International financial institutions have been positioning themselves to scale up their loans/credits to meet the financing needs of emerging economies and developing counties during the global crisis. The World Bank has just announced a big increase in the Group's (Bank, IDA, IFC) total lending at 58.8 billion dollars in the fiscal year ending June 2009. Bank and IDA (hard and soft respectively) lending totalled 47 billion dollars, of which 14 billion dollars were IDA long-term concessional credits. IFC, the other affiliate extending aid to private sector in developing countries, committed 10.5 billion dollars. The Bank has not yet given the regional break-up of these commitments.

India has not sought any crisis-related loans from IMF, which has launched a Flexible Credit Line (FCL) or from the Bank Group except that it has sought more aid for infrastructure projects from both the Bank and ADB. The Bank had offered to commit 14 billion dollars, one-third in soft credits, for a three-year period (2009-11), which will cover a fast track lending for infrastructure development as well as social support programmes in seven poorest states in Northern and Central India.

IMF had committed some 150 billion dollars, largely since the latter half of 2008, for a number of emerging economies including Mexico and east European countries under its FCL. and through its regular stand-by (bail-out) credits to member-countries including Pakistan. The Fund will now issue Notes for purchase by member-nations and central banks to mobilise resources and strengthen its capacity “to bring rapid assistance” to countries as and when needed. China has offered to buy 50 billion of these notes and Russia and Brazil 10 billion each. The Notes will be for five-year maturity and denominated in SDR.

The global financial crisis has led to a sharp fall in India's corporate investments, financed externally to a significant extent, once the sources of borrowings dried up in the wake of the credit crunch. In 2008-09, net inflows declined to a mere nine billion dollars (as against 108 billion in the previous year). This was because foreign investment was reduced to 3.4 billion dollars (net of 15 billion dollars of portfolio outflows of foreign investors) though FDI was robust at 17 billion dollars. Banking capital and short-term trade credit were also negative for the first time in recent years while India's external commercial borrowings also came down to 8 billion from the 22 billion in 2007-08.

As a result, India ended the last fiscal year with a decline in the level of foreign exchange reserves by 57 billion dollars (20 billion dollars in the capital account plus 37 billion dollars arising out of valuation changes). This was the first decline in reserve addition in 12 years since l995-96. Trade deficit had widened to 117 billion dollars in 2008-09 despite the loss of trade growth momentum since September and though invisibles held up more or less, the current account deficit rose to a new high of 29.8 billion dollars or 2.6 per cent of GDP, the highest ratio after 17 years since 1990-91 (3.1 per cent).

Trade data show growth in exports nose-dived to 2.4 per cent while imports also dropped to 12.9 per cent. The setback occurring in the second half of the year saw exports losing ground month after month while reduction in imports reflected partly the lowering in oil prices in the third and fourth quarter (now they are moving up fast) and partly the fall in non-oil imports with the slowdown in economic activity. In the fourth quarter, the current account showed a surplus.

Contrary to subdued optimism in official India, the depth of slowdown is yet to be measured in real terms. In the first two months of the current fiscal (April-May), exports at 21.75 billion dollars were 31.2 per cent less over the corresponding months of last year while imports (31.95 billion) were down by 38 per cent. Trade deficits get reduced to roughly five billion dollars a month. While oil prices are going up to raise the import bill in the coming months, trade growth (both ways) would continue to remain negative for the best part of the year, which means running current deficits.

Government moves to liberalise access to foreign investments must be seen in the context of the likely pressure on the reserves during a year of slow economic growth, even if investment flows improved in April-May. Developed countries struggling to come out of recession look to markets like India and China to import more as part of promoting global growth while signs are abundant that they will not be the source of growth for exports from developing countries for quite some time to come.

Let alone the domestic fiscal over-runs when the budget has to be expansionary, with all the flagship programmes, the Finance Minister, while presenting the Budget for 2009/10, will have to take into account the no-longer-conducive external environment, assumed as a given until the global bubble bust. Additionally, more worrisome domestically will be the reversal of the negative inflation expected shortly, the pace quickened perhaps with the unavoidable hike in petrol and diesel prices. (IPA Service)