the global financial crisis of 2008 and its impact on the indian economy
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THE GLOBAL FINANCIAL CRISIS OF
2008 AND ITS IMPACT ON THE
INDIAN ECONOMY Literature Review
Paper No. CH 6.3 (b)
Submitted for partial fulfilment towards requirement of
BCom (Hons.) course
MOHAMED ARSHAD
Roll No. 58
University Roll No.
Tutorial Group D16
2014-15
Under the supervision of Prof. NAVEEN MITTAL
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DECLARATION BY STUDENT
This is to certify that the material embodied in this study entitled
The Global Financial Crisis of 2008 and its impact on the Indian Economy
is based on my own research work and my indebtedness to other publications has
been acknowledged at the relevant places.
This study has not been submitted elsewhere either wholly or in part for award of
any degree.
MOHAMED ARSHAD
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DECLARATION BY TEACHER IN-CHARGE
This is to certify that the project titled
The Global Financial Crisis of 2008 and its impact on the Indian
Economy done by Mohamed Arshad
is a part of his academic curriculum for the degree of BCom (Hons). It has no
commercial implication and is done only for academic purpose.
Prof. Aruna Jha Prof. Naveen Mittal (Teacher In-charge) (Mentor)
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TABLE OF CONTENTS
1. INTRODUCTION
2. REVIEW OF LITERATURE
3. CONCLUSION
4. BIBLIOGRAPHY
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CHAPTER 1: INTRODUCTION
1.1 INTRODUCTION
The Global Financial Crisis was a nationwide banking emergency that coincided with the US
mortgage crisis of December 2007 June 2009. It was triggered by a large decline in home
prices, leading to mortgage delinquencies and foreclosures and the devaluation of housing-
related securities. Declines in residential investment preceded the recession and were followed
by reductions in household spending and then business investment. Spending reductions were
more significant in areas with a combination of high household debt and larger housing price
declines.
The expansion of household debt was financed with mortgage-backed securities (MBS)
and collateralized debt obligations (CDO), which initially offered attractive rates of return due
to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused
massive defaults. While elements of the crisis first became more visible during 2007, several
major financial institutions collapsed beginning with Lehman Brothers in September 2008, with
significant disruption in the flow of credit to businesses and consumers and the onset of a severe
global recession.
There were many causes for the crisis, with commentators assigning different levels of blame to
financial institutions, regulators, credit agencies, government housing policies, and consumers,
among others. A proximate cause was the rise in subprime lending. The percentage of lower-
quality subprime mortgages originated during a given year rose from the historical 8% or lower
range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the
U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example,
were adjustable-rate mortgages. These two changes were part of a broader trend of lowered
lending standards and higher-risk mortgage products. Further, U.S. households had become
increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in
1990 to 127% at the end of 2007, much of this increase mortgage-related.
As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly
payments), mortgage delinquencies soared. Securities backed with mortgages, including
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subprime mortgages, widely held by financial firms globally, lost most of their value. Global
investors also drastically reduced purchases of mortgage-backed debt and other securities as part
of a decline in the capacity and willingness of the private financial system to support
lending. Concerns about the soundness of US credit and financial markets led to tightening credit
around the world and slowing economic growth in the US and Europe.
The crisis had severe, long-lasting consequences for the U.S. and European economies. The US
entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 9% of
the workforce. One estimate of lost output from the crisis comes to "at least 40% of 2007 gross
domestic product". U.S. housing prices fell nearly 30% on average and the U.S. stock market fell
approximately 50% by early 2009. As of early 2013, the U.S. stock market had recovered to its
pre-crisis peak but housing prices remained near their low point and unemployment remained
elevated. Economic growth remained below pre-crisis levels. Europe also continued to struggle
with its own economic crisis, with elevated unemployment and severe banking impairments
estimated at 940 billion between 2008 and 2012.
Financial market conditions continued to worsen during 2008. By August 2008, financial
firms around the globe had written their holdings of subprime related securities by US$501
billion. The IMF estimated that financial institutions around the globe would eventually have to
write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had
been recognized as of November 2008. These losses wiped out much of the capital of the world
banking system. Banks headquartered in nations that have signed the Basel Accords must have
so many cents of capital for every dollar of credit extended to consumers and businesses. Thus
the massive reduction in bank capital just described has reduced the credit available to businesses
and households.
