The Fiscal Response to the Global Crisis

India's banks had no direct exposure to the subprime mortgage assets. Yet India was affected by the global financial crisis as its economy has significantly integrated with the global economy in the recent past in terms of the globalization of trade and financial integration. The global crisis resulted in a reversal of capital flows to India and a slump in the demand for its exports. This caused a deceleration in growth and the policy response was a fiscal and monetary stimulus that resulted in the fiscal deficit being the highest since 1993–94, the revenue deficit that is the largest ever in India's history, and an aggressive reduction in monetary policy rates. The massive government borrowing programme has resulted in a hardening of the yield on government securities which adversely affects aggregate output. As financial markets have factored in a lack of commitment to fiscal correction, the intentions of the fiscal stimulus have been impeded. The fiscal stimulus lacks sustainability, states Errol D'Souza.