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Indian economy: Winner in global turmoil of 2008

By M Karthikeyan and Rakesh Pathak in New Delhi
December 31, 2008 12:34 IST
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Described as the elephant that didn't know its strength, India stood tall in 2008 as the global community battled this century's worst economic crisis, while easing prices and dissipation of energy turbulence offered the hope it would outperform the rest in the new year.

Arguably the most eventful year ahead of Lok Sabha polls, the high of the initial months gave in to despair by the middle, but the end appeared to be working in favour of the consumer with inflation halving from the year's high of close to 13 per cent.

The academic theories and manifestation of the finance ministry for strict fiscal discipline were, for once, given a backseat as the government worked to push agriculture by waiving farm loans, industry through a stimulus package and consumer by paving the way for low interest regime.

The best part of the economy was its resilience, of course with a little help in the form of fiscal actions from the government to reverse the slow down, at a time when finance minister P Chidambaram was asked to take charge of the law and order machinery as home minister in the face of Mumbai terror attacks.

Prime Minister Manmohan Singh took the finance portfolio under his fold.

It is the collectivism of RBI and the government that possibly helped the government avert the blues of the global financial crisis on the domestic economy at a time when the world economies are falling prey to recession one by one.

However, India is expected to grow between six-seven per cent at the pessimistic and optimistic level for the current financial year, while it would be a tad lower -- five-six per cent -- in the next financial year.

During the course of the year, corporate India and markets swung from euphoria to despair and it is only towards the end that a semblance of sanity appears to have returned at the bourses.

The government and RBI put up a hard fight to defeat the 13-year high inflation witnessed during the year that also saw global crude prices surging to a record $147 a barrel, putting extreme pressures on government finances and very high interest rates for industry and consumers alike.

It was a paradox that when the government was working for a high 9 per cent plus growth of the economy in the initial period, rising prices made the monetary regulator RBI to resort to continuous tightening of money flow, which to an extent led to increase in interest rates.

The crisis in the financial sector erupted in the mighty US with the fall of a giant -- Lehman brothers -- triggering the bankruptcy of over two dozen banks in America and forcing the global economy to scurry for cover.

Jolts of such changes that started in September were also felt in India, prompting the government and the RBI to go for course correction to prevent an economic crisis and large-scale retrenchment and unemployment due to exports posting negative growth and industry output falling in October, the first in 15 years.

No wonder, the stock market that soared with BSE Sensex crossing 21,000 mark in January came crashing like nine pins in October, a development associated with fusion of Indian economy with the global one.

The crisis in the West led to Foreign Institutional Investors withdrawing billions of dollars from the market leading to fall in bourses apart from a 20 per cent surge in value of dollar vis-a-vis the rupee.

Quick to realise the dangers that were facing the economy and the need to instill confidence among industry and investors, Singh held a series of meetings with captains of Industry, bankers, economists and top policy planners.

There was a single point agenda for the government from October onwards and that was how to weather the effects of the global turmoil and put the economy back to track.

During such brainstorming, Singh, the architect of Indian economic liberalisation, realised that retrenchment could be the singularly biggest crisis and warned the industry against job cuts and promised support to ailing sectors.

A massive retrenchment by aviation sector led by Jet Airways created a political storm. Aviation and hospitality sector appeared to have become the first victim of the slowdown and showed signs of collapsing.

Thankfully, there were no bankruptcies in aviation.

Realty and automobile sector became very restive as demand started collapsing.

The silver lining, however, was that crude prices started easing and hovered near $38 a barrel at the year end, while global commodity prices took a more than 50 per cent dip, providing relief to both government and consumers.

However, the industry that started 2008 with massive expansion and acquisition drive felt the pinch of the downturn more than anybody and pestered the government for bailout.

The plight of realty, as reflected by eight per cent drop in share prices of market leader DLF, was more grave with the housing market suddenly drying up due to high costs and equally high interest rates.

Government, in tandem with RBI, started working on salvaging the industry by announcing sector-specific relief and stimulus packages.

On its part, the finance ministry started announcing relief on indirect tax front to bring down the prices, while RBI unleashed a series of steps to reverse the soaring interest rates by providing banks more money.

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M Karthikeyan and Rakesh Pathak in New Delhi
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