ECONOMIC SHOCK: THE

GLOBAL FINANCIAL CRISIS

AND ITS IMPACT ON INDIA
A Project submitted to the Department of Economics for the Partial fulfillment
of Degree of B.Sc.(H)

SUPERVISOR SUBMITTED BY

Mrs. Vaishali Gupta Name: - Gurusha Raj

Class: - B.Sc. Hons Sem 4

Roll no.: - IISU/2020/ADM/32139

Department of Economics
IIS (deemed to be University)
Jaipur

(2020 – 21)
TABLE OF CONTENTS
S no. Topic Page no

1. Economic shock 3

2. Financial shocks 5

3. Introduction 8

4. Causes and magnitude of the crisis 9

5. Impact of the crisis on emerging markets 12

6. Global response to the crisis 13

7. Impact of the crisis on India 14

8. Conclusion 32

9. References 35
 ECONOMIC SHOCK
An economic shock refers to any change to fundamental macroeconomic
variables or relationships that has a substantial effect on macroeconomic
outcomes and measures of economic performance, such as unemployment,
consumption, and inflation. Shocks are often unpredictable and are usually the
result of events thought to be beyond the scope of normal economic
transactions.
 Economic shocks are random, unpredictable events that have a widespread
impact on the economy and are caused by things outside the scope of economic
models.
 Economic shocks can be classified by the economic sector that they originate
from or by whether they primarily influence either supply or demand.
 Because markets are connected, the effects of shocks can move through the
economy to many markets and have a major macroeconomic impact, for better
or worse.
Economic shocks can be classified as primarily impacting the economy through
either the supply or demand side. They can also be classified by their origin
within or impact upon a specific sector of the economy. Finally, shocks can be
considered either real or nominal shocks, depending on whether they originate
from changes in real economic activity or changes in the nominal values of
financial variables.
Because markets and industries are interconnected in the economy, large shocks
to either supply or demand in any sector of the economy can have a far-reaching
macroeconomic impact. Economic shocks can be positive (helpful) or negative
(harmful) to the economy, though for the most part economists, and normal
people, are more concerned about negative shocks.
While there is not an absolute consensus among scholars about the definition of
an economic shock, there are four features that commonly are understood to
define an economic shock.

PROPERTIES
Singular or short-term event
An economic shock is a single or short-term event. By its nature, this event
breeds instability because it results in either costs or gains that have not been
priced into the market. Long-term trends aren’t considered economic shocks
because the economy has time to adjust. For example, an industry disappearing
overnight would be considered a shock, while an industry fading out over
several decades would not.
Large-scale
By large-scale, economists mean that the event has to affect the entire economy
or close to it. Individual industries or geographic areas can suffer local or
regional economic shocks, but the more local the event is the less likely it is to
meet the definition. Events that affect only a certain group of people, such as
those hit by the Bernie Madoff scandal, are more likely to be considered
“financial shocks,” meaning an event which affects the personal finances of
individuals rather than the economy at large.
Unexpected
An economic shock is an event that was neither planned nor foreseen. As a
result, it causes unexpected changes to the economy. Anticipated events, such
as demographic trends, are generally priced into the marketplace. Consumers,
businesses and investors spend according to what they know is coming.
Unanticipated events, by definition, are not. They catch the market by surprise
and, as a result, have unpredictable consequences.
Exogenous
Many – but not all – economists argue that an economic shock must come from
outside the economy, in other words, be exogenous. Something like weather,
political upheaval or war would meet this definition. By this logic, however, an
event like the 2008 financial crisis would not necessarily be considered an
economic shock since the crisis arose from within the economy, namely, a
series of financial decisions. This has led some economists to argue that an
economic shock doesn’t need to be exogenous.
FINANCIAL SHOCKS
A financial shock is one that originates from the financial sector of the
economy. Because modern economies are so deeply dependent on the flow of
liquidity and credit to fund normal operations and payrolls, financial shocks can
impact every industry in an economy.
A stock market crash, a liquidity crisis in the banking system, unpredictable
changes in monetary policy, or the rapid devaluation of a currency would be
examples of financial shocks. Financial shocks are the primary form of nominal
shocks, though their effects clearly can have a serious impact on real economic
activity.

5 OF THE WORLD’S MOST DEVASTATING

FINANCIAL CRISES
The Credit Crisis of 1772
 This crisis originated in London and quickly spread to the rest of Europe. In
the mid-1760s the British Empire had accumulated an enormous amount of
wealth through its colonial possessions and trade. This created an aura of
overoptimism and a period of rapid credit expansion by many British banks.
The hype came to an abrupt end on June 8, 1772, when Alexander Fordyce
—one of the partners of the British banking house Neal, James, Fordyce, and
Down—fled to France to escape his debt repayments. The news quickly
spread and triggered a banking panic in England, as creditors began to form
long lines in front of British banks to demand instant cash withdrawals. The
ensuing crisis rapidly spread to Scotland, the Netherlands, other parts of
Europe, and the British American colonies. Historians have claimed that the
economic repercussions of this crisis were one of the major contributing
factors to the Boston Tea Party protests and the American Revolution.

 The Great Depression of 1929–39

This was the worst financial and economic disaster of the 20th century. Many
believe that the Great Depression was triggered by the Wall Street crash of 1929
and later exacerbated by the poor policy decisions of the U.S. government. The
Depression lasted almost 10 years and resulted in massive loss of income,
record unemployment rates, and output loss, especially in industrialized nations.
In the United States the unemployment rate hit almost 25 percent at the peak of
the crisis in 1933.
 The OPEC Oil Price Shock of 1973
This crisis began when OPEC (Organization of the Petroleum Exporting
Countries) member countries—primarily consisting of Arab nations—decided
to retaliate against the United States in response to its sending arms supplies to
Israel during the Fourth Arab–Israeli War. OPEC countries declared an oil
embargo, abruptly halting oil exports to the United States and its allies. This
caused major oil shortages and a severe spike in oil prices and led to an
economic crisis in the U.S. and many other developed countries. What was
unique about the ensuing crisis was the simultaneous occurrence of very high
inflation (triggered by the spike in energy prices) and economic stagnation (due
to the economic crisis). As a result, economists named the era a period of
“stagflation” (stagnation plus inflation), and it took several years for output to
recover and inflation to fall to its precrisis levels.

