Come September” is a catchy tune but finance executives, especially in the US, are unlikely to think of it fondly. That’s because September 2008 marked the end of Wall Street as we knew it. Some people had hoped that the earlier collapse of Bear Sterns presaged the end of the crisis. As it turned out, Bear was just an early warning. With a series of bankruptcies and bailouts the US financial services landscape has changed irrevocably. The seriousness of the situation has been accentuated by several countries reporting shrinking or recessionary economies. What began as a leverage crisis and credit crunch has turned into a full-blown economic crisis affecting the entire world. But is the worst over?
That’s a difficult question to answer, especially since bad news has moved from the stock market to a different theatre—main street.
India is no exception. It was only in September that the emerging India growth story took a drastic turn for the worse. Until then, experts had said India would not be affected to the extent of a slowdown in the US. Since then, it has become increasingly apparent that the global credit crisis is affecting India much more than expected and in more ways than anticipated.
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Impact assessment has become an ongoing exercise. The global credit boom fuelled India’s exceptional growth rates over the past few years— but what once promised to be a secular, long-term bull run came down with a thud in 2008.
The Indian stock market is down to its 2005 levels: it has lost in a year what it gained in at least three years (see chart on the BSE 500 Index).
So, what happened?
Sign of the times: The BSE building. The market has lost in a year what it gained in at least three years. Ashesh Shah / Mint
Is it a mere coincidence that the Indian markets began rising in 2003, when the US economy started recovering strongly against the backdrop of aggressive cuts in interest rates? Not likely—on looking back, it seems that US was not just cutting interest rates, it was determining the price of money at a global level. India, given its need for capital and its inherent currency linkages, could ill afford to run an interest rate policy that would be directionally different from that of the US. This essentially meant that money was easily available both domestically and in international markets, and this cheap money fuelled huge expansion plans of Indian companies, pushing our GDP (gross domestic product) growth rates closer towards double digits. Of course, the inherent demographic advantages and the benefits of broader policy changes including globalization have contributed towards the India growth story.
However, these seem to make relatively a marginal impact—India’s GDP growth is expected to slow in today’s tighter liquidity environment.