2. I NDIA S HINING : G ROWTH S TORY
2001-2007
Entrepreneurial spirit, rise in productivity and
increasing savings.
Unprecedented nine per cent growth
Rising forex reserves
Well performing services sector
Strong fundamentals
4. E VOLUTION OF THE CRISIS
Subprime mortgage crisis: rising interest rates,
falling home prices leading to widespread default
and foreclosures.
Securitized mortgages labeled investment grade
turn illiquid on back of loose regulations and
irresponsible financial innovation.
Host of institutions in US and Europe effected
badly.
Financial markets freeze, recession sets in.
5. D ECOUPLING T HEORY
Holds that emerging economies will remain
unscathed if advanced economies went into a
downturn because of their substantial foreign
exchange reserves, improved policy framework,
robust corporate balance sheets and relatively
healthy banking sector.
However, once the crisis hit, capital flow
reversals, sharp widening of spreads on
sovereign and corporate debt and abrupt
currency depreciations , invalidate the theory.
6. I NDIA : S AFE FROM THE CRISIS ?
The Indian banking system had had no direct
exposure to the sub-prime mortgage assets or to the
failed institutions.
It has very limited off-balance sheet activities or
securitized assets.
India's recent growth has been driven predominantly
by domestic consumption and domestic investment.
External demand, as measured by merchandize
exports, accounts for less than 15 per cent of our GDP.
So the question is, why were we effected?
7. A NS : G ROWING I NTEGRATION WITH
THE G LOBAL E CONOMY
Increased globalization.
India's two-way trade (merchandize exports plus imports), as a
proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the
Asian crisis, to 34.7 per cent in 2007-08.
Increased financial integration.
Ratio of total external transactions (gross current account flows plus
gross capital flows) to GDP, this ratio has more than doubled from 46.8
per cent in 1997-98 to 117.4 per cent in 2007-08.
Increased reliance of corporate sector on external financing
In 2007-08, India received capital inflows amounting to over 9 per cent
of GDP as against a current account deficit in the balance of payments
of just 1.5 per cent of GDP, which shows the importance of external
financing.
8. H OW I NDIA WAS HIT ?
Financial
Channel
Real Confidence
Channel Channel
9. F INANCIAL C HANNEL
Overseas financing dried up
Corporate demand shifted to domestic banking sector
Corporates withdrew investment from NBFCs and MFs,
putting redemption pressure
Capital flows reversed, corporates converted domestically
raised money to foreign currency to meet foreign
obligations
Rupee depreciated
10. R EAL C HANNEL
Fall in outsourced services
Slump in demand for
demand as overseas firms
exports (US, ME, EU in
face restructuring and
downturn)
downsizing.
12. P HASE 1: C RISIS MANAGEMENT
(O CTOBER 2008-A PRIL 2009)
Monetary measures
Lower interest rates, CRR, SLR, repo and reverse repo rates
Expansion of refinance facilities for export credit
Relaxation of ECB rules for corporates, NBFCs and HFCs
Fiscal Stimulus packages of Dec ‘08 and Jan ‘09
additional public capital expenditure
government guaranteed funds for infrastructure spending
cuts in indirect taxes
expanded guarantee cover for credit to MSEs
additional support to exporters
13. P HASE 2: R ECOVERY M ANAGEMENT
(M AY 2009-D ECEMBER 2009)
Strong rebound in investment demand
Domestic private demand remained dampened
Inflation started increasing due to high liquidity
and money supply
Monetary measures withdrawn; SLR, export
credit refinance limit, etc., restored to pre-crisis
levels.
14. P HASE 3: I NFLATION M ANAGEMENT
Sustained increase in food prices and
manufactured goods
CRR raised to contain excess liquidity
Repo and reverse repo rates were increased
Risks from sluggish global economy, rebound in
global commodity prices, volatile capital flows
and high domestic food prices remaing
significant.
16. A FTERMATH OF C RISIS 2008-09
Large erosion in asset value
Failure of financial firms
Contraction of output
Slowdown in growth
Widespread unemployment
Fiscal burden on countries, world-wide.
17. H IGH LIQUIDITY ACROSS THE
WORLD
Across the globe, central banks are pegging their
lending rates at near zero levels, leaving scope
for another asset bubble to take down the global
financial system.
US Fed has pledged to keep interest rates low till
2014.
US treasury bonds have become the investment
of choice instead of lending to small businesses.
18. E UROPEAN DEBT CRISIS
Euro-zone’s ‘Sovereign Debt Crisis’, threatens to
derail the recovery process and plunge the world
into a fresh financial crisis.
Some of the countries in the Euro-zone, namely,
Portugal, Ireland, Italy, Greece and Spain (PIIGS)
are finding it difficult to even service their debts.