India’s Tryst with the Global Financial Crisis

This paper analyses the impact of the global financial crisis on India. Contrary to early beliefs, India was significantly affected by this crisis through the trade and financial channels. Moreover, India was at an especially vulnerable point when the crisis hit as it was already experiencing an autonomous slowdown due to other adverse domestic and external factors, which got aggravated by the crisis. The Indian policy response has been swift with fiscal policy geared to provide stimulus, and the monetary policy aimed at providing liquidity. However, with limited fiscal space and a relatively weak monetary transmission mechanism, the impact of these measures is likely to be muted in the immediate future. The recovery to a high growth rate will depend on rejuvenating exports and private investment in the medium term. While recovery of the global growth rate is essential to stimulate exports, certain domestic policies like a competitive exchange rate, cost of capital, etc. will be crucial for revival.