Indian Politics Confronting the Global Crisis

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Indian Politics Confronting the Global Crisis

• Mike Murphy
• College Lecturer in Marketing, U.C.C.
• Visiting Marketing Professor (2008/9), LIBA, India

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Crisis has lower impact on India

• Financial sector fundamentally sound
• Tighter controls on bank lending
• small property bubble (1520 falls likely to
  be re-gained by year end) current shortage of
  20 million units!
• Little exposure to sub-prime debt (only one
  bank)
• Non-performing loans just 2 of bank lending
  nationally
• Banks are well-capitalised (capital adequacy
  ratio of 13)
• High domestic savings rate (37.7 of GDP by 2007)
• Foreign exchange reserves reach 315bn by May
  2008
• Strong internal market exports only 22 of GDP
• But 29 fall in exports between April and Sept.
  2009
• High growth rates (9 annually for 3 years
  before crisis) powered by rapid infrastructural
  and other development current growth rates of 6
  7

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Impact of Crisis on India (cont.d)

• Sensex fell from a high of 20873 to less than
  8160 - but now back to 16,500 (second highest in
  BRIC, at 19.1 times earnings)
• But relatively few Indians have shares, pension
  funds etc.
• Rupee depreciated 25 due to increased foreign
  exchange demand due to fall in foreign credit
  supply
• Net capital flows fall from 108bn to 9.1bn
  foreign exchange reserve falls by 58bn
• But weaker rupee now helping exporters
• Budget deficit has grown to 6.8 of GDP (v. 12.5
  for Ireland!). Limited scope for further deficit
  spending (Moodys)

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Response of the Indian Government

• Monetary Policy
• RBI shift from monetary tightening to monetary
  easing
• Reduces Repo rate (inter-bank) from 9 to 4.75
• Reduction in Cash Reserve Ratio from 9 to 5
• Reduction in Statutory Liquidity Ratio by 1
• Special liquidity adjustment facility for
  non-banking financial companies (housing finance,
  mutual funds)
• Extending refinancing facility for banks no
  collateral
• Highlight need to improve flow of credit by
  commercial banks to private sector
• Sale of foreign exchange (US)
• Potential liquidity made available by these
  measures Rs5.6tn (9 of GDP)

5

• Fiscal Policy
• Deviation from Fiscal Responsibility and Budget
  Management (FRBM) Act planned deficit increased
  from 2.5 of GDP to 6.2 in 2008 / 09 Budget
• 3 fiscal stimuli packages in the last 12 months
• Prior to the crisis the government was generating
  substantial growth stimulus with various programs
  (Farm loan waivers, National Rural Employment
  Guarantee Scheme, Rural Road Programme etc.)
• Increased rural demand for consumer durables and
  non-durables

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Challenges for the future

• Maintain stability, both internal and external
• Remove structural bottlenecks expand physical
  infrastructure enhance education and vocational
  training secure power supply
• Improve investment climate for domestic and
  foreign investors