15 years on, lessons from the global financial crisis

Ashraf Engineer

September 16, 2023


Hello and welcome to All Indians Matter. I am Ashraf Engineer.

September 15 marked 15 years of the 2008 global financial crisis precipitated by the collapse of Lehman Brothers. The scale and spread of what turned into a financial contagion was unprecedented and India struggled to deal with the seismic waves that had their epicentre 12,500 km away. There was no manual or rulebook to refer to and, anyway, India believed that its strong and innate economic growth would insulate it from global shocks. So, the initial response was sluggish. But, sure enough, India began to feel the tremors and had to scramble to secure itself. A decade and a half passed and again the R-word, recession, began to be bandied about late last year and early this year on the back of soaring inflation, the Ukraine invasion and a supply chain crisis. India didn’t slip into a recession in 2008 and it won’t now. And it’s certainly way stronger economically than it was in 2008. However, it’s worth looking back on what exactly happened, how India was impacted and whether there are any learnings from that time to keep in mind today.


One thing’s for sure: steady, sustained growth can be a great armour but it can’t completely insulate you from shockwaves abroad. India discovered that in 2008.

Our economic system had little to do with structured financial instruments carved out of subprime mortgages, whose failure ultimately resulted in the worldwide contagion. Yet, growth slowed in 2008-09 to 6.7%, a fall of 2.1% from the average of 8.8% over the previous five years.

Why? Because, after the Asian financial crisis of 1998, India had integrated steadily with the international economy. That’s why the high growth recorded between 2004-05 to 2007-08 coincided with the world experiencing a growth high. India’s exports boomed, surging an average of 25% every year. In 2009, however, international trade plummeted 11% taking India’s exports down 16%.

The lesson of that time: our world is inter-connected and a financial squeeze elsewhere will hurt India too.

One of the first effects was the fall of stock indices. As markets across the US and European Union collapsed, foreign institutional investors started selling the shares they held in Indian markets in order to meet their liquidity requirements. This resulted in massive losses to Indian investors. It is estimated that foreign institutional investors sold more than $13 billion worth of Indian companies’ shares and repatriated the funds back home.

As they sold shares here, the money they received was in Indian rupees. This was then converted into US dollars and sent abroad. As the demand for dollars rose, the corresponding value of the rupee also eroded from 39.4 to 50.6. Also, as more dollars had to be supplied after being bought in rupees, the volume of Indian currency in the banking sector began to decline, leading to liquidity problems. This affected credit flow to industry.

Foreign trade was affected and registered a $60-billion deficit in the first half of 2008-09 – almost double from the corresponding period the previous year.

As the economy slowed, there was a fall in industrial output across sectors, from automobiles and aviation to textiles and jewellery. Agriculture grew a mere 1.6% in 2008-09 compared to 4.7% in 2007-08. As the slowdown took root, unemployment rose, especially in major job-generating industries such as textiles.

The government responded first through monetary measures, with the Reserve Bank of India decreasing the statutory liquidity ratio from 25% to 24%. The statutory liquidity ratio is the minimum percentage of deposits that a commercial bank must maintain in the form of cash, gold or other securities. It also released Rs 25,000 crore to banks for farm loan waivers. Market stabilisation schemes were undertaken to increase banks’ liquidity and this resulted in about Rs 2 lakh crore being infused into the domestic money market.

Three fiscal stimulus packages followed, which included tax relief and higher expenditure on public projects.

The first stimulus was announced on December 6, 2008: an increase of Rs 30,700 crore in government expenditure directed at infrastructure, housing and other measures. The package also subsidised the interest costs of exporters.

Another stimulus followed on January 2, 2009, which enabled the Indian Infrastructure Finance Company, a public sector firm, to borrow Rs 30,000 crore from the market via tax-free bonds.

The third stimulus followed on January 24, 2009, with the government cutting service tax, customs duty and central excise duty. The last was slashed from 10% to 2% in order to catalyse price reductions. Service tax was reduced to 2% to boost demand.

As a result of all these measures, India registered a recovery with growth rising to 8.6% in 2009-10.

At this point, I want to reference the 2020 global financial crisis brought on by the COVID-19 pandemic. While their causes were different, both crises had similar consequences, such as stock market crashes and huge unemployment. Many feared a greater economic impact in 2020 than 2008. As a result, governments across the world had to introduce subsidies and tax cuts, as well as fiscal stimuli. It was déjà vu, albeit for wholly different reasons.

It is clear now that 2008 was the result of excessive risk-taking by banks combined with the popping of the US housing bubble. Economies across the world were affected.

Are there any long-term, lingering effects of 2008, especially on India? To understand that, I spoke to Suranjali Tandon, Associate Professor at the National Institute of Public Finance and Policy, who’s been a guest previously on the show. Here’s what she had to say: “While there were effects of the 2008 financial crisis on India, ranging from a stock market dip to the slowing of foreign investment, we dealt with it better than most countries to ensure there are no long-term effects.”

And what about the lessons? Suranjali said: “The learnings of the crisis would be that we must be cautious when it comes to evolving structures of debt instruments. There needs to be proactive regulation of these instruments. We are seeing new forms  of credit emerge from buy now pay later to the aggressive push for credit cards. However, we must be careful not to increase risk of non-payment of debt due to this. This is particularly important as we’ve had a large volume of non-performing assets, although it’s been dealt with quite effectively.”

In short, there may be no crisis on the horizon, but we must be ever watchful.

Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.