R9_worldcrisis_nachane

the crisis and india Economic & Political Weekly EPW march 28, 2009 vol xliv no 13 115 The views expresse d here are personal and do not reect those o the instit ution that the author works or. Dilip M Nachane ([email protected]) is Director, Indira Gandhi Institute o Development Research, Mumbai. th F of in Un nopo Dilip M Nachane While evaluating the Indian policy responses to the global crisis, this article focuses on the likely ex tent of the spread of the crisis to India and ho w it will affec t the domestic economy. In India, exports have declined, foreign institutional investment has fallen, and share and real estate prices have crashed. The social cost of the slowdown has been unemployment. India’s policy response has so far addressed the issue of reviving the real economy but has done little to build firewalls around the financial sector and provide safety nets for the vulnerable sections. Some measures which could go a long way towards attainment of the last t wo objectives are outlined. T he genesis o the current global fnancial crisis, its unolding in the United States (US) and the European Union (EU), and the ofcial responses (the revised Paul- son Plan, the Bush and Obama bailout packages and similar huge fscal stimuli in the other developed economies) are by now too amiliar to bear repetition here. 1 In this article, there- ore, I confne mysel to the likely extent o the spread o the crisis to India, how it will aect the Indian economy ( especially its vulnerable sections) and then evaluate the policy responses attempted so ar. While descriptions (o the milestones in the crisis) abound, analytical explanations are ewer and more controversial. Some explanations try to locate a common thread between the current crisis and notable past crises such as the Kondratie o 1873, the Great Depression o 1929 and the more recent Japanese (early 1990s) and Asian crises (1997-98). Others tend to view this crisis as undamentally dierent (the mother o all crises) and see the fnanciali sation o global capital as the single most impor- tant actor responsible both or its precipitation and its u nprece- dented severity. The latter group interestingly includes both those who view the current crisi s as a systematic crisis o capitalism (a la Marx) and those who contend that it is a Minsky moment (Minsky 1982) when liquidity dries up as unsustainable fnancial exuberance ru ns its course, in the wake o deteriorating credit standards. 2 In contrast, the frst group o explanations shares the common view o crises as typiying Schumpeter’s process o creative destruction (rom which will emerge a rejuvenated capitalism). While some o these issues are viewed as o mere academic interest by policymakers, there is no denying that such theoretical writings oten contain valuable insights or practical policy d esign, and hence it may not be wise to neglect them altogether in evaluating alternative policy options. douplng thoy As soon as the frst signs o the cri sis became visible in the US, the top economic leadership in several emerging market economies ( EMEs), including India, hastened to reassure their citizens as well as oreign investors that their fnancial systems were saely insulated rom that o t he western economies and that the recent impressive growth t hat many o them had experienced was most unlikely to lose its sheen. The basis o this robust optimism was located in the ashionable decoupling theory, which was then doing the rounds o the Ivy League academic circuit in the west and the International Monetary Fund (IMF ) – see Akin and Kose (2007) – and was strongly endorsed by The Economist as late as 6 May 2008. Since policymakers in EMEs tend to view these

R9_worldcrisis_nachane

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