The Global Economic Crisis and its Impact on India

Much has been written about the way in which India was one of the few countries that was relatively unscathed because of the global economic crisis. Most of these narratives focused on how India managed to weather the storm in the dark days following the collapse of Lehmann Brothers. However, it cannot be completely said that the worst is over for India as events of the last few months have indicated.

Starting with the rating agency, S&P (Standard & Poor’s) downgrading it to the runaway inflation that has plagued the country, there have been other economic indicators as well that do not bode well for the future of the economy. Given these factors, it is too early to say that India is out of the woods.

However, a noteworthy aspect of the global economic crisis has been the way in which global banks nearly collapsed and had to be bailed out by their respective governments. It is to the credit of the policymaking elite in India that they did not allow the trading of derivatives that were responsible in part for the global economic crisis.

Further, the fact that the RBI (Reserve Bank of India) and the Finance Ministry took steps to ensure that the banks are adequately capitalized as well as ensuring that they set aside a portion of their capital towards statutory requirements has meant that the Indian banking system did not suffer the fate that many countries in Europe and especially the United States were faced with in the aftermath of the crisis.

It is important to remember that the Indian government did respond with a stimulus package and has followed a rather loose monetary policy, in the build up to the crisis. This has meant that the growth that India has experienced has been partly due to the availability of easy money.

And the fact that the RBI is now following a tight monetary policy is an indication that it recognizes the severity of the problem of inflation. This is one aspect that needs to be watched over the coming months.

Apart from this, there is the aspect related to the way in which India is not overly export dependent like China and hence, if the foreign exchange reserves and the balance of payments along with the current account deficit are managed properly, there is no reason why India can breathe easy. However, the recent gyration in the value of the Rupee that has fallen steeply against the Dollar means that this aspect needs to be watched as well.

In conclusion, the experience of the Indian economy in the aftermath of the global economic crisis has been mixed and though there some notable positives there are downsides as well. It is for this reason that the recent pronouncements from the Prime Minister and the Industry Captains against policy paralysis needs to be seen in the context of the revival of the India story. What happens next is anybody’s guess but it is fair to say that the golden years of growth might be behind us.