 The Asian Crisis of 1997

This crisis originated in Thailand in 1997 and quickly spread to the rest of East
Asia and its trading partners. Speculative capital flows from developed
countries to the East Asian economies of Thailand, Indonesia, Malaysia,
Singapore, Hong Kong, and South Korea (known then as the “Asian tigers”)
had triggered an era of optimism that resulted in an overextension of credit and
too much debt accumulation in those economies. In July 1997 the Thai
government had to abandon its fixed exchange rate against the U.S. dollar that it
had maintained for so long, citing a lack of foreign currency resources. That
started a wave of panic across Asian financial markets and quickly led to the
widespread reversal of billions of dollars of foreign investment. As the panic
unfurled in the markets and investors grew wary of possible bankruptcies of
East Asian governments, fears of a worldwide financial meltdown began to
spread. It took years for things to return to normal. The International Monetary
Fund had to step in to create bailout packages for the most-affected economies
to help those countries avoid default.

 The Financial Crisis of 2007–08

This sparked the Great Recession, the most-severe financial crisis since the
Great Depression, and it wreaked havoc in financial markets around the world.
Triggered by the collapse of the housing bubble in the U.S., the crisis resulted in
the collapse of Lehman Brothers (one of the biggest investment banks in the
world), brought many key financial institutions and businesses to the brink of
collapse, and required government bailouts of unprecedented proportions. It
took almost a decade for things to return to normal, wiping away millions of
jobs and billions of dollars of income along the way.
Sri Lanka, a nation of 22 million people, is today facing an
unprecedented economic crisis that threatens to undo much of
the progress that had been made since the end of the bloody
civil war in 2009. Amidst skyrocketing inflation (which stood
at more than 21 percent for March 2022), power cuts lasting
well over 10 hours, and shortage of essential items—like
food, fuel, and life-saving medicines—the crisis appears to
have spilled over into newer domains, with the island nation
now also confronted with a political crisis wherein so far
Prime Minister Mahinda Rajapaksa has resigned amidst
violent clashes between pro-and anti-government
demonstrators, a caretaker PM been installed, the national
emergency declared (including shoot-on-sight orders issued to
the military) and dramatic curbs on the use of social media
imposed. So, the question that arises is: What are the factors
that led to this?
Even though many economists and policymakers point to the
pandemic as the principal cause of the problem—linking the
fall in earnings from the tourism sector (one of the most
significant contributors to Sri Lanka’s GDP) from over US$4
billion in 2018 to less than the US $150 million in 2021 to the
drop in the country’s forex reserves—this crisis long been in
the making. Between 2009 and 2018, Sri Lanka’s trade deficit
swelled from US$5 billion to US$12 billion. In recent years,
the economy has had to withstand multiple shocks due to
some of the policy measures—drastic tax cuts, downward
interest rate revisions, and a ‘disastrous’ plunge into organic
farming through a complete ban on imports of all fertilizers
and pesticides—adopted by the Rajapaksa government; more
recently, it has also had to contend with an unanticipated
spike in the import bill caused by inflation on account of the
Ukrainian crisis. Amidst all of this, the one event that can be
said to have tipped it over the precipice was Sri Lanka’s
effective exclusion from the international credit market—
caused by a dramatic downgrading of the nation’s credit
ratings in the immediate aftermath of the pandemic. This
essentially made it impossible for Colombo to find the means
to service its foreign-currency-denominated debt accumulated
over the years, thereby, precipitating the crisis it finds itself in
today.
The economy has had to withstand multiple shocks due to
some of the policy measures—drastic tax cuts, downward
interest rate revisions, and a ‘disastrous’ plunge into organic
farming through a complete ban on imports of all fertilizers
and pesticides—adopted by the Rajapaksa government.
With an outstanding present-day external debt of more than
US $50 billion—the largest chunk of it (nearly 47 percent)
borrowed from the market, mostly through the instrument of
International Sovereign Bonds (ISBs)—and forex reserves of
just over US $2 billion (barely enough to foot two months’
import), it appears increasingly unlikely that the country will
be able to repay all its debt. In this article, we look at the
reasons why India should facilitate a speedy resolution of this
crisis and explore some ways it can address the challenges
that beset its neighbour.
India’s interest

