K C Chakrabarty: India's economic transformation - a snapshot
Inaugural address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Antique India Markets Conference 2009, Mumbai, 7 September 2009.
The assistance provided by Mr. Rajan Goyal and Mr. Sujit K Arvind in preparation of the address is gratefully
acknowledged.
* * *
Mr. K.V. Kamath, Chairman, ICICI Bank; Mr. Gagan Chaturvedi, Director, Antique Finance
Limited; Distinguished participants from different parts of the World, invited guests, Ladies
and Gentlemen:
It is a great pleasure for me to be here in such august company and distinguished group of
people. I would like to thank the organisers for inviting me to share my thoughts on a topic
which has great relevance for sustained growth of Indian economy. I would be sharing my
views with all of you during this session on, "India's Economic Transformation" and its
changing contours over the years. Structural reforms, during last two decades, have
unambiguously altered the economic landscape of the country. However, there are certain
questions/ concerns that have always been a source of discomfort and have acquired a new
relevance as economy moved to a higher growth trajectory in recent years. For instance,
how inclusive our growth process is? Are we moving towards affording a decent standard of
life to people at large? After a brief discussion on how the reforms brought about
transformation in different sectors of the economy, I would like to flag some of these
contentious issues.
The Indian economy has registered an impressive growth in recent times with GDP recording
an average of 7.2 per cent growth rate in the current decade from an average growth of 5.7
per cent in the nineties. A comparison with the earlier period since the beginning of the last
century brings out the extent of economic transformation far more clearly. During the first 50
years of the nineteenth century the average GDP growth rate has been just 0.7 per cent
which picked up to 3.5 per cent (popularly called as "Hindu rate of growth") in the next three
decades after independence, before progressing to higher growth path in the recent
decades. Concomitantly, the per capita income grew from a mere 0.2 per cent in 1900-1950
and 1.1 per cent in 1951-1980 to 3.2 per cent in the eighties and 3.6 per cent in the nineties
and further to 5.4 per cent in the current decade (Table 1).
Transformation of the economy is quite apparent from the noticeable changes that have
occurred in the sectoral composition of output. The share of services in the national income
has steadily increased with corresponding fall in the contributions of agriculture and industry
over the years. Services sector now accounts for nearly two third of total output as against
less than half in the early eighties and the nineties. Share of industry declined marginally to
19 per cent from 20 per cent whereas share of agriculture registered steep decline from 38
per cent to just 17 per cent (Annex 1).
This positive performance seems to be an outcome of reforms encompassing a range of
measures that led to transformation spreading over all the sectors of economy.
Transformation brought in higher degree of sophistication and efficiency in operations of
almost all the sub segments of real as well as financial sectors. Moreover, domestic
economy has become far more integrated with rest of the world which is visible not only in
terms of growing trade volumes; financial flows from and to the outside world have also been
steadily growing. There are some experts who argue that India's economic transformation
needs to be attributed to change in policy orientation of 1980s rather than the reforms
undertaken during 1990s. Although they do recognise the possibility that improvement in
1980s might have run out of steam without further reforms undertaken in the nineties
(Subramanian, 2007). While, academic debate as to what triggered the economic
transformation might still be unresolved, there is a near consensus with regard to the
important role of liberalisation process initiated in the early nineties in placing the economy
on a higher growth path.
The economic reforms that ushered in 1991 put forward some important political questions.
The first question comes to our mind is about the timing of the reforms i.e. why the reforms
were started only in 1991 and why not earlier? How the process of reforms continued despite
changes in ruling party at the centre? How the direction of reforms sustained and remained
irreversible despite various hurdles and hiccups? The answers to these questions, to a large
extent, lie in the transformation in political spectrum of the Indian electoral democracy. As
one avid follower of India's economy puts it, " --- the greatest change in the last 10 years has
been in the attitude towards reforms. Whereas the vocal supporters of reforms within India
were rare during the 1980s, virtually every political party today recognises the need for
continued reforms" (Panagariya, 2008).
Besides brewing up of twin economic imbalances i.e. fiscal crisis and external payment
crisis, the timing of reforms may have been the outcome of international and domestic
political events. Internationally, two major events questioned the basic premise of our earlier
social consensus regarding the development strategy. First was the collapse of erstwhile
USSR and the East European socialist regimes and their march towards market oriented
economic system. Second, the spectacular success of "socialist market economy" of China
with the aggressive opening up since 1978 and its associated success in poverty reduction
raised concerns about the efficacy of India's inward orientated strategy. Domestically, the
appreciable growth performance of 1980s which was induced by hesitant liberalization efforts
strengthened the hands of pro-liberalization minority in the bureaucracy and in the
Government that has been instrumental in systemic reforms in the 1990s. (Tendulkar and
Bhavani, 2007).
