March 2010
By Ramesh Ramamurthy

Ramesh Ramamurthy is a senior technical writer working in API/Software documentation. He has taken senior roles in various projects and been involved in knowledge management and knowledge sharing activities within his organization.


r.ramesh(at)siemens.com
twramesh.blogspot.com

Effects of the global financial crisis on India

A financial crisis occurs whenever changes are encountered including a sudden drop of the exchange rate due to new financial market conditions. The latest financial crisis in the United States has influenced markets across the world, including India, which saw the growth of its Gross Domestic Product (GDP) declining.

The sudden shift in the global economy initiated by the collapse of top financial giants in the US, has send shock waves through global financial markets. Since a high amount of businesses in many sectors are tied up with the global economy, the effects of the crisis left a deep footprint on India. The areas most affected in the Indian economy included financial markets, trade flows and exchange rates. A major part of credit markets seems to show decrements as the crisis unfolds.

In India, especially in the equity markets, there have been some adverse effects due to the financial crisis changes. These changes were experienced by the domestic industry as well as other sectors. Change in capital flows towards the Indian economy have been experienced and have affected the Indian exchange rate. India’s GDP growth estimates for the current fiscal (2008-09) have been downgraded from 8% to 7.4 percent.

A decline in economic activity lasting a few months is termed a recession. Whenever the economy of any country reaches a peak of activity, the recession begins. This is normally visible in real GDP, employment and production.

This has been the first recession on the Indian market caused by a global financial crisis. All industry sectors, including the major IT sector, have experienced changes caused by the crisis. The majority of IT organizations relied on investment banks, which were no longer able to support the enhancement of their business.

Thus, there has been a great decrease in production as well as in the average spending of consumers. Organizations are looking at cost cutting measures, reducing overheads and average spending. The demand for products and services is reduced with a steep decrease in the productivity ratio, resulting in increased unemployment.

After-effects of the crisis

Despite of these developments, the second half of 2009 has been reasonably bright leading to a stabilization of the Indian economy.

Recent studies and reports by financial analysts and economists, based on a worldwide GDP report taking into consideration the economy factors of more than 40 countries, indicate that the global recession seems to be gradually decreasing. It was also observed that India recorded a faster growth.

India’s exchange rate has recently stabilized and the pressure on the financial sector is easing.

For 2010, it has been predicted that India may receive IT outsourcing contracts worth up to $1 billion. As US banks emerge from the crisis, leading Indian outsourcers such as Tata Consultancy, Infosys and Wipro are predicted to gain major contracts.

With improvements for businesses and increasing job opportunities, people are looking to invest in property, and the domestic market is showing a positive development. The continued buoyancy of foreign direct investment suggests that confidence in Indian growth prospects remains healthy.

References

  • Rakesh Mohan, RBI (Oct 9, 2008) Global Financial Crisis and Key Crisis: A Report
  • Economic Times, Newspaper, Business Report
  • The Economist, Magazine, Top Business Stories