How India’s policymakers saved India from this global crisis

P. Vaidyanathan Iyer of Indian Express has this very interesting story on the topic. He explains how Indian policymakers got together to save India. It looked very bad in the beginning around October-2008 and then condition improved slowly.

FOR FOUR weeks starting mid-September, 2008 — your money, in equities, mutual funds, perhaps even in private banks, was, or was perceived to be, at enormous risk. This is the inside story, never told in such detail before, of how your money was saved as India coped with the global financial crisis triggered by the meltdown of the investment bank, Lehman Brothers, in the United States.

On the second anniversary of the crisis, in September 2010, basic assumptions about how our money is governed seem boring. But that time two years ago, those assumptions were under threat. Today, the Sensex coming close to 20,000 again seems unremarkable. Then, the Sensex falling below 10,000 was not even the worst of problems for the economy’s managers; there were things far worse. India’s quick recovery and its high growth rates now owe a lot to how the crisis was handled then.

This fascinating story of all the players and all the moves that ensured there were no panic runs in India has two broad lessons. One, stakeholders must cooperate and do so by forgetting precedents when money is at risk. As the latter part of the story shows, this wasn’t the case at the start. There was a group within policy-making circles who didn’t take the crisis seriously enough. How that group lost its argument is a fascinating part of how India avoided a full-blown crisis. The second lesson is that it all boils down to the government in the end. Bankers, businessmen and regulators are crucial. But it is the political appointees who are finally accountable for keeping India’s money safe.

This absorbing story is also inevitably complex, given the nature of the crisis. We tell the story via three crisis points that best capture the drama and the dilemma — the ICICI bank, speculators and mutual funds. We wrap up the story with an account of the big picture, as recalled by those who handled the crisis.

It is not often a journalist gives credit to government for any policy.

All the three events- ICICI Bank (how assurance was given to depositors),  speculators (how ban on speculation was avoided) and mutual funds (how liquidity was pumped and mutual fund industry was saved)- are a nice read. Interesting to note that there were huge pressures to ban speculation but governments avoided the pressures.

Overall a nice story on Indian government policy in this crisis.

On forwarding this story to couple of friends, most asked how true is this?

This is hard to say.  The fact is we largely avoided the crisis and policymakers will get credit for the same.

I was reading this Vir Sanghvi piece on Iceland. He visited the country and was recollecting his experience there, He says:

Iceland is now struggling to find a way out of this crisis (as a matter of interest nearly everyone of consequence I met in Iceland congratulated India for not having listened to the international banking whiz kids and thus having escaped the global collapse)..

So even Iceland people know about India avoiding this crisis.

And then there was this piece from Joe Nocera of WSJ (discussed here) in 2008 which looked at the role of YV Reddy in avoiding the crisis. So it was not just the current policymakers but past policymakers also played an important role. It is part of Indian system. We never go overboard with anything. It is slow and gradual (calibrated) and same applies for economic reforms as well. Plus we are always lucky to have some policymakers who just understand the system really well.

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One Response to “How India’s policymakers saved India from this global crisis”

  1. How India’s policymakers saved India from this global crisis « Indian Industry Tracker Says:

    […] Leave a comment Go to comments An interesting compilation of write-ups on the topic by Amol Agrawal. Categories: Economic Growth Comments (0) Trackbacks (0) Leave a comment […]

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