India seems to have got off more lightly than the rest of the world and has largely been spared the damages caused by the financial crisis.

“We lost about 3 percent of growth rate last year,” the economist Abusaleh Shariff explained, " so that caused some unemployment, a bit of return migration, but not of the level and size that China has experienced.”

India’s economy is predicted to grow at a rate of 5 to 6 percent in 2009. This is a rate that industrialised countries such as Japan, Germany or the United States can only dream of.

Various reasons explain why India has been spared

There are various reasons for the fact that the Indian economy is enduring the crisis so well. First of all, India was not directly affected because the banking sector is strictly regulated in the country. Indian banks simply cannot make high-risk investments.

Foreign banks do not play a significant role in India, said Shariff. “Indian businesses are entirely dependent on Indian banks. In India, 95 percent of the total banking turnover is in the public sector.”

So the state did not have to rescue banks in crisis. Moreover, whereas Asian countries such as China and Japan were indirectly affected by the crisis because their exports to the US suddenly collapsed, India did not have this problem as its economy is far less export-dependent.

So much depends on the harvest

“This is India’s strength at the moment. It has a robust domestic market which is very dependent on consumer spending in rural areas, where some 700 million people live. That’s why the monsoon this year is going to be so important,” said Oliver Müller, chief economist at the Indo-German Chamber of Commerce in New Delhi.

For rural consumers, a good harvest is more important than all the whims of the world markets.

This explains why the government and the Indian stock exchanges are worried about the fact that the annual monsoon rains in northern India came late and that there is not enough rain.

Not a risk-free approach

Last week the government still thought it was important to stabilise domestic demand when it launched a massive credit-financed economic recovery programme as part of the new budget.

But the approach is not without risk, warned Oliver Müller: “At the moment, it definitely seems to have made sense to prop things up here. But next year at the latest -- the World Bank is already predicting 8 percent growth in India for 2010 -- at the latest then, the government will quickly have to change course and switch to budget consolidation because at the moment there’s an overall deficit of 11 to 12 percent in India.”

If the government manages to make this swift change of course, India will be on the right track and will likely become more attractive for foreign investors again -- if they themselves have money again by that time.

Author: Thomas Bärthlein
Editor: Anne Thomas