Tuesday, August 11, 2015

Impact of the Global Economic Crisis on India

Impact of the Global Economic Crisis on India
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I. Impact of the Global Economic Crisis on India:

1. Indian Stock Markets Crashed:
In October 2008, Indian Stock markets crashed along with the global stock markets on fears of US financial crisis. The Bombay Stock Exchange (BSE) Sensex lost over 2,000 points in the second week of October 2008. The value of Indian stocks listed on the US bourses sharply reduced causing losses of billions of dollars.

2. GDP Growth Expected to Moderate between 7% to 8%:
In the wake of the global financial crisis, a report released by the Finance Ministry in November 2008 identifies sectors of the Indian economy that are likely to be adversely impacted in varying intensities while segregating those that may not be affected at all and others which may have a positive impact. India’s Gross Domestic Product (GDP) growth is expected to moderate, yet look fairly robust. A GDP growth between 7 per cent and 8 per cent would still be one of the best under these circumstances, according to the report.

3. Positive Impact of the Global Economic Crisis due to Meltdown in Global Commodity Prices Especially Decline in Crude Oil Prices:
The report noted that owing to the meltdown in global commodity prices especially the decline in crude oil prices, the positive impact may get reflected through Moderation in inflation Improving the corporate profitability through input cost reduction and increasing their internal accruals. The sharp reduction in crude oil prices have moderated the prices of products which use crude oil and its derivatives as inputs such as fertilizers, chemicals and others. Community and Services - Relating to Defence and Social Sector Services would witness a positive impact. The Growth was also likely to improve on account of the Positive Impact of the Sixth Pay Commission and other wage increases.

4. Sectors of Indian Economy Experiencing a Moderate Impact of the Global Financial Crisis:
The Finance Ministry report pointed out that many sectors of the Indian economy would experience a moderate .

5.impact of the global financial crisis coupled with domestic factors:
Manufacturing, exports, construction, transport, insurance and banking, business services and real estate. Sectors of the Indian Economy Experiencing Neutral Impact - Agriculture, Electricity, Communication, Trade and Recreation.

6. Sectors of the Indian Economy Experiencing Negative Impact of the Global Financial Crisis:
Lower inflow of portfolio capital despite India being ranked the second most preferred destination in the latest World Investment Report.

7. Impact of the Global Economic Crisis on India Stronger than Expected:
The Reserve Bank of India (RBI) Governor D. Subbarao, said that the impact of the global financial crisis on India was stronger than expected. He pointed out that though India is not directly impacted, the country has not weathered the indirect knock-on effect of the global economic crisis. As the global economic crisis was turning out to be deeper and longer than expected, the impact on India was also turning out to be stronger.

8. Loss of Jobs:
The global economic crisis resulted in the loss of thousands of jobs in India. Recruitment was very low and temporary contract workers were the worst sufferers.

9. India has Several Strengths that can help Mitigate the Adverse Effects of the Global Economic Crisis:
The Centre’s Mid-Year Review 2008-09 presented to the Parliament in December 2008 pointed out that compared to other emerging economies, India has several strengths that can help mitigate the adverse effects of the global financial crisis: Having run a tight monetary policy during the first half of 2008-09, there is considerable scope for monetary policy easing over the next 6-12 months to offset the global increase in demand for money that is being transmitted to India. A pro-active monetary policy may be necessary if the global economic depression continued to adversely affect manufacturing India has relatively high share of services in GDP that tend to be less affected by cyclical downturns Five years of nearly four per cent growth in the Agricultural sector High domestic savings rate of 36 per cent which led to nine per cent growth in past years. India retained its position as a preferred destination for Foreign Direct Investment (FDI).

10. India can Turn the Global Financial Crisis into in an Opportunity to Review and Revisit Pending Reforms:
The then Finance Minister P. Chidambaram pointed out that India can turn the global financial crisis into an opportunity to review and revisit pending reforms. Introduction of reforms particularly in the financial sector would make the economy more competitive and economic regulatory and oversight system more efficient, quick and responsive to global developments. Aggressive easing of interest rates and fast-tracking of pending reforms was needed to mitigate the adverse impact of the global economic crisis on the Indian economy, according to the Mid-Year Review 2008-09 presented by the Centre to the Parliament in December 2008.

II. Steps Taken by the Government to Tackle the Impact of the Global Financial Crisis on the Indian Economy:

1. Monetary Policy:
The tool of macroeconomics policy which involves the regulation of money supply, credit and interest rates in order to control the level of spending in the economy. Focus on measures to increase liquidity in the banking system. Reduce interest rates Ease regulatory management.

Decreasing the CRR:
The Credit Reserve Ratio (CRR) is one of the tools of the monetary policy. When the CRR (the amount of money banks need to keep with the RBI) is decreased, there is more money in the banks to lend, which increases the liquidity.

2. Fiscal Policy:
An instrument of demand management which seeks to influence the level of economic activity in an economy through the control of taxation and Government expenditure. Primarily refers to the Government’s spending patterns. When inflation is falling the Government can increase expenditure, thereby increase demand. Fiscal Deficit Allowed to Expand beyond the Originally Targeted Level: In recognition of the need for a fiscal stimulus the Government had consciously allowed the fiscal deficit to expand beyond the originally targeted level. The fiscal deficit would be over 6 per cent in 2008-09 more than 3 percentage points of the GDP above what was originally targeted.