There are three primary reasons why this crisis affects India:
China, trade, and potential political instability.
Even though Sri Lanka occupies an integral spot in India’s
neighbourhood first policy, there appears to have been some
amount of neglect over the years in fostering closer trade and
developmental ties between New Delhi and Colombo, leading
to Beijing’s rise as the dominant foreign player in the island
nation. This is apparent as China being the country’s top
single lender and also its biggest source of foreign direct
investment, since at least 2015. Even in trade terms, Sri Lanka
imports more from China than India.
India’s concerns about Beijing stem from the very nature of
Chinese investment in the island nation and what this could
mean in the context of this crisis. Criticised often for being
made in exchange for political ‘kickbacks’ and the lack of the
required transparency of review and assessment—Chinese
investments in Sri Lanka have time and again failed to
generate the kind of local employment or revenue expected of
them to justify the debt, often compelling the Sri Lankan
government to default and thereby surrender strategically-
located townships and ports such as the Hambantota in
exchange. In many instances, Sri Lanka has simply leased out
land in exchange for Chinese investment—for instance, in the
case of the Port City of Colombo project where Beijing
received over 100 hectares in exchange for a US$1.4-billion
investment. Through such means, China has found an
increasingly larger territorial foothold in the country. Now, as
the economic crisis worsens, Sri Lanka could stand to lose
control of even more of its land in such strategically-located
port cities. This would heighten Indian fears of greater
Chinese presence in this region, given its proximity to some
of the busiest shipping routes in South Asia, especially since it
considers the island-nation a crucial part of its ‘sphere of
influence’.
The figure above gives a break-up of the external debt
incurred by Sri Lanka (April 2021). Source: Department of
External Resources (website), Government of Sri Lanka.
In more immediate terms, any major disruption to the normal
functioning of the Colombo Port due to the crisis would be a
source of major concern to India as it handles over 30 percent
of India’s container traffic and 60 percent of its trans-
shipment. Sri Lanka is also a major destination for Indian
exports—receiving over US$4 billion annual worth of
merchandise from India. In the event of a worsening of the
economic crisis, there would be major implications for Indian
exporters who will have to find alternative markets for their
produce. Besides trade, India has a substantial investment in
the island-nation in the areas of real estate, manufacturing,
petroleum refining, etc.—all of which stand to be adversely
impacted by the crisis.
Officials estimate that more than 2,000 of such ‘economic’
refugeeld arris couve in India if the crisis were to continue—
and this should be a major cause of concern.
Besides trade, investment, and geopolitics, immediate
political instability arising out of the current crisis could also
become a source of major concern for India. Over the past few
weeks, scores of people have fled from Sri Lanka to India.
Officials estimate that more than 2,000 of such ‘economic’
refugeeld arris couve in India if the crisis were to continue—
and this should be a major cause of concern. For one, any
significant spike in the number of refugees could trigger the
apprehensions of the state around issues of public safety and
refugee resettlement and stoke conflict with the local
population over the use of common resources. Additionally,
there would be fears of a possible return of the Tamil–
Sinhalese conflict (from the days of the Lankan civil war) and
its potential spillover into India. It would, therefore, only be in
India’s interest to play a role in ensuring a speedy end to the
economic crisis.
The way forward
On the list of countries to which Sri Lanka owes the most
debt, India ranks third, behind only China and Japan. It thus
has a significant role to play in helping the island nation meet
its financial commitments during this time of need. For one, it
must consider granting Sri Lanka a moratorium on debt
repayment and/or the option of restructuring the debt owed to
it. This will not only help Colombo better allocate its limited
revenues toward meeting the immediate needs of the people
such as food, medicine, and fuel but also go a long way in
building some much-needed goodwill amongst its leadership:
To be able to counteract, in some way, the influence of
enormous Chinese investment over the years. Such a move
would assume increased salience amongst the political
leadership in Sri Lanka against the backdrop of the recent
Chinese refusal of President Rajapaksa’s request to consider
the restructuring of its debt. Of course, this should be
alongside the developmental and humanitarian assistance that
India continues to provide.
Any significant spike in the number of refugees could trigger
the apprehensions of the state around issues of public safety
and refugee resettlement and stoke conflict with the local
population over the use of common resources.
Over the longer term, India must stand ready to provide any
assistance required by the island nation. As it is only in
India’s interest to reduce Sri Lanka’s dependence on China,
the former must contribute to closer integration of the island
nation into the world economy. Here, a good place to start
would be through expanding bilateral trade between New
Delhi and Colombo. The India–Sri Lanka Free Trade
Agreement (ISFTA), for one, can be utilised to this end. In
2019, only 64 percent of all Sri Lankan exports to India were
made under the ISFTA, down from over 90 percent in 2005.
On the import side, only 5 percent of all Indian imports were
covered under the agreement. This means there is room to
renegotiate some of the key inclusion terms of the agreement
to spur greater trade-based cooperation between the two
countries.
How Does the Crisis in Sri Lanka Impact India?
April 20, 2022Posted byIndia BriefingWritten byNaina
BhardwajReading Time:5 minutes

As the economic crisis in Sri Lanka deepens, further spilling

over into civil unrest and political instability in the island
nation, we discuss its impact on India – economic, societal as
well as geopolitical. India is currently navigating uncertain
straits in its dealings with Sri Lanka, where the right
diplomatic strategy is the key to determining India’s
geopolitical influence in the region.

Sri Lanka Crisis India

Mounting economic woes in neighboring Sri Lanka, triggered

by a severe shortage of foreign currency and the inability to
pay for essential imports, including fuel, have deepened the
crisis in the island nation. From debilitating power cuts lasting
up to 13 hours to shortages of food, petroleum products,
essential goods, and a soaring double-digit inflation rate of
17.5 percent, the situation in Sri Lanka is worrisome, with
political uncertainty fuelling violence among the masses.
India, Sri Lanka’s only immediate neighbor, is treading a
tightrope as it grapples with the challenges and opportunities
that this crisis in Sri Lanka has presented.

What led to the Sri Lankan crisis?

