Page 1 of 11

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 06

July 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 148

Impact of Global Recession on Indian Exports:

Performance and Policy Implications

Dr. Laxmi Narayan; Dr. Sidhanshu

Assistant Professor Department of Economics, Govt. P.G. College Mahendergarh Haryana, India

Assistant Professor, Department of Economics,Govt. College Tauru, Haryana, India.

Email-laxmi_narayan70@yahoo.com ; Email-sidhanshu3@yahoo.com

ABSTRACT

When the recent crisis gripped the world

2008, most policymakers, economists and

experts put forth the view that India would be

only marginally affected. But the contagion

of the crisis has spread to India through

three major channels – the financial channel,

the real channel, and importantly, as

happens in all financial crises, the confidence

channel. The decline in the exports as a

result of declining demand in the world

market was the major factor which affected

Indian economy not only in the export

intensive sectors but other sectors too. It is

worthwhile to examine the changes in volume

and composition of the export during

recession period. The present paper made an

effort in this direction. The paper aims to

understand the various aspects of the impact

of the recession with particular reference to

the exports of India.

Keywords: Global Recession, Indian Exports,

Fiscal Policy

1. INTRODUCTION

The recent global recession, considered worst

since the great depression of 1930s, has

started in the U.S. economy and gradually

spread to the other developed and developing

countries with varying degree. Initially it was

considered that the recession would not affect

the Indian economy in a big way because of

‘decoupling hypotheses. But with the spread

of the recession in other advanced

economies, the Indian economy started

feeling the strains with declining demand of

the Indian exports. The export sector was

first to feel the heat of the recession.

When the crisis gripped the world 2008,

most policymakers, economists and experts

put forth the view that India would be only

marginally affected. But the contagion of the

crisis had spread to India through three major

channels – the financial channel, the real

channel, and importantly, as happens in all

financial crises, the confidence channel. The

decline in the exports as a result of declining

demand in the world market was the major

Page 2 of 11

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 06

July 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 149

factor which affected Indian economy not

only in the export intensive sectors but other

sectors too. It is worthwhile to examine the

changes in volume and composition of the

export during recession period. The present

paper made an effort in this direction. The

paper aims to understand the various aspects

of the impact of the recession with particular

reference to the exports of India.

The present paper is organized in six

parts. Part-II of the paper discusses the

causes of recession. Part-III of the paper

analyses the channel of spread of the

recession to India. Part-IV analyses the

impact of the Recession on Indian Exports.

Part-V discusses the policy measures adopted

by Indian Government to boost the exports.

The conclusions and important suggestions

are presented in the last Part-VI.

2. CAUSES OF RECESSION

The causes of the crisis have become a

major topic of discussion among both

economists and policymakers. The crisis

originated in US in 2007 but its seeds were

sown in 2001 when the US economy

experienced a mild short lived recession.

Most contributions to the ongoing post- mortem analysis of the crisis recognizes that

government failure has played a major role in

allowing banks and other financial

institutions to capitalize on loop-holes in the

regulatory system to increase leverage and

returns. Another important explanation of the

crises is the market failure, namely the

catastrophic performance of the financial

market that was in stark contrast to the

theoretical proposition that it is efficient. The

four market failures that are believed

triggered and amplified the financial crisis of

2007-2010 are (i) Risk-Taking Incentives of

Financial Institutions (ii) Systemic Risk of

Financial Institutions (iii) Opacity of

Financial Institutions and Markets (iv) Runs

on the System. As a result of above market

failures the financial/housing market have

resorted to (i) Use of off -balance sheet

entities and over-the counter transactions (ii)

Complex securitization of assets

accompanied by lax risk analysis/

assumptions (iii) Excessive leverage and

reliance on short-term debt (repos) (iv)

Remuneration incentives encouraged

excessive risk-taking (v) Credit ratings

agencies failure to accurately assess risk (vi)

Aggressive mortgage lending and poor

lending standards. The debate has considered

both the contribution of domestic issues and

global imbalances. To keep recession away

the federal accommodated the monetary

policy and lowered the funds rate 11 times

and created a flood of liquidity lowering

interest rate and rising housing prices, levels

of standards were relaxed to the point that

people were able to buy the houses.

Therefore housing bubble and imprudent

mortgage lending, failure of corporate

governance and risk management, lack of

transparency and accountability in mortgage

finance leads to the collision of financial

system. Lax regulatory environment

permitted financial institution to engage in

Page 3 of 11

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 06

July 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 150

risky transaction at a vast scale. Even many

banks established off books special purpose

entities to engage in speculative investment

allowing the banks to make more loans

during the expansion but also created

contingent liabilities that with the onset of

crisis reduced market confidence in the

bank’s credit worthiness. Government also

mandated subprime lending i.e. federal

mandates to help low income borrowers. This

excessive leverage bring the meltdown of

financial system and caused the bankruptcy

of many financial institutions like Lehman

brothers in mid of 2007. As a result credit

flows to the private sector were choked off, at

the same time consumer’s and businessman

confidence collapsed. The comprehensive

review of crisis-related studies1

shows that

both macroeconomic and microeconomic

factors have played an important role in this

global crisis.

3. TRANSMISSION CHANNELS

When the financial crisis erupted in

USA, Indian policy makers and media

persons argued that India would be relatively

immune to this crisis, because of the strong

fundamentals of the economy and the

supposedly well-regulated banking system.

1 See, for example, the contributions in the

special issue of Critical Review by Acharya

and Richardson (2010), Astley et.al. (2009),

Baily et al. (2008), Fox (2009), Garnaut

(2009), IMF (2009), Krugman (2009a,b),

Obstfeld and Rogoff (2009), Posner (2009),

Reinhart and Rogoff (2009), Sheng (2009),

Stiglitz (2010a & 2010b) and Taylor (2009&

2010).

The macroeconomic and financial indicators

predominantly pointed to a strong and vibrant

Indian economy prior to the financial crisis.

The GDP was growing at the rate of 7.5%,

9.5%, 9.7% and 9% respectively for the years

leading up to the crisis. The original

consensus estimate for 2008-09 was also

around 9%. A significant component of the

growth in the Indian economy was the export

sector. In the four years leading up to the

crisis, India’s exports grew by more than

22% each year, averaging 25.8% during that

period.

Dooley & Hutchinson (2009) identified

that prior to May 2008, the EMEs were

insulated from the financial crisis that had

been severely affecting. The decoupling of

the EMEs from the advanced economies

broke down in May 2008 as the crisis spread

to the rest of the global economy. This was

apparent in case of India also as the financial

meltdown, morphed in to a global economic

downturn with the collapse of Lehman

Brothers on 23 September 2008, the impact

on the Indian economy was almost

immediate. This is apparent in the case of

India, as evidenced by the deterioration of all

the macroeconomic and financial indicators

in 2008-09. Industrial production increased

by 2.7%, a significant drop from the 9.2%

average growth in the previous four years.

This contributed to the economy growing at

only 6.7%. The BSE Index, which had been

rising over a protracted period, lost 37.9% of

its value, adversely affecting household

wealth and the ability of businesses raising