GLOBAL RECESSION AND ITS IMPACT ONINDIAN ECONOMY

Pankaj Dogra, Sheikh KashifUNIVERSITY OF JAMMU, INDIA

Abstract: This paper is an attempt to look into the impact of global recession on Indianfinancial market, major initiatives taken up by the Government and Reserve Bank of India in the order to contain it with special focus on employment, import-export, interest rates, risk management, credit demand and taxation.Key Words: Global Recession, Impact on Indian Economy, GDP, Taxation, andInterest Rate, RiskIntroductionThe economic slowdown of theadvanced countries which started aroundmid-2007, as a result of sub-prime crisisin USA, led to the spread of economiccrisis across the globe. Many hegemonicfinancial institutions like LehmanBrothers or Washington Mutual orGeneral Motors collapsed and severalbecame bankrupt in this crisis. Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emergingeconomies like India. Many economists arenow predicting that this ‘GreatRecession’ of 2008-09 will be the worstglobal recession since the 1930s.Meaning Of RecessionA recession is a decline in a country'sGross domestic product (GDP) growthfor two or more consecutive quarters ofa year. A recession is also preceded byseveral quarters of slowing down. Aneconomy, which grows over a period oftime, tends to slow down the growth as a

part of the normal economic cycle. Aneconomy typically expands for 6-10years and tends to go into a recession forabout six months to 2 years. A recessionnormally takes place when consumerslose confidence in the growth of theeconomy and spend less. This leads to adecreased demand for goods andservices, which in turn leads to adecrease in production, lay-offs and asharp rise in unemployment

Impact On Indian EconomyIn India, the impact of the crisis has beendeeper than what was estimated by ourpolicy makers although it is less severethan in other emerging marketeconomies. The extent of impact hasbeen restricted due to several reasonssuch as-• Indian financial sectorparticularly our banks have nodirect exposure to tainted assetsand its off-balance sheetactivities have been limited. • India’s growth process has beenlargely domestic demand drivenand its reliance on foreignsavings has remained around 1.5per cent in recent period.• India’s merchandise exports arearound 15 per cent of GDP,.I. Stock MarketThe economy and the stock market areclosely related as the buoyancy of theeconomy gets reflected in the stockmarket. Due to the impact of globaleconomic recession, Indian stock marketcrashed from the high of 20000 to a lowof around 8000 points. Corporateperformance of most of the companiesremained subdued, and the impact ofmoderation in demand was visible in thesubstantial deceleration during thecurrent fiscal year. Corporateprofitability also exhibited negative

growth in the last three successivequarters of the yearII. Forex MarketIn India, the current economic crisis waslargely insulated by the reversal offoreign institutional investment (FII),external commercial borrowings (ECB)and trade credit. Its spillovers becamevisible in September-October 2008 withoverseas investors pulling out a recordUSD 13.3 billion and fall in the nominalvalue of the rupee from Rs. 40.36 perUSD in March 2008 to Rs. 51.23 perUSD in March 2009, reflecting at 21.2per cent depreciation during the fiscal2008-09.Hence, sharp fluctuation in the overnight forex rates and the depreciation of therupee reflects the combined impact ofthe global credit crunch and the deleveraging process underway in Indianforex market.III. Money MarketThe money market consists of creditmarket, debt market and governmentsecurities market. All these markets arein some or other way related to thesoundness of banking system as they areregulated by the Reserve Bank of India.According to the Report submitted bythe Committee for Financial SectorAssessment (CFSA), set up jointly bythe Government and the RBI, ourfinancial system is essentially sound andresilient, and that systemic stability is byand large robust and there are nosignificant vulnerabilities in the bankingsystem. Yet, NPAs of banks may indeedrise due to slowdown as Reserve Bankhas pointed out. But given the strengthof the banks’ balance sheets, that rise isnot likely to pose any systemic risks, asit might in many advanced countries.IV. Slowing GDPIn the past 5 years, the economy hasgrown at an average rate of 8-9 per cent.Services which contribute more than half

