India during the ‘Great Recession’
Economists called the financial crisis of the 2007 – 2009 as the “Great Recession”, since it is a critical factor and vital cause for the failure of many businesses and significant influencer that has worsened many economies. After US busted out the housing bubble, this raised the rates of sub-prime and mortgage rates. India, the country which is fully an export driven economy like many other countries, the GDP of India mainly relies on domestic consumption. If a country’s GDP is based on domestic consumption, then how this financial tsunami did left vestige in India. The software industry, though not a prime deterministic factor for Indian economy, contributes notable financial transactions towards Indian economy. This brought flow of foreign funds in to the economy. The portfolio investments are visible in the Indian stock exchanges where foreign borrowings and FDI inflows remain less visible. When the global economies started decelerating, all these three factors bound to decease, which caused an impact on India’s emerging economy. The following essay is presented in a macroeconomic perspective, when the period of growth alternated to a period of stagnation, how Indian economy faced the crisis and how government and Reserve Bank of India responded by taking various steps to handle the economic downturn.
Effects in Indian Economy
India, after a subsequent growth, experienced a decline in its economy due to the global economic downturn. Faced many uncertainties like stumbling industrial growth, reduced foreign exchange and diminishing rupee value. This economic instability gave a worst hit in Indian economic portfolio by acutely affecting Indian banks. Many public sector units and banks, who invested money into derivatives, were funded by Lehman Brothers Inc and Meryl Lynch Inc for the exposure in the derivatives market. As Lehman Brothers Inc dissolved, many companies including leading banks in India filed losses for few hundred million dollars.
The impact of this huge financial crisis affected not only the financial markets primarily, but also the Indian IT industry, availability of global funds, and decrease in exports.
Reduced Availability of Global Funds
The availability of the global funds, which is accounted as one of the major driving force of the emerging economies like India, was considerably less. The initial stage experienced a rise in the interest rates and the equity prices were affected as the funds transformed into bonds. This less inflow didn’t affect the GDP of the Indian economy, since it holds the larger share on its domestic household savings. Indian companies, which relied on the foreign funds for its trading activities, were allowed less access, which affected corporate profitability due to high interest rates, created large demand for the domestic fund access and peer supply pressure restricted from capacity increase.
Effects in Indian Exports
India faced a sudden decline in its exports during this economic crisis, as a piece of Indian economy is a sole dependent on exports. In October 2008, after 35% growth in the previous months, filed its decrease in exports calculated to 15%, and shipments decreased to 33.33%, recorded to be a largest drop ever. This drop affected many industrial sectors right from the manufacturing goods to jewellery exports. This fall in the exports which lead to many job losses estimated to be 1million and closure of many small units.
Effects in Indian IT Industry
As discussed above, one of the main tools to transact and access the flow of foreign funds is the Indian IT industry, which contributes significantly a mind share towards the Indian GDP. Indian IT companies are well accredited for its quality software and services, well stated to be a major employment opportunity creator. Since, India has abundant labor resources and plays a major service provider across the globe. Many foreign companies are attracted to the Indian IT companies for its software development and for its service outsourcings. The recent outsourcing boom into India from the foreign countries mainly from US left an impact in the in the IT industry, which is accounted to be a major player in employment and foreign exchange. Approximately 60% of the Indian IT sector’s revenue is fully based only on the US suppliers. Around 30% of the industry’s revenue is generated from the financial services companies from US. Indian companies were appreciated for its flexibility in work, Quality product deliveries and for its efficient services. As there were no intense partnering between Indian firms and major financial services, major share of the IT firms were saved from the impact of the recession. Even though, some Indian IT companies partnered with US financial companies like Lehman Brothers Inc and Meryl Lynch Inc affected a little. This slowdown in the US economy lead 70% of the firms to negotiate for lower rates with their suppliers and nearly 60% have cut back the contracts. The sudden fall in the US economy reduced the growth of Indian IT firms down by 2-3%.
Now and then many new outsourcing opportunities were given to the Indian companies from the US firms, which involved in mergers and acquisitions, since the companies would look forward to reduce its selling, general and administrative costs through offshore developments. Even when some firms were affected a little in the economic downturn, however this crisis created equal opportunities in the outsourcing side of the IT industry.
Effects in Indian Financial Industry
The Indian financial market remained resilient, when the foreign institutional investors disappeared. As the impact of the economic crisis, the mental attitude of investors took a drift to withdraw from risky markets ended with substantial capital outflow that led to a liquidity crunch putting Indian stock market under huge pressure. Indian market continued to be healthier since its prime drive is through domestic consumption which includes productivity in agricultural sector, domestic infrastructure products and through small & medium enterprises. Indian banks have gained the investor’s trust and have most of the deposits, since most of the banks are nationalized and the investments are protected by the Indian Government.
Even though the domestic banking is secure as the nationalized banks remain the core of the system. This economic crisis created fragility as many banks invested the investments of US financial firms into the derivatives. Many other factors like decline in the foreign exchange reserves held by Reserve Bank of India, diminished value of rupee with respect to US dollar value, and decline in the share value of the stocks.
Steps for the Recovery