8/4/2019 Current Global Credit Crisis

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Current global credit crisis: Is India vulnerable too?

While the international economy struggles with the worst credit crisis in the economic history, India

would be a vulnerable market among the many other emerging markets around the world. India

also witnessed the impact of the crisis. Even as consumption and domestic revenue have been key

drivers of our growth, Indias integration into the world has been on the increase. In 1997-98, theyear of the Asian crisis, Indias two way trade as a proportion o f GDP grew from 21% to 35% in 2007-

08. Similarly the ratio of gross current account gross capital flows to GDP increased from 47% in

1997-98 to 117% in 2007-08. These numbers were a clear evidence of Indias increasing integration

into the world economy over a period of 10 years.

The global financial crisis which began in 2007 took a turn for the worse in September 2008 with the

collapse of several international financial institutions, including investment banks, mortgage lenders

and insurance companies. After a long spell of growth, the Indian economy also experienced a

downturn. Industrial growth faltered, inflation remained at double-digit levels, the current account

deficit widened, foreign exchange reserves depleted and the rupee depreciated.

The global crisis had a direct bearing on capital inflows into India. The rate of FDI inflow recorded an

increase in 2008-09 compared to 2007-08, the FIIs recorded heavy stream of outflows from India in

2008-09 contrary to a healthy rate of inflow in the previous year. Also, during the period, both

external commercial borrowings as well as short-term trade credit shrank substantially.

The most immediate effect of the crisis on India has been an outflow of foreign institutional

investment from the equity market. Foreign institutional investors became major sellers in Indian

markets. In 2007-08, net FII inflows into India amounted to $20.3 billion. As compared with this, FIIs

pulled out $11.1 billion during the first nine months of 2008, of which $8.3 billion occurred over thefirst six months of financial year 2008-09 (April - October). This has had two effects: in the stock

market and in the currency market.

In this uncertain environment, banks and financial institutions concerned about their balance sheets,

saw cutting back on credit, especially the huge volume of housing, automobile and retail credit

provided to individuals. According to RBI figures, the rate of growth of auto loans fell from close to

30% over the year ending June 30, 2008, to as low as 1.2%.

Indias fundamentals remain strong and its financial sector is robust. Its monetary policy is flexible

and has sufficient instruments at its disposal. The Indian corporate sector is not too leveraged, and is

undergoing a second round of restructuring, with resultant productivity gains. The flow of foreign

direct investment into India continues to remain buoyant. The most heartening aspect of all is that

the economic growth of India is almost wholly domestically financed.

The global crisis has certainly damaged Indias growth trajectory as investments and exports slowed

down. But as the global economy would recover, Indias turnaround would be sharper and swifter,

considering countrys strong fundamentals and untapped growth potential. Thus one of the greatest

challenges for the government and RBI would be to manage this adjustment with as little pain as

possible.

In conclusion, the Indian economy should be able to recover rapidly and return to a 9%+ growth path

soon.