integration with the world has been as deep as india's trade globalization, if not deeper. if we take an expanded measure of globalization, that is the ratio of total external transactions ( gross current account flows plus gross capital flows ) to gdp, this ratio has more than doubled from 46. 8 per cent in 1997 - 98 to 117. 4 per cent in 2007 - 08. importantly, the indian corporate sector's access to external funding has markedly increased in the last five years. some numbers will help illustrate the point. in the five - year period 200308, the share of investment in india's gdp rose by 11 percentage points. corporate savings financed roughly half of this, but a significant portion of the balance financing came from external sources. while funds were available domestically, they were expensive relative to foreign funding. on the other hand, in a global market awash with liquidity and on the promise of india's growth potential, foreign investors were willing to take risks and provide funds at a lower cost. last year ( 2007 / 08 ), for example, india received capital inflows amounting to over 9 per cent of gdp as against a current account deficit in the balance of payments of just 1. 5 per cent of gdp. these capital flows, in excess of the current account deficit, evidence the importance of external financing and the depth of india's financial integration. so, the reason india has been hit by the crisis, despite mitigating factors, is clearly india's rapid and growing integration into the global economy. how has india been hit by the crisis? the contagion of the crisis has spread to india through all the channels – the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel. let us first look at the financial channel. india's financial markets – equity markets, money markets, forex markets and credit markets – had all come under pressure from a number of directions. first, as a consequence of the global liquidity squeeze, indian banks and corporates found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual funds putting redemption pressure on the mutual funds and down the line on non - banking financial companies ( nbfcs ) where the mfs had invested a significant portion of their funds. this substitution of overseas financing by domestic financing

outlook for india going forward is mixed. there is evidence of economic activity slowing down. real gdp growth has moderated in the first half of 2008 / 09. the services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub - sectors. for the first time in seven years, exports have declined in absolute terms for three months in a row during october - december 2008. recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. the index of industrial production has shown negative growth for two recent months and investment demand is decelerating. all these factors suggest that growth moderation may be steeper and more extended than earlier projected. in addressing the fall out of the crisis, india has several advantages. some of these are recent developments. most notably, headline inflation, as measured by the wholesale price index, has fallen sharply, and recent trends suggest a faster - than - expected reduction in inflation. clearly, falling commodity prices have been the key drivers behind the disinflation ; however, some contribution has also come from slowing domestic demand. the decline in inflation should support consumption demand and reduce input costs for corporates. furthermore, the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spending. from the external sector perspective, it is projected that imports will shrink more than exports keeping the current account deficit modest. there are also several structural factors that have come to india's aid. first, notwithstanding the severity and multiplicity of the adverse shocks, india's financial markets have shown admirable resilience. this is in large part because india's banking system remains sound, healthy, well capitalized and prudently regulated. second, our comfortable reserve position provides confidence to overseas investors. third, since a large majority of indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that is plaguing the advanced economies should be quite muted. consequently, consumption demand should hold up well. fourth, because of india's mandated priority sector lending, institutional credit for agriculture will be unaffected by the credit squeeze. the farm loan waiver package implemented by the government should further insulate the