The continuation of reform process and irreversibility of its direction could be explained with
three interlinked political developments. First is the emergence of regional parties and their
increasing hold in national politics. Second is the beginning of the era of coalition
Government at the centre. Third is the growing and widespread acceptance of the need for
rapid economic growth that can be achieved by the market-oriented reforms. Besides,
competing claims of various states on benefits of economic reforms has also helped in
sustaining the momentum of reform process in India. During the reform period some states
have performed well while others have been lagging. This has been the effect of policy
environment and the quality of governance at the state level. Those states, which
reorganized their policies in favour of market oriented reforms in tune with national economic
policy framework and provided hassle free investment environment to entrepreneurs, have
reaped more benefits of economic reforms in terms of high growth and per capita income.
Let us now see how the reform process has brought about transformation in each of sub
sectors of the economy.
Economic transformation - real sector
Real Sector Policy measures mainly focussed on the manufacturing sector in the early
stages of reform process. Deregulation of industry by way of eliminating licensing
requirement, overhauling of public enterprises, enhanced role for private sector, abolition of
MRTP Act, automatic approval route for foreign investment, elimination of quantitative import
restrictions and reduction in tariff rates crated a conducive environment to gear up the
industry to face growing domestic as well as external competition to which it was exposed by
the reform process. Another area where reforms came about at a later stage related to
dereservation of large number of items that were earlier meant to be produced exclusively in
the small scale sector. Measures were further supplemented with liberalisation of foreign
direct investment not only in terms of scope and proportion of foreign ownership but also with
regard to procedural details. Industry responded to reforms by undertaking massive
restructuring of its operations by upgrading their technologies, expanding to more efficient
scales of production, resorting to mergers and acquisitions both within and outside the
country and refocusing their activities to the core competence.
While manufacturing became more competitive and efficient, major impact occurred with
respect to services sector. Entry of private sector and foreign direct investment that
introduced competition and state of the art technology brought a sea change in the services
sector. For instance, there was a time when telephone was a luxury and customers had to
queue up for years to get a connection. Now it is available on demand. Mobile phones have
reached to the lowest rung of the society and have played a key role in integrating the far
flung areas to the main stream. Synergies provided by the manufacturing sector,
liberalisation of financial sector with entry of private sector in areas hitherto restricted to
public sector and policy initiatives with regard to information technology led to surge in
growth of services sector.
The boom in information technology (IT) and Information Technology and Enabled Services
(ITES) sector essentially led to an era of "services-led growth" as India emerged as global
hub for BPO/KPO services in the world. This shift in the pattern of off-shoring services to
India was mainly due to inherent advantages of Indian IT/ITES sector. Advantage of the low
wage structure, flexibility due to time zone differences and access to a larger and better
talent pool provide globally active companies, India as an ideal place, to look for off-shoring
services.
In the last two decades, the Indian IT/ITES industry has contributed significantly to Indian
economic growth in terms of GDP, foreign exchange earnings and employment generation.
Indian IT/ITES sector's contribution to the country's GDP has been steadily increasing. As a
proportion of national GDP, the IT/ITES sector has grown from 1.2 per cent in FY98 to 5.2
per cent in FY07.
IT to an extent has generated the employment opportunities for both skilled and unskilled
labours. The direct employment in the IT/ITES sector was expected to be 2.0 million by end
of FY08 and has been growing at a compounded annual growth rate (CAGR) of 26 per cent
in the last decade. Studies have shown that for every one job created in the IT/ITES sector,
four additional jobs are created in the rest of the economy.
Socio-economic dimension, that lends uniqueness to India's pattern of growth and economic
transformation, is evident in the relative surge in the growth of industrial and services sectors
vis-à-vis primary segment. India seems to have skipped the stage of development that
emphasises growth in labour intensive industries with absorption of surplus labour from the
agricultural sector. As transformation of industrial as well as services sector has
overwhelmingly been based on capital intensive techniques requiring skilled manpower,
relative shift in sectoral incomes have been devoid of any commensurate relocation of
surplus labour and more than three-fifth of population continued to draw its livelihood from
the primary sector.