The crisis in Sri Lanka was mainly triggered due to a shortage
of foreign exchange (forex) reserves, which have plummeted
by 70 percent over the last two years to just US$2 billion by
the end of February 2022. The remaining forex reserves can
barely sustain two months of imports. Meanwhile, the country
has foreign debt obligations of about US$7 billion in 2022.
Several factors have contributed to the forex crisis. Sri Lanka
has suffered the most due to the collapse of the tourism
industry ever since the 2019 Easter Sunday suicide bombings,
after which tourist arrivals in Sri Lanka dropped by 70
percent. This was further exacerbated by the pandemic led
travel restrictions. Additionally, during the pandemic,
remittances from foreign workers, which is Sri Lanka’s
largest source of US dollars, slumped by 22.7 percent to
US$5.5 billion in 2021.
The country’s consumption patterns are also heavily dictated
by the dependance on imports of essential goods like sugar,
pharmaceuticals, fuel, pulses and cereals, which worsened the
crisis. Coupled with a series of bad policy decisions like the
ban on chemical fertilizers led to a drastic decline in domestic
food production, pushing up food prices by 25 percent.
How is the crisis in Sri Lanka impacting India?
India is not isolated from the impact of the economic crisis in
Sri Lanka. Driven out by hunger and loss of jobs, there has
been a surge of people from the island nation seeking refuge
in India.
Challenges
Economic challenges
It must be noted that India relies considerably on the Port of
Colombo for global trade given its status as a transshipment
hub. 60 percent of India’s transshipment cargo is handled by
the port. India-linked cargo, in turn, accounts for 70 percent of
the port’s total transshipment volume.
However, at present, thousands of containers sent from India
to Sri Lanka, including for its own consumption as well as
trans-shipment cargo, have been lying uncleared at the port as
authorities are unable to afford to transfer containers between
terminals. This, in turn, has led to some build-up of cargo
intended for Sri Lanka at Indian ports. Any disruption in
operations at the Port of Colombo makes India vulnerable to
an increase in costs and congestion issues. While the work on
building a transshipment hub in Kerala has begun, it is in
India’s interest to help relieve Sri Lanka of the economic
crisis in the short-term
Additionally, India is also one of the largest contributors to
foreign direct investment (FDI) in Sri Lanka. FDI from India
amounted to about US$1.7 billion from 2005 to 2019. After
China and the UK, India was the biggest source of FDI for Sri
Lanka in 2019 at US$139 million. The main investments from
India are in the areas of petroleum retail, tourism and hotel,
manufacturing, real estate, telecommunication, banking, and
financial services. Any instability in Sri Lanka might affect
the interests of large Indian companies like Indian Oil, Airtel,
Taj Hotels, Dabur, Ashok Leyland, Tata Communications,
Asian Paints, State Bank of India etc, which have invested in
Sri Lanka.
Humanitarian crisis
With India being the only immediate neighbor of Sri Lanka,
the threat of large-scale humanitarian crisis could also impacts
India. With the shortage of food, medicines, and growing
political instability, India finds itself placed in a position of
immense responsibility to avert the crisis through all possible
aid.
Refugee crisis
Whenever a political or social crisis has occurred in Sri
Lanka, India has witnessed a large influx of ethnic Tamil
community refugees from the Sinhala Land to India through
the Palk strait and Gulf of Munnar. However, India may find
it difficult to handle such an influx and needs a robust policy
in place to handle the crisis.

Opportunities
Amid the sudden halt of tea supply by Sri Lanka to the global
tea market, India is keen to plug the supply gaps. Sri Lanka,
which is world’s largest tea exporter, has been left grappling
with a sharp decline in tea production amid 12–14-hour daily
power cuts. Indian tea exporters find themselves well-
positioned to capture markets in countries that import
orthodox tea. India could strengthen its footprint in Iran and
as well as new markets such as Turkey, Iraq, the US, China
and Canada.
The Indian textile industry too is poised to gain amid the crisis
as Indian apparel exporters are beginning to receive orders
from the UK, EU, and even Latin American countries where
Indian textiles had little or no presence. Before the financial
crisis ensued, textiles and garments contributed nearly half of
Sri Lanka’s exports. However, in the apparel segment too, the
production and supply are disrupted due to power cuts.
Geopolitical experts have also touted that India can make use
of this opportunity to balance its diplomatic ties with Sri
Lanka, which have been distant owing to Sri Lanka’s
proximity with China. However, in recent times, Sri Lanka’s
policy tilt vis-à-vis India and China, trying balancing both the
Asian powers is evident. As the disagreement with China
intensified on the fertilizer issue, India’s fertilizer delivery to
Sri Lanka on the latter’s request  is seen as a positive
development in the bilateral relations.
This has been followed up with India’s four-pronged
economic and financial assistance approach to Sri Lanka. It
includes credit lines for the import of food, fuel, and
medicines; currency swaps to boost foreign exchanges;
modernization; and holistic investments, in the sectors of
renewable energy, ports, logistics, infrastructure, connectivity,
and maritime security.
How is India aiding Sri Lanka?
India has extended financial assistance to the tune of US$2.4
billion, starting from late 2021, which includes a US$400
billion Reserve Bank of India (RBI) currency swap, deferral
of a US$500 million loan and a US$1.5-billion credit line for
importing fuel, food and medicines.
As immediate relief, India has sent around four consignments
of 40,000 metric tons of diesel to mitigate the spike in power
cuts in Sri Lanka. India has also sent 40,000 tons of rice in
prompt shipments to the island nation.
Besides, Sri Lanka has also requested for additional assistance
of US$1.5 billion. India has also signed a new Memorandum
of Understanding (MoU) to develop the Trincomalee Oil Tank
Farm. Furthermore, India has also signed new renewable
energy contracts in northern Sri Lanka and is attempting to
promote connectivity in the region.
Sri Lanka, a country of 22 million people, is under the grip of
an unprecedented economic turmoil, the worst in seven
decades, leaving millions struggling to buy food, medicine,
fuel and other essentials.
Following the political and economic instability, hundreds of
anti-government protesters stormed into the Sri Lankan
President's residence demanding his resignation.
What led to recent Sri Lanka Crisis?
Background:
When Sri Lanka emerged from a 26-year long civil war in
2009, its post-war GDP growth was reasonably high at 8-9%
per annum till 2012.
However, its average GDP growth rate almost halved after
2013 as global commodity prices fell, exports slowed down
and imports rose.
Sri Lanka’s budget deficits were high during the war and
the global financial crisis of 2008 drained its forex
reserves which led to the country borrowing a USD2.6 billion
loan from the IMF in 2009.
It again approached the IMF in 2016 for another USD1.5
billion loan, however the conditionalities of the IMF further
deteriorated Sri Lanka’s economic health.
Economic Factors:
The Easter bomb blasts of April 2019 in churches in Colombo
resulting in 253 casualties, consequently, dropped the number
of tourists sharply leading to a decline in foreign exchange
reserves.

