IMPACT OF GLOBAL MELTDOWN ON INDIAN ECONOMY: AN OUTLOOK 2008-09

The world economy is currently experiencing the worst global financial crisis since the Great Depression. Over the past year, the global economy has been buffeted by the deepening crisis in financial markets, by major corrections in housing markets in a number of advance economies and by surges in commodity prices. Indeed the financial crisis that erupted in August 2007 after the collapse of the US subprime mortgage market entered a tumultuous new phase in September 2008 that has badly shaken confidence in global financial institutions and markets. With the spread of the US subprime mortgage crisis to the rest of the US financial system and other industrialized-country financial markets, a significant slowdown in economic growth has taken place in the US, Europe, and Japan. The crisis has moved from the financial sector to the real economy. For more than a year since the out break of the crisis, it appeared that the emerging Asian economics, especially the larger ones like India and China, would not only remain relatively insulated from the crisis, but also play a major role in moderating the global downturn and paving the way for a worldwide recovery in a year or so. This paper provides an outlook for the Indian economy in the light of the extraordinary global financial crisis. The Indian economy was slowing down even before the onset of global crisis and so the timing of this external shock could not have been worse. The analysis undertaken for this paper shows that the global crisis is likely to bring the Indian GDP growth rate down considerably. This will pose a big challenge requiring urgent and sustained policy attention to prevent this downturn from becoming unnecessarily prolonged. There is real downside risk that the growth rate could plummet to the pre-1980s levels if appropriate countercyclical measures are not taken immediately and are not urgently followed by necessary structural reforms. The paper provides an outlook of impact of the external crisis on the different sectors of Indian economy and the recent economic developments in India. Finally the paper suggests a set of policy measures to get the Indian economy back on the path of sustained rapid and inclusive growth.