Recessions and depressions teach us one thing quite clearly: no country or region is immune from its global contagion. And the recent global economic crisis has brought to the fore the vulnerabilities of the Indian economy as well.

Until recently, India was seen as an economy which was far more resilient to such global shocks. In fact, it was deemed as an economy which had the potential to lead the global financial markets out of a grave crisis. But all that seems to be behind us now.

The Indian economy is confronting huge problems, which were not deemed possible couple of years ago. Foreign direct investments into the country slipped. Inflation became endemic. Interest rates shot up, transforming India into a high cost economy.

Growth in exports waned while imports shot through the roof. The balance of trade worsened. Current account deficit touched critical levels. The value of the Indian rupee lost ground to a rapidly appreciating dollar. The growth momentum faltered as India confronted a major slowdown.

In 2009 and 2010 India was perceived as the country which had withstood the global contagion efficiently while several other emerging and developing economies were seen vulnerable. The situation has changed dramatically since then.

ADB study

A recent paper from the Asian Development Bank, ‘How can Asia respond to the global economic crisis and transformation?' addresses the same question.

Talking about the recent crisis, the paper says: As maybe expected, more export-oriented newly industrialised economies suffered more than the middle income Association of Southeast Asian Nations (Asean) economies during these periods.

It was mainly growth in global trade which accelerated the economic development in the Asian region. Now, it is the very same trade which is exposing the vulnerabilities of the region. But there is nothing new in this. There have been instances of the US and Euro Zone shocks impacting Asian economies during the last four decades, the ADB report pointed out.

What is different this time is that the global economy has become far more integrated and cohesive during the last two decades. Liberalisation and globalisation have become accepted mantras for accelerated economic development, with most Asian countries pursuing them as the stepping stone to economic prosperity.

The People's Republic of China remained the sole exception. However, even in the case of China, the sensitivity to recession has grown in consonance with its export growth.

But China has a huge domestic market which has helped it to tide over the crisis to some extent. Similar was the case of India and Indonesia. These were economies which revealed minimal output contractions, the ADB report said. The resilience was more in evidence in the years 2009 and 2010. But later, India began to reveal increasing vulnerabilities.

The ADB prognosis is that these countries would continue to be resilient, should the global slump repeat in 2012. The prognosis was based on further diversification of Asia's markets. Also there was a sudden spurt in intra-regional trade while trade with the US and Europe waned.

During the 2008-09 global financial crisis, economic growth in the region collapsed as demand for Asian exports contracted due to weak global growth. There was also a collapse of trade financing as global liquidity further contracted.

As a consequence, economies with closer trade ties with the US and Euro Zone were the most severely affected. Singapore, Hong Kong, China, Malaysia, and Thailand recorded large declines in gross domestic product (GDP) growth in 2008 and 2009.

A prolonged or deeper Euro Zone sovereign debt crisis will affect the region through the trade channel even as demand from developed countries continues to fall. For instance, Asian region's exports to the Euro Zone and US have declined from 33.8 per cent of total exports in 1999 to 24.5 per cent in 2010.

Changing trade pattern

This was made up to a good measure by increased domestic and intra-regional trade. The share of intraregional exports to total exports in emerging East Asia rose from 36.9 per cent to 44.2 per cent during the same period.

Also, as the fortunes of the US-Euro Zone waned, stronger trade ties were being developed with Latin America and Africa.

The extent of the crisis in Europe as well as the US economic performance will largely determine how Asia is impacted.

Should downside risks materialise, the Euro Zone could fall into a deep recession and drag the US economy to lower growth or even recession. A low-probability scenario would find both the Euro Zone and the US in deep recession, with output reaching the economic troughs of 2009, the ADB report said.

The contagion could be critical for Asia, but much more so for India. While most economies of Asia have begun putting the crisis of 2008-09 behind them, the effects are yet to wear off from India. Economists had earlier ascribed India's rapid economic growth story to increased inflow of foreign direct investments.

Foreign direct investments tend to play a key role in the development of an emerging economy – because it ensures rapid and efficient transfer and adoption of “best practices” across borders. This often resulted in better quality products using superior technology being produced in the recipient country at lower costs.

But in the Indian context, inflow of FDI has whittled down. Balance of trade has worsened. Current account deficit has grown to alarming levels and a crisis seems to be emerging.

India has been faring poorly on several economic parameters against her Asian neighbours. As the accompanying tables and graphs show, India's performance on external debt as a percentage of GDP, short-term external debt as a percentage of the foreign exchange reserves or the extent of foreign exchange reserves to fund the country's imports, have been quite dismal. The prominent Asian countries seem to be better placed than India. Although recent reports of a spurt in foreign direct investments and increased inflow of NRI deposits raise hopes of turnaround, the Indian economy is not out of the woods. Not just yet.

cj@thehindu.co.in