Indian households never had a better time before: at the end of 2007, the Indian economy was cruising at a growth rate of about 9%, throwing up numerous opportunities of income and investments, while the stock market was up by at least 40% for three consecutive years. There was confidence and optimism all around. But the narrative began to change dramatically since the beginning of 2008. The problems in the housing market in the US and its financial system started spilling over to other globally inter-connected economies, including India. Developments in New York started affecting finances in New Delhi.
The chain of events took a nasty turn on 15 September 2008 when Lehman Brothers, one of the largest financial firms in the US, collapsed under its own weight and filed for bankruptcy. Within no time, the entire financial world started falling like a pack of cards. American International Group (AIG), the largest insurer in the world, had to be rescued and the US government had to pump money in a number of other financial institutions.
As a result, the globally inter-connected and highly inter-dependent financial system was in the clutch of fear and confusion, while asset prices were falling all over the world. In India, the stock market lost at least 50% in the year 2008 alone. The S&P BSE Sensex went down by more than 10,000 points during the year.
The world has not fully recovered from the shock till date and, in more ways than one, we are still living in the shadow of the financial crisis of 2008.
The Indian stock markets did recover in 2009, but have still not been able to conquer the heights that they once touched. The five years gone by have been difficult for the Indian households as well. Investments have not yielded returns, paycheques have lost weight in many cases and high inflation is taxing what is left.
The only saving grace for small investors in the last few years was gold. The safe haven demand pushed up international gold prices significantly in the aftermath of the financial crisis. In India, it was also aided by weakening of the Indian rupee. However, even gold is now beginning to lose its shine and has corrected from its highs in the international market. Prices have been shielded in India to an extent because of the fall in rupee and higher import duty.
To be sure, the story of the last five years has not been uniformly bad for India. There have been a number of twists and turns to the tale. The economic growth in India did recover sharply after the financial crisis. However, it could not be sustained as it was primarily fuelled by excess government expenditure, which only led to higher level of inflation. In between, there was a sovereign debt crisis in Europe, where, unlike companies in the US, countries had to be bailed out. Developments in Europe exacerbated the pain in the global markets and delayed the chances of recovery. On several occasions, it looked like the world will see a replay of the 2008 crisis. But such extreme consequences were avoided by timely policy intervention.
However, amid the global gloom and doom, India lost its way. Uncertainty in both global and domestic environment affected prospects for India. As a consequence, even as developed economies are stabilizing and recovering, though at a much slower than the desired pace, India is losing momentum. Balance sheets are getting stretched for households and companies alike. The confidence that the Indian household once showed while earning, spending and investing is now only a thing of the past and the future depends on how the global and Indian economy shapes up. The correlation between the global macroeconomic developments and the Indian households was, perhaps, never so explicit.