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INDIA WEATHERS 12 MONTHS OF FINANCIAL CRISIS

Swaminathan S Anklesaria Aiyar

Economic Times, September 13, 2009

An economy is best judged not in fair weather but foul. India has successfully weathered the great financial crisis of September 2008. Indian gross domestic product (GDP) has grown around 6% in every quarter of the most difficult 12 months in recent history. Most countries suffered an outright fall in at least one quarter.

The global recession started in December 2007. The initial impact on India was muted: GDP growth slowed from 9% in 2007-08 to 7.8% in April-September 2008, still a very high rate. But after Wall Street collapsed in September, India's growth plummeted to 5.8%, 5.8% and 6.1% in the next three quarters. This was a comedown. Yet, it far exceeded the World Bank's forecast of 4% growth in 2009. It exceeded my expectations too.

Let's compare India's performances in the Great Recession and Asian financial crisis. In the latter, India's GDP growth fell to just 4.5% in 1997-98, of which 1% was a boost from the Pay Commission. Today, the annual rate of growth exceeds 6%, of which 0.5% is a Pay Commission boost. That's a big improvement.

In 1997, India's foreign exchange reserves were strained, interest rates went sky-high, companies defaulted on loans and dragged down banks. But in 2008, India's high foreign exchange reserves prevented any panic, even after foreign institutional investors withdrew $12 billion from the stock market and foreign credit suddenly vanished. Indian corporates were much less over-borrowed in 2008 than in 1997, and Indian banks were far better capitalized, so they withstood the financial crisis. Companies that had borrowed big for new projects in 1997 collapsed, and many begged for debt forgiveness. In 2008, Tata Steel, Tata Motors and Hindustan Aluminium had raised gargantuan dollar loans for foreign acquisitions, yet managed to weather the storm.

So resilient was India's performance that the very foreign investors who had withdrawn $12 billion in 2008, flooded back into Indian stock markets at the rate of $1billion per week in May 2009. This was in stark contrast with the Asian financial crisis, when foreign institutional money remained a trickle for years.

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