How India survived the 2008–09 Financial Crisis ?

Authored by Shivang Ranjan & Arijit Das

2020 hasn’t been a good year for the Indian stock markets till now. In fact, no market around the world is in a good position currently, because of COVID-19. Various governments & central banks are measuring out the possibility to salvage the economy, with a combination of monetary & fiscal policies measures to contain & minimize the damage caused.

IMF chief also recently mentioned that the ongoing coronavirus pandemic, which has brought the global economy to a standstill, may have a much worse impact than the 2008 financial crisis.

So we thought it’d be interesting to understand how India made it through that time and what policy amendments did the Government of India & the RBI make to protect our nation from the 2008–09 crisis. First, let’s look at what exactly happened then!

To understand the housing bubble briefly, it was due to a pile of subprime loans i.e large number of high default rate home loans which were packaged & sold as investment products (CDOs). Once the housing market crashed, it caused a domino effect, causing a large number of financial institutions to declare bankruptcy, famously Lehman Brothers. And the federal bank having to bailout a lot many of them.

Why was the crisis impact less severe on India ?

First, India’s dependence on exports is very less when compared to other economies. Indian exports were on average ~22% of then GDP. The fact that a sizable contribution to GDP is from the domestic market helped keep industries humming.

Second, our financial system is highly regulated which may sound negative but, it is the very reason why our financial institutions weren’t tempted to buy into the investment products that caused the crisis.

Third, the pro-activeness of the government & RBI to provide enough stimulus by injecting money into the system & also reducing interest rates to make borrowing cheaper helped a lot to keep made sure that the economic engine kept running without stalling.

Some steps taken by the RBI (source):

1. The repo rate was reduced from 9.0% to 4.75%.
2. The policy reverse repo rate was reduced from 6.0% to 3.25%.
3. The Cash Reserve Ratio (CRR) was reduced from 9.0% to 6.5%.
4. The Statutory Liquidity Ratio (SLR) was reduced from 25% to 24%.

Fourth, Around the world the heat was faced by the common citizens too especially in USA. The reason was they weren’t having substantial savings to survive. People in India are usually brought up to be thrifty and careful. Indians use their savings to accumulate wealth and make provisions for “the rainy day”. As per the study published in Global Journal of Finance and Management, it has been found that Indians have higher risk aversion as compared to their European and American counterparts.

To conclude, India didn’t come out of the crisis unscathed but the economic structure of our nation surely cushioned the impact which could have been disastrous.