India’s planning commission deputy chairman Montek Singh Ahluwalia and Prime Minister Manmohan Singh, at a plenary session of the Group of 20 summit in Pittsburgh, Pennsylvania, on Sept. 25, 2009. (Photographer: Andrew Harrer/Bloomberg)

10 Years Since Lehman Collapse: The Global Financial Crisis And All The Prime Minister’s Men

With the collapse of Lehman Brothers, the global economy and markets worldwide plunged into the worst crisis seen since the days of the Great Depression of 1929.

The crisis didn’t stem from emerging markets but it took them down with it. India was no exception. The economy was relatively insulated due to the dominance of domestic demand and macro-prudential measures put in place to stem risk-taking across the banking sector. Still, it found its markets plunge and economic growth took a knock.

We always knew that we were a little bit insulated, said Montek Singh Ahluwalia, former deputy chairman of the erstwhile Planning Commission.

“But if there was a credit squeeze around the world, we would be part of the world where the credit would be withdrawn from irrespective of our underlying credit worthiness. We were concerned that we need to do something,” Ahluwalia told BloombergQuint in an interview.

The Prime Minister at that time, Manmohan Singh, a former Reserve Bank of India governor and an economist himself, understood the gravity of the situation right from the start. Ahluwalia recalls that the Prime Minister called for a meeting soon after Lehman Brothers filed for bankruptcy, inviting the RBI governor, the Finance Minister and Ahluwalia. That became the core group that Singh relied on to judge the appropriate domestic response to the global crisis.

Generally, on macro-economic matters, you wouldn’t have a meeting chaired by the PM. That made it evident to everybody that it is unusual and different. After that, I think, the system worked the way it should.
Montek Singh Ahluwalia, Former Deputy Chairman, Planning Commission
Prime Minister Manmohan Singh and Finance Minister P Chidambaram at the Summit on Financial Market and the World Economy, at Washington, USA on November 14, 2008. (Photograph: PIB)
Prime Minister Manmohan Singh and Finance Minister P Chidambaram at the Summit on Financial Market and the World Economy, at Washington, USA on November 14, 2008. (Photograph: PIB)

Also read: The Global Financial Crisis, A New Governor And His Trial By Fire

The burden of the immediate response was on the RBI. In the early days, the central bank moved in small steps but as the situation worsened, the government was in favour of a stronger response.

It’s not like the situation was master-minded from New Delhi, said Ahluwalia. “Once it was clear that liquidity had to be released, a number of steps were taken by the RBI in quick succession, and thereafter, that part of the management was left for RBI to do.”

Over time, it also became clear that economic stimulus would be required. Globally, there was a feeling that this could precipitate very severe recessionary trends and decided that India would need a stimulus too, Ahluwalia recalls. “We did go in for a fiscal stimulus. We also went for reversal of monetary stance,” said Ahluwalia.

The monetary stimulus came in the form of a cut in cash reserve ratio and the benchmark repo rate. The fiscal stimulus came through an across-the-board cut in the Central Value Added Tax by four percentage points, announced by the government in December. Additional government spending was also allocated for the infrastructure and export sectors.

The government also stepped in when rumors surrounding the health of ICICI Bank started to surface. There was a huge increase in the spreads of credit default swaps of one of the larger private banks, implying there was some doubt on the health of our financial system.

“We got the governor and government to give a clear signal that Indian financial institutions will not suffer,” Ahluwalia said.
KV Kamath, then managing director and chief executive officer of ICICI Bank at a news conference in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)
KV Kamath, then managing director and chief executive officer of ICICI Bank at a news conference in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)

The Fight For A Stronger Global Voice

In November 2008, a G20 meeting was scheduled in Washington to assess the global response to the financial crisis. Ahluwalia accompanied Singh at the ‘sherpa’ for the meetings.

Prime Minister Singh was also keen to make a push for a stronger voice for emerging markets on the global stage. In his statement to the G20, Singh cautioned that a slowdown in developing economies could push millions into poverty. He called for a coordinated fiscal response to limit the growth impact of the financial crisis and initiatives to counter the impact of a reversal of capital flows on emerging markets.

But Prime Minister Singh also wanted to initiate a discussion on the role and funding of International Monetary Fund and the representation of emerging economies in the fund.

We must also consider whether the IMF is adequately funded for the task it will face in managing this global crisis. Looking ahead we must plan for possible additional demands on the IMF if the global recession is pronounced. This suggests that we must activate a process for replenishing IMF resources.
Former Prime Minister Manmohan Singh’s Statement On Nov .15, 2008.

“We felt that the IMF needed strengthening to create confidence in the system,” explained Ahluwalia. “The IMF didn’t have the resources needed to handle crises of this kind. So, a lot of our concern was focused on it.”

In December 2010, the Board of Governors of the IMF finally approved additional funding. The IMF’s resources were doubled to approximately SDR 477 billion. Quota reforms were also approved. The voting shares of emerging market and developing countries as a group rose by over 5 percentage points.

U.S. President George W Bush addressing the Heads of State at a dinner hosted by him in White House in connection with the Summit on Financial Market and the World Economy, at Washington, USA on November 14, 2008. (Photograph: PIB)
U.S. President George W Bush addressing the Heads of State at a dinner hosted by him in White House in connection with the Summit on Financial Market and the World Economy, at Washington, USA on November 14, 2008. (Photograph: PIB)

Also read: Lehman Brothers Former Global Chief Economist On The 2008 Financial Crisis: Lessons Learned, Lessons Missed

In Retrospect

How does Ahluwalia feel about the events of 2008 a decade later?

“The world didn’t collapse and developed countries did limp back to some kind of normal,” he said while remembering that the prognosis at the time was far worse than the actual outcome has been.

But the global economy is not necessarily a safer place, he added.

It is not clear to me that the financial system is necessarily more robust. There was talk that the financial institutions have become too big to fail. There is no evidence as that have changed. If one is sufficiently critical, I will say that we managed to avoid the worst consequences of the crises, managed to get back in industrialized world but financial vulnerability still remains strong.
Montek Singh Ahluwalia, Former Deputy Chairman, Planning Commission