The crisis hit a critical point in September 2008 with the failure, buyout or bailout of the largest
entities in the U.S. shadow banking system. Investment bank Lehman Brothers filed bankruptcy,
while Merrill Lynch was purchased by Bank of America. Investment banks Goldman
Sachs and Morgan Stanley obtained depository bank holding charters, which gave them access to
emergency lines of credit from the Federal Reserve. Government-sponsored enterprises Fannie
Mae and Freddie Mac were taken over by the federal government. Insurance giant AIG, which
had sold insurance-like protection for mortgage-backed securities, did not have the capital to
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honor its commitments; U.S. taxpayers covered its obligations instead in a bailout that exceeded
$100 billion.
Further, there was the equivalent of a bank run on other parts of the shadow system, which
severely disrupted the ability of non-financial institutions to obtain the funds to run their daily
operations. During a one-week period in September 2008, $170 billion were withdrawn from
US money funds, causing the Federal Reserve to announce that it would guarantee these funds
up to a point. The money market had been a key source of credit for banks (CDs) and
nonfinancial firms (commercial paper). The TED spread, a measure of the risk of interbank
lending, quadrupled shortly after the Lehman failure. This credit freeze brought the global
financial system to the brink of collapse.
In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed
Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout of
the banking system. Bernanke reportedly told them: "If we don't do this, we may not have an
economy on Monday." The Emergency Economic Stabilization Act, also called the Troubled
Asset Relief Program (TARP), was signed into law on October 3, 2008.
In a nine-day period from Oct. 1-9, the S&P 500 fell a staggering 251 points, losing 21.6% of its
value. The week of Oct. 6-10 saw the largest percentage drop in the history of the Dow Jones
Industrial Average - even worse than any single week in the Great Depression.
The response of the US Federal Reserve, the European Central Bank, and other central banks
was dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of
government debt and troubled private assets from banks. This was the largest liquidity injection
into the credit market, and the largest monetary policy action, in world history. The governments
of European nations and the US also raised the capital of their national banking systems by $1.5
trillion, by purchasing newly issued preferred stock in their major banks. On Dec. 16, 2008, the
Federal Reserve cut the Federal funds rate to 0-0.25%, where it has remained since then; this
period of zero interest-rate policy is unprecedented in U.S. history.
http://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Money_fundhttp://en.wikipedia.org/wiki/Certificate_of_deposithttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/TED_spreadhttp://en.wikipedia.org/wiki/Henry_Paulsonhttp://en.wikipedia.org/wiki/Ben_Bernankehttp://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Acthttp://en.wikipedia.org/wiki/Troubled_Asset_Relief_Programhttp://en.wikipedia.org/wiki/Troubled_Asset_Relief_Programhttp://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/European_Central_Bankhttp://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/wiki/Federal_funds_ratehttp://en.wikipedia.org/wiki/Zero_interest-rate_policy
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1.2 MOTIVATION FOR THE STUDY
The Global Financial Crisis of 2008 was a turning point in the economic history of the world; the
meltdown cost tens of millions of people their savings, their jobs, and their homes.
Economists generally watch the activities of the different aspects of the financial sector of the
country to facilitate smooth functioning of the country. But, when they fail to predict the
forthcoming crisis, the entire economy is affected.
In this case, the crisis had its repercussions on the entire world mainly because of
interdependencies of the globalized world. The worst impacts were seen on the European
economy; in fact the meltdown paved the way for the beginning of the Euro crisis. The crisis had
also affected the macroeconomic policies of most of the third world countries including India
and China.
Therefore, some of the fundamental motives behind the study conducted are as follows:
To establish a reasonable understanding of the reasons due to which the meltdown in the
Wall Street began.
To ascertain how the crisis actually affected the entire US economy despite it being one
of the strongest and the most powerful economy in this era.
To obtain general awareness on how big corporates and banks were rescued from
bankruptcy to save the economy from further destruction.
To know about the precautionary measures being taken by the U.S Government to
prevent occurring of any such crisis in future.
To find out the impact of the Global Financial Crisis on Indian economy and other
developing nations.