of GDP have grown fastest along withmanufacturing which has also done well.But this impressive run of GDP ended inthe first quarter of 2008 and is graduallyreduced. Even before the globalconfidence dived, the economy wasslowing.V Reduction In Import-ExportDuring 2008-09, the growth in exportswas robust till August 2008. However, inSeptember 2008, export growth evinceda sharp dip and turned negative inOctober 2008 and remained negative tillthe end of the financial year. For the firsttime in seven years, exports havedeclined in absolute terms in October2008.. Similarly, imports growth also witnessed a deceleration during October-November 2008, before turning negative thereafter.VI. Reduction In EmploymentEmployment is worst affected duringany financial crisis. So is true with thecurrent global meltdown. This recessionhas adversely affected the serviceindustry of India mainly the BPO, KPO,IT companies etc. According to a samplesurvey by the commerce ministry109,513 people lost their jobs betweenAugust and October 2008, in export relatedcompanies in several sectors,primarily textiles, leather, engineering,gems and jewelry, handicraft and foodprocessingVIII. TaxationThe economic slowdown has severelydented the Centre’s tax collections withindirect taxes bearing the brunt. The tax-GDP ratio registered a steady increasefrom 8.97 per cent to 12.56 per centbetween 2000-01 and 2007-08. But thistrend has been reversed as the tax-GDPratio has fallen to 10.95 per cent duringcurrent fiscal year mainly on account ofreduction in Customs and Excise Taxdue to effect of economic slowdown.

Response To The CrisisThe future trajectory of the economicmeltdown is not yet clear. However, theGovernment and the Reserve Bankresponded to the challenge strongly andpromptly to infuse liquidity and restoreconfidence in Indian financial markets.The fiscal and monetary responseto the crisis has been discussed in thefollowing points-I. Fiscal ResponseThe Government launched three fiscalstimulus packages between December2008 and February 2009. These stimuluspackages came on top of an alreadyannounced expanded safety-netprogramme for the rural poor, the farmloan waiver package and payoutfollowing the Sixth Pay Commissionreport, all of which added to stimulatingdemand.The challenge for fiscal policy is tobalance immediate support for theeconomy with the need to get back ontrack on the medium term fiscalconsolidation process. The fiscalstimulus packages and other measureshave led to sharp increase in the revenueand fiscal deficits which, in the face ofslowing private investment, havecushioned the pace of economic activity.II. Monetary ResponseThe RBI has taken several measuresaimed at infusing rupee as well asforeign exchange liquidity and tomaintain credit flow to productivesectors of the economy such as infusingliquidity through interest ratemanagement, risk management andcredit management which is described indetail under the following heads:-1. Interest Rate ManagementIn order to deal with the liquiditycrunch and the virtual freezing ofinternational credit, RBI took

steps for monetary expansionwhich gave a cue to the banks toreduce their deposit and lendingrates. 2. Risk ManagementThere has been a sustained demandfrom various quarters for exercisingregulatory forbearance in regard toextant prudential regulationsapplicable to the banking sector. Asa part of counter-cyclical package,RBI has already made severalchanges to the current prudentialnorms for robust risk disclosures,transparency in restructured productsand standard assets.3. Credit ManagementThere was a noticeable decline in thecredit demand during 2008-09 whichis indicative of slowing economicactivity- a major challenge for thebanks to ensure healthy flow ofcredit to the productive sectors of theeconomy. The reduced fundingdemand on the banks should enablethem to reduce the interest rates ondeposit and thereby reduce theoverall cost of funds. Althoughdeposit rates are declining andeffective lending rates are falling,there is clearly more space to cutrates given declining inflation. Inorder to facilitate demand for creditin the economy the Reserve Bankhas taken certain steps.

Future Outlook For IndiaTo sum up we can say that the globalfinancial recession which started off as asub-prime crisis of USA has brought allnations including India into its fold. TheGDP growth rate which was around nineper cent over the last four years hasslowed since the last quarter of 2008owing to deceleration in employment,export-import, tax-GDP ratio, reduction

in capital inflows and significantoutflows due to economic slowdown.The demand for bank credit is alsoslackening despite comfortable liquidityin the system. Indian financialmarkets are capable of withstanding theglobal shock, perhaps somewhat bruisedbut definitely not battered. India, with itsstrong internal drivers for growth, mayescape the worst consequences of theglobal financial crisis. In other words,the fundamentals of our economycontinue to be strong and robust. Yet, it is not possible to clearlysee the path of the crisis and itsresolution over the coming months. Inthis sense, India is not unique as almostevery country, whether or not directlyaffected, has to manage the currenteconomic crisis under uncertainty.

REFERENCES

1. Economic Survey, Government ofIndia.2. http://www.economics.harvard.edu/about/views3. www.finmin.nic.in4. www.rbi.org.in