How will India Survive In Global Financial Crisis
The significance of the financial crisis that has hit the US economy
can be measured from the fact that the cost of the rescue of these
financial giants to the Federal Reserve and Treasury Department has
been estimated at close to a trillion dollars.
According to some analysts, the total cost on this count could go up to
trillion since the financial turmoil is not likely to end anytime
soon. Most of these banks had created debts to the tune of 30-40 times
their equity against the prudential norm of not exceeding ten times.
In India, the Reserve Bank of India has been pumping in liquidity into
the system and local banks have been borrowing at least Rs 70,000 crore
on an average over the past three weeks under its liquidity adjustment
facility. Even so, liquidity has been drying up.
Recently, the Asian Development Bank down-scaled the growth
expectations of many Asian economies, including India’s, in its half
yearly report: Asian Development Outlook 2008.
The ADB attributes this to the worsening conditions in major industrial
economies that will weaken demand for goods and services. “The myth of
uncoupling has been exploded”, the report says.
India’s GDP growth estimate for the current financial year has been
downgraded from 8% to 7.4% and, for the next financial year, from 8.5%
to 7%.
ADB bluntly states that “very large fiscal imbalance created by the
current level of subsidization of oil, fertilizer and food, as well as
other off-budget items, sets a daunting task for economic management.”
With the financial turmoil in the US and Europe showing signs of
worsening since the publication of Asian Development Bank’s half-yearly
report, one need not be surprised if GDP growth in India turns out to
be even lower than that projected by Asian Development Bank — just
around 7% or so for the current fiscal. In line with the falling
capital markets across the world, which have already wiped out investor
wealth of over ten trillion dollars this year so far, the Indian stock
market has witnessed an unprecedented fall over the past few weeks. Not
surprisingly, FIIs have been pulling out from the stock market in a big
way, corporate borrowings from the global markets are becoming
increasingly difficult, raising money for new investments through
public issues is on hold, and liquidity in the economy is fast drying
up.
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