OVERCUMING INDIAN

ECONOMIC CRISES

GROUP MEMBERS

HETAL BID 05
KAUSHAL MEHTA 37
BHARAT THADESWAR 61
NEHA THAPAR 62
SUAKANYA TALUKDAR
PRIYA AGARWAL 101
Introduction
Less than a year ago, much of what has happened in the Indian economy
since last October would have been hard to anticipate, what are the factors that
put India on a high growth trajectory and what can we do to remain there?
Today, the FAQ is, when and how do we get back on to the high growth
trajectory? The sharp turn around in the FAQs summarizes in a nutshell the
impact of the global financial crisis on India.

Global Outlook
2. The global economic outlook deteriorated sharply over the last quarter. In a
sign of the ferocity of the down turn, the IMF marked down, yet again, its
estimate for global growth in 2009 to a range of (-) 1.0 to (-) 0.5 per cent, the
first global contraction in 60 years. With all the advanced economies – the
United States, Europe and Japan - having firmly gone into recession, the
contagion of the crisis from the financial sector to the real sector has been
unforgiving and total. Recent evidence suggests that contractionary forces are
strong: demand has slumped, production is plunging, job losses are rising and
1 Speech delivered at the Confederation of Indian Industry's National
Conference and Annual Session 2009 in New Delhi on March 26, 2009.
2Credit markets remain in seizure. Most worryingly, world trade – the main
channel through which the downturn will get transmitted on the way forward
is projected to contract by 2.8 per cent in 2009, the fastest pace of shrinkage
in the last 80 years.
3. Policy making around the world is in clearly uncharted territory.Governments
and central banks across countries have responded to the crisis through
big,aggressive and unconventional measures. There is a contentious debate on
whether these measures are adequate and appropriate, and when, if at all, they
will start to show results. There has also been a separate debate on how
abandoning the rule book, driven by the tyranny of the short-term, is
compromising medium-term sustainability. What is clearly beyond debate
though is that this Great Recession of 2008/09 is going to be deeper and the
recovery longer than earlier thought.
SCENARIO OF THE INDIAN MARKET

 Rapid growth of speculative lending and deregulation of financial market

over the past couple of decades.

 Increase in global liquidity and risk appetite e.g. subprime lending and
mortgage-backed securities

