This paper focuses on the economic impact of the global crisis on South Asia and the policy measures pursued.It analyzes the effectiveness of these policies and raises the critical longerterm issues, which to date have largely been ignored. It argues that the global crisis has to be analyzed against the backdrop of the commodity price shock in the lead up to the crisis, which was particularly harmful in South Asia, leaving many countries with limited fiscal space, high inflation, relatively tight monetary policies, and increasing pressure on current account balances. Another interesting result is that those countries that had large fiscal deficits entering the crisis did manage to exercise some degree of fiscal discipline and indeed limited the size of the countercyclical fiscal spending, perhaps in recognition of the downside risks to macroeconomic management and debt sustainability considerations. On the transmission channels, monetary policy was criticized for not being particularly effective in relaxing liquidity constraints because financial intermediaries were slow to lower policy rates. This paper also concludes that in India and
Sri Lanka, despite counterparty risk, lending was by and large demand constrained, at least from December 2009 onward. Finally the paper discusses some of the longer-term implications
of fiscal adjustment required to bring deficits back to a sustainable equilibrium.