There are at least three ways in which we are immediately vulnerable: export demand could fall, investment reduces and employment comes down.   

Exports account for only 16 per cent of GDP, but rapid shrinking of global demand, quickly reflected in cancellation of export orders, can dent growth. Production units that depend on orders from abroad ay have to shed labour and defer expansion plans. Efforts need to made towards exploring alternate markets in the Middle East, South East Asia and the Far East. This applies also to the travel and tourism sectors. We have already seen the first rumbles in the hitherto-expanding aviation industry. The crunch will also be felt in other areas of international trade like shipping, which is particularly susceptible to cyclical movements.   

Direct foreign investment and portfolio investment, as well as external commercial borrowing, account for only 5 per cent of GDP. But our stockmarkets have already been battered FIIs withdrawing. We may have to live with the Sensex below 10000 for some time. Indian investors are shifting to stable but low-yielding fixed deposits and domestic businesses are being forced to postpone public offerings and new projects. On the FDI front, multinationals and foreign corporates are busy revising investment plans and we must be prepared for much lower materialisation of approved FDI clearances.   

As in the developed world, the crisis is moving to the real economy through banks: their lower liquidity is affecting corporates. Equally worrisome, however, is the impact of lower global demand itself on business prospects. It is only if projects financed by banks fail that their solvency will be at risk. Instead of government support to failing banks more effort is required towards coordinated procyclical action to counter recessionary pressures arising out of global developments. Hiking the CRR and lowering the repo rate are only temporary and partial measures. They must be buttressed by budgetary policy for the short and medium term. And while the economy adjusts, there must be measures to ease the pain of sectors and groups that are likely to be most affected during the transition.   

... contd.