 Encompassing the banking sector , securities and currency markets, and

institutional and individual investors in most parts of the world

 Impact of the crisis on growth in the India spills over to other parts and
the financial system.
 The impact of the global crisis on India can broadly be divided into three different
aspects: (1) the immediate direct impact on its financial sector; (2) an indirect impact
on economic activities; and (3) potential long-term geopolitical implications.
Fortunately, India, like most of the emerging economies, was lucky to avoid the first
round of adverse affects because its banks were not overly exposed to subprime
lending. Only one of the larger private sector banks, the ICICI, was partly exposed but
it managed to counter the crisis through a strong balance sheet and timely government
action. The banking sector as whole maintained a healthy balance sheet and, over the
third quarter of 2008 –a nightmare for many big financial institutions around the
world–, India’s banks reported encouraging results and witnessed an impressive jump
in their profitability.
 However, the indirect –or second-round– impact of the crisis has affected India quite
badly. The liquidity squeeze in the global market following Lehman Brothers’
collapse had serious implications for India, as it not only led to massive outflows of
Foreign Institutional Investment (FII) but also compelled Indian banks and companies
to shift their credit demand from external sources to the domestic banking sector. It
thereby exerted pressure on domestic market liquidity, thereby giving rise to a credit
crunch. Coupled with the ensuing loss of confidence, this increased the risk aversion
of Indian banks, hurting credit expansion in the domestic market.
 Additionally, given the recession in the developed world, the demand for Indian
exports in their major markets has almost collapsed. Merchandise exports shrank by
more than 17% from October 2008 to May 2009. The decline in exports has
accelerated, with a drop in May 2009 of 29.2% compared with May 2008. Likewise,
exports of services are also facing a steep downturn. In the third quarter of 2008-09,
growth in services exports declined to a mere 5.9%, compared with 34% in the same
period a year back. Earnings from travel, transport, insurance and banking services
have contracted, while the growth of software exports declined by more than 21
percentage points. The real shock came in the fourth quarter of 2008-09 when services
exports contracted by 6.6% over the same period a year back.
 The impact of the global crisis on the real economy became evident in the second half
of 2008-09 when, giving the lie to optimistic official pronouncements, the Indian
economy grew by a modest 5.8%, significantly below the 9.0% recorded in the same
period of 2007-08, and after having achieved GDP growth of 7.8% in the first half of
2008-09. At the sectoral level, robust growth in community, social and personal
 services (up 17.5%) and financial, real estate and business services (up 8.9%) enabled
the services sector to maintain healthy growth despite the sharp decline in trade, hotel,
transport and communication services. The secondary sector in general and the
manufacturing sector in particular performed extremely poorly. In the wake of a
decline in domestic and export demand, the manufacturing sector contracted by 0.3%,
while growth in construction slowed down significantly from 8.3% to 5.5%.
 The geopolitical impact, which is likely to be the most significant for India, is still
unfolding. With the global financial crisis as a backdrop, there is a growing sense of
insecurity in the international system. Predictions that point to an increase in conflicts
over the world, particularly over resources, are being made repeatedly. With the onset
of the financial crisis, roughly a quarter of the states in the international system are
already experiencing low level instability, such as government changes.
Destabilisation could be one of the most severe spill-over effects of the global
financial crisis for developing countries. The likely effect could be that many sectors
in developing societies will receive fewer funds, leaving local governments to re-think
the allocation of resources between health, education, economic development and
other areas. This will inevitably create growing disparities, tensions and unrest, all of
which could be aggravated by problems related to corruption and poor governance.
The prevailing food crisis could lead to an even more serious effect of the financial
crisis.
 Thus, as these scenarios make clear, the crisis is creating new flash points for unrest
and conflict. Furthermore, as a result of financial constraints the deployment of
peacekeeping operations is already being hindered and is likely to become even more
of a burden –making it a low priority for the US, EU, NATO and UN–. In such a
situation, the image of a more unstable –almost Kaplanesque– world is starting to grip
the imagination of many.
 The economic crisis currently facing the world will have the greatest toll on countries
that are already at the limits of economic endurance. There could be an increase in
what are termed ‘failed’ and ‘failing’ states, along with greater possibilities of
radicalisation in the international system, combined with an expansion of conflict
zones in various parts of the world. Although this might suggest an extremely grim
scenario, the fact is that India’s neighbourhood is one of the most susceptible to it.
 In any case, India has long-standing border disputes with at least two of its neighbours
in South Asia –Pakistan and China– and faces the threat of militant terrorist
organisations operating from Pakistani territory. Furthermore, Bangladesh, another of
India’s South-Asian neighbours, is suspected of being a shelter for militants who have
repeatedly caused extensive damage in India. Therefore, although India has escaped
the financial crisis without much damage, it can be argued that because of its
geopolitical location in South Asia, the consequences of the global financial crisis
could become severe.
 It is useful to look at China to understand what the geopolitical implications of the
global financial crisis could be for India. Even though China has US$2 trillion in
foreign currency reserves at its disposal, the global financial crisis has caused
widespread poverty, unemployment and inequality. China’s growth was largely due to
the Open Door Policy initiated in 1978, as a result of which it became the
manufacturing platform of the world. China largely depends on exports for its growth,
making the maintenance of high growth levels one of its foremost foreign policy
priorities. Chinese exports mainly go to the Western World, primarily the US and the
EU. However, given the global financial crisis, demand for Chinese goods in the US
and EU has severely declined, hitting the manufacturing sector of the Chinese
 economy in a drastic manner. Unemployment is one of China’s chronic maladies, and
is at present so severe that predictions suggest that it could even lead to the collapse of
the regime if the problem is tackled not in a timely and appropriate manner. This
would have a serious impact on India, which requires a stable China in the region, as
it could lead to political instability, growing radicalism, widespread migration,
changing demographic trends and a deteriorated economic partnership between India
and China.
 Besides the threat of a regime change in China, the probable effects of the global
financial crisis in Asia could include perceptions of renewed energy scarcity. This
could lead countries to take action to ensure their future access to energy supplies. In
a worst-case scenario even interstate conflicts would be possible, although action
