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Entrepreneurial spirit, rise in productivity and increasing savings. Unprecedented nine per cent growth Rising forex reserves Well performing services sector Strong fundamentals
E VOLUTION
OF THE CRISIS
Subprime mortgage crisis: rising interest rates, falling home prices leading to widespread default and foreclosures. Securitized mortgages labeled investment grade turn illiquid on back of loose regulations and irresponsible financial innovation. Host of institutions in US and Europe effected badly. Financial markets freeze, recession sets in.
D ECOUPLING T HEORY
Holds that emerging economies will remain unscathed if advanced economies went into a downturn because of their substantial foreign exchange reserves, improved policy framework, robust corporate balance sheets and relatively healthy banking sector. However, once the crisis hit, capital flow reversals, sharp widening of spreads on sovereign and corporate debt and abrupt currency depreciations , invalidate the theory.
I NDIA : S AFE
The Indian banking system had had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets. India's recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandize exports, accounts for less than 15 per cent of our GDP. So the question is, why were we effected?
Increased globalization.
India's two-way trade (merchandize 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.
Ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.
In 2007-08, India received capital inflows amounting to over 9 per cent of GDP as against a current account deficit in the balance of payments of just 1.5 per cent of GDP, which shows the importance of external financing.
H OW I NDIA
WAS HIT ?
Financial Channel
Real Channel
Confidence Channel
F INANCIAL C HANNEL
Corporates withdrew investment from NBFCs and MFs, putting redemption pressure Capital flows reversed, corporates converted domestically raised money to foreign currency to meet foreign obligations
Rupee depreciated
R EAL C HANNEL
Fall in outsourced services demand as overseas firms face restructuring and downsizing.
Monetary measures
Lower interest rates, CRR, SLR, repo and reverse repo rates Expansion of refinance facilities for export credit Relaxation of ECB rules for corporates, NBFCs and HFCs
additional public capital expenditure government guaranteed funds for infrastructure spending cuts in indirect taxes expanded guarantee cover for credit to MSEs additional support to exporters
Strong rebound in investment demand Domestic private demand remained dampened Inflation started increasing due to high liquidity and money supply Monetary measures withdrawn; SLR, export credit refinance limit, etc., restored to pre-crisis levels.
Sustained increase in food prices and manufactured goods CRR raised to contain excess liquidity Repo and reverse repo rates were increased Risks from sluggish global economy, rebound in global commodity prices, volatile capital flows and high domestic food prices remaing significant.
A FTERMATH
OF
C RISIS 2008-09
Slowdown in growth
Widespread unemployment Fiscal burden on countries, world-wide.
H IGH
Across the globe, central banks are pegging their lending rates at near zero levels, leaving scope for another asset bubble to take down the global financial system.
E UROPEAN
DEBT CRISIS
Euro-zones Sovereign Debt Crisis, threatens to derail the recovery process and plunge the world into a fresh financial crisis. Some of the countries in the Euro-zone, namely, Portugal, Ireland, Italy, Greece and Spain (PIIGS) are finding it difficult to even service their debts.