India Is Under Threat From The Global Recession

Only a few months ago, India’s government was confident that the country was on its way to reach a two-digit growth rate. But with the ongoing global financial crisis squeezing bank’s liquidity and cooling the country’s exports, India’s economy is heading to a sharp downturn.

Last year India’s stock market nearly collapsed, losing 54% of its value and prompting foreign investors to withdrawal its capital and stop financing new investments. Moreover, the worldwide downturn has accelerated the currency depreciation, as Indian companies unable to raise capital abroad, have been turning to Indian local banks for money. To support the currency, the Reserve Bank of India has been selling its foreign-exchange reserves, which so far have dropped by nearly $77 billion from a high of $316 billion at the end of May. All this, connected with two years of rising interest rates, has brought India its own credit crunch. To make things even worst, the wave of economic destruction has started hitting the real economy. Manufacturing, which accounts for about 80 percent of India’s total output, deteriorated 2.1 percent in December and key sectors of the Indian economy shed half a million jobs in the final quarter of last year.

However, even though there are plenty of reasons to be pessimistic, India’s government has still a chance to revive the deteriorating economy. In fact, the government has announced two stimulus packages, which include tax cuts, the injection of capital into banks, and allows overseas investors to double purchases of debt. More importantly, the central bank has cut the interest rate at which it lends to commercial banks by 400 basis points to 5 percent.

Anna Fedec,
2/15/2009 8:30:36 PM