The newly led government by Gotabaya Rajapaksa in 2019

promised lower tax rates and wide-ranging SoPs for farmers
during their campaign.
The quick implementation of these ill-advised promises
further exacerbated the problem.
The Covid-19 pandemic in 2020 made the bad situation worse
Exports of tea, rubber, spices and garments suffered.
Tourism arrivals and revenues fell further
Due to a rise in government expenditures, the fiscal
deficit exceeded 10% in 2020-21, and the debt to GDP ratio
rose from 94% in 2019 to 119% in 2021.
The Crisis in Sri Lanka is triggered due to a shortage of
foreign exchange (forex) reserves, which have dropped by
70% over the last two years to just USD 2 billion by the end
of February 2022.
Meanwhile, the country has foreign debt obligations of about
USD 7 billion for 2022.
Sudden Move to Organic Farming:
In 2021, all fertiliser imports were completely banned and it
was declared that Sri Lanka would become a 100% organic
farming nation overnight.
This overnight shift to organic fertilisers heavily impacted
food production.
Consequently, the Sri Lankan President declared an economic
emergency to contain rising food prices, a depreciating
currency, and rapidly depleting forex reserves.
China’s Debt Trap:
Sri Lanka has borrowed heavily from Beijing since 2005 for
infrastructure projects, many of which became White
Elephants (no longer needed/ useful).
Sri Lanka also leased its Hambantota port to a Chinese
company in 2017 after it became unable to service the USD
1.4 billion debt from Beijing used to build it.
Sri Lanka’s total debt to China stands at USD 8 billion, almost
one sixth of its total external debt

Current Political Vacuum:

Prime Minister Wickremesinghe and President Gotabaya
Rajapaksa signalled the willingness to resign making way for
an all-party government to take over.
Why should India worry about Sri Lanka Crisis?
Challenges:
Economic:
Sri Lanka’s share in India’s total exports has declined from
2.16% in FY15 to just 1.3 per cent in FY22.

Automotive firms like Tata Motors and TVS Motors have

stopped exports of vehicle kits to Sri Lanka and halted
production at their Sri Lankan assembly units due to its
unstable forex reserves and fuel shortages.
Refugee:
Whenever a political or social crisis has occurred in Sri
Lanka, India has witnessed a large influx of ethnic Tamil
community refugees from the Sinhala Land to India through
the Palk strait and Gulf of Munnar.
However, India may find it difficult to handle such an influx
and needs a robust policy in place to handle the crisis.
The state of Tamil Nadu has already started feeling the impact
of the crisis with the reported arrival of 16 persons from Sri
Lanka through illegal means.
What Opportunities should India look for?
Opportunities:
Tea Market:
Amid the sudden halt of tea supply by Sri Lanka to the global
tea market, India is keen to plug the supply gaps.
India could strengthen its footprint in Iran and as well as new
markets such as Turkey, Iraq.
Big Sri Lankan tea importers from Iran, Turkey, Iraq and
Russia are reportedly visiting India for tea plantations in
Assam and Kolkata.

As a result, at recent Kolkata auctions, the average price for

orthodox leaf saw an increase of up to 41% compared to
corresponding sales last year.
Apparel (Clothing) Market:
Many apparel orders from the United Kingdom, European
Union, and Latin American countries are now being diverted
to India.
Several orders have been given to companies in Tirupur, the
hub of the textile industry in Tamil Nadu.
Why Should India assist in Helping Sri Lanka?
Sri Lanka has been a strategically important partner for
India. India can make use of this opportunity to balance its
diplomatic ties with Sri Lanka, which have been distant owing
to Sri Lanka’s proximity with China.
As the disagreement between Sri Lanka and China intensified
on the fertiliser issue, India’s fertiliser delivery to Sri Lanka
on the latter’s request is seen as a positive development in the
bilateral relations.
Extending diplomatic ties with Sri Lanka will ease India’s
effort to keep the Sri Lankan archipelago out of China’s
‘string of pearls’ game in the Indo-Pacific.
To the extent India can extend help to alleviate the hardships
of Sri Lankans, it should be done with due care keeping in
mind that the optics of its aid matters too.

Way Forward

Implementing Democracy in True Spirit:

There is a need for strong political consensus in Sri Lanka for
better crisis-management. Militarisation of Administration can
be reduced.
Considerations are needed to help the poor and vulnerable get
back on their feet and prevent long-term scarring.
The steps include an increase in agricultural productivity,
increased job opportunities in non-farming sectors, better
implementation of reforms and reviving the tourism sector.
Support from India:
India, which has followed the "Neighbourhood First policy" to
cement bonds with its neighbours, can walk that extra mile to
help Sri Lanka out of the current crisis and help Sri Lanka
towards realising its potential, to reap the rewards of a stable,
friendly neighbourhood.
Bailout from International Monetary Fund:
Sri Lanka has approached the IMF for the bailout. The IMF
can support Sri Lanka’s efforts to overcome the current
economic crisis.
Prospects of Circular Economy:
With reference to economic instability in Sri Lanka, the
dependence on imports can be minimised by the circular
economy, it will offer a sustainable alternative to aid a
recovery.
Economic Collapse Of Britain
International Monetary Fund (IMF) has predicted the growth
of the UK in 2023 to be less than 0.3% which may be
catastrophic for the country, especially in the current wake of
high inflation and overall recession.
The United Kingdom or Britain, a superpower of the earlier
times and under whose reign “Sun never used to set” is on the
verge of economic collapse. With the resignation of the
current Prime Minister Liz Truss after a mere 44 days of
being in power, the question is looming before everyone —
Will the former Superpower survive this economic crisis or
going to collapse?
While the ruling Conservative Party is going to elect its new
leader on the 28th of October 2022, the challenge still remains
at large and the economic crisis is deepening with each
passing day. The tell-tale signs were visible right in August
2022 and things became clear with the Mini Budget of Sep
2022 that the road ahead is not smooth. International
Monetary Fund (IMF) has predicted the growth of the UK in
2023 to be less than 0.3% which may be catastrophic for the
country, especially in the current wake of high inflation and
overall recession. Let us understand what were the reasons for
Mighty Britain’s economic collapse.

Effects of Brexit– While the immediate effects of Brexit over

the British economy were well anticipated, the situation
worsened in April 2019 and beyond when multinational
companies transferred over $1Trillion out of British banks and
further transferred nearly $150Bn of their assets out of the
country. This created serious liquidity crunch before the
financial institutions who were already facing crisis due to
change of currency. Foreign direct investment reduced
drastically and British Property Market which used to be the
most lucrative in the entire Europe recorded massive negative
growth. All this led to a steep fall in economy which became
irreversible in 2022.

