India was impacted by the global financial crisis through three main channels: the financial channel as overseas financing dried up, the real channel as exports declined with falling demand from the US, Europe and Middle East, and the confidence channel as corporates withdrew investment. The crisis highlighted India's growing integration into the global economy through increased trade, financial flows, and corporate reliance on external financing. India responded with monetary easing and fiscal stimulus packages to contain the crisis initially, then shifted to recovery and inflation management policies as growth rebounded. However, risks remain from high global liquidity, the European debt crisis, and potential for another asset bubble.

1. I NDIA AND THE G LOBAL
F INANCIAL C RISIS

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

3. G LOBAL F INANCIAL C RISIS OF
2009

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.

11. R ESPONSE TO CONTAIN THE CRISIS

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.

15. B REWING E CONOMIC CRISIS

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.