1. UNDERSTANDING INDIA’S CURRENT ECONOMIC CRISIS AND THE WAY FORWARD

2. Global Macroeconomic Imbalances: Current Account Balance as % of GDP, 2007 Australia -6.2 U.S. -5.3 U.K. -3.8 Spain-10.1 China 11.3

3. Global Macroeconomic Imbalances: Current Account Balance as % of GDP, 2007 (contd.) Germany 7.6 Japan 4.8 Russia 5.9 Saudi Arabia 25.1 India -1.4 Source: ICRIER, New Delhi.

4. A Global Crisis Japan’s GDP contracted 3.3% from the previous quarter, in the October-December 2008 period. This is the steepest slide for Japan since the oil shock in 1974. U.S., U.K., Germany, France, South Korea, Singapore and other countries also suffering from recession. Europe a major investor in U.S. toxic products. Orders for Volvo trucks: Oct-Dec 2007: 52,000; Oct-Dec 2008: 115.

5. A Global Crisis (contd.) Protectionism may increase: buy American products, hire Americans. Guarantee for savings: puts pressure on others, with countries not strong enough to guarantee savings but practicing capital account convertibility, deprived of capital (e.g., Brazil). “Once in a century shock.” (Rakesh Mohan, Dy. Gov., RBI, Feb 10, 2008.)

6. India’s Foreign Exchange Reserves (US $ Billion) 1999-00 38.0 2000-01 42.3 2001-02 54.1 2002-03 76.1 2003-04 113.0 2004-05 141.5 2005-06 151.6 2006-07 199.2 2007-08 309.7 End-Nov. 2008 246.0

7. India’s Five Golden Years, 2003-04 To 2007-08 Remarkable growth performance; Incredible increase in foreign exchange reserves; and Huge stock market rally.

8. Deepening Economic Crisis Reversal of capital flows from India; Weakening of demand for India’s exports; Weakening of domestic demand; and Job losses.

9. Sharp Real Sector Deterioration from September 2008: Growth in Selected Economic Indicators (% Change, Y-O-Y) Apr-Aug 08Sep-08Oct-08Nov-08Dec-08Jan-09 Industry4.8 5.5 -0.3 2.4 Exports 35.1 10.4 -12.1 -9.9 -1.1 -22.3 Imports 37.7 43.3 10.6 6.1 8.8 -16.1 Railway freight traffic8.6 8.2 -0.1 1.3 3.1 Major ports traffic8.7 1.1 -5.7 -4.6 Commercial vehicle sales 3.9 -0.6 -34.9-48.0 -58.2 Airport passenger traffic-0.8 -14.0 -7.7 Source, ICRIER, New Delhi.

10. The Government of India’s Response to the Economic Crisis Two packages of fiscal stimulus, in early Dec 08 and early Jan 09 –Direct fiscal burden of stimulus: 1.2% of GDP Across-the-board excise duty reduction by 4 %age points Additional plan spending of Rs. 200 billion State governments allowed additional market borrowing of Rs 300 billion for plan expenditure Assistance to export industries –Fiscal deficit (Central and States combined) rising sharply to cross 11% of GDP in 2008-09

11. The Reserve Bank of India’s Response to the Economic Crisis RBI loosening cost and availability of liquidity in a series of steps from mid- September 08

12. RBI Liquidity Injection: Actual/Potential Release of Primary Liquidity Since Mid- September 2008 (Rs. Crore) Cash Reserve Ratio (CRR) Reduction1,60,000 MSS Unwinding 63,045 Term Repo Facility 60,000 Increase in Export Credit Refinance 25,500 Special Refinance Facility for SCBs (Non-RRB) 38,500 Refinance Facility for SIDBI/NHB/EXIM Bank 16,000 Liquidity Facility for NBFCs through SPV 25,000 Total ) 3,88,045 Memo: Statutory Liquidity Ratio (SLR) Reduction 40,000 Source: ICRIER, New Delhi.

13. Concluding Remarks India is seriously affected by the global crisis. The crisis is deepening. The worst is not over yet and nobody knows how long the crisis will last. What we carefully need to monitor are: the numbers on job losses, the numbers on foreign exchange reserves, the central and state governments’ fiscal deficit numbers, and how the deficit is financed.

14. Concluding Remarks (contd.) Recovery possible, provided the government is able to push through the implementation of massive investment in social and physical infrastructure. Receipts from privatization of public enterprises can be used to finance fiscal stimulus package. The current economic crisis is a story of the huge balance sheet losses and of those who ended up/may end up financing these losses.

15. Concluding Remarks (contd.) I think it will be a great idea to do a detailed case study on Lehman Brothers. The study may focus on Lehman Brothers’ balance sheet and attempt to address issues such as the following: Who lent money to Lehman Brothers? What kind of due diligence did they do before lending their money to Lehman Brothers? What are the details (including value) of the assets that Lehman Brothers held at the time it collapsed? What is the current market value of these assets?

16. Concluding Remarks (contd.) The study may also focus on the structure of incentives governing the behaviour of its managers. I will be happy to be associated with this study.