The significance of the financial crisis that has hit the US economy can be measured from the fact that the cost of the rescue of these financial giants to the Federal Reserve and Treasury Department has been estimated at close to a trillion dollars.
According to some analysts, the total cost on this count could go up to $2 trillion since the financial turmoil is not likely to end anytime soon. Most of these banks had created debts to the tune of 30-40 times their equity against the prudential norm of not exceeding ten times.
In India, the Reserve Bank of India has been pumping in liquidity into the system and local banks have been borrowing at least Rs 70,000 crore on an average over the past three weeks under its liquidity adjustment facility. Even so, liquidity has been drying up.
Recently, the Asian Development Bank down-scaled the growth expectations of many Asian economies, including India’s, in its half yearly report: Asian Development Outlook 2008.
The ADB attributes this to the worsening conditions in major industrial economies that will weaken demand for goods and services. “The myth of uncoupling has been exploded”, the report says.
India’s GDP growth estimate for the current financial year has been downgraded from 8% to 7.4% and, for the next financial year, from 8.5% to 7%.
ADB bluntly states that “very large fiscal imbalance created by the current level of subsidization of oil, fertilizer and food, as well as other off-budget items, sets a daunting task for economic management.”
With the financial turmoil in the US and Europe showing signs of worsening since the publication of Asian Development Bank’s half-yearly report, one need not be surprised if GDP growth in India turns out to be even lower than that projected by Asian Development Bank — just around 7% or so for the current fiscal. In line with the falling capital markets across the world, which have already wiped out investor wealth of over ten trillion dollars this year so far, the Indian stock market has witnessed an unprecedented fall over the past few weeks. Not surprisingly, FIIs have been pulling out from the stock market in a big way, corporate borrowings from the global markets are becoming increasingly difficult, raising money for new investments through public issues is on hold, and liquidity in the economy is fast drying up.