The global financial crisis has now become the staple of
front page news. Banks around the world, including those in India, are in the forefront of managing the challenge of crisis resolution. The turmoil in
the global financial markets is no longer just a concern for bankers and
economists. There is now almost universal consensus that the global economy is
set to weaken, with the debate shifting from whether emerging economies would
decouple from the advanced economies to whether the slowdown will be shallow
and somewhat protracted or deep and very long. While the events of the past
week underscore the seriousness of the situation, Director John Lipsky,
Managing Director of International Monetary Fund (IMF), quoted that "this storm can be weathered without a damaging global
recession, but attaining such an outcome will require clear and coherent policy
responses from public authorities and institutions around the world, together
with the restoration of private market functionality and an end to investors' spiraling
crisis of confidence".
Global Financial Outlook
According to IMF analysis, the most likely outcome is that
the financial turmoil still underway in many advanced economy markets will not
by itself prevent a gradual recovery in economic activity in 2009. Nonetheless,
the turmoil is one reason why we expect the recovery to be only gradual. At the
same time, the moderate growth we expect will not be sufficiently powerful to
quickly end the deleveraging and sector shrinkage afflicting financial institutions
in many key markets. Furthermore, the dangers created by the financial crisis
still represent the principal risk to near-term growth prospects.
Global Economic Outlook
Many economists are now predicting that this 'Great
Recession' of 2008/09 will be the worst global recession since the 1930s. By
early November, the IMF had revised its forecast for global growth downwards -from
3.9 per cent to 3.7 per cent for 2008, and from 3.0 per cent to 2.2 per cent
for 2009. There are two inferences from it that follow are:
- First that the global situation has deteriorated
rapidly, in a space of less than two months.
- Second that 2009 is going to be a more
challenging year than 2008.
Impact of the Crisis on India
India too has to weather the negative impact of the crisis. As the
impact on India unfolds, there are two questions that are on the forefront:
- First, how is that India is affected when it
came out of the Asian crisis relatively unscathed?
- Second, why is India affected even when its
exports account for only 15 % of its GDP?
The answer to both the questions lies in "Globalization". India is certainly more integrated into the world economy today than ten years ago at the
time of the Asian crisis. Integration into the world implies more than just
exports.
Going by the common measure of globalization, India's two-
way trade (merchandise exports plus imports), as a proportion of GDP, grew from
21.2 % in 1997-98 as compared to (the year of the Asian crisis) 34.7% in 2007-08.If
one takes an expanded measure of globalization, that is, the ratio of
total external transactions (gross current account flows plus gross capital
flows) to GDP, this ratio has increased from 46.8 per cent in 1997-98 as
compared to 117.4 per cent in 2007-08. These
numbers are clear evidence of India's increasing integration into the world
economy over the last 10 years.
Inflation
Headline inflation, as measured by the wholesale price
index, has fallen sharply, and the decline has been sustained for the past four
weeks, pointing to a faster-than-expected reduction in inflation. Largely, the
falling commodity prices have been the key drivers behind the disinflation;
however, some contribution has also come from slowing domestic demand. The
reduction in prices of petrol and diesel announced last week, and a cut in the
excise duties should further ease the inflationary pressures. Consumer price
inflation for the months of September & October 2008 did increase. This is
possibly owing to the firm trend in food-articles inflation and the higher
weight of food articles in the measures of consumer price inflation.
Historically, there has been a positive correlation between wholesale and
consumer price inflation, and given this correlation, consumer price inflation
too can be expected to soften in the months ahead.
