Impact of Global Financial Crisis on South Asia
The global financial crisis hit South Asia at a time when it had barely recovered from severe terms of trade shock resulting from the global food and fuel price crisis. The food and fuel price shocks had badly affected South Asia, with cumulative income loss ranging from 34
percent of 2002 GDP for Maldives to 8 percent for Bangladesh. Current account and fiscal balances worsened sharply and inflation surged to unprecedented levels.
India, South Asia’s largest economy, has been facing major challenges owing to the global financial
crisis. The immediate effects were plummeting stock prices, a net outflow of foreign capital, a large
reduction in foreign reserves and a sharp tightening of domestic liquidity. These caused a rapid
depreciation of the exchange rate and a surge in short-term interest rates. The second round effects
emerged from a slowdown in domestic demand and exports. Demand effects have been particularly
severe in housing, construction, consumer durables and the IT sector. As a result, manufacturing
production has taken a hit and activities in the organized services sector (housing, construction, IT)
are down sharply. Exports declined for two consecutive months in October and November 2008. A
recent government study estimates job losses to the tune of five hundred thousand between
October and December 2008. GDP growth rate is now estimated at around 7 percent for 2008,
down from 9 percent in 2007, and is projected to decline to around 5 percent in 2009.
The government of India has been highly proactive in managing this ongoing crisis with a slew of
monetary and fiscal measures to stabilize the financial sector, ensure adequate liquidity, and stimulate
domestic demand. The monetary policy measures have succeeded in stabilizing interest rates and the
availability of domestic liquidity. The exchange rate has also stabilized and capital outflows have
been contained, with foreign exchange reserves maintained at around $250 billion level. The
pressure on the financial sector has been eased, although there is some evidence of an increase in
non-performing loans. However, the financial sector has become more risk-averse. The decline in
global fuel and other commodity prices has helped the balance of payments and lowered inflation,
which has fallen sharply from a peak of 12.8 percent in July 2008 to below 6 percent in December
2008. This has created the space for monetary easing as well as providing better scope for the fiscal
stimulus. The monetary and fiscal stimulus package is expected to contain the downward
slide in demand in 2009 while providing a good basis for recovery in 2010.
Here are some excerpts of the interview.
Q. Whether the financial meltdown affected the trade and business developments between India and the UAE in 2008 and now?
A. No negative effects of the global financial meltdown on India-UAE trade relations have been seen so far. They may emerge, after a year or so, if oil prices continue to fall in tandem with business decline in the West. India and UAE have good economic and trade relations which are growing further. The UAE is India’s third largest trade partner in the financial year 2007-08.
Q. Has the flow of Indian expatriates travelling to the UAE gone down due to the economic downturn, and it resulted in job losses of many in the UAE who toil in construction fields?
A. The current economic crisis is unlikely to have any significant impact on the recruitment of Indians as the major energy, infrastructure and real estate projects being pursued in the country would not be halted, keeping in view the readily available financial support for such projects. Major real estate developers have also assured that ongoing projects would not be slowed down or delayed.
Q. What new improvements have been gained in the two way trade ties between the two countries in 2008?
A. Non-oil trade between India and the UAE has crossed $29 billion in the financial 2007-08, up 24 per cent compared to the last fiscal year, making the UAE India’s third-largest trading partner after the US and China. India’s non-oil exports to the UAE in 2007-08 rose to $15.47 billion from $13.61 billion, a year earlier whereas, India’s non-oil imports from the UAE were valued at $13.56 billion, higher than $9.79 billion in 2006-07.
Q. What was the growth rate of Indian and UAE investors in both countries, has it been affected due to unstable developments in India ?
A. India’s main area of priority for investment is the infrastructure sector where more than $500 billion are required over a period of five years. Apart from it, the other areas for investments are telecom, energy and agriculture. Major UAE companies like Emaar, Nakheel, ETA ASCON are investing in the sectors like real estate, hospitality and tourism. DP World is actively engaged in the development of six different ports on the vast coastline of India.
UAE side has also shown interest in agriculture and food processing, and in utilising India ‘s experience for developing the consumer sector in the UAE. The UAE is supporting development of small and medium enterprises (SME) in order to develop entrepreneurial spirit in its young generation. Given India’s strengths in the SME sector, this is an important area for Indian companies. The sectors of priority interest to the UAE are: industry, services and alternative energy.