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CHAPTER 2: REVIEW OF LITERATURE
2.1 CAUSES OF THE CRISIS
The crisis can be attributed to a number of factors pervasive in both housing and credit markets,
factors which emerged over a number of years. Causes proposed include the inability of
homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages
resetting, borrowers overextending, predatory lending, and speculation), overbuilding during the
boom period, risky mortgage products, increased power of mortgage originators, high personal
and corporate debt levels, financial products that distributed and perhaps concealed the risk of
mortgage default, bad monetary and housing policies, international trade imbalances, and
inappropriate government regulation. Excessive consumer housing debt was in turn caused by
the security, credit, and collateralized de+bt obligation sub-sectors of the finance industry, which
were offering irrationally low interest rates and irrationally high levels of approval to subprime
mortgage consumers because they were calculating aggregate risk using Gaussian
copula formulas that strictly assumed the independence of individual component mortgages,
when in fact the credit-worthiness of almost every new subprime mortgage was highly correlated
with that of any other because of linkages through consumer spending levels which fell sharply
when property values began to fall during the initial wave of mortgage defaults. Debt consumers
were acting in their rational self-interest, because they were unable to audit the finance industry's
opaque faulty risk pricing methodology.
Among the important catalysts of the subprime crisis were the influx of money from the private
sector, the banks entering into the mortgage bond market, government policies aimed at
expanding homeownership, speculation by many home buyers, and the predatory lending
practices of the mortgage lenders, specifically the adjustable-rate mortgage, 228 loan, that
mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in the
financial industry, moral hazard lay at the core of many of the causes.
In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15
November 2008, leaders of the Group of 20 cited the following causes:
During a period of strong global growth, growing capital flows, and prolonged stability earlier
this decade, market participants sought higher yields without an adequate appreciation of the
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risks and failed to exercise proper due diligence. At the same time, weak underwriting standards,
unsound risk management practices, increasingly complex and opaque financial products, and
consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers,
regulators and supervisors, in some advanced countries, did not adequately appreciate and
address the risks building up in financial markets, keep pace with financial innovation, or take
into account the systemic ramifications of domestic regulatory actions.
Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the
crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the
crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and
supervision) that amplified the shocks. Examples of triggers included: losses on subprime
mortgage securities that began in 2007 and a run on the shadow banking system that began in
mid-2007, which adversely affected the functioning of money markets. Examples of
vulnerabilities in the private sector included: financial institution dependence on unstable sources
of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk
management; excessive use of leverage (borrowing to invest); and inappropriate usage of
derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector
included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority;
and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail"
institutions, monetary policy, and trade deficits.
During May 2010, Warren Buffett and Paul Volcker separately described questionable
assumptions or judgments underlying the U.S. financial and economic system that contributed to
the crisis.
These assumptions included:
1) Housing prices would not fall dramatically;
2) Free and open financial markets supported by sophisticated financial engineering would
most effectively support market efficiency and stability, directing funds to the most
profitable and productive uses;
3) Concepts embedded in mathematics and physics could be directly adapted to markets, in
the form of various financial models used to evaluate credit risk;
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4) Economic imbalances, such as large trade deficits and low savings rates indicative of
over-consumption, were sustainable; and
5) Stronger regulation of the shadow banking system and derivatives markets was not
needed.
The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It
concluded that "the crisis was avoidable and was caused by: Widespread failures in financial
regulation, including the Federal Reserves failure to stem the tide of toxic mortgages; Dramatic
breakdowns in corporate governance including too many financial firms acting recklessly and
taking on too much risk; An explosive mix of excessive borrowing and risk by households and
Wall Street that put the financial system on a collision course with crisis; Key policy makers ill
prepared for the crisis, lacking a full understanding of the financial system they oversaw; and
systemic breaches in accountability and ethics at all levels.
2.2 SHOCKS OF THE CRISIS ON INDIAN ECONOMY
Though in the beginning Indian official denied the impact of US meltdown affecting the Indian
economy but later the government had to acknowledge the fact that US financial crisis will have
some impact on the Indian economy.
2.2.1 CRASH ON STOCK MARKET
The immediate impact of the US financial crisis has been felt when Indias stock market started
falling. On July 23, 2007, the SENSEX touched a new high of 15,733 points. On July 27, 2007
the SENSEX witnessed a huge correction because of selling by Foreign Institutional Investors
and global cues to come back to 15,160 points by noon. Following global cues and heavy selling
in the international markets, the BSE SENSEX fell by 61512 points in a single day on August 1,
2007.
http://en.wikipedia.org/wiki/Shadow_banking_systemhttp://en.wikipedia.org/wiki/Financial_Crisis_Inquiry_Commission
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2.2.2 IMPACT ON INDIAN/FOREIGN EXCHANGE RATES
Over the last decade it has been fashionable to invest increasing quantities of money in these
economies. Financial flows have also been instrumental in accelerating the growth of local
domestic credit. Money flows are now in the process of reverting back to base and the chart
below of the Indian rupee is a good example in which this effect on a currency can be observed.
