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Global Crisis 2011 India

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Global Crisis 2011

Effects of the crisis on India

It was not more than three years ago that the global financial system and world economy almost collapsed. Now, there are more than enough signals pointing towards another global crisis very soon which may be more serious than that of 2008. The massive stimulus packages of the United States government and the negative real rate of ineterst failing to kick start growth in economy, unemployment still at a high nine percent level, US looks like it is heading in to another recession which might be much larger this time. In Eurozone, with several governments on the verge of defaulting, the situation looks much worse. What began as a problem with minor peripheral countries like Ireland, Greece and Portugal now seems to be buffeting Spain, Italy and even France. This crisis has done and is doing a considerable damage to the countries all over the world even before it manifested completely. India is no exception to this. The deepening financial crisis in Eurozone and renewed fears of double dip recession in US has definitely effected India's growth this fiscal though the situation is still under control.

So how does the Europe's financial crisis, US heading to another recession, China and Germany stuttering effect India? India was able to withstand the 2008 crisis in a much better way than most of the other countries and the rebound after crisis was also much quicker. However, India needs to be cautious in drawing conclusions from the after effects of the 2008 global crisis. Back in 2008, India adopted a stimulus package by allowing fiscal deficit to rise to nearly six per cent which led to severe inflationary pressures in the economy. This time the cushions available in 2008 no longer exist. If western economies will eventually end up in the crisis, Indian exports will be severely affected. As the inflation rate is already high, any increase in fiscal deficit may harm the economy resulting in a steep decline in our GDP growth rate. Many analysts including the Finance Minister are arguing that India is better prepared to face the global crisis. One of the reasons analysts state is that Indian economy is a domestic-demand driven economy. However, this is only partially true. Fifty percent of Indian GDP comes from the foreign trade in goods and services. Back in 2008, when the global crisis hit all the emerging economies, India's exports which accounted for about 23% of its GDP declined by 2% in the next two years. It is this link to the global economy that troubles from the world flow into India. The effects of the crisis were seen in domestic economy as the buyers of were afraid to make any new purchases. Manufacturing sector which was growing at the rate of 10% for several months started falling down. Houses prices crashed by almost 30%. However, there has been no change in Indian exporters' dependence on western markets. Reports suggest that the Indian economy's dependence on the US has actually increased. The US, Europe and Gulf markets together roughly account for half of India's exports. Any downside risks in these highly interrelated markets will result in trouble in India resulting in a lower level of confidence in consumers in India.

However, on an optimistic note it may very well be possible that this global crisis may

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