While, foregoing has been the reason for general perception about relative isolation of the
agricultural sector from the reform process; keeping with the growing openness, a series of
policy initiatives transformed this sector as well. Measures relating to free movement of
agricultural commodities, APMC Act permitting farmers to bypass the mandatory requirement
of sale in regulated markets and relaxation of restrictions under Essential Commodity Act,
1955 along with introduction of future trading brought major change in the pricing
mechanism. National commodity futures markets discover price rather manipulation by local
traders. Banks in association with professionally managed godowns extend credit to farmers
against warehouse receipts. Large consumer goods companies directly source agricultural
produce from the farmers. While, these developments have worked towards improving the
terms of trade (TOT) for the agriculture sector, this trend in TOT was also strengthened by
lowering of protection for the manufacturing sector and market determined price of foreign
exchange. With economic growth and rising disposable incomes, the consumption basket
has changed significantly. Growing demand for milk, poultry products and horticulture
products, has induced substantial diversification towards allied activities which now account
for nearly three fifth of total primary sector output.
Economic transformation - financial sector
Reforms in financial sector complimented the real sector developments. Transformation of
financial sector not only assisted in sharp pick up in services sector growth, it helped the
manufacturing sector to progress from a high cost to internationally competitive segment of
the economy. It was a clear recognition of the role of market forces in price discovery
process. Prior to these reforms, pricing of financial resources whether it is bank lending to
corporates or borrowings by the Government or the foreign exchange, each of these was
determined broadly on the basis of regulator's decision or an administrative fiat rather than
its opportunity cost. Cost of resources hardly reflected the underlying situation of a capital
scarce economy. Along with free pricing, removal of constraints in terms of participation, type
of instruments, market infrastructure and policy environment instilled life in severely
underdeveloped financial market segments. While measures were taken to bring financial
markets at par with international best practices, it was a conscious decision to go slow on
derivative products, a stand amply vindicated by the current global crisis and relative
immunity of India's financial sector.
Money market
Reforms in money market were essentially aimed at providing avenues for the market
players to deploy or access to short-term funds and a platform to the monetary authority to
modulate liquidity in the system. Liberalisation measures in money market preceded the
overall reform process as steps related to deregulation of interest rates and introduction of
new instruments were initiated in the late 1980s itself. A series of steps over the years viz.,
freeing of interest rates on call and other money market instruments, introduction of
Commercial Paper and Certificate of Deposit, exemption of inter-bank lending from reserve
requirement, introduction of screen based trading and rupee derivatives such as Interest
Rate Swaps (IRS) and Forward Rate Agreements (FRA), enlarging the scope of Repo
market by expanding the repo-able securities and eligible participants in the repo market and
introduction of tripartite repo i.e. CBLO to create pure interbank call money market, led to
pick up in activity and volumes across the instruments unlike in the past when volumes
remained concentrated in call money market.
With steps towards making call market a pure interbank market, turnover progressively
switched from call money market to repo and CBLO market as daily average volumes in call
market got almost half in 2008-09 from Rs. 23,161 crore in 1999-00. Volumes in case of
market repo, on the other hand, rose by two fold during the period and in case of CBLO
increase has been four-fold during 2004-05 to 2008-09. Volumes in other market segments
such as CP and CD rose as well (Annex 2). Besides, reforms also lent stability to the market
as volatility in call market got reduced by nearly half in the current decade from levels
prevailing in the nineties (Annex 3).
Government securities market
Till mid-eighties or the early nineties, Government had been borrowing at sub-market rates, a
system sustained by captive market created by statutory reserve requirement. As a part of
reforms, concessionary financing was eliminated with introduction of market auction system
and phasing out of automatic monetisation with Ways and Means Advances (WMA). As
yields became market related and Government started competing with the private sector in
the market for funds, it had the desired impact on G-Sec market as evident by rising
secondary market activity and near emergence of market yield curve. The annual turnover in
the market has grown from about Rs 2.8 lakh crore in 1998-99 to Rs. 56.3 lakh crore in
200708. Yields on G-Sec now provide bench mark for pricing of securities in other markets.
With reforms, G-Sec is no longer a captive market. Investment in G-Sec by the banks is
based on their commercial judgement rather than being dictated by the reserve requirement.
