India’s emergence from the 2008 crisis points to concerns of today


NEW DELHI: India – 10 years since the global financial crisis, countries around the world felt the impact in a myriad of ways. India being an emerging economy, having good growth can learn from the events that lead up to those historic series of events.

Managing financial stability, leverage against risk, irresponsible lending and borrowing are practices that still need to be looked at in the current context; but they were the talking points the aftermath of the 2008 financial crisis. Confidence and inflation were at a low; hence government and central banks adopted policy measures to calm things down – Japan, USA and Switzerland cut policy rates drastically.

For India, at the time, the economy prior to the crisis was robust and riding high. The year previous to the crisis, India’s GDP was at 9.3% (2007-08). In the year following, it fell to 6.7%. What followed domestically was a combination of monetary and fiscal stimulus; slashing rates and increasing government spending. Jahangir Aziz, Chief Emerging Markets Economist at JPMorgan, in a column for Bloomberg, states the extent of the damage – “The damage to household, corporate, and bank balance sheets in the developed economies was far more extensive than imagined and it would require much larger and unconventional monetary easing and policy support to eventually pull them out of the crisis”.

The lessons for India are many. The overall picture is that the Indian economy has been opening up since the crisis, for better or for worse. An economic event of significance in an important emerging economy, or in a country like the USA or in the EU, has an effect domestically. The economy isn’t immune from global movements – positive or negative.

In India, currently, there is a crisis in the banking industry. Raghuram Rajan, the former RBI Governor, in a note to a parliamentary committee warned of the dangers of the banking crisis. Arundhati Bhattacharya, former Chairperson of SBI, in a column for Moneycontrol, mentions that the 2008 crisis had a part to play in the current problem of Non Performing Assets (NPA’s) in India banks – “Some effects are clear. Banking systems in India and the world evolved in the wake of the crisis. The renewed focus and emphasis on capital was definitely a result of the crisis. There was also an increase in emphasis on risk management”.

At the time, as Ms. Bhattacharya writes, SBI had put a whole time executive director on the board that was in charge of risk. In the aftermath of the crisis, the government, regulators and banks took steps to restore confidence and liquidity in the markets. Government spending was increased on infrastructure and thus began Public Private Partnerships (PPP). She continues in the column that more could’ve been done – “In hindsight, it would appear that there was misallocation of risk which was not understood or appreciated by stakeholders”.

Countries like India have held up better than others in the wake of the crisis; it’s still recoding good GDP growth, in spite of a weakening rupee and rising fuel prices. The role of the central banks has become larger. They have emerged as regulators and risk managers. The RBI through its Financial Stability Unit conducts system wide stress tests which focus on emerging risks by releasing Financial Stability reports. The argument Raghuram Rajan made is wise; he insists that the macroeconomic fundamentals should be shored up. One such concern is India’s current account deficit.

India needs to be on guard for any significant events in the global economy – fears of a trade war between the US and China could have adverse affects on both economies. Any major slowdown in the Chinese economy could have repercussions domestically.


All Comments