short of war would also have serious geopolitical implications. Maritime security
concerns have lead to naval build-ups and modernisation efforts, such as the
development in India and China of blue-water naval capabilities.
 With respect to Pakistan, political instability and turmoil in Pakistan have always
resulted in an adverse impact on India. Terrorism has always been a major hurdle in
the bilateral relations between the two states. The repercussions of the Mumbai terror
attack have still to be settled. The current civilian government in Pakistan is in its
infancy and terrorism is one of its most critical challenges.
 According to several analysts, Pakistan is one of the best examples of a state where
economic pressure is feeding unrest and threatening the government. Growth has
stalled, while food and fuel prices have risen drastically, classic ingredients for
radicalisation. Besides, Pakintan’s external sources of finance –foreign aid and
remittances– are now under considerable pressure.
 Apart from this, another source of concern regarding Pakistan is its border with
Afghanistan. The global financial crisis has made the US less keen to intervene
militarily, having an effect on NATO’s current operations in Afghanistan as well as
on the future of the alliance. In any case, the financial crisis has serious implications
for the Afghanistan-Pakistan strategy because of the simple fact that the financial
crisis will absorb a significant share of steadily decreasing resources for a
considerable time in the near future. Thus, tackling terrorism in the face of a global
financial crisis, with reduced aid from the US, could have grave implications for
India. A stable and democratic Pakistan is in India’s interest. The economic problems
arising from the crisis could lead to funds being diverted from the fight against
terrorism to providing temporary relief to Pakistan’s citizens. However, should the
Pakistani government not come to the rescue of its citizens its legitimacy would be
undermined and a power vacuum could ensue in which elements detrimental to Indian
interests might arise, such as another military dictator.
 Similarly, Bangladesh needs foreign direct investment (FDI) of up to 28% of its GDP,
which is almost US$415 billion every year to reduce poverty in the country.[1]
However, FDI is likely to slow down considerably. Likewise, foreign aid from the G-
7 countries is likely to dwindle. India faces similar threats of a radicalisation in
Bangladesh, that could lead to the growth of militancy in India’s North-Eastern
territories. In any case, the separatist United Liberation Front of Asom (ULFA) is
suspected of using Bangladeshi territory as a haven. Increasing militancy is a direct
outcome of greater poverty and unemployment, and the worsening of either in any of
India’s neighbours will have adverse effects on India itself. The flow of illegal
migrants from Bangladesh to the states of the North-East in general and Assam in
particular has been a burning political issue in the region. Faced with a negative
economic scenario the number of people migrating could drastically increase, leading
 to huge backlashes and undermining the North-East’s already fragile political
stability.
 Democracy in Nepal is at a very early stage of development. The present state of
economic hardship, in which the population is desperate for –even radical– solutions,
the Maoists have a prime opportunity to increase their political clout in Nepal. Should
this occur, China’s influence in Nepal’s internal affairs would increase, with long-
term economic and strategic implications for India, given Nepal’s historical role as a
buffer state.
 Hence, what is required at this juncture is a very high degree of collaborative
engagement between the major states of the world and the region to tackle these
multiple crises, even though domestic preoccupations might seem to demand more
attention at this time.
 However, the implications of such a scenario in India’s neighbourhood are not
altogether negative. Among other things, such a scenario creates a larger strategic
space and India will have more room for manoeuvre in managing its relations with a
more diverse set of powers, and with a greater flexibility than before.
 It is in India’s interest to encourage the trend towards a more diffuse and diversified
international order. This, in any case, fits in well with India’s preferences for a multi-
polar world, including a multi-polar Asia. India’s efforts should thus concentrate on
building coalitions with other powers who share the same objectives. This basically
means that a more energetic pursuit of relations with countries like Russia, Brazil,
South Africa and Mexico is in India’s best interests. The EU and some of its
individual members, like France, could be useful political and economic partners for
India.
 In Asia, India needs a deeper engagement with Japan and Indonesia, and the
cultivation of a more nuanced diplomacy towards China. Chinese and Indian positions
on multilateral trade, climate change and several other global issues are similar.
However, there are competitive aspects between the two countries as well, which have
to be managed with prudence and firmness. Thus, India needs to go beyond the
defensive and survival-first strategies that currently dominate its thinking.
 At least for some time to come the impact of the global financial crisis will be a
diminished market overseas, as a result of the revival of protectionism. Similarly there
will be reduced prospects for attracting investment inflows from major capital-
exporting countries. The cumulative effects of all these phenomena will be the
destruction of employment and a rise in poverty within India itself. However, the
government is using both fiscal stimuli and an easy monetary policy to prime the
economy. Schemes like the National Rural Employment Guarantee Act (NREGA),
which lead to both asset creation and employment generation in rural areas, provide a
safety net for the rural poor.
 Amidst the unfolding global financial crisis, India held its 15th Lok Sabha elections,
which resulted in the triumph of the Congress and its allies, who together won 262 of
543 seats. The people of India showed their faith in the Congress, leading Manmohan
Singh to his second term of office as Prime Minister.
 Although the exact reasons of the Congress’s victory remain a matter of political
debate, it is clear that amidst the uncertainties prevailing in the international and
domestic economy and polity, the masses voted for stability and continuity.
Manmohan Singh played an instrumental role as Finance Minister in rescuing India
from the BOP crisis in the early 1990s and the voters seem to have put their faith in
his government to tide the country through these troubled times.
  Moreover, the ‘Look East’ policy that India had been following since the 90s finally
culminated into something specific with the signing of the India-ASEAN Free Trade
Agreement. This is a step in the right direction as only a diversified range of trade
partners can help the country mitigate the risks associated with international trade.
 Given the global financial crisis, India faces both opportunities and challenges. For
instance, it could exploit the opportunity created by the crisis to consolidate its
economic interaction with its neighbours. Without a politically stable and
economically prosperous neighbourhood, India will find it difficult to foster its
regional and global interests. As the economic crisis hits India’s more fragile
neighbours –such as Bangladesh, Pakistan, Sri Lanka and Nepal– it could push for a
South-Asian Economic Recovery Initiative, which could lead to a higher degree of
economic integration and cooperation in the region.

