How Bad was 2008 market crash?
The global financial crisis of 2008 triggered one of the steepest corrections in modern market history. Major global indices fell anywhere between 40 percent and 60 percent as the US subprime mortgage bubble burst and panic spread across financial systems worldwide.
India was hit hard. The Sensex fell from around 21,200 in January 2008 to nearly 8,160 by March 2009, a decline of about 61 percent. Several trading sessions saw single day falls of more than 7 percent. Although the root cause originated abroad, India faced a severe shock because of its macroeconomic position at the time.
What caused the crash and why India’s problem was different
Unlike Western banks, Indian banks were not loaded with toxic mortgage backed securities. They were far less leveraged and far better regulated. The domestic financial system did not collapse because of credit quality issues.
India’s vulnerability came from a completely different source. Global crude oil prices shot up to more than 140 dollars a barrel in 2008. At that time India imported roughly 70 to 75 percent of its crude requirement. The oil import bill for 2007-08 was about 77 billion dollars.
When you compare that amount to India’s GDP in 2007-08, which was roughly 1.2 trillion dollars, the oil bill alone was actually closer to 12 to 13 percent of GDP when valued at a 140 dollar crude price. No emerging market can sustain such a sudden external shock. Foreign capital began to exit, the rupee weakened sharply, interest rates rose, and the macro environment tightened significantly. Even though Indian banks were structurally sound, the economy still suffered a major correction, which was reflected in the equities market. indiabudgetgov.in
Why a crash like 2008 is unlikely in India today
India still imports a large share of its crude oil requirement, currently around 87 to 88 percent. On the surface, this may look like a vulnerability. But the scale of the economy has changed dramatically since 2008.
India’s GDP today is close to 4.2 trillion dollars, more than four times its size in 2008, while oil import volumes have risen only modestly to about 4.6 million barrels per day. If crude were to spike again to 140 dollars per barrel, India’s daily import bill would be around 644 million dollars, translating into an annual oil burden of roughly 235 billion dollars. When measured against the current GDP, this amounts to about 5.6 percent of national output. In 2008 the equivalent shock was nearly 12 to 13 percent of GDP, which is why the economy was pushed into severe stress despite a healthy banking system.
Today the same price spike would be far less damaging in proportional terms. The economy is not only much larger but also more diversified, supported by stronger forex reserves, better capitalized banks and broader capital inflows. The macro sensitivity to oil has declined sharply, making a repeat of the 2008 style collapse highly unlikely.
Conclusion
The 2008 crash in India was not caused by bank failures or domestic credit excesses. It was driven by a global financial meltdown combined with an oil price shock that was extraordinarily large relative to India’s GDP at the time. Today the economic base is far larger, external buffers are stronger, and oil imports account for a much smaller share of national output. Even if crude were to spike sharply again, the macro stress would not come close to what India experienced in 2008.
A repeat of the 2008 style crash in India is therefore highly unlikely under current economic conditions. For investors, this stability provides a stronger foundation for long term wealth creation. If you are considering building or refining your investment plan, you can explore our approach and insights at Vipulam Financial Services – Mutual Funds.
Good insight. My view is that with the continuous never ending geopolitical tension on one side and more participation in the equity market on the other side echoing greater retail investor confidence and wisdom, the market volatility will be reduced and the market return will be steady but with reduction in percentage return. The metal market particularly gold also will balance the return. With short pockets of downturn, the annual growth will be around 11%. Correction of market valuation will also keep the growth in check. If US market outperforms, it will be good for India too. But if China also outperform, it will be dull market for India. Main point is to bring back the institutional investors and for that earnings must be improved.
Fair point. FIIs has already started coming and earnings are already coming better than expected. For India, Q3 and Q4 is always stronger than the first half. But, let’s not rule out the tariff war yet, trade deal is still crucial and most important for market in short-medium term.