Global Financial Crisis & India

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GLOBAL FINANCIAL CRISIS & ITS EFFECTS ON INDIA
By
Subhankar Das

THE recent economic crisis, which originates in the USA, is being transmitted to almost every corner of the world like an epidemic, although economist thought that this dreaded financial turmoil will be a pandemic pertaining to only the USA. This financial tsunami has primarily three fangs which eventually engulf investment of investors’ worldwide. The first & foremost reason is the direct impact on the balance sheets of many FIs which invested in the mortgage backed securities & their derivatives that turned toxic following large scale defaults in the US housing market. Second, the crisis has created a liquidity crunch. The USA firms seeking liquidity resources massively withdrew their investments in stocks also led local investors to pull back from the market. Both factors contributed to the tightening of credit. Reinforcing these factors was the return of the local firms, which had previously borrowed in foreign markets, to the domestic market. These firms saw the foreign markets suddenly dry up. The final source of transmission of the crisis has been the real sector now frequently referred to as the ‘Main Street’ in the USA. The financial crisis coincided with the creeping recession in the USA & made it worse. That has meant a cut in the US demand for imports from other countries.

According to a recent report by IMF, the world’s GDP growth estimates have been cut to 3.7% for 2008 & 2.2% for 2009, which is significantly lower as compared to 5% achieved in 2007. Likewise, export volume forecast for the developing & emerging economies has been cut to 5.6% for 2008 against the 9.5% achieved in 2007. Even for 2009, the numbers are not impressive at 5.3%. To large extent, the slowdown will be consequent to the sharp deceleration in imports by advanced economies such as the US, Europe & Japan among others.

The picture in India although not as gloomy as in the case of advanced economies is nowhere exciting. The global slowdown is likely to impact Indian companies, which export or have their business units in international markets. To give some numbers almost 13% of the total Indian exports go to the US followed by the countries like UAE, China, Singapore, and the UK & Hong Kong. Meanwhile Indian export which grew at about 30.8% during April- September 2008 is already showing signs of a slow-down; the growth rate was down to 10.4% in September 2008. And, while official numbers released by the Director General of Foreign Trade says that exports are already down by 15% year-by-year in October marking the first such occasion in five years. It is really a hard time to boost exports in the next few months as the global crisis has deepened hurting demand around the world. The weak rupee may help to improve the appeal of Indian products among other Asian exports but subdued demand means that there will be little realized benefit for Indian exporters.

The moderation in external orders will hurt Indian business, which in turn reduce labor demand & weigh on consumption. Therefore, although India is relatively less trade dependent compared to its Asian neighbors, it is still exposed to external shocks. In this light expect tough times for some of them, which have a visible exposure to global markets. The hit will be an account of lesser volume, but could also mean lower realization. Companies which are dependent on the export markets or outsourcing will have a bleak future going ahead, the volume growth anyway is likely to decline on top of that the dollar rate will come down. Thus, companies will have to keep on reinventing themselves. The effect of this financial turmoil on various industries is described as follows. ❖ Apparel & Textiles: - The woes of the textile industry just don’t seem to end. While last year it was the rupee appreciation that affected textile exports, this year the weakening of demand in recession struck US, Europe & Japan is...
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