Export Trade Performance of Indian Economy during and Following the Global Financial Crisis


Friday, 14 October 2011 17:51

  • Introduction

The global financial crisis which was actually triggered by the US sub-prime mortgage market in early 2007, started to show its ripple effects in the end of 2007 and morphed into a global economic crisis with the collapse of Lehman Brothers on 23rd September 2008. Today, no one any longer doubts that was the most serious crisis that the world economy has faced, at least since the 1930s (Subramanian and Williamson, 2009). The global financial crisis imposed great harm to the world economy and affected virtually almost all areas. In most countries of the world, GDP declined (Figure 1) significantly due to global financial crisis. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4 per cent in Germany, 15.3 per cent in Japan, 7.4 per cent in UK, 18 per cent in Latvia, 9.8 per cent in Euro area and 21.5 per cent in Mexico. Italy’s economic growth in 2008 decreased 1.0 per cent, largely due to the global economic crisis and its impact on exports and domestic demand. GDP contracted further as the Euro zone and world economies slowed. Some developing countries that have seen strong economic growth saw significant slowdowns during global financial crisis. For example, growth in Cambodia fell from more than 10 per cent in 2007 to close to zero in 2009, Kenya growth declined from 7 per cent in 2007 to only 2 per cent in 2008 and 2009 due to global financial crisis. India recorded a GDP growth rate of 9 per cent during 2007-08. The declining output of the manufacturing sector pulled down the economic growth rate in the fourth quarter of 2008-09 to 5.8 per cent and 6.7 per cent in the entire fiscal year. According to a Report of United Nations (UN) on‘Word Economic Situation and Prospects, 2009’, at least 60 developing countries (of 107 for which data are available) suffered with declining per capita income, whereas only 7 recorded per capita GDP growth 3 per cent or higher-considered as the minimum required growth rate for achieving significant reduction in poverty-down from 69 countries in 2007 and 51 in 2008. Growth rate of Commonwealth of Independent States (CIS) declined by 5.4 per cent in 2009, down by more than 10 per cent from the growth of 2008 and the average of preceding seven years. Growth rate also declined in many African countries. The economies of Angola, Nigeria, for instance were contracted by 4.2 per cent and 0.5 per cent respectively in 2009. The economies of Australia, Canada and New Zealand also declined in 2009, suffering from falling global demand and commodity prices.

crisis_Further, around the world the stock markets fell, exports growth tumbled, credit flows dried up (Sumanjeet, 2010), money market interest rate spiked to above 20 per cent and remained high for few months, large financial institutions collapsed or been bought out by their competitors at low prices, and governments in even the wealthiest nations had to come up with rescue packages to bail out their financial systems. But, despite enormous write downs and massive financial sector rescue operations by governments, problems have not gone away. Between September 2008 and May 2009, the market capitalization of banks in US and Europe declined by 60 per cent (US$ 2 trillion). Crisis also contributed to the failure of key businesses. It is estimated that US$ 14.5 trillion, or 33 per cent of the value of the world’s companies wiped out by the crisis. Exports from world’s major exporters like Germany, China and Japan plummeted by more than 35 per cent in the last quarter of 2008. These declines in economic activity have caused the rise in the extent of unemployment worldwide. A rapid rise in unemployment has been witnessed since 2008. According to the International Labour Organization (ILO, January 2010) estimates, nearly 34 million more were added to the unemployed people during the crisis of 2008-09. As a result, the total number of unemployed people worldwide soared to 212 million at the end of 2009 (i.e. 6.6 percent of world total workforce). Job losses in economies with well-developed and highly integrated financial service industries, such as Hong Kong, China; Japan; Republic of Korea (Korea); and Singapore, occurred immediately, especially among white-collar workers. However, in developing countries in Asia, the labour market was more deeply affected when the exports declined due to the crisis. As overseas consumer demand fell, labour-intensive export industries such as textiles, garments, and electronics faced increasing pressures to lay off workers, while the local construction industry likewise contracted due to decreased domestic consumer confidence (Hyun and Emmanuel, 2009). Moreover, already gloomy employment prospects were exacerbated due to the slowdown of foreign direct investment (FDI) in the region, which put a brake on creating new enterprises and jobs. The reduction in employment and income opportunities has led to a considerable slowdown in progress towards poverty reduction and fight against hunger. Department of Economic and Social Affairs of United Nations Secretariat (UN-DESA) estimated that between 73 and 103 million more people would remain poor or fall into poverty in comparison with a situation in which pre-crisis growth would have continued.

  • Global Financial Crisis and World Export Performance  

From the above discussion it is clear that the crisis of 2007-09 was globally intensive in its impact. With its impact, both in scope and depth worldwide, the crisis posed a significant challenge to the world economic and social development. Broadly, the impact of financial crisis on the world economy has been transmitted through three distinct channels, viz., the financial sector, exchange rate and trade. But, recession in trade volume was the main channel of transmission of crisis to exporters of manufactures and service. Towards the end of 2008 (around October) the global recession started to manifest itself in international trade. The fall in global demand and the slowing-down in economic growth translated into a substantial reduction in international trade that has affected the cross-border trade of virtually all countries and economic sectors. During the global financial crisis exports trade volume dropped significantly. This collapse in trade was global in nature and dramatic in magnitude (UNCTAD, 2009). For instance, while GDP of US between 2007-09 declined by 3.9 per cent from its peak; real exports fell by 15.2 per cent and imports 18.6 per cent during the same period. The growth of trade volume experienced a strong slowdown since mid-2007, to a rate of around 2 per cent by September 2008 (UNDP, 2009). In October 2008, of 41 countries reporting monthly data (the EU countries counted as one), about 18 countries reported a decrease in exports compared with the same month in 2007. The limited downturn in October 2008 became more widespread in November, and deteriorated further in December and in January 2009. In January 2009, all reported decreases in exports, and about half of the countries for which data isavailable reported substantial export declines of over 30 per cent. According to a report of UN-DESA on ‘World Economic Vulnerability Monitor’ (February 2010), global trade flows dropped at an annualized rate between 30 per cent and 50 per cent during the end of 2008 and second quarter of 2009. Figure 2 shows estimates of the change in export levels in February 2009 compared with that a year previous.


* Published in Journal of Global Analysis (JGA) Vol. 2  No. 2

** Sumanjeet Singh is presently working as Assistant Professor at Department of Commerce, Ramjas College, University of Delhi, India. He has authored more than 100 research papers for various national and international journals of repute and presented papers in many national and international conference. He is associate editor and member in editorial boards of many international journals. He has been awarded with’ Rashtriya Vidhya Sarswati Award and Rajiv Gandhi Excellence Award, 2008 for his outstanding contribution in the field of application of ICTs and E-Commerce. His name has been included in NIC World Who is Who. Author is M.Com; M.Phil; PG Diploma in Cyber Law and Ph.D.

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