The current economic crisis that started off as a sub-prime crisis in the US housing mortgage sector has snowballed into the largest credit crunch the world ever faced since the Depression of 1929. When the crisis erupted, there were some premature talks among the Indian policymakers that India would relatively be immune to this crisis but the fact remains that no country has been spared from this crisis.
India has been one of the strongest performing economies over the years registering growth rates of over 8% for the past four years. Although India has not faced a financial meltdown of the kind experienced in the US, owing to its strong fundamentals, well regulated banking system and controls on domestic finance, it has experienced the knock-on effects of the global crisis. Following are some of the major impacts on the Indian economy:
Firstly, the immediate impact has been the outflow of FII’s from the Indian equity markets in order to cover losses in their home countries and seek havens of safety in an uncertain environment. In 2007-08, net FII inflows into India amounted to $20.3 billion. As compared with this, they pulled out nearly $13 billion in the year 2008-09 resulting in a net outflow of FII money from India, the first time in 11 years. Given the importance of FII investment in the Indian stock markets, this pullout triggered a free fall in the BSE sensex from its closing peak of 21,000 in January 2008, to sub -9000 levels in early months of 2009, eroding millions of investor money.
Secondly, this reversal of capital flows has led to a sharp depreciation of the Rupee; the Rupee fell from Rs 39.20 to the dollar to Rs 48.86 between January 1 and October 16, 2008. While some argue that this depreciation may be good for India’s exports which have declined sharply due to the slowdown in global markets, it is not so good for those who have accumulated foreign exchange payment commitments.
Thirdly, it is a known fact that credit financed consumption and housing underpin the 8% growth trajectory India has been experiencing over the years. In this uncertain environment banks and other financial instructions have cut back on credit, especially the huge volume of housing, automobile & retail credit given (auto loans increased marginally by 1.2% in the year 2008 as against a 30% increase in the previous year whereas loans to finance consumer durable fell by 33% in the year 2008). India Inc. which till now did not have any problems in finding money to fund their acquisition and expansion plans is also finding the going tough due to this curtailment of credit.
Fourthly, this crisis has forced many companies to resort to drastic measures in order to reduce costs and cover their losses. Some of the measures include layoffs, salary cuts, bonus cuts and freeze on hiring. This has led to an increase in the un-employment rates in India and the world over.
Lastly, the indirect impact is in the form of the losses sustained by non-bank financial institutions especially mutual funds, as a result of their exposure to domestic stock and currency markets. Such losses are expected to be large, as signalled by the decision of the RBI to allow banks to provide loans to mutual funds against certificates of deposit (CDs) or buyback their own CDs before maturity. These losses are bound to render some institutions fragile, with implications that would become clear only in the coming months.
In conclusion, we can say that India is neither thrashed nor is safe from the crisis and if the Citigroup’s Vulnerability Index is any indicator then India remains the most vulnerable economy in the Asian region.
India has been one of the strongest performing economies over the years registering growth rates of over 8% for the past four years. Although India has not faced a financial meltdown of the kind experienced in the US, owing to its strong fundamentals, well regulated banking system and controls on domestic finance, it has experienced the knock-on effects of the global crisis. Following are some of the major impacts on the Indian economy:
Firstly, the immediate impact has been the outflow of FII’s from the Indian equity markets in order to cover losses in their home countries and seek havens of safety in an uncertain environment. In 2007-08, net FII inflows into India amounted to $20.3 billion. As compared with this, they pulled out nearly $13 billion in the year 2008-09 resulting in a net outflow of FII money from India, the first time in 11 years. Given the importance of FII investment in the Indian stock markets, this pullout triggered a free fall in the BSE sensex from its closing peak of 21,000 in January 2008, to sub -9000 levels in early months of 2009, eroding millions of investor money.
Secondly, this reversal of capital flows has led to a sharp depreciation of the Rupee; the Rupee fell from Rs 39.20 to the dollar to Rs 48.86 between January 1 and October 16, 2008. While some argue that this depreciation may be good for India’s exports which have declined sharply due to the slowdown in global markets, it is not so good for those who have accumulated foreign exchange payment commitments.
Thirdly, it is a known fact that credit financed consumption and housing underpin the 8% growth trajectory India has been experiencing over the years. In this uncertain environment banks and other financial instructions have cut back on credit, especially the huge volume of housing, automobile & retail credit given (auto loans increased marginally by 1.2% in the year 2008 as against a 30% increase in the previous year whereas loans to finance consumer durable fell by 33% in the year 2008). India Inc. which till now did not have any problems in finding money to fund their acquisition and expansion plans is also finding the going tough due to this curtailment of credit.
Fourthly, this crisis has forced many companies to resort to drastic measures in order to reduce costs and cover their losses. Some of the measures include layoffs, salary cuts, bonus cuts and freeze on hiring. This has led to an increase in the un-employment rates in India and the world over.
Lastly, the indirect impact is in the form of the losses sustained by non-bank financial institutions especially mutual funds, as a result of their exposure to domestic stock and currency markets. Such losses are expected to be large, as signalled by the decision of the RBI to allow banks to provide loans to mutual funds against certificates of deposit (CDs) or buyback their own CDs before maturity. These losses are bound to render some institutions fragile, with implications that would become clear only in the coming months.
In conclusion, we can say that India is neither thrashed nor is safe from the crisis and if the Citigroup’s Vulnerability Index is any indicator then India remains the most vulnerable economy in the Asian region.
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