Between 2002 and 2008 the rupee rose against the dollar (i.e. fewer to the dollar) reflecting
inward investment, and after the Lehman Crisis it started to fall as the money-tide reversed.
Since then the rupee has lost almost 40% of its value. It is also clear from this chart that the
primary trend for the rupee has been firmly down for some time.
The trade deficit is reaching at alarming proportions. Because of workers remittances, NRI
deposits, FII investment and so on, the current deficit is at around $10 billion. But if the
remittances dry up and FII takes flight, then we may head for another 1991 crisis like situation, if
our foreign exchange reserves depletes and trade deficit keeps increasing at the present rate.
Further, the foreign exchange reserves of the country has depleted by around $57 billion to $253
billion for the week ended October 31, 2008.
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2.2.3 IMPACT ON INDIAS EXPORTS
With the US and several European countries slipping under the full blown recession, Indian
exports have run into difficult times, since October. Manufacturing sectors like leather, textile,
gems and jewelry have been hit hard because of the slump in the demand in the US and Europe.
Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07
was directed toward USA. Indian exports fell by 9.9 per cent in November 200814, when the
impact of declining consumer demand in the US and other major global market, with negative
growth for the second month, running and widening monthly trade deficit over $10 billion.
2.2.4 IMPACT ON INDIAS JEWELLERY, TOURISM
Again reduction in demand in the OECD countries affected the Indian gems and jewellery
industry, handloom and tourism sectors. Around 50,000 artisans employed in jewellery industry
have lost their jobs as a result of the global economic meltdown. Further, the crisis had affected
the Rs. 3000 crores handloom industry and volume of handloom exports dropped by 4.6 per cent
in 2007-08, creating widespread unemployment in this sector. Exchange rate depreciation with
the outflow of FIIs, Indias rupee depreciated approximately by 20% against US dollar and stood
at Rs. 49 per dollar at some point16, creating panic among the importers. The overall Indian IT-
BPO revenue aggregate is expected to grow by over 33 per cent and reach $64 billion by the end
of current fiscal year (FY200). Over the same period, direct employment to reach nearly 2
million, an increase of about 375000 professionals over the previous year. IT sectors derives
about 75 per cent of their revenues from US and IT-ITES (Information Technology Enabled
Services) contributes about 5.5 per cent towards Indias total export17. So the meltdown in the
US will definitely impact IT sector. Further, if Fortune 500 hundred companies slash their IT
budgets, Indian firms could adversely be affected.
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2.3 GLOBALIZED WORLD
India has been hit by the global meltdown; it is clearly due to Indias rapid and growing
integration into the global economy. The strategy to counter these effects of the global crisis on
the Indian economy and prevent the latter from any further collapse would require an effective
departure from the dominant economic philosophy of the neo-liberalism. The first such departure
should be a return to Food first doctrine, not only to ensure food security of the large population
but also due to the fact the food production will be more profitable given the current signs of a
shrinking market for export oriented commercial crops. The other important initiatives that needs
to be adopted is the building of institution based on the principle of cooperation that will provide
an alternative frame work of livelihood generation in the rural economy as opposed to the
dominant logic of markets under capitalism. Institutions like cooperative markets and credit
cooperative can go a long way in addressing the lack of economically viable producer prices
primary sector.
Such an alternative policy to tackle the consequences of the financial crisis will require effective
Keynesian policies in the form of increased public expenditure at the rural and urban
infrastructure. To sum up we can say that the global financial recession which started off as a a
sub-prime crisis of USA has brought all nations including India into its fold. The GDP growth
rate which was around none percent over the last four year has slowed since the last quarter of
2008 owing to deceleration in employment export, import tax GDP ratio reduction in capital
inflows and significant outflows due to economic slowdown. The demand for bank credit is also
slackening despite comfortable liquidity in the system. Once calm and confidence are restore in
the global markets, economic activity in India will recover sharply. Yet there will be a period of
painful adjustment which is inevitable.
