Investors in the Indian stock markets can be forgiven if they feel of late that they are in the middle of a disaster movie, with everything collapsing all around them. Dalal Street has seen a veritable bloodbath of late, with the Sensex falling by

over a whopping 900 points in just two days of trading. In the middle of this, many experts have warned that the “worst is yet to come”, raising visions of 2008 when the markets crashed by almost half in just eight months.
Markets elsewhere in the world are in an even gloomier mood. Wall Street, London, Frankfurt, Hong Kong, Tokyo — everywhere indices are in the red, with much more pain in the offing. Investors are unenthused by policymakers’ efforts, whether in Washington or Europe, to pump up the global economy. India, which is now linked to the global economy, cannot escape this spreading contagion.
Soon after the near-recession of 2008-09, when large companies crashed and burned, the markets began reviving and a sense of optimism quickly returned. The sub-prime crisis, which set off the domino effect and caused an American and then a global free fall, seemed getting sorted out, and consumer demand began picking up. India escaped the worst, not least because of conservative banking policies and as domestic demand remained fairly strong. Yet two years later, those ghosts have come back to haunt everyone. It turns out that the United States is not so robust after all, and Europe is staring at the nightmare scenario of defaults and a possible collapse of the Eurozone, which could result in bankruptcies and social tension. It is now clear that the problems are not temporary but structural, and thus will take a long time to be solved.
In the circumstances, India, despite its predicted seven-plus per cent growth — extremely good by global standards — cannot remain untouched. Exporters are being hit due to falling demand in the West, while the import bill is climbing rapidly as the rupee weakens against the dollar. In addition, India faces the nagging problem of inflation, which simply refuses to go away. Foreign investors are looking for other international options and pulling out their funds. It seems like a perfect storm, and the Indian markets merely reflect this growing sense of panic.
The real danger is that the precipitous decline in the stock markets will start taking a toll on the real economy. Indian corporates are already wary about making new investments, and with interest rates rising continuously, which make raising capital difficult, they may put their expansion plans on hold. This, in turn, could adversely affect the India growth story, and that will be really bad news indeed.