India’s Increased International Integration and the Financial Crisis: Has India Become More Prone to External Shocks?

This paper looks at the impact of the global financial crisis on the Indian Economy via the three potential channels of contagion namely the trade channel, the financial channel and the confidence channel. We do so by analyzing the quarterly data of India’s Balance of Payments (BOP) for the time period 2007-2008 to 2009-2010. We come to the conclusion that India has become more prone to external shocks which is but natural with increased integration with the world economy and particularly financial integration. However the economy was already experiencing a downturn two quarters before the onset of the effects of the crisis on the Indian Economy and hence, at best, we can say that due to the crisis the downturn got accentuated for a few more quarters. The economy also seems to have recovered within a short period of time.