SECTION – C

SECTION – D

The crisis which originated in the United States (US) housing mortgage market in 2007 transformed into a full-fledged global financial crisis, considered to be the worst ever since the Great Depression. The financial landscape changed drastically with the collapse of Lehman Brothers in 2008. Irrespective of the degree of globalization of a country and soundness of economic fundamentals, the crisis spread across the world in varying degrees of penetration. The international transmission of liquidity shocks was fast and unprecedented. The falling asset prices and valuation uncertainty affected market liquidity, the failure of leading global institutions and the deleveraging process tightened the market for funding liquidity. While the global financial markets have started showing signs of stabilization, credit flow in the advanced markets is yet to recover. Despite the decoupling theory, the emerging economies too faced problems and were affected during the crisis. Decoupling theory basically states that when the growth of the developed economies goes downwards, the emerging economies would remain unaffected due to their foreign exchange reserves, corporate balance sheets and the banking system. In the peak of the global economic crisis however, the decoupling theory did not make sense as emerging economies, including India, faced capital flow reversals, sharp widening of spreads on sovereign and corporate debt and abrupt currency depreciations. Even though the Indian banking system had no direct exposure to the subprime crisis and had very limited off balance sheet activities and securitized assets, limited dependence on external demand as exports account for less than 15 % of the GDP and growth is predominantly driven by domestic consumption and investment, the financial crisis did affect the Indian economy. The seemingly 9 % GDP growth rate fell down to 6 %. This was primarily because of India’s integration into the world economy, India’s two-way trade (merchandise exports plus imports), as a proportion of GDP grew from 21.2% in 1997-98, the year of the Asian crisis, to 34.7 % in 2007- 08 and the increase in the Indian corporates’ access to external funding. In the five year period from 2003 to 2008, the share of investment in India’s GDP rose by 11 percentage points. Corporate savings financed roughly half of this, but a significant portion of the balance financing came from external sources. While funds were available domestically, they were expensive relative to foreign funding. On the other hand, in a global market awash with liquidity and on the promise of India’s growth potential, foreign investors were willing to take risks, and provide funds at a lower cost. In 2007 – 08, India received capital inflows amounting to over 9 % of GDP as against a current account deficit in the balance of payments of just 1.5 % of GDP. These capital flows, in excess of the current account deficit, prove the importance of external financing and the depth of India’s financial integration.

1. How did global crisis affected our Indian Financial service sector?
2. What are the challenges faced by the sector?
3. How did India manage the crisis?