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2.3.1 STABILITY OF THE INDIAN ECONOMY
Thus the global financial crisis made a hit in the Indian economy. After severe uncertainties in
various sectors such as IT industry in India, Financial market in India, Non availability of global
funds and impact in the export business have given broader outlook to the impact of the global
financial crisis, starting from US and how it had en route to India. All the fields were discussed
with several insights on how the various industries have been affected by this economic
downturn, some had opportunities to grow and some were flattened, since the Indian economy is
one of the emerging economies in the world, which recorded to be the least affected by this
economic crunch. Even government faced a wide range a problems during this credit crunch. The
Indian Government and The Reserve Bank of India, worked collaboratively with consultation
and coordination, after initiating and implementing various processes, rules and acts, kept this
huge economic problem under control. Thus the global economic crisis is inevitable till the
economy of the developed, developing countries become stable and self-sustainable. The effects
of the economic downturn are a test to check the financial stabilities in market and regulations
across the global economy.
After watching so many positive points We Indians can ourselves that we are quite in a safer
place in comparison to many countries economy. To conclude lets hope for a stronger India by
rectifying all its economic weaknesses after this so called financial crunch. Hence, the growth of
the public sector and the narrow reliance on financial services for growth needs to change, with
manufacturing and exporters having particular attention paid to them. After watching so many
positive points We Indians can ourselves that we are quite in a safer place in comparison to many
developed countries economy.
To conclude, we are tempted to use a popular aphorism; the Chinese character for Crisis
represents two symbols Danger and Opportunity. The choice is ours.
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2.3.2 CAPITAL INFLOWS
The surge in capital flows to developing countries in recent years is supply-driven and not
warranted by the financing needs in these countries. This supply-side driven surge of capital has
three kinds of effects:
(i) it results in a situation where financial decisions in these countries are increasingly made by
international firms seeking environments and pursuing strategies similar to that in their countries
of origin, necessitating fundamental changes in financial policies and regulatory structures;
(ii) it increases financial vulnerability in these countries resulting in periodic crisis that can have
damaging effects on the real economy; and
(iii) it leads to macroeconomic adjustments that reduce the fiscal and monetary autonomy of the
governments and the central banks in these countries, with potentially adverse consequences for
economic growth. If developing countries want to avoid such outcomes in the current
environment, the only option they have is that of adopting domestic policies that restrict the
volume and the nature of capital inflows into their economies.
2.3.3 MACROECONOMIC PERSPECTIVES
The present crisis situation is often compared to the Great Depression of the late 1920s and the
early 1930s. True, there are some similarities. However, there are also some basic differences.
The crisis has affected everyone at this time of globalization. Regardless of their political or
economic system, all nations have found themselves in the same boat. Thus, first time world is
facing truly global economic crisis. Around the world stock markets have fallen, large financial
institutions have collapsed or been bought out, and governments in even the wealthiest nations
have had to come up with rescue packages to bail out their financial systems. The cause of the
problem was located in the fundamental defect of the free market system regarding its capacity
to distinguish between enterprise and speculation and hence, in its tendency to become
dominated by speculators, interested not in the long-term yield assets but only in the short-term
appreciation in asset values. Weak and instable financial systems in some countries increased the
intensity of crisis. India which was insulted from the first round of the crisis partly owing to
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sound macroeconomic management policies became vulnerable to the second round effects of
global crisis. The immediate effects were plummeting stock prices, loss of forex reserves,
deprecation of Indian rupee, outflow of foreign capital and a sharp tightening of domestic
liquidity. Later effects emerged from a slowdown in domestic demand and exports. However,
Indias banking system has been considerably less affected by the crisis than banking system in
US and Europe32. The single most important concern that Indian government needed to be
addressed in the crisis situation was the liquidity issue. The RBI had in its arsenal a variety
instruments to manage liquidity, viz., CRR, SLR, OMO, LAF, Refinance and MSS. Through the
judicious combination of all these instruments, the RBI was able to ensure more than adequate
liquidity in the system. At the same time it was also ensured that the growth in primary liquidity
was not excessive. The pressure on financial market has been eased, although there is some
evidence of an increase in the non-performing loans. However, the financial system has been
more risk averse. The decline in global fuel prices and other commodity prices has helped the
balance of payments and lowered the inflation level. This has created the space for monetary
easing as well as providing better scope for fiscal stimulus. The monetary and fiscal stimulus
package is expected to contain the downward slide in demand in 2009 while providing a good
basis for recovery in 2010. However, there are many examples of policy failures (structural and
macro-management) that contributed towards the pre-crisis slowdown and magnified the
negative impact of the slowdown. For example, the reason behind the slowdown in export
growth in the pre-crisis period seems to be largely policy related. Ignoring all economic logic
and international experiences, the government went in for large-scale liberalization of FIIs. This,
apart from inflating stock market bubble, let to a significant strengthening of Indian rupee and
posed a serious hurdle to the countrys export growth.
