Global Financial Crisis and India

The global financial crisis which witnessed the biggest ever bankruptcy in United State’s premier financial institutions in the early second week of September, 2008 has soon engulfed in other countries of the world including European and South East Asian countries.

The IMF in its recent “World Economic Outlook” report observed that the “financial turmoil which began in the summer of 2007 has mutated into a full-blown crisis”.

With the financial turmoil ravaging economies globally, four out of five investors feel that the world will continue to be gripped by recession over the coming years, despite the injection of billions of dollars by various governments. Reeling under the impact of recession, 25 banks in USA have already collapsed in the year 2008.

In September 2008, Merill Lynch of USA was bought over by Bank of America, Lehman Brothers failed for largest bankruptcy in the US. AIG was given an 85 billion US dollar package by the US Federal Reserve for its revival.

While considering the impact of current global financial crisis on the Indian economy it can be clearly stated that Indian economy has been passing through a critical phase experiencing slowdown in economic growth rate, high rates of inflation, fall in the growth rate of exports etc. as a result of global recession.

Moreover, the current global financial crisis will also create serious impact on the Indian economy in the long run. Indian stock market has been bearing an unfavourable impact the global crisis as the Sensex in going downwards causing widespread confusion and uncertainties among the small investors and depositors. Thus the growth of Indian economy is going to be affected in the long run as a result of on-going global financial crisis.

The global crisis has already affected some of our export oriented industries like—automobile, leather, electronics, Diamond Jewelleries, readymade garments, handicrafts, textiles, machinery industry etc. seriously. As a result, some of these industries have already declared cut in production, temporary suspension of work, laying off workers etc.

India’s export oriented leather industry employing 2.5 million people would be forced to lay off around 5.0 lakh workers in the next three to four months with the worsening market scenario in US and Europe. Similar threat is apprehended in vehicle industry, diamond industry, garment industry etc.

Regarding Indian banking sector in the aftermath of global financial crisis Prime Minister Dr. Manmohan Singh has already assured the Lok Sabha that Indian banks, both in the public sector and private sector, are comparatively financially sound, well capitalized and well regulated.

There is no fear of failure of any bank as it happened in USA and the deposits in these banks are quite safe. RBI has also introduced some measures to pump more liquidity into the economy, reducing short term repo rate for lending.

As a result, interest on bank loans has been reduced paving the way for cheaper housing loans, consumer loans, corporate loans and personal loans which will definitely raise consumer’s demand. Indian banks are also having limited exposure to sub-prime lending unlike US.

Moreover, Indian banking as reformed by Narasimham Committee Report (1992 and 1998) is now well placed in terms of sound banking practices such as adequate capitalisation, good provisioning norms, prudential practices, profitability and well structured supervision.

These measures have placed the banks and financial institutions of our country in a better position and effectively insulated them from the current volatility of the bourses.

As Indian financial system has sound fundamentals and Indian Government has introduced right systems and practices for promoting safe, transparent and efficient market to protect market integrity along with correction measures by RBI thus the current global financial crisis is not likely to affect it much.

The International Monetary Fund (IMF) in its statement issued on December 31,2008 observed that the current global financial crisis is expected to last for “several more quarters” and has called for a large and timely fiscal stimulus with targeted tax cuts increased spending and even insurance cover from governments, IMF has also mooted the idea of governments providing insurance against extreme recessions by offering contracts with payment.

The agency has pointed out that for instance, such an insurance could be made available, contingent on GDP growth declining below some “threshold level”. Thus the current crisis calls for two main sets of policy measures.

First, measures to repair the financial system. Second, measures to increase demand and restore confidence. Thus what is needed at the present circumstances is the adequate flow of credit to the real economy especially in the context of global meltdown.

Conclusion:

Considering the recessionary trends in the Indian economy along with global meltdown situation, the Government should look at this problem seriously and undertake cautious and bold steps to tackle this problem. Finally the people, in general, should not panic while facing the current recession.

Rather workers working both in public as well as private sectors should co-operate with the government policy in tackling this current phase of recession with a sacrificing attitude for the betterment of the economy of the country as a whole.