3. Monetary Measures Taken by the RBI:
The RBI cut the CRR from 9 per cent to 5 per cent. The repo rate (When RBI conducts a repo it lends to banks by purchasing securities and selling them back at a predetermined price) was reduced from 9 per cent to 5.5 per cent. The reverse repo rate (When RBI does a reverse repo it borrows from banks by selling them securities and buying them back at a future date) was reduced from 6 per cent to 4 per cent. These measures taken by the RBI released Rs.3,20,000 crore for the banking system to lend to the industry. The monetary measures undertaken by the RBI have made consumer loans cheaper. This would inevitably create demand. The industry including automobiles, white goods and consumer electronics would recover faster. With the Central Government mandated reduction in interest rates for affordable housing, the real estate sector has also been positively impacted.

4. Centre’s First Fiscal Stimulus Package to Shore up Various Sectors of the Economy from the Global Economic Meltdown (December 07, 2008):
The stimulus package aimed to revive crucial sectors affected by slowdown such as housing, exports, automobile, textiles and small and medium enterprises (SMEs) through additional funding. Across-the-board 4 per cent cut in Cenvat (Value Added Tax) to bring down the prices of most manufactured goods including cars, cement, textiles and other products. Additional Rs.20,000 crore earmarked for infrastructure, industry and export sectors for the current fiscal. Permitted India Infrastructure Finance Company Ltd. to raise Rs. 10,000 crore through tax-free bonds by March 2009 as part of the exercise to support the Rs.1,00,000 crore highways development programme.

5. Centre’s Second Stimulus Package (January 02, 2009):
The second stimulus package aimed at reversing the economic slowdown through higher public spending, providing additional liquidity for onward lending at lower interest rates, boosting sagging sale of commercial vehicles and making easier credit availability for the export sector, housing and small industries. India Infrastructure Finance Company would access Rs.30,000 crore to fund infrastructure projects. States to be allowed to borrow Rs.30,000 crore from market to finance their expenditure. Package allows Public Sector Banks (PSBs) to be recapitalised by Rs.20,0000 crore. Government asked the PSB’s to increase their credit targets for the fiscal to ensure optimal disbursal of funds at least cost.

6. Third Stimulus Package (February 24, 2009):
A reduction of 2 percentage points in the rates of excise duty and service tax, were announced by the Centre on February 24, 2009. The excise duty was reduced from 10 to 8 per cent while the service tax was reduced from 12 to 10 per cent. The Government was keen on restoring business confidence in the services sector. The Government’s objective was that the dispersal between the CENVAT rate and the service tax rate be reduced with a view to moving towards the Uniform Goods and Service Tax, according to the External Affairs Minister Pranab Mukherjee who was holding charge of Finance.

7. Significance of the Fiscal Stimulus Packages:
The fiscal stimulus packages focus on spurring growth in a grim scenario of a crumbling financial system and recession in the West in order to minimise the slowdown impact. The Government’s fiscal stimulus packages to deal with the economic slowdown were far more than just spending packages, according to the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia. The Government allayed fears that the stimulus packages were inadequate by pointing out that the packages would contribute to the widening of the fiscal deficit in 2008-09. Including the Central and State deficits, the fiscal deficit is expected to rise to 10 per cent of the GDP, according to Mr. Ahluwalia. Stimulus packages focused on infrastructure to bring the economy out of the current situation, according to Mr. Ahluwalia. Both public-private partnerships and government investment would be encouraged. The public expenditure in the packages was focussed on irrigation, housing for the poor, rural roads and urban infrastructure. Packages Provide Relief to All Sectors and Boost the Growth of the Economy: The Indian industry welcomed the stimulus packages describing them as a set of positive measures aimed at providing relief to all sectors and help give boost to the growth of the economy. By combining monetary and fiscal measures, the packages sought to address a number of concerns and restoring business confidence, according to the industry. The reduction in rates of excise duty and service tax were much needed fiscal measures which would go a long way in stimulating demand, according to the CII.

III. Conclusion:
1. RBI’s Views on the Current Economic Situation:
The global financial situation described as the worst since the Great depression, continues to be uncertain and unsettled. Some impact of the global financial crisis on India was felt through the credit, equity and the foreign exchange markets. The global financial crisis had reinforced the importance of putting special emphasis on preserving financial stability. The adverse global developments had led to moderate growth in the industrial and services sectors in the first-half of 2008-09. Later the impact on liquidity and credit was also felt. The financial sector in India is sound and healthy. Indian banks do not have financial exposure to the US sub-prime assets. The fundamentals of Indian economy continue to be strong.

2. India’s Financial Sector Mostly Insulated from the Risks of International Markets due to a Strong Regulatory Framework:
Economists point out that India’s financial sector has mostly been insulated from the risks of international markets due to a strong regulatory framework. Although India has a largely free market-based banking system, it has ensured that its regulatory checks and balances prevent any undue exposure to global risk and the financial sector is prepared to cushion adverse situations.

3. The Current Global Financial Crisis Calls for Governments to Focus on Employment Creation:
Analysts point out that the current global financial crisis can be used by Governments around the world to reshape policies, and put in place structures to help in increasing the pace of recovery. The adverse impact of the crisis has been on employment with millions likely to lose their jobs. India’s focus on urban and rural infrastructure projects linked to employment creation is commendable, according to analysts. Governments around the globe need to focus on employment creation to minimise the adverse impact of the current global financial crisis.

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