why is india hit by economic CRISES?

ferocity with which the global crisis hit India dismayed many.
And this dismay stems from two analytical strands.
4
8. The first analytic goes something like this. The Indian banking system
has had no direct exposure to the sub-prime mortgage assets or to the failed
institutions. It has very limited off-balance sheet activities or securitized
assets. In fact, our banks continue to remain sound and healthy. So, the
enigma is how can India be caught up in a crisis when it has nothing much to
do with any of the maladies that are at the core of the crisis.
9. The second reason for dismay is that India's recent growth has been
driven predominantly by domestic consumption and domestic investment.
External demand, as measured by merchandize exports, accounts for less than
15 per cent of our GDP. The question then is, even if there is a global
downturn, why should India be affected when its reliance on external demand
is so limited?
10. The answer to both the above causes of dismay lies in globalization.
Let me explain. First, India's integration into the world economy over the last
decade has been remarkably rapid. Integration into the world implies more
than just exports. Going by the common measure of globalization, India's
two-way trade (merchandize exports plus imports), as a proportion of GDP,
increased from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7
per cent in 2007-08.
11. Second, India's financial integration with the world has been as deep
as India's trade globalization, if not deeper. If we take an expanded measure of
globalization, that is the ratio of total external transactions (gross current
5
account flows plus gross capital flows) to GDP, this ratio has more than
doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.
12. Importantly, the Indian corporate sector's access to external funding
has markedly increased in the last five years. Some numbers will help
illustrate the point. In the five-year period 2003-08, the share of corporate
investment in India's GDP rose by 9 percentage points. Corporate savings
financed a little more than half of this, but a significant portion of the balance
financing came from external sources. While funds were available
domestically, foreign funding was perceived to be less expensive than
domestic financing. On the other hand, in a global market awash with liquidity
and on the promise of India's growth potential, foreign investors and lenders
were willing to take risks and finance investment in India. Last year
(2007/08), for example, India received capital inflows amounting to over 9 per
cent of GDP as against a current account deficit in the balance of payments of
just 1.5 per cent of GDP. These capital flows, in excess of the current account
deficit, evidence the importance of external financing to the corporates and the
depth of India's financial integration.
13. So, the reason India has been hit by the crisis, despite mitigating
factors, is clearly India's rapid and growing integration into the global
economy.

KEY POINTERS

Fall in Share Prices

After gradual fall in the previous weeks, the sensex fell to 8510, on 27.10.08,
the lowest in 5 years

Fall in Rupee

On 21.11.08, Rupee hits record low of 50.20, against the greenback

FDI Inflow

Global meltdown may slow down FDI inflows

Job Loss

Across all sectors - manufacturing, retail, realty, IT and BPO, banking and
financial services

Economic Growth

Slow down has begun and growth will drop to about 7 percent, for the first time
in 3 years

Impact on Exports

Exports are likely to slide by 20 per cent of its target of $200 billion in 2008-09

Fall in Forex Reserves

Forex reserves dropped by nearly $8 billion in early October, to $284 billion

Impact on various industries

Steel manufacturers,

Textile Sector, Hosiery,

Sports Goods,

IT, ITeS, BPO, KPO,

Diamond Exports,

Real Estate, and many others have started feeling the heat

IMPACT ON SERVICE SECTORS

 particularly the IT sector

Companies in the IT and financial sectors continue to

downsize and cut costs and will not likely hire more people.

