Describing the ongoing Euro zone debt crisis as the fallout and continuation of the global financial meltdown of 2008-09, Reserve Bank deputy governor Subir Gokarn on Thursday warned that the world economy may take some more time to pull itself off the brink.
These comments come amid fears that the still lingering Euro zone sovereign debt crisis, which has been ravaging the global financial and capital markets since this February, could have larger ramifications on the emerging markets which have so far largely been insulated.
“The (global financial and economic) crisis is not still put to rest. Uncertainties still persist. It will take some more time for the crisis to settle down,” Mr. Gokarn told mediapersons while releasing the RBI report on Currency and Finance 2008-09 here.
“The developments in Europe suggest that some weaknesses which are related to the global financial crisis still remain. We are clearly watching them in the context of our policy-making,” Mr. Gokarn said.
The deputy governor said though the emerging economies largely remained unaffected during the early part of the global financial crisis, that began with the fall of the Lehman Brothers in September 2008, have started feeling the pain eventually as demand shrunk in Western markets.
The global financial crisis and the resultant recession forced the RBI to change its policy course towards a more accommodative monetary stance, while the government announced fiscal measures to boost a sagging economy. However, with the economy recovering faster, both the RBI and the government started exiting the stimulus measures from late last year.
According to the RBI report, if the unrest in the global economy continues, it can impact jobs in the country’s labour-intensive sectors and may even affect domestic demand.
Nearly 42 percent of manufacturing exports come from labour-intensive sectors like leather, gems and jewellery and handicrafts, which are likely to get affected in the external demand shocks, the report warns.
“The domestic economy is vulnerable to external demand shocks, with a large impact on output and employment. Empirical evidence suggests that with high global growth, the pull factor operating on the country’s exports could be sizable,” says the report.
The report further notes that the current global crisis has “accentuated the cyclical downturn in the domestic economy, adversely affecting private consumption and investment and thereby affecting savings”.
The report, prepared by a group of professional economists of the Central Bank, cautions that the most direct impact of the global commodity cycle on the economy comes through the prices of primary commodities.
