In recent months many people have been heard saying that India escaped unscathed in the crisis, and that the world should learn from India on financial sector regulation. This isn’t new; each time the global financial system experiences problems, there is a resurgence of calls in India to block financial sector development and capital-account liberalisation. These come from those who take pride in India’s license-permit raj, through which, it is argued, India was undisturbed through the crisis. This “let us block development” chorus sprang up after the Asian crisis in 1997, and has sprung up again after the global financial crisis in 2008.

First, is this view of what happened in the crisis correct? Let us start with the claim that India got off lightly in the global crisis. While India did not have a financial crisis of the dimensions that the US did, the real economy was not unscathed. IIP growth crashed from a pre-crisis peak of 15 per cent annualised to a bottom of minus 5 per cent annualised. India was hit hard by the global downturn; its business cycle downturn is not out of line with what has been seen in the rest of Asia. The extent to which Indian growth dropped, compared with the high Indian trend growth, is comparable with the extent to which growth dropped in other countries, given their lower trend growth. India did as badly or as well as most of the other countries. It is certainly true that India got off lightly compared to the US, which was at the epicentre of the crisis. But then so did many other countries.

... contd.