Impact on emerging markets contained

The Reserve Bank of India (RBI) report on macroeconomic and monetary development in financial year 2008-09 has noted that the credit crisis’ impact on emerging market economies (EMEs), including India, has been contained to a certain extent by the strength of domestic demand, albeit the currency and equity markets of the EMEs has been witnessing a steady capital outflow.

The International Monetary Fund has projected that Asia will grow by 5.5 per cent in 2009 (it was 7.8 per cent in 2008), including a downward revision in the growth projections of both China (from 9 per cent in 2008 to 6.7 per cent in 2009) and for India (from 6.3 per cent in 2008-09 to 5.3 per cent for 2009-10).

The impact of the global slowdown has been felt severely on India’s external demand, which is evident in the negative growth of merchandise exports, widening trade deficit, some moderation in services exports and remittances and the consequent expansion in current account deficit.

On Balance of Payment basis, while merchandise exports increased by 17.5 per cent during April-December 2008 (21.9 per cent in April-December 2007), import payments recorded a growth of 30.6 per cent during the same period (28.3 per cent in April-December 2007).

Overall, the trade deficit was higher at $105.3 billion during April-December 2008 ($69.3 billion in April-December 2007), primarily due to higher import payments reflecting high international commodity prices, particularly crude oil prices during the first half of 2008-09.

Amidst a reversal of FIIs’ inflows and a decline in long-term and short-term debt flows, a positive development was, however, the turnaround in NRI flows and the resilience of FDI inflows in the face of reversal of capital flows, reflecting the attractiveness of India as a long term investment destination.

While the gross capital inflows declined to $246.4 billion during April-December 2008 from $ 291.8 billion in April-December 2007, the gross capital outflows increased to $231.1 billion from $209.8 billion during the same period.

Net inward FDI into India remained buoyant at $27.4 billion during April-December 2008 ($20 billion in April-December 2007), reflecting the relative attraction of India as an investment destination.