World economy has been passing through a rough weather. Many of the
developed and developing countries are facing the wrath of economic
slowdown. The Gross Domestic Product (GDP) growth is declining, trade has
come down and there is widespread retrenchment of workers all over the
world. To mitigate the adverse impact of this wide spread economic
slowdown, various measures are taken world over. But the impact of
slowdown is so wide and deep rooted
recover.

Impact on India’s Social and Development Sectors

key aspects:
 Impact on employment and poverty
 Funding for development or development
expenditure
 Achievement of the Millennium
 Development Goals (MDGs)
IMPACT EMPLOYMENT AND POVERTY

 Job losses in export manufacturing often affect the rural-to-
urban migrants and their income support to their rural
families.
 Workers who are not able to find new urban employments.
 Process of reverse migration has already begun in India.
 This shift will often coincide with reduced wages and
household income.
1.2 One of the yardsticks to measure the impact of slowdown is the decline in
employment. In developed countries like United States and United
Kingdom, employment and unemployment data are released at regular
intervals. This helps in measuring the impact of economic policy on
employment so as to take appropriate measures. However, in India
such frequent and timely data on employment and unemployment are
not available.

1.3

Aggregate Demand-Aggregate Supply Curve Scenario

Here, after economic recession, the equilibrium (pt. O) shifts from y0 to

y1. Supply decreases
considerably and prices of goods and commodities increases drastically
(pt. A). After the
government decides to give monetary thrust to the economy through the
apex bank, money
supply in the household sector increases. This leads to an increase in
demand but the supply
curve remains the same (pt. B). After sometime, which is after the inside
and outside lags of the
measures are over, the investment by the Industry sector increases which
leads to an increase
in supply curve and hence prices reduces to a stable p2 and output also
increases to y2 (pt. C).
Thus we see the effects of the economic recession on the Short Run
Aggregate Supply Curve
and the Aggregate Demand Curve.
Action by Govt.

 SEBI eases Participatory-Note norms,

Lifts 40 percent cap on overseas

derivative instruments

 RBI injects 20,000 crore for Mutual

Funds

 The CRR, the amount banks are

required to keep with the apex bank,

has been cut from 9 per cent earlier to

5.5 per cent in three tranches.

 Short-term lending (repo) rate also

reduced

 Rs 25,000 crore against farm debt

waiver

 A temporary 1 per cent reduction in

SLR announced last month would be

made permanent.

 High-level panel to address industry’s

woes

 Market regulator SEBI is keeping

vigilant eye on short-selling and on

the settlement mechanism.

Government Speak

Prime Minister

Growth Rate 7.5 to 8 percent

Country not immune to what happens in the world

Finance Minister – P. Chidambaram

Adequate liquidity in the banking system

Advised banks to lend aggressively

Asked investors not to sell stocks in panic

Commerce and Industry Minister - Kamal Nath

Financial crisis may slow down FDI inflows.

Planning Commission Dy. Chairperson - Montek Singh Ahluwalia

Global meltdown to hit growth\

Expert Speak

Dr Rajiv Kumar, Director and Chief Executive, ICRIER

A growth of not more than 7.8 per cent in the present year.

Dr L.K. Malhotra, President, PHDCCI

India may not be able to remain untouched by the financial turmoil in the US.
Exports from India are also likely to be hit if major economies go into
recession.

Sajjan Jindal, President , ASSOCHAM

India will see downturn and it will be an uphill task for the government to bring
back the economy on
Lessons Learnt

o Weaknesses of structured products and derivatives

o Importance of Financial supervision

o Inter-agency coordination required

o We can not remain insulated

Conclusion

 The Indian economy is already under the

impact of global financial crisis.

 Government has taken various steps but as

of now there are no signs of recovery.

 Share prices have steadily fallen, rupee has

lost ground to the dollar, exports have been

hit, various sectors of the economy have

seen decline in demand and even the Prime

Minister has gone on record to say that that

India has to bear the pain.

 The point is that we have to live with the

present scenario for some more time to

come.