Rise of Islamic Hardliners & creating an unsafe environment–

Over last few decades, United Kingdom especially London
has become a favourite place for Islamic hardliners to come
and settle. Birmingham is called a mini-Pakistan and it is
difficult to spot any sign of Britain in this area. In recent past,
there have been attacks on various religious institutions of
Hindus and other communities and these communities were
targeted by Islamic hardliners. At this time, no concrete action
from the government (apparently to appease Muslim
community) came as a surprise & discouraged investors to
come to Britain.

COVID-19 Pandemic– As we know that post Brexit and after

2019 crisis, when the country had a window to recover itself,
the COVID-19 pandemic stuck which created multiple dents
to the economy of the country. While the overall GDP
reduced, the financial burden on the exchequer increased
drastically resulting in a misalignment between the income
and government spendings. Prolonged impact of COVID-19
related issues for over two years destroyed all hopes of the
revival of the economy.
Russia-Ukraine Conflict– Russia Ukraine conflict has created
landslide impact on the world economy however unlike other
countries, Britain got affected in two ways. On one hand it
had the overall impact over the economy due to the soaring
energy prices but since Britain is an integral part of NATO, it
also had to cough out major chunk of money as well as
defence equipment’s and War machines to be given to
Ukraine as part of aid package. It is estimated that the overall
effect of Russia-Ukraine conflict on the economy of Britain
itself is more than $50Bn in the last six months itself.
Wrong decisions by the British government and its officials–
Repeatedly again and again, British officials kept making
wrong decisions. One of the example is the Mini Budget of
Sep 2022 where the Finance Minister Kwasi Kwarteng
announced freezing of energy bills and pledged 45 Billion
pounds of tax cuts which were practically not possible. He
assumed that if people have more money in hand, their
purchasing power will increase, consumer spending will rise
and as a result, more and more businesses will be attracted to
invest in his country. However, what happened was a serious
fall out. Due to this step, the markets became volatile, the
currency got depreciated and to handle that, banks had to
increase their mortgage rates. He paid the price and was
sacked after 38 days in power.
The situation now is very much grim. On one hand the
economic outlook of IMF about Britain is not very good and
on the other hand, there is no silver line visible in the dark
clouds. Ukraine Crisis is further deepening with Russian
President Putin threatening of a nuclear strike and the
unexpected behaviour of OPEC countries has created a big
question mark on the future of energy prices. British Financial
institutions are facing liquidity crunch while the London
Stock exchange is sliding massively with each passing day.
Rishi Sunak or Boris Johnson whomsoever may become the
next prime minister is not going to solve the problem. Britain
has to take some strong, stern and difficult decisions it at all
their leadership is serious about resolving the current crisis.
Why is Britain facing another financial crisis?
Investors were already worried about the huge cost of the tax
cuts and energy subsidies promised by new Prime Minister
Liz Truss even before Finance Minister Kwasi Kwarteng
announced more cuts to taxes late last month. Rather than
heed Kwarteng’s promises of stronger economic growth,
investors took fright at the prospect of higher inflation caused
by unfunded fiscal policy – which they saw as forcing the
Bank of England to speed up its interest rate increases.

The sterling slid against the U.S. dollar, adding to inflation

pressure in a country that relies on imports for its fuel, food
and other products. Even more worryingly for the BoE, yields
on government bonds leapt, especially on long-term debt,
causing problems in Britain’s pensions industry.
Why is the Bank of England buying bonds again?
By buying bonds, the BoE is seeking to reverse what it sees as
“dysfunction” in the bond market. Specifically, the central
bank was seeking to address problems facing pension funds.
They were forced to stump up vast amounts of emergency
collateral in liability-driven investments (LDI), which use
derivatives to hedge against shortfalls in pension pots after
British government bonds dropped sharply in value. Many did
so by selling gilts, sparking a vicious cycle of falling prices
that forced the BoE to pledge to buy as much as 65 billion
pounds of long-dated conventional government bonds
between Sept. 28 and Oct. 14
While this intervention bolstered that particular section of the
gilt market, this week a fire-sale of inflation-linked gilts –
which are pegged to changes in consumer prices – took place
in similar circumstances. A day later, the BoE announced it
would also buy these bonds. Until the end of this week, the
BoE will now spend up to 10 billion pounds a day buying
gilts: half allocated to linkers, and the other half to long-dated
standard bonds.
By temporarily acting as a buyer for the bonds, the BoE aims
to prevent panic selling and give pension funds time to sort
out their liquidity problems. The buying programme is
different to the one the BoE launched during the
2020 COVID-19 pandemic, after the Brexit referendum and
following the 2008-09 financial crisis, as it is only designed to
be very short-term. Investors are nervous about the prospects
for gilts after Friday and a pension industry body has urged
the BoE to extend its support to the end of this month.

NEW DELHI: Six months ago, this day, Russia invaded

Ukraine and rattle done city after another. What followed was
not just social outcry but alsoeconomic slowdown.

Disruption to 2 major trade routes, Russia and Ukraine, along

with subsequent sanctions imposed on Russia by diff erent
economies, had a major impact on global supply chains. As a
result, oil prices surged to record highs, which in turn pushed
up infl ation.

The spill over eff ect fell upon India as well. In line with
global cues, stockmarkets tumbled, infl ation soared to record
high, rupee plunged and forexreserves took a hit.

This was the 2nd major blow -- for not just India but global
economy as a whole -- after the onset of Covid-19 pandemic
in2020.

The war pushed pandemic-battered economy into yet another

period of uncertainty, right when things were looking
positiveand all economies were reco
Interestingly, while some aspects of the slowly recovering
world played out as expected, there were a few surprises as
well.For India, the impact wasn't felt as much as other major
economies.

Despite volatility, the Indian economy has shown resilience

and the economic pain seems to be easing for certain
keyindicators. For others, long route to recovery awaits.