Q. Which Indian companies are investing in the UAE?
A. Indian companies like L&T, Punj Lloyd, Hinduja Group, Pioneer Cement, Oberoi Group of Hotels, have bagged projects in the UAE. Following the emergence of Dubai as a major re-export centre, Indian companies have emerged as important investors in the free trade zones such as Jebel Ali FTZ, Sharjah Airport and Hamariya Free Zones and Abu Dhbai Industrial City. Again with Dubai positioning itself as a service centre, many Indian Service Providers and leading IT companies such as Infosys, Wipro, have opened their offices here.
Q. Who are the new investors from UAE to India and what is the growth rate in health tourism sector from UAE to India ?
A. Many joint ventures have been set up by the UAE-based companies in India in recent years including those by Emaar, Dubai Ports World, ETA Ascon. With regard to health tourism, the idea of travelling to India at low-cost but for world-class medical treatment, is gaining in popularity. India has some of the best hospitals and treatment centres in the world with the best facilities. Emiratis going on self-expenses are already utilising Indian health services, including the Ayurvedic establishments and Spas.
Q. How the historical ties keep both nations attached to each other and what major events are planned for 2009?
A. From the firm mercantile foundations of the past when dates, pearls, clothes and spices were the main items of trade, commercial ties between India and the UAE have in recent years, acquired a new level of substance. Indians were present in UAE long before the oil was discovered and have played a vital role in the development of the UAE. Along with commercial relations, political and defence relations are also on the upswing.
In 2008, the India-UAE relations got new impetus by the visit of External Affairs Minister, Pranab Mukherjee and Minister of Commerce and Industry, Kamal Nath to the UAE. In June 2008, the second India-UAE Joint Defence Cooperation Committee meeting took place in Abu Dhabi . The first ever India-UAE Joint Air Forces exercise took place in September 2008 at Al Dhafra base in Abu Dhabi.
As far as major events in 2009 are concerned, there are plans to organise an exclusive India Trade Fair in Abu Dhabi in December 2009 by India Trade Promotion Organisation (ITPO) in association with Abu Dhabi National Exhibitions Company (ADNEC). This fair will showcase India’s industrial products and will also provide space for India ‘s services sector including IT, health, education and financial services.
Q. What are the new strategies for strengthening cultural and traditional bonds between the two nations?
A. An exclusive Indian Film Festival was organised in November 2008 by the Embassy in association with Abu Dhabi Authority for Culture and Heritage (ADACH) where eight Indian films in different languages were screened along with short UAE documentaries.
The Crisis and India
The impact of the global crisis on India can broadly be divided into three different aspects: (1) the immediate direct impact on its financial sector; (2) an indirect impact on economic activities; and (3) potential long-term geopolitical implications. Fortunately, India, like most of the emerging economies, was lucky to avoid the first round of adverse affects because its banks were not overly exposed to subprime lending. Only one of the larger private sector banks, the ICICI, was partly exposed but it managed to counter the crisis through a strong balance sheet and timely government action. The banking sector as whole maintained a healthy balance sheet and, over the third quarter of 2008 –a nightmare for many big financial institutions around the world–, India’s banks reported encouraging results and witnessed an impressive jump in their profitability.
However, the indirect –or second-round– impact of the crisis has affected India quite badly. The liquidity squeeze in the global market following Lehman Brothers’ collapse had serious implications for India, as it not only led to massive outflows of Foreign Institutional Investment (FII) but also compelled Indian banks and companies to shift their credit demand from external sources to the domestic banking sector. It thereby exerted pressure on domestic market liquidity, thereby giving rise to a credit crunch. Coupled with the ensuing loss of confidence, this increased the risk aversion of Indian banks, hurting credit expansion in the domestic market.
Additionally, given the recession in the developed world, the demand for Indian exports in their major markets has almost collapsed. Merchandise exports shrank by more than 17% from October 2008 to May 2009. The decline in exports has accelerated, with a drop in May 2009 of 29.2% compared with May 2008. Likewise, exports of services are also facing a steep downturn. In the third quarter of 2008-09, growth in services exports declined to a mere 5.9%, compared with 34% in the same period a year back. Earnings from travel, transport, insurance and banking services have contracted, while the growth of software exports declined by more than 21 percentage points. The real shock came in the fourth quarter of 2008-09 when services exports contracted by 6.6% over the same period a year back.
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