2.3.4 INDIA STILL REGULATED
Many lessons can be learned from the recent subprime crisis. Those lessons have not been
systematically addressed, perhaps because everyone has been busy with fighting the fire. This
is not a normal crisis period, and hence, no normal post crisis recovery was expected. The
financial wizards seem to remain overly optimistic that the crisis will be followed by a normal
economic recovery so that life can get back to normalcy. The US meltdown which shook the
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world had little impact on India, because of Indias strong fundamental and less exposure of
Indian financial sector with the global financial market. Perhaps this has saved Indian economy
from being swayed over instantly. Unlike in US where capitalism rules, in India, market is
closely regulated by the SEBI, RBI and government.
2.3.4 THE HOUSING BUBBLE
The economic problems leading to the recession began with a housing price bubble in many
parts of the country and a coincident stock market bubble. These problems evolved into the
financial crisis. Following very large declines in the stock market in September and October,
2008, we fielded our first survey which we called the Financial Crisis survey because at that time
the news was dominated by the financial problems in the banking sector, the stock market bust,
and the housing market. Unemployment had been increasing but it was still at a relatively
modest 6.9%. Although we were not in the field to capture the immediate effects of the largest
part of the stock and housing declines, those prices did decline for a few more months following
our first survey, so we were able to observe at least some immediate effects. Even as prices in
the housing market stabilized and the stock market partially recovered, the unemployment rate
continued to increase, reaching 10.1% in October 2009. The financial crisis became the Great
Recession. Many people approaching retirement suffered substantial losses in their retirement
accounts: indeed in the November 2008 survey, 25% of respondents aged 50-59 reported they
had lost more than 35% of their retirement savings, and some of them locked in their losses prior
to the partial recovery in the stock market by selling out. Some persons retired unexpectedly
early because of unemployment, leading to a reduction of economic resources in retirement
which will be felt throughout their retirement years. Some younger workers who have suffered
unemployment will not reach their expected level of lifetime earnings and will have reduced
resources in retirement as well as during their working years. Spending has been approximately
constant since it reached its minimum in about November, 2009. Short-run expectations of stock
market gains and housing prices gains have recovered somewhat, yet are still rather pessimistic;
and, possibly more telling, longer-term expectations for those price increases have declined
substantially and have shown no signs of recovery. The implication is that long-run expectations
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have become pessimistic relative to short-run expectations. Expectations about unemployment
have improved somewhat from their low point in May 2009 but they remain high: they predict
that about 18% of workers will experience unemployment over a 12 month period.
2.4 UNHAPPY IN THEIR OWN WAY
Tolstoy famously begins his classic novel Anna Karenina with Every happy family is alike, but
every unhappy family is unhappy in their own way. While each financial crisis no doubt is
distinct, they also share striking similarities, in the run-up of asset prices, in debt accumulation,
in growth patterns, and in current account deficits. The majority of historical crises are preceded
by financial liberalization, as documented in Kaminsky and Reinhart (1999). While in the case of
the United States, there has been no striking de jure liberalization, there certainly has been a de
facto liberalization. New unregulated, or lightly regulated, financial entities have come to play a
much larger role in the financial system, undoubtedly enhancing stability against some kinds of
shocks, but possibly increasing vulnerabilities against others. Technological progress has plowed
ahead, shaving the cost of transacting in financial markets and broadening the menu of
instruments. Perhaps the United States will prove a different kind of happy family. Despite many
superficial similarities to a typical crisis country, it may yet suffer a growth lapse comparable
only to the mildest cases. Perhaps this time will be different as so many argue. Nevertheless, the
quantitative and qualitative parallels in run-ups to earlier postwar industrialized-country financial
crises are worthy of note. Of course, inflation is lower and better anchored today worldwide, and
this may prove an important mitigating factor. The United States does not suffer the handicap of
a fixed exchange rate system. On the other hand, the apparent decline in U.S. productivity
growth and in housing prices does not provide a particularly favorable backdrop for withstanding
a credit contraction. Another parallel deserves mention. During the 1970s, the U.S. banking
system stood as an intermediary between oil-exporter surpluses and emerging market borrowers
in Latin America and elsewhere.
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2.4.1 INDIAS GDP
The short-run outlook for the Indian economy is unclear. Real GDP growth has shown strong
signs of slipping. Even