The Monetary, Fiscal and External Trade Policy in face of the Global Slowdown: The Indian Context
The global economic outlook deteriorated sharply over the last quarter. In a sign of the ferocity of the down turn, the IMF made a marked downward revision of its estimate for global growth in 2009 in purchasing power parity terms – from its forecast of 3.0 per cent made in October 2008 to 0.5 per cent in January 2009. In market exchange rate terms, the downturn is sharper – global GDP is projected to actually shrink by 0.6 per cent. With all the advanced economies – the United States, Europe and Japan – having firmly gone into recession, the contagion of the crisis from the financial sector to the real sector has been unforgiving and total. Recent evidence suggests that contractionary forces are strong: demand has slumped, production is plunging, job losses are rising and credit markets remain in seizure. Most worryingly, world trade – the main channel through which the downturn will get transmitted on the way forward – is projected to contract by 2.8 per cent in 2009. Contrary to the “decoupling theory”, emerging economies too have been hit by the crisis. The decoupling theory held that even if advanced economies went into a downturn, emerging economies will remain unscathed because of their substantial foreign exchange reserves, improved policy framework, robust corporate balance sheets and relatively healthy banking sector. In a rapidly globalizing world, the ”decoupling theory” was never totally persuasive. Reinforcing the notion that in a globalized world no country can be an island, growth prospects of emerging economies have been undermined by the cascading financial crisis with, of course, considerable variation across countries. After clocking an average of 9.4 per cent during three successive years from 2005-06 to 2007-08, the growth rate of real GDP slowed down to 6.7 per cent (revised estimates) in 2008-09. Industrial production grew by 2.6 per cent as compared to 7.4 per cent in the previous year. In the half year ended March 2009, imports fell by 12.2 per cent and exports fell by 20.0 per cent. The trade deficit widened from $88.5 billion in 2007-08 to $119.1 billion in 2008-09. Current account deficit increased from $17.0 billion in 2007-08 to $29.8 billion in 2008-09. Net capital inflows at US$ 9.1 billion (0.8 per cent of GDP) were much lower in 2008-09 as compared with US$ 108.0 billion (9.2 per cent of GDP) during the previous year mainly due to net outflows under portfolio investment, banking capital and short-term trade credit. As per the estimate made by the RBI in its Annual Policy announced on April 21, 2009, GDP is expected to grow by 6 per cent in 2009-10. The contagion of the crisis has spread to India through all the channels – the financial channel as well as the real channel.
Effects of the Crisis on India
GDP Growth is slowing down
GDP growth exceeded 9.0% in the last three years but is expected to slowdown in the current year in view of the global financial crisis and slowdown •
However, India would still remain the second fastest growing major economy in the world •
Given the inherent strengths of the economy, the slowdown is unlikely to be very deep or protracted – recovery is expected much faster than other parts of the world.
Industrial Production has Moderated
Industrial growth has moderated to 4.1% during the Apr – Oct 2008 compared to 9.9% in the same period of the previous year.
Decline in Export Growth
India is a much more externalised economy now than ten years back. •
Using an expanded measure of globalisation – ratio of total external transactions (gross current account flows + gross capital flows) to GDP the figure is 117.4% in 2007-08 compared to 46.8% in 1997-98. •
Therefore, it is only expected that the global economic slowdown would start reflecting in India through India’s externalisation. 4.
Exchange Rate Volatility
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