:
- Plan, non-plan expenditure of Rs.300, 000 crore (Rs.3, 000 billion/$60 billion) in four
months
- Parliament nod to be sought for Rs.20, 000 crore more toward plan expenditure
- Across-the-board cut of four percent in the ad valorem central value-added tax
- Interest subvention of two percent on export credit for labour intensive sectors
- Full refund of service tax paid by exporters to foreign agents
- Incentives for loans on housing for up to Rs.500, 000, and up to Rs.2 million
- Limits under the credit guarantee scheme for small enterprises doubled
- Lock-in period for loans to small firms under credit guarantee scheme reduced
- India Infrastructure Finance Co allowed raising Rs.100 billion through tax-free bonds
- Import duty on naphtha for use by the power sector is being reduced to zero
- Export duty on lumps for steel industry reduced to five percent
Whereas the second package focused on:
- An SPV will be designated to provide liquidity support against investment grade paper
to Non Banking Finance Companies (NBFCs) fulfilling certain conditions. The scale of
liquidity potentially available through this window is Rs.25, 000 crores.
- an arrangement will be worked out with leading Public Sector Banks to provide a line
of credit to NBFCs specifically for purchase of commercial vehicles.
- Credit targets of Public Sector Banks are being revised upward to reflect the needs of
the economy. Government will closely monitor, on a fortnightly basis, the provision of
sectoral credit by public sector banks.
- Special monthly meetings of State Level Bankers’ Committees would be held to
oversee the resolution of credit issues of micro, small and medium enterprises by
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9. banks. Department of MSME and Department of Financial Services will jointly set up a
Cell to monitor progress on this front.
- Recently the guarantee cover under Credit Guarantee Scheme for micro and small
enterprises on loans was extended from Rs 50 lakh to Rs 1 crore with a guarantee
cover of 50%. In order to enhance flow of credit to micro enterprises, it has been further
decided to increase the guarantee cover extended by Credit Guarantee Fund Trust to
85% for credit facility upto Rs 5 lakh. This will benefit about 84% of the total number of
accounts accorded guarantee cover.
- State Governments are facing constraints in financing expenditure because of slower
revenue growth. To help maintain the momentum of expenditure at the state
government level, states will be allowed to raise in the current financial year additional
market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting
to about Rs 30,000 crore, for capital expenditures.
-India Infrastructure Finance Company (IIFCL), which has already been authorized to
raise Rs 100 billion through tax free bonds by 31.03.2009 for refinancing bank lending
of longer maturity to eligible infrastructure bid based PPP projects, will be accessing the
market next week for raising the first tranche of the amount. This will enable the funding
of mainly highways and port projects on hand of about Rs 25,000 crore. To fund
additional projects of about Rs 75,000 crore at competitive rates over the next 18
months, IIFCL is being enabled to access in tranches an additional Rs 30,000 crores by
way of tax free bonds once funds raised in the current year are effectively utilized.
But still, credit growth in the Indian economy has indeed slowed down considerably.
According to data released by the RBI, credit growth between October 10, 2008, and
February 13, 2009, was only $7.6bn, compared with $37.8bn during the corresponding
period of the previous fiscal year.
In a bid to encourage banks to lend more, the RBI introduced a series of rate cuts from
mid-September last year, but these have not had the desired impact. While the state-
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10. owned banks have responded to some extent by reducing their lending rates, private
sector banks have not.
Conclusion:
Over the past five years, India clocked an unprecedented 9% growth, driven largely by
domestic consumption and investment even as the share of net exports rose. This was
no accident. True, the benign global environment, easy liquidity and low interest rates
helped, but at the heart of India’s growth was a growing entrepreneurial spirit and rise in
productivity. These fundamental strengths continue to be in place.
Yet the global crisis has dented India's growth trajectory as investments and exports
have slowed. Clearly, there is a period of painful adjustment ahead of us. But, once the
global economy begins to recover, India’s turnaround will be sharper and swifter, given
the country’s strong fundamentals and untapped growth potential. Meanwhile, the
challenge for the government and the RBI is to manage the adjustment with as little pain
as possible.
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11. Bibliography:
Newsletters, reports, periodicals, journals, factsheets, research papers and databases
of:
The World Bank
International Monetary Fund
Asian Development Bank
The Banker
The Economist
Pricewaterhouse Coopers
Boston Consulting Group
Franklin Templeton
Merrill Lynch
The Economy Watch
Reuters
Securities and Exchange Board of India
Center for Development Policy Research (School of Oriental and African Studies)
Xinhua (China)
The Business Week
The United States Treasury Department
McKinsey Quarterly
Ministry of Finance (Government of India)
Reserve Bank of India
Indian Statistical Department
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