Impact On India

         The economic crisis of 2007-2008, which is considered to be the second largest crisis after the Great Depression in 1929, in USA, swept off many of the world's largest economies and even had it's impact on economy of developing countries. India is one such economy which survived this massive crisis resiliently. Though the growth rate of India was hampered it soon rebounded with an impressive GDP growth of 6.7% in 2008-2009 while rest of the world economies were facing a negative growth.

Why should global crisis affect India? Our search begins by analyzing various reforms and regulations undertaken by the Indian government, which date back to 1991. During this year, having survived a crisis already in 1990-1991, the Indian Government started to open the Indian economy to the world. This included various reforms like reduction in import duty, increasing the restriction levels of export, and allowing foreign direct investments. The effect of these steps under taken by the government can been realized by consistent growth of the country from 2003-04 to 2007-08. Clearly the amount of openness created by these new reforms integrated Indian economy to some extent with global economy and any changes in the global economy is sure to have an impact on it.

What was the result of crisis on India? In the recent years, India registered a high growth even with a low per capita income and this growth was consistent even when the global economies were dwindling this led the economists into thinking that India has decoupled from the global economy, that is to say it is no longer affected by global economy, and capable of self sustenance. Also the strong domestic financial sectors of the nation seemed to show no signs of impact by rapidly varying global financial sectors. But little did economists realize that the high growth rate of India in 21^st century has been achieved by significantly integrating its economy with the global economy, hence a downturn of global markets leaves its impression on Indian markets too.

When the US economy was hit by crisis in August 2007, Indian economy apparently seemed to have been insulated from this effect. It was actually in September 2008 when Lehman Brothers collapsed the impact on Indian Economy was unavoidable and clearly visible. This resulted in high interest rates overnight and drying up of credit flows into the economy. The crisis was a contagion, it plummeted most of the largest economies. The countries with high export rates were greatly affected which resulted in declining of GDP growth, unemployment, reversal of capital inflow(investors took back their money from Indian market) into the economy and inflation. Global crisis effect on India can be seen at two major levels, they are:

Financial Sector: It includes banks, equity(stock markets) markets and other financial institutions. When crisis hit global economy many of the foreign investors withdrew a huge amount of 12 billion USD from Indian market in order to save their parent companies. The resulting scarcity of funds had to be replaced by capital from domestic banks. Due to the fact that there was no money for banks to lend even to other banks it resulted in higher interest rates which eventually led to depreciation of Indian Rupee(the value of a currency is determined by many factors and interest rates increment combined with reduction in capital account lead to decline in currency value). This led to increase in foreign debt of the country. Hadn't Reserve Bank Of India tightened the laws on use of securitization, sub-prime lending and derivatives all banks in India would have fallen to worst situations.

Export Sector: Export occupies a share of 22% in India GDP growth as on 2008. Exports increased by about 30% over a span of five years from 2003. But most of the export sector is rather clustered in nature. Only few states registered high growth due to exports, like Tamil Nadu, Karnataka, Rajasthan, Andra Pradesh etc. Even though export sector percentile is low compared to capital formation in financial sector, it's multiplying effect has drastic consequences on economy. About 21% decline in export was seen during 2008-09 and this resulted in job losses of approximately 1 million people in this sector. The industries that were badly affected were textile, gems, jewelry, leather and handicrafts. Clearly these states which had high growth rate due to exports had a major downturn in their income and increment in unemployment. Many of the workers in this sector are migrants from villages to cities because of which all those who had lost their jobs during the crisis had to return back to their rural areas. This questioned the apparent stability that rural area provided during crisis since the returning number of migrants was in thousands.

Export sector mainly consists of unorganized labor but the case is true not only for unorganized sector it is even true for organized sector where informal workers are employed and they too suffer form this. Only about 8% of total working class in India are covered by social securities like old age pension, unemployment insurance etc where as, among the rest of the community who have lost their jobs, have no means to afford these privileges that come from social securities. Migration of Indian workers in other countries back to India was also seen. The main reason for the fall of export sector can be attributed to the fact that exports from both organized and unorganized sector are consumed mainly by USA and Europe, as their economies were also undergoing recession it led to the decline in their import, owing to declined consumer consumption.

Agriculture which has lesser share in GDP growth had only marginal effects of crisis in terms of job losses. But it's effect on economy was seen at different levels. The reforms of 1990's were not in favor of farmers. Trade liberalization led to severe and frequent changes in crop prices. This volatility of crop prices had a increased burden on farmers other than unpredictable monsoons. During 2007 and mid 2008 globally primary commodities prices took a steep inclination which led to farmers shifting to cultivate high cash yielding crops, for more profit. As the crisis struck, these prices suddenly came down, especially oil seeds, leaving farmers empty handed and full of debt. The effect of which was reflected by about 10% increase in prices of food products. The rise in food prices was more pronounced for food grains rather than fruits, eggs, meat and vegetable which added additional woes to the public, mainly the poor.

Why did India take lesser hit during the crisis compared to other nations? Compared to any other developed country India did not sustain severe damages. Various domestic trade, public consumption and fiscal stimulus by government kept the economy growing, but with a slower pace. The growth of Indian economy depends majorly on its financial sector and export. The lessons that were learnt during the crisis of 1997-1998 paved way for creation of policies which led to slower pace of opening up of capital account(which basically reflects net change in nation's ownership of assets) of the country. Hence stringent policies by RBI made sure that Indian banks do not purchase mortgage - based securities and derivatives, which were the main reasons for crisis in US economy. Though many argued that additional tightening of interest rate by RBI curbed the growth even before crisis. But these were also the policies which prevented banks from going into bankruptcy. Government released three fiscal stimulus packages(part of budget used for public purposes during such times) which totally amounted for 2.7% of GDP in 2009. These packages included reduction in in-direct taxes(from public) and specific measures for sectors which got affected during this period of crisis. Although these policies have been implemented, because of decentralized system of governance and various other delays it takes time for them to reach their targets. But nonetheless growth in recent years is turning out to be positive. The timely action by Indian Government and RBI has prevented India from having the fate of USA and other developed economies. These policies by Government and RBI eventually increase consumer spending by providing employment, loans at lower interest and cutting down inflation, which will ultimately curb the slowdown of market.

The Global Financial Crisis surely showed us the flaws in our system, even if the policies of this system reduced the effect, and a need for more dependable policies which adapt to ever changing markets and investment sector, a more diversity of exports so that the impact of any such crisis would be distributed rather than clustering and affecting adversely on smaller groups. Ultimately it was Indian poor who was greatly affected hence there is a need for systems which monitor the financial activities efficiently so that the government is well prepared with the measures and strategies to tackle such situations in future or change the oncoming economic adversity into advantage.



References:
1. Bibek Debroy, India Country Report. In: Bertelsmann Stiftung (ed.), Managing the Crisis. A
Comparative Assessment of Economic Governance in 14 Economies. Gütersloh: Bertelsmann Stiftung, 2010.
2. An article by Shashi Tharoor, Former Indian Minister, How India Survived The Financial Crisis
3. Wikipedia: Economics Portal