Since late nineties, banks' holding of G-Sec have been far in excess of the reserve
requirement with ratio going up to near 42 per cent of net demand and time liabilities. Banks
progressively off-loaded excess investment in SLR securities from 2004-05 onward in view of
the strong credit demand.
Importantly, since April 2006, Reserve Bank does not participate in the primary segment of
the G-Sec market that not only provide leeway to RBI in implementing monetary policy, the
pricing of Government securities has also become far more market oriented. Beside these
core aspects, development of the market was sustained by up-gradation of technology and
market infrastructure with regard to settlement systems and trading systems and amendment
of legislative provisions.
Foreign exchange market
Prior to reforms, foreign exchange market was virtually absent. Exchange earners were
required to surrender/ purchase foreign exchange from Reserve Bank at the reference rate.
In this highly regulated system, very few transactions used to take place among the
authorised dealers and trades were required to be squared off by the close of the day.
Introduction of market based exchange rate regime, adoption of current account convertibility
and relaxation on capital account, inter alia, in terms of permission to run open positions, to
hold investments abroad and to retain foreign exchange along with introduction of hedging
tools (derivatives) led to emergence of active and vibrant foreign exchange market. Now
exchange rate is flexible and market determined; and capital account is also effectively
convertible for the non-residents.
It is interesting to note that with significant liberalisation on the capital account and given that
market forces play a predominant role in determining external value of the rupee, there has
not been large volatility in this market barring few mild episodes related to turbulence in
global markets. Daily exchange rate volatility in rupee had been in the range of 1.6 to 4.7 per
cent during 2001 to 2006 as compared to 7.5 in 1993-95. It is lower than most of the
emerging economies. Computed from monthly NEER and REER indices, volatility in Indian
market is one of the lowest in the world. Reform measures enhanced depth and liquidity in
the market reflected in rising turnover and moderation in bid-ask spread over the years.
There has been more than four-fold rise in total annual turnover in foreign exchange market
from US $ 1.3 trillion in 1997-98 to US $ 5.7 trillion in 2006-07.
Capital market
Like other market segments, there have been far reaching changes in both the primary and
secondary market segments of capital market. Primary market witnessed a significant
movement away from CCI regime imposing primary issuance at sub-market rates to free
pricing and book-building system along with mandatory disclosures as prescribed by SEBI. In
the secondary market, corporatisation of exchanges, screen based trading replacing open
outcry system, introduction of options and futures replacing erstwhile Badla System, rolling
settlement replacing 14-day settlement cycle, dematting of securities with depository system
created state-of-the art infrastructure comparable to best international practice. This not only
integrated stock markets across the country, capital market became far more efficient as
could be observed in terms of various parameters. There has been sharp increase in liquidity
as observed from fall in impact or transaction cost by more than 50 per cent and rise in
turnover ratio from 20.3 per cent in 1991-92 to a peak level of 409.3 in 2000-01 before
moderating to 81.8 per cent in 2006-07. Similarly, in terms of market stability, volatility
declined from 3.3 in 1992 to 1.1 in 2005.
Credit market
Prior to reforms, banking operations both on the assets and liabilities side were governed by
the guidelines set out by the regulator. With guidelines that ensured banks' margin on cost
plus basis, competition was virtually absent with no incentive to cut cost, raise efficiency or
upgrade credit assessment skills. While, broad approach to reforms in this market has been
to bring more competition along with higher flexibility and operational autonomy to the banks,
stability of the players at the same time was intended to be ensured by emphasising building
up of risk management capabilities and introduction of prudential regulation and supervision
in line with best international practices. Moreover, widening of ownership due to stock market
listing and associated disclosure requirements brought greater market discipline and
transparency in the bank management. These measures transformed the banking sector
which could be discerned in measures of efficiency and soundness. There has been steady
decline in intermediation cost of banks from 6.24 per cent in 1991-92 to 3.43 in 2006-07.
DEA based estimates of efficiency and productivity indicates sharp improvement in
operations of public sector banks and are now comparable to their counter parts in the
private sector (RBI, 2008). Growing soundness of the banking sector is also evident in falling
NPAs from 7.7 per cent in 1995-96 to about 1 per cent in 2006-07.
While banks' operations became more efficient, there has been considerable progress in
terms of business volumes reflecting growing economy and reach of the banking sector.
