How will India Survive In Global Financial Crisis

Impact of US Financial Crisis on the Indian Economy

The US financial crisis, with an estimated rescue cost approaching a trillion dollars for institutions like the Federal Reserve and Treasury Department, has sent ripples across the global economy. Some analysts predict this figure could reach $2 trillion due to the prolonged nature of the turmoil. Many US banks are significantly leveraged, holding debts 30-40 times their equity, far exceeding the recommended ten-fold limit.

India's Response and ADB's Predictions

In response, the Reserve Bank of India (RBI) has injected liquidity into the Indian financial system. Indian banks have borrowed substantial sums, averaging Rs 70,000 crore over the past three weeks, through the RBI's liquidity adjustment facility. Despite these efforts, liquidity continues to dwindle. The Asian Development Bank (ADB), in its Asian Development Outlook 2008 report, has lowered growth projections for many Asian economies, including India. The ADB attributes this downward revision to the deteriorating economic conditions in major industrial economies, impacting the demand for goods and services. The report states, “The myth of uncoupling has been exploded”.

The ADB has reduced India's GDP growth estimate from 8% to 7.4% for the current financial year and from 8.5% to 7% for the next. They highlight India's substantial fiscal imbalance stemming from subsidies on oil, fertilizer, and food, alongside other off-budget expenses, as significant challenges for economic management.

Implications for India's Economic Growth

Given the worsening financial situation in the US and Europe since the ADB report's publication, India's GDP growth could fall even below the ADB's projections, potentially nearing 7% for the current fiscal year. Mirroring global capital market declines, which have erased over ten trillion dollars in investor wealth this year, the Indian stock market has experienced an unprecedented drop in recent weeks. Consequently, foreign institutional investors (FIIs) have been withdrawing significant investments, corporate borrowing from global markets is increasingly challenging, raising capital for new investments through public issues is stalled, and economic liquidity is rapidly diminishing.