Here's a look at how economy behaved in last 6 months:

* GDP growth

The actual impact of Russia-Ukraine war on India's gross

domestic product (GDP) growth will be clear when the
governmentreleases economic data for the period April-June
on August 31.

According to a report by SBI Ecowrap, India's GDP is

expected to be much higher in Q1 of FY23. Growth is
expected to bearound 15.7% with a large possibility of an
upward bias.
In the same quarter last year, India's GDP grew by a
whopping 20.1%, mainly on account of low base eff ect.

Looking at the economic activities that persisted during the

last 6 months, the impacted of war seems to be much lower
thanthat of the pandemic. The economy had suff ered a
technical recession in Q1 of FY21 in wake of nationwide
lockdowns to curbthe spread of Covid.

Even amid supply chain disruptions since February, the

economy grew by 4.1% in the January-March 2022
quarter.vering gradually from the Covid shock.

* Oil price rise

Crude oil prices had jumped to record highs, touching $139

per barrel on March 8. Average crude oil prices increased by
$20.1

per barrel on quarterly basis to $99.5 per barrel.

Price surged sharply amid concerns over supply disruptions

following the geopolitical crisis.
Besides, reluctance by Opec+ to increase production capacity
of brent crude, also led to supply shocks as demand had
started

to pick up after 2 years of Covid lockdowns.

On June 9, the Indian basket of crude touched $121.28,

matching levels seen in February-March 2012, according to
data byPetroleum Planning and Analysis Cell (PPAC).

As a result, oil marketing companies hiked price of petrol,

diesel for a brief period in March-April. Price of domestic
LPG,pipeline gas, jet fuel also soared to multi-level highs.

However, brent crude prices started easing as fears of

recession overpowered fear of supply disruption

* Infl ation pressures persist

The war and sanctions imposed on Russia took a toll on

economies, threatening a further slowdown to global trade
volume.Besides, the sharp rise in crude oil prices adversely
impacted infl ation in IndiaRetail infl ation based on
consumer price index (CPI) accelerated to 8-year high of
7.79% in April, mainly on account of risingfood and oil
prices. Similar eff ect was witnessed in wholesale price infl
ation (WPI). It has remained in double digits since thepast 15
years.

However, in the past few months measures have been taken

by Reserve Bank of India (RBI) and government as well to
curbdomestic prices of key commodities, which helped in
cooling infl ation.

Even though infl ation has come down, but it still continues to
be on the higher side. It has stayed above RBI's upper band
targetof 6%.

* Food prices ease

The war in Ukraine led to surge in food and energy prices

amid disruption in shipments of oil, natural gas, grain and
cooking oil.

While post-pandemic global demand, extreme weather,

tightening food stocks, high energy prices, supply chain
bottlenecksand export restrictions and taxes have been
straining the food market for two years, the recent
convergence of all these factorsfollowing Russia’s invasion is
unprecedented and has sent food infl ation rates spiking
around the world.

Food infl ation -- which comprises majority of India's infl

ation basket -- had been rising since October last year.

The jump from February to March showed a sharp uptick and

soared further to over 8% in April.

* Stock markets recover

One of the common reactions to the war was a fall in investor

sentiment globally. Not just India, but stock markets across
the

world witnessed one of their worst falls since the pandemic.

The benchmark BSE sensex fell below 51,000 level as the war
continued. Investors became jittery and opted for safe haven

assets.
The war led to one of worst fall in BSE sensex in the last 2
years. The index crashed nearly 4,000 points in the first 20
days of

war and investors witnessed massive losses.

However, timely policy measures helped in faster recovery.

From its recent low level of 50,921 on June 17, the BSE
sensex witnessed an upward trajectory in almost every trading
session.It took 40 days for the index to scale past 60,000-mark
last week.

Interesting, sensex took less number of days to scale up back

to 60,000 than over 50 days when it fell from 60,845 in April
to50,921 in June.

In other words, sensex jumped 3% in 6 months, compared

with 2% fall in S&P 500.

* Central bank rates back to pre-pandemic level

When an economy grapples with soaring infl ation, it is
imminent that its central bank will hike benchmark lending
rates in orderto curb it.

In line with US Federal Reserve, which started raising rates

since March this year, RBI too resorted to rate hikes.

Looking at persistent geopolitical pressures, RBI held an off -

cycle meet of its Monetary Policy Committee (MPC) in
March andhiked repo rate for fi rst time since August 2018.

Till date, there have 3 consecutive rate hikes, taking the total
hike to 140 basis points. The policy repo rate now stands at
5.4% -- higher than its pre-pandemic level.

Rupee yet to recover

The rupee has has weakened 7.5% so far in the 2022 calendar
year, trading close to a record low of 80.0650 hit last month,
asaggressive rate hikes by the Federal Reserve sent the dollar
rallying and commodity prices soared after Russia
invadedUkraine.

Even though stock markets witnessed recovery, the Indian

currency is yet to see relief.
When the war began rupee was priced at Rs 74.57 against the
US dollar. It surged past Rs 80-mark earlier this month and
isnow valued at Rs 79.93 to a dollar.

RBI intervened to curb the fall of Indian currency and

unvieled a slew of measures like raising overseas borrowing
limit forcompanies, liberalised norms for foreign investment
in government bonds, and more.

* Shrinking reserves

India witnessed robust growth in foreign exchange reserves

before the war struck. Even during the pandemic, India's forex
kittykept growing.

The graph below depicts forex reserves depleted at a faster

pace since February. On February 24, reserves amounted to
$633billion. At present, forex amount stands at $570.74
billion.

Defending the rupee amid pressures due to rising interest rates

in the developed world, high commodity prices and
foreignportfolio investment outfl ows has resulted in heavy
decline in the forex assets, which had touched an all-time high
of $642billion in September 2021

Foreign investors return

Foreign institutional investors (FIIs) have been pumping

money into Indian equities again. In August till now, they had
boughtshares worth Rs 16,218 crore. This is in sharp contrast
to previous months when FIIs were only interested in
withdrawing theirmoney from Indian equity markets.

In July, they had recorded an outfl ow of Rs 6,567.71 crore.