Over the past 11 years, on an average, deposits of scheduled commercial banks have risen
at a compound growth rate of 17.7 per cent and advances grew by 21 per cent. Growth has
been higher for urban and semi urban branches compared to rural branches. In terms of
advances to various sectors of the economy banks' portfolio has been quite diversified.
Since, 1998-99, while share of advances to agriculture sector remained around 12 per cent,
there has been progressive diversification from industrial and wholesale credit to segments
such as professionals, personal loans, etc (Annex 4).
Payment systems
The rapid developments in the Payment Systems and technology have led to the deeper
penetration in terms of increase in the number of direct and indirect participants and market
players in the payment systems. Among the major developments in recent times, the
enactment of the Payment and Settlement Systems Act, 2007 empowering the Reserve
Bank to regulate and supervise payment and settlement systems, lay down policies and
providing a legal basis for multilateral netting and settlement finality, is of great significance.
Another recent development has been to make free the use of other bank ATMs with effect
from April 1, 2009. The service charges for "Electronic Payment Products" and outstation
cheque collection have also been rationalised. "Speed Clearing" has been introduced to
reduce the time taken for realisation of outstation cheques to T+1 or T+2 basis. "Cheque
Truncation System (CTS)" has been introduced in cheque clearing since July 2008 in New
Delhi. The coverage of Electronic Clearing System (ECS) has been increased to 75 centres
and 89 banks with 55, 225 branches are participating in National Electronic Funds Transfer
(NEFT) system.
Real Time Gross Settlement System (RTGS)
In terms of payment systems growth, the
volume has gone up from a modest 17.67 lakh in 2005-06 to 133.6 lakh in 2008-09, and the
value has gone up from Rs.1,15,40,836 crore to Rs. 3,22,79,881 crore in the corresponding
Electronic Clearing
period. The retail volume has gone up from 8.3 crore in 2005-06 to 28.06
crore in 2008-09, and the value has gone up from Rs.1, 06,598 crore to Rs. 4, 16,419 crore
in the corresponding period. The MICR Cheque Clearing volume has gone up from 101.59
crore in 2005-06 to 114.04 crore in 2008-09, and the value has gone up from Rs.54, 01, 429
crore to Rs. 58, 49, 642 crore in the corresponding period. The Cards volume has gone up
from 201.77 crore in 2005-06 to 387.21 crore in 2008-09, and the value has gone up from
Rs.39,783 crore to Rs. 83,903 crore in the corresponding period. The spread of ATMs has
increased from 34, 789 in March 2008 to 43, 651 in March 2009 and the volume of ATM
transactions has increased from 17,797 lakh in 2007-08 to 23,530 lakh.
These data suggest that the payment systems in India are robust, sound and have been
growing at a steady pace.
Economic transformation - integration with the global economy
Another aspect of developments in India's economic arena that facilitated the process of
transformation by enabling rapid growth of services sector and change in character of
manufacturing sector in terms of efficiency and sophistication with considerable outward
orientation, relates to its growing integration with rest of the world. The most common
measure of country's integration with the global economy is its openness, i.e., its participation
to international trade and capital flows. In India, the share of merchandise exports to GDP
increased from 5.8 per cent in 1990-91 to 15.1 per cent in 2008-09, the share of
merchandise imports as a per cent to GDP, on the other hand, increased from 8.8 per cent to
25.5 per cent during the same period. On the import side, India's demand for primary
products, viz., raw materials and energy has increased since 1990s, which may be linked to
its rapid economic growth. In 2007, India was the 7th largest oil importer of the world. While,
India's merchandise trade has grown many folds in the current decade, during 2008, India
ranks 26th in the world with a share of 1.1 per cent. However, in terms of commercial
services exports, India ranks much higher at 9th in the world with a share of 2.7 per cent.
In terms of capital flows, India has emerged as one of the most favoured destination of global
investment among the developing and emerging market economies. Net capital inflows
increased from US $ 7.1 billion in 1990-91 to $45.2 billion in 2006-07, and further to $108.0
billion during 2007-08. The gross volume of capital inflows, however, amounted to $428.7
billion in 2007-08 as against an outflow of $320.7 billion. Overall, India's total transactions
with rest of the world (current receipts plus current payments plus capital inflows plus capital
outflows) increased from 31.4 per cent of GDP in 1990-91 to 119.7 per cent of GDP in
200708 before declining marginally to 112.4 per cent of GDP in 2008-09 in the wake of global
financial crisis.
