By Mahima Jejani
What are the big economic shocks that hit the Indian economy hard?
India has faced three big economic shocks this century. The first from the financial crisis at the top of 2008. The other hit when Federal Reserve Chairman Ben Bernake announced that the Fed would reduce the volume of its bond purchases within the middle of 2013. We are currently living through the third big shock, the Covid Pandemic.
In 2007 one or another investment bank reported bankruptcy. The bankruptcy of investment bank Lehman Brothers on September 15, 2008, was the most prominent moment within the worldwide financial crisis. The times when housing prices roiled and fell for the first time in decades. Borrowers took advantage of the low mortgage and even subprime borrowers were also taking home loans. Some blamed the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation for the whole crisis. To them, the sole solution was to shut down or to privatize their two agencies. If they shut down, the entire housing market would have collapsed because they guaranteed the majority of the mortgage. The Subprime mortgage revolution and loose monetary policy were the main causes identified for the financial crisis.
How the Indian economy was hit by the Financial Crisis of 2008?
The impact was felt both through capital inflow and production in the Indian Economy. The fall in international commodity prices and more particularly crude oil reduced the import bill. The recession abroad had an adverse effect on our exports of goods and services. Portfolio capital had turned negative, with a big impact on the stock market. The Sensex rose about eight-fold from 2003 to the beginning of 2008. Portfolio capital had turned negative, with a significant impact on the stock market. The lack of Indian firms to spice funds abroad, including trade credit, put up a grave pressure on the domestic banking industry for more credit.
US Federal Reserve System during 2013 commonly known as Taper Tantrum. As we go further to understand, how the macroeconomic imbalances were exposed after the US Federal Reserve System was announced within the middle of 2013. We need to throw some light on the quantitative easing policy of US 2013. Quantitative easing (QE) is a monetary tool, which involves large purchases of bonds and other securities. This leads to an increase in the liquidity in the economy to promote stability and promote economic growth. It is considered a short-term fix tool because of the danger that could arise from falling dollar values leads to hyperinflation.
Back in 2013, Federal Reserve Chairman Ben Bernake announced that the Fed would reduce the volume of its bond purchases. This announcement of reducing the bond purchases by the fed leads to a massive situation of shock among the investors. Bond investors in the situation of massive shock immediately responded to the announcement, by selling the bonds. Falling bond prices means higher yields, therefore US treasuries shot up.
All emerging markets in emerging countries were impacted by this announcement, In India, the fiscal gap had averaged 3.9 percent of gross domestic product between 2014 and 2018. The rupee fell, losing as much as 20 percent against the dollar Consumer Inflation eased to an average of 5.7 percent between 2014 and 2018 from the 10.1 average seen between 2009 and 2013.
Covid 19, the pandemic which has adversely impacted the entire world. The event that witnessed the shut down all over the world. Covid19, which reminds us that the material prosperity has come at the cost of worsening environmental conditions and working conditions. The pandemic throws light on the fact that India has to build economic models that consider the environmental objectives of pollution reduction, sustainable growth, and a good environment. India policy should pay focus on the good health care system that would lead to an increase in health GDP.
Covid 19, have a deep impact on the Indian Economy. As we know that India is a developing nation passing through demand depression and high unemployment. On March 23, 2020, Prime Minister Narendra Modi announced the complete lockdown, its further slowdown on the supply side and the economic well-being of millions. Indian Economy lost around US$ 5 trillion every day during the first twenty-one complete lockdown. Some economists say that there is a job loss of 40 million people in the unorganized sector. Dine operations – restaurants, pubs and cafes, tour and tourism have a big hit due to the pandemic. Orders on swiggy and Zomato have dropped 60 percent amid the pandemic.
Our government’s responses to the global financial turmoil have been both monetary and fiscal. Back in 2008, RBI cut the cash reserve ratio (CRR) four times in October 2008 to January 2009 by 400 basis points (by4 percentage points) from 9 percent to 5 percent. Besides RBI reduced statutory liquidity ratio (SLR) from 25 to 24 percent. In 2013, the RBI cut the benchmark repurchase rate by 25 basis points to 7.25 percent only to quickly reverse course as the external situation deteriorated. During the coronavirus pandemic, Finance Minister Nirmala Sitharaman announces stimulus for the industries affected by the pandemic. Union government announces a number of measures for the relief of the nation.
Sometimes, it does take a crisis to set things right. Crisis magnifies every weakness of our economic system. The broad goal should be developing each and every sector of our economy and to fix each disability.
AUTHOR
Mahima is currently a second year Economics student at Kirori Mal College, University of Delhi. She has a keen interest in finance and economics, and wishes to explore opportunities in these fields. Apart from this, she is interested in working for projects that cater sustainability.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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