B.Sc.

Sem 5 Examination
2022
India Amidst
ECOA, CC 12 Indian
Economy Global Crisis
By Mihir Rakshit

Roll No. – 203031-11-0030

Reg. No. – 031-1211-0321-20
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review
The writer is emphasizing that global meltdown has seriously affected the ongoing economic slide
of Indian economy in considering the domestic and external factors. He is of the opinion, that there
are palpable signs that our economy was losing stain long before the outbreak of the global crisis.
And policy omissions and commissions has only aggravated the problem. He has also opined that
the decoupling hypothesis is ‘wrong’.

Even there are pre- crisis developments – (i) which has started nearly six months before financial
crisis along with all developed countries from August 2008, (ii) he is clearly noting that there is
significant increase in agricultural GDP; 3.8% in 2006-07 to 5% in 2007-08. But in contrast there is
a decline and slowdown in trends in secondary and tertiary sectors.

He is of the view; the deceleration was due to demand side factors operating in the market for the
non-agricultural products. In Indian context the autonomous demand requires modifications in two
respects - (i) distinguishing public and private investment (ii) remittances from NRIs significantly
drives up domestic demand. It is observed that deceleration of Indian economy in preceding era is
caused by declining trend in capital formation; one of the many sources.

He is pointing to the fact that there was a sharp slowdown in private investment since 2005-06,
downturn in capital formation in pulling down GDP growth well ahead of global financial turmoil.
Though there is 17.6 percentage point jump in public investment, 7.2 percentage point fall in
aggregate investment in 2008-09 is almost certainly due to the continuation of the downward trend
in private investment from 2005-06.

There was a sharp slowdown in exports in the pre-crisis period. In his observation, export slowdown
was causing decline in GDP growth in general and industrial growth in particular during 2007-08.
Between 2006-07 to 2007-08 there was 15.8 percentage fall in ELEM attests to enormous
significance in GDP deceleration.

Between 2006-07 and 2007-08 there was growth of public investment and government consumption
which helped in autonomous expenditure and prevented a sharper slide in GDP growth. Both
growth debilitating and enhancing factors worked.

He observed that it is not easy to explain why the slowdown in consumption growth was larger than
that in GDP in 2007-08. The downward trend in consumption ratio is of major macroeconomic
significance for which GDP growth is demand driven. He is pointing to the factor, the worsening
distribution of income in sunrise sector and that of unorganised enterprises. There was increase in
demand for food and other commodity prices which had impact on non-agricultural goods and
services.

With the starting of global crisis, he has noticed a sharper slowdown in private consumption and
public investment which has connection with slowdown in GDP and industrial growth from first
quarter of 2007-08.
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The first significant impact of global crisis was on the country’s capital inflows specially on
external commercial borrowing and FII. ECBS and FII registered a steep fall in October, November
2007 from $3.6 billion and $5.7 billion to $2.2 billion and negative $1.6 billion. It has impact on
private bonds and government securities. As to be expected the reversal of capital growth led to a
steady fall on value of INR and running down of foreign currency assets by the RBI between
October 2007 and November 2008.

Though there was share market boom continued until early 2008 and he finds in Indian economy
there appears to be no direct casual link between capital formation and either FII or share price. He
noted some adverse consequences for credit-financed economic activities. Banks were not
honouring guarantees extended to traders, domestic exporters were in trouble to secure credit. And
all had greater impact on Indian exports than imports and the chain relation, negative impact on
domestic demand for not getting raw materials for exportable goods which again caused problems
of unemployment in domestic and international economy. There was reversal in banking behaviour
in giving loans to the buyers of real estate and consumer durables so rise in NPAs resulting erosion
of banking capital was profound.

Global economy faced (September 2007 to October 2008) stagflationary phase, with growth
slowdown on the one hand and rising inflation on the other. Surge in prices of crude oil in the
international market affected the country’s trade balance and hence the scale of domestic economic
activity directly and through multiplier mechanism.

He is of the opinion that external trade had quite the impact on domestic economy on various points.
Firstly, a sharp drop in export growth, secondly share of exports at around 22% of GDP and thirdly
crude oil which is most important item of India’s merchandise import.

Changes in international oil prices no wonder had major consequences on India economy and there
is adverse impact of global development transmitted through trade is fairly clear. Sin fourth quarter
of 2006-07 CAD continued to widen and was high as 4.3% of GDP in 2 nd quarter of 2008-09.
Slowdown in global GDP is an important factor constraining the country’s exports. Due to world
income elasticity of demand of Indian exports being high, global meltdown on the country’s export
earnings tended to be large.

Interestingly the depreciation of INR has helped in limiting the GDP slowdown. India’s earnings
from merchandise exports in terms of USD registered at 33.3%. But when the recessionary forces
hit, export growth plummeted and turned negative. Rising crude oil prices in the midst of global
gloom increased sources of NRI incomes and gave rise to remittances as also in exports.

He observed two types of policy failures which contributed towards pre-crisis slowdown that
magnified the negative impact of global downturn – structural and macro-management. Government
policies were counterproductive; the programmes like Golden Quadrilateral, and other highway
projects, rural cum urban reconstruction and the MGNREGA “have provided both a demand and
supply side boost to the economy”. There was serious deficiency in stimulating private investment
specially in sectors with large positive externalities. There was weakness in government policy
relating to PPP. It also lies in reliance of private funding but a fraction of private investment on
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highways and other infrastructure has not totally materialised. And there was a steep fall in private
investment which led to fall in capital formation. In the context of macro-management, six months
after the global crisis, government proposed to reduce revenue deficit by 0.4 and fiscal deficit by 0.7
percentage points which in his opinion estranged orthodoxy regarding the superiority of monetary
and fiscal policies for controlling cycles.

Though CRR was raised and RBI’s policies during this phase was similar to that of many central
banks including European central banks. The government following the example of China, UK and
other countries announced fiscal stimulus package on 7th December 2008.

In future as India is globalised more and more, the global recession may hit India to a greater extent
and there is no universal policy prescription for this. Depending on the origin of global crisis, the
government should take necessary actions. In this paper, the author could discuss or relate a
reference to the previous global crisis and India’s policy reaction to those crises. This comparison
could give an indication for the path for handling future crisis.