This growing integration of Indian economy with rest of the world was essentially an outcome
of reform measures triggered by BOP crisis in 1991. Apart from a swift transition to a market
determined exchange rate regime, other important reforms measures included dismantling
trade restrictions, moving towards current account convertibility, liberal inflows of private
capital, removal of restrictions on all inflows and related outflows, as also, gradual
liberalisation of certain restrictions on outflows.
Trade liberalisation
De-licensing of virtually all intermediate inputs and capital goods, progressive reduction in
tariff rates along with permission for all current business transactions, expenses for
education and medical and foreign travel enabled India to accept IMF Article VIII obligation
thereby making rupee convertible on current account as early as in 1994. Further
liberalisation with regard to import licensing for consumer goods and reduction of tariff rate
below 10 per cent (barring few exceptions, such as automobiles) considerably enhanced the
outward orientation of Indian economy.
Capital account
Although, the external payment crisis of 1991 brought to the fore the need for
debtdominated capital account financing, the move towards full capital account liberalisation has
been calibrated with extreme caution. The broad approach that characterised the policy
framework for capital inflows involved supplementing debt capital with non-debt capital with a
clear prioritisation in favour of the latter.
Foreign direct investment
The major policy thrust towards attracting foreign direct investment (FDI) began in the early
1990s by introduction of automatic approval route that empowered RBI to approve equity
investment up to 51 per cent in select 34 priority industries. Currently, unless there is specific
restriction contained in FDI policy, 100 per cent foreign investment is permitted under
automatic route. A very limited number of activities fall under this category viz., retail trading,
atomic energy, lottery business, gambling and betting. Again, the list for FDI cap below 100
per cent is also quite short including broadcasting, print media, defence, insurance, asset
reconstruction, investment companies, petroleum and air transport.
Portfolio investment
Portfolio investment both in primary and secondary market by Foreign Institutional Investor
(FII) was opened up in 1992. At the same time, Indian companies were permitted to raise
equity finance through issue of GDR and ADR in Europe and American markets. Policy with
regard to FII investment was progressively liberalized with total FII share in equity being
raised from 24 per cent to total sectoral cap on foreign investment. For majority of sectors
this cap is 100 per cent. Beside, FII are permitted to invest in debt instruments issued by
both private corporate and the Government, and they can operate in forward market to
hedge their currency risks.
External commercial borrowings
Permission to access ECB further contributed to integration of India's financial sector with
rest of the world with corporate increasingly compared the cost of financing and switched
between ECB and the domestic bank credit. In the recent years, corporate have increasingly
accessed commercial borrowings from abroad with net inflow on account of ECB rising from
USD 5 billion in 2004-05 to more than USD 22 billion in 2007-08. However, the policies
towards ECB that inter alia include bank loans, buyers' credit, suppliers' credit have been
guided by the overall consideration of prudent external debt management by keeping the
maturities long, cost low and priority for projects in the infrastructure and core sectors.
Outward flows
In line with liberalized regime with regard to inflows, outward capital flows were also
progressively relaxed for both individuals and the corporate sector. Firms can invest abroad
up to their net worth plus EEFC holdings and also the foreign exchange raised through ADR/
GDR. This has been a key policy feature that enabled emergence of Indian MNCs in the
recent years.
Global crisis and impact on India
Growing integration of Indian economy with the rest of the world essentially explains as to
why our economy couldn't remain completely immune to global events though initially, India
like many other emerging economies remained impervious to these global developments till
as late as October 2008. But for the equity market there has been no direct impact of
meltdown abroad on Indian financial sector as reflected by liquidity, turnover and the price
movements in various financial market segments. Except for a brief period in
September/October, 2008, the transactions were not impeded on account of counterparty
concerns since the Indian banking system is prudently regulated, well capitalised and free
from "toxic" assets. A closer look at the sequence of events would reveal that impact on the
financial sector eventually emanated from the real sector which had a direct impact from the
global financial crisis.
Worsening of external environment with Lehman failure caused sudden sell-off in domestic
equity markets by portfolio investors reflecting deleveraging. Consequently, the net outflow
by portfolio investors was to the tune of US $ 14 billion during 2008-09 against the net inflow
of about US $ 29 billion in the preceding year. Besides, access to external commercial
borrowings (ECB) and trade credits was also rendered somewhat difficult. Net inflow on
account of ECB during 2008-09 was US $ 8 billion approximately as against US