Recovery from the global economic crisis has been staggered because of a complex mix of real and financial challenges facing many industrialized economies. Moreover, the recovery has been two- paced, with emerging market economies like China and India leading the way followed by Latin America and Africa.
Advanced economies have grown more slowly than before. Over the past months, deep and widespread economic problems have surfaced in Europe which is a further setback to the global economy.
series of local intermittent shocks getting transferred to the global economy. All this has happened despite the aggressive use of both fiscal and monetary policy tools and our collective resolve to keep markets open.
The heart of the problem lies in sovereign debt.
During economic slowdown in the wake of the global financial crisis, virtually all governments increased their spending as part of fiscal stimulus packages. In particular, several European governments built up large public debt. As a consequence, those who lent money to these sovereigns are in trouble. I should add that reality is a little more complex than what Keynes had said. The large debt is causing a problem for both the lenders and the borrowers.
Though emerging economies recovered quickly from 2008-09 global crises, factors including capacity constraints, rising commodity prices, uncertainties in capital flows and slowdown in external demand have impacted their growth to varying degrees. Some of them have also been experiencing inflationary pressures. Excessive liquidity from aggressive policy actions, by central banks from around the world trying to counter recessionary tendencies, spilled over onto emerging economies, resulting in excessive volatility in capital flows and inflationary pressures.
While the Indian economy faced excessive capital inflows in the aftermath of the global crisis leading to appreciation of the domestic currency, with the unfolding of the euro zone crisis, the matter of concern at present is reversal in such flows leading to increased currency volatility.
We have witnessed sharp depreciation of the Rupee vis-à-vis the US Dollar in the last few months. Slowdown in external demand has led to deceleration in the growth of exports in recent months with the current account deficit widening to around 3 per cent of GDP.
This is partly a reflection of global trends, but our own fight against inflation has also taken a toll on investments by our corporations.
We also have our fiscal challenges
India’s resilience results from the fact that the bulk of India’s GDP is domestic demand driven.
A calibrated approach to capital account convertibility has, to a significant extent, prevented rapid surges and reversals of debt creating capital flows.
India’s external commercial borrowings policy that places end-use, all-in-cost and maturity restrictions, has been successful in maintaining external debt at sustainable levels.
India’s banking sector is robust and export basket is increasingly diversified with developing countries being our largest export market.
We can also boast of optimal regulatory mechanisms in place that check unsustainable financial practices, thus ensuring the robustness of the financial sector.
Advanced economies have grown more slowly than before. Over the past months, deep and widespread economic problems have surfaced in Europe which is a further setback to the global economy.
series of local intermittent shocks getting transferred to the global economy. All this has happened despite the aggressive use of both fiscal and monetary policy tools and our collective resolve to keep markets open.
The heart of the problem lies in sovereign debt.
During economic slowdown in the wake of the global financial crisis, virtually all governments increased their spending as part of fiscal stimulus packages. In particular, several European governments built up large public debt. As a consequence, those who lent money to these sovereigns are in trouble. I should add that reality is a little more complex than what Keynes had said. The large debt is causing a problem for both the lenders and the borrowers.
Though emerging economies recovered quickly from 2008-09 global crises, factors including capacity constraints, rising commodity prices, uncertainties in capital flows and slowdown in external demand have impacted their growth to varying degrees. Some of them have also been experiencing inflationary pressures. Excessive liquidity from aggressive policy actions, by central banks from around the world trying to counter recessionary tendencies, spilled over onto emerging economies, resulting in excessive volatility in capital flows and inflationary pressures.
While the Indian economy faced excessive capital inflows in the aftermath of the global crisis leading to appreciation of the domestic currency, with the unfolding of the euro zone crisis, the matter of concern at present is reversal in such flows leading to increased currency volatility.
We have witnessed sharp depreciation of the Rupee vis-à-vis the US Dollar in the last few months. Slowdown in external demand has led to deceleration in the growth of exports in recent months with the current account deficit widening to around 3 per cent of GDP.
This is partly a reflection of global trends, but our own fight against inflation has also taken a toll on investments by our corporations.
We also have our fiscal challenges
India’s resilience results from the fact that the bulk of India’s GDP is domestic demand driven.
A calibrated approach to capital account convertibility has, to a significant extent, prevented rapid surges and reversals of debt creating capital flows.
India’s external commercial borrowings policy that places end-use, all-in-cost and maturity restrictions, has been successful in maintaining external debt at sustainable levels.
India’s banking sector is robust and export basket is increasingly diversified with developing countries being our largest export market.
We can also boast of optimal regulatory mechanisms in place that check unsustainable financial practices, thus ensuring the robustness of the financial sector.
