INDIAN ECONOMY

Growth Hit, Market Plunges

(Essential Reading material for Civil Services General Studies Paper- I & II and extremely useful for MBA and other Competitive Examinations, Group Discussion and Interviews.)

The Reserve Bank of India (RBI) on October 10, 2008 announced a surprise one percentage point cut in reserve requirement of commercial banks- Cash Reserve Ratio (CRR) – so as to inject more liquidity into the system. This cut, coupled with the helf a percentage point cut announced on October 6, 2008, would release about Rs. 60,000 crore into the system.India’s industrial production seemed to hit rock bottom on October 10, 2008 , as the economy registered the slowest growth in 14 years . What made the situation worse was the global financial turmoil that sent the Sensex into a nosedive . Also , the fall in the value of rupee compounded the worries ,as the rupee turned out to be the most vulnerable of Asian currencies touching a record low of 49.26 per dollar.The recent developments in India’s economic scenario have clearly signalled the onset of a slowdown bordering on recession. The possibility of an economic recession was further accentuated by the dismal 1.3 percent industrial growth rate which the economy registered in August 2008. It represented a drastic downslide in industrial growth as compared to the 10.7 percent growth logged during the same month in 2007. As markets around the world tumbled amid deepening fears of a global recession , more evidence surfaced which showed that India, too was taking a bigger than expected hit. The impact of the global financial crisis, so far limited to the stock market and a couple of other export- centric businesses, now appears to be cascading into the real economy. It is evident that the ongoing global financial crisis has taken its toll in India as well. The financial turmoil , coupled with the monetary tightening measures put in place to check inflation, contributed in worsening the crisis . Analysis opine that a possible fall in industrial growth has for quite sometime been around the corner in view of the high interest rates and decreasing demand in both domestic and international markets. However , the magnitude of the fall has come as a surprise to many.Meanwhile ,almost all sectors of the economy continued to suffer as the global financial crisis triggered a number of spill-over effects. It included stock markets, rupee value and other such aspects. Sensex tanked by 800 points to 10,527 points on October 10, 2008 , which was the lowest in two years. The rupess touched an all-time low and the inflation rate was at11.8 percent for the week ended September 27, 2008 . The financial situation also markedly affected the fortunes of Indian business conglomerates, as the top five Indian companies suffered huge value erosion. Reliance (Mukesh Ambani) Group’s net worth went down by 49.1 percent ,Anil Ambani-led Bharti Group by 28.4 percent, KP Singh-led DLF Group by 75.3 percent , and Azim Premji-led Wipro Group slid by 46 percent.However to India’s credit, controls on capital flows and banking transactions have relatively insulated the country from the kind of turmoil that financial institutions are facing in the US and elsewhere. The economic slowdown in the US is not an abrupt development . This is basically a credit crisis which stems from skyrocketing expectations of financial services companies that made them overindulge in the risky business of trade in derivatives. Derivatives usually project overstated earning estimates, which , if used as an instrument for gauging returns, may happen to be a fallacious premise . The US financial majors like the Lehman Brothers, now in the dock , banked overmuch on such innovative patterns as trade in Futures & Options . In the long run, the rick factors associated with such ventures caused their failure. As a result , markets around the world took a tumble. India has so far been comparatively immune to the global turmoil because of the fact that the country’s financial and banking set – up revolves around old- world and time- tested principles involving savings deposits, mutual funds, equity shares and the likes. These instruments have a lower risk of inducing across the board failures and that is why Indian economy appears relatively safe as of now. However , there is concern at the highest level that though the US meltdown has not had a substantial impact in India, a prolonged crisis may take is toll on our economy as well. Globalisation has interlinked all nations and economies to the extent that no single country can sustain immunity for long in the wake of a global crisis . In some sectors such as IT and in the overall corporate scenario , the impact of the turmoil is already visible. Experts are unanimous in their opinion that if such a situation continued for long , it will be foolish to expect that India will remain insulated in the long run. Referring to emergency liquidity injection by central banks around the world , Union Finance Minister Mr. P. Chidambaram said that India would also take the necessary steps to bring the situation under control. He added "We will take steps to infuse liquidity because we recognize that flow of credit efficiently and smoothly through the system is vital to the stability of the financial system".