However, the outfl ow in July was much lower than that in
previousmonths.

For example, in June itself FII outfl ows amounted to Rs

58,112.37 crore. Between October 2021 till June 2022, FPIs
sold Rs 2.46lakh crore in the India equity markets.

In the fi rst half of this year, FIIs sold stocks worth Rs 2 lakh
crore

* Global comparison
If we compare consumer prices in India with that of other
major economies, it will be clear that India is recovering at a
muchfaster pace than others.

As mentioned above, retail infl ation has cooled from 8-year

highs in India, while economies like US, UK and EU still
continue tohave over 8% infl ation.

In February, India's CPI infl ation stood at 6.1%. Even then,

US infl ation was higher than that of India's, at 7.9%.

At present, CPI stands at 6.7% in India, while UK, US, EU all

are at a higher level.

Even in terms of economic growth, India is projected to be the

fastest growing among major economies, according
toInternational Monetary Fund's (IMF) latest World Economic
Output report.
VI. CONCLUSION
Recent economic history has taught us that financial crisis that simultaneously
affect several economies occur frequently, and that prudent policies and
appropriate responses by monetary authorities help in managing the crises.
However, the task of containing the adverse effects becomes more challenging
when all the economies of the world are affected by the crisis. The current
global financial crisis, which started in 2008, has been adversely affecting all
the world economies and the magnitude of its impact is exceeded only by that of
the Great Depression of 1930s. In response to the crisis, the various national
monetary authorities and international financial organizations have
implemented fiscal and monetary policy initiatives to alleviate the problems and
soften the impact on the affected sectors. While all economies were adversely
affected by the crisis, the impacts were not uniform across significant part of the
labour force. Subbarao estimates the size of the fiscal stimulus amounted to
about 3% of the GDP countries. Consequently, the responses by the
governments in individual countries varied. The global financial crisis has had a
more severe impact on the advanced economies compared to the rest of the
world. The economic indicators in the United States and the European Union
countries point to a severe contraction in these markets. At the same time, the
slowdown in the emerging markets has been smaller. Within the emerging
markets, countries such as India, China and Brazil have even managed to
expand during the crisis, albeit at a lower rate compared to their growth prior to
the crisis. They have also successfully avoided a protracted slowdown and are
projected to achieve higher growth rates. This paper detailed the impacts of the
global financial crisis on the Indian economy, and the responses of the Indian
government in managing the crisis. The proactive policies of the RBI have
ensured the availability of adequate liquidity in the markets. In the credit and
consumer markets, interest rates and inflation rates have stabilized. In the
foreign exchange market, the Indian Rupee has rebounded against currencies of
the major trading partners. The fiscal stimulus provided by the government has
helped cushion the decline in private investment and consumption in the real
sector. Although preliminary estimates of the nonperforming assets of banks
have been rising, they are still at manageable levels. In the meantime, industries
that were facing rising unemployment in 2008-09 have been reversing the trend.
The stock market, which is an indicator of the strength of the economy, has
risen by 80% in the first three quarters of the current fiscal year (2009-10), after
falling by 38% in the previous year. The current figures for the Purchasing
Managers' Index, the RBI's Business Expectations Index and the Neilsen Global
Consumer Confidence Index for India indicate optimism about the economy on
the part of businesses and consumers in India. Finally, IMF's consensus
estimates for the GDP of 7.7% and 7.8% for 2010 and 2011, respectively, is
evidence that India has recovered from the global financial crisis and is back on
the growth trajectory. Although India has been liberalizing its markets since
1991, it has adopted a cautious approach by opening up its markets slowly and
implementing reforms after studying their effects on the domestic market.
Unlike many other emerging economies, the banking sector in India is still
highly regulated and continuously monitored. The Reserve Bank of India has at
its disposal a number of tools to control the money supply and to infuse
liquidity as needed. The size of its foreign reserves allows India to intervene
effectively in the foreign exchange market to support its currency.
Consequently, businesses can manage their exchange rate risk when trading
with foreign countries and when borrowing in the external markets. Although
India has expanded its foreign trade sector, which is now a major component of
its GDP, the domestic sector is large enough to cushion any shocks in the real
sector of the global economy. This contrasts with several EMEs that have
implemented strategies to expand their external trade sector at the expense of
the domestic markets, making them vulnerable to external shocks. Finally, the
government in India has been expanding investments in social safety-nets to
soften the impact on the groups most vulnerable to economic shocks and
contagion in free markets
 REFERENCES
1. Ghosh, Jayati (2009), "Global Crisis and the Indian Economy", in 'Global
Financial Crisis: Impact on India's Poor, United Nations Development Programme
(India).
2. Misra, B. M. (2009), "Global Financial Crisis and Monetary Policy Response:
Experience of India", Paper presented at the workshop on 'Strengthening the Response
to the Global Financial Crisis in Asia-Pacific: The Role of Monetary, Fiscal and
External Debt Policies, United Nations Economic and Social Commission for Asia
and the Pacific, Dhaka, Bangladesh, July 2009.
3. Gupta, Abhijit (2009), "India's Tryst with the Global Financial Crisis", Review of
Market Integration, Volume 1, Number 2, pp. 171-197.
4. Subbarao, Duvvuri (2009), "Impact of the Global Financial Crisis on India -
Collateral Damage and Response", Speech delivered at the Symposium on 'The
Global Economic Crisis and Challenges for the Asian Economy in a Changing
World', Institute for International Monetary Affairs, 18 February 2009.

TABLE SOURCE
TABLE 1
International Monetary Fund. World - World Economic Outlook Database,
October 2009, January 2010
TABLE 2
Compiled from various tables in Reserve Bank of India 2009 Annual Report
and Central Statistical Organization database.

TABLE 3
Source: Securities and Exchange Board of India (SEBI) Annual Reports, SEBI
Handbook of Statistics, and Reserve Bank of India Annual Report
TABLE 4
Securities and Exchange Board of India (SEBI) Annual Reports, SEBI
Handbook of Statistics, and Reserve Bank of India Annual Report