India braved the recession better than many other countries

Sun, Jun 19, 2011

Biz Arena

India braved the recession better than many other countries

When America sneezes – the rest of the world catches a cold

It may be true with rest of the world but India had some higher immunity to resist the global meltdown which started in USA in 2007. This financial crisis impacted various economies across the world; including USA, UK, Japan, China, France and India. During this turmoil the countries had varying impacts; countries like China and India had a lesser share of the worldwide despair. There are many reasons which it has led the world to believe that India survived the global problem.

Financial policies implemented in India after liberalization in 1991 played an important role in this perspective. In India we have strictly regulated market by active participation of financial regulators like Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance, Ministry of Corporate Affairs. These regulators ensure that although Indian Markets have exposure to foreign players but at the same time have lesser vulnerability to global risks. Participatory Notes (P Notes) is one of the measures taken by Government of India (GOI) to control the Foreign Institutional Investment (FII). During recession stock markets gets plummeted if foreign players pull out their investments, P Notes is the key to check that. There are many such policies which had enabled GOI to run Indian Market as a tight ship. Some of the major Indian Banks were nationalized in 1969; it facilitated GOI in forcing certain policies like high Cash to Reserve Ratio (CRR), stringent credit policy and regulation of lending rate. This control over banks has proven to be a boon to India as recession started in U.S. due to the burst of Sub Prime Bubble; during this phase, to increase their profits, financial institutions started lending to the borrowers having lesser credibility at higher rates. In India above policies prevented Indian Banks from falling into this pitfall.

Apart from these, as compared to countries like USA and UK, people in India are traditionally less spend thrifty. In India people use their savings in accumulating wealth and making provisions for rainy day. As per the study published in Global Journal of Finance and Management, it has been found that Indians have higher risk aversion as compared to their European and American counterparts. Above study reflects the behavior of Indians in stock market, that they are less prone to speculative and risky investments. In India people also tend to put their savings in form of gold which further reduces the risk of losing investment. Gold is considered to be the best investment during recession times. US economy is having high level of consumerism which led to the avalanche effect of meltdown. India is still far behind USA in this aspect. Indian economy is still focusing more on its local markets, which makes it lesser susceptible to the risk posed by global markets.

India is one of the largest economies in Purchasing Power Parity Terms. It has made India a preferred location for Foreign Direct Investment (FDI). Large amount of FDIs make the economy of India robust and hence more resistant to the global fluctuations. Indian markets are still untapped at large and hence provide a much greater opportunity. Bigger local markets of India insulate her from global turmoil up to an extent. In India we still don’t have full Capital Account Convertibility (CAC). CAC is a nation’s feature to conduct various local financial transactions at market driven exchange rate. It has again protected India from various market forces and hence made India immune towards the global turmoil. Indian has broad government policies targeting the long term growth by facilitating growth in sectors like energy, infrastructure and manufacturing.

Another aspect of why India survived recession is the poverty prevailing in India. As per the World Bank Report, 80% of Indian’s population survives on less than 2$ a day. These people mostly earn their livelihood on daily wages. They are least impacted by any crises, as poor people will eat pulses and chapatti but if finds pulses are expensive he will switch to other cheaper alternatives like potato or sometime will have chapatti with just salt. In this way a large portion of Indian Population is completely immune to any financial turmoil.

India has not only shown greater resistance during financial crises but it was one of the countries showing the fastest recovery too. This financial crisis displayed the robustness of Indian economy. It has also helped in further fine tuning our economic policies and changing the vision of various corporate.

Vijay Kibe

Master in Business Administration(2010-2012)

IIT Kanpur

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One Response to “India braved the recession better than many other countries”

  1. Ben Says:

    I think the scary thing about India is that the price of everything will start to go up and up, then the food,goods, electronics and service prices will be more expensive. This will then cause a lot of problem because the manufacturing is very cheap at the moment. People from India will start struggling between their earnings and the cost of living, this is where the hard time will come. India will have to increase it’s manuafacturing cost and years after years, the western countries who have created a lot of facturies overthere will remove them again to go into a cheaper country. I think what we are seeing now is the movement of wealth from one country to the other, it has happened in the past and will continue. I really don’t think India will keep being cheap for too long, things have to change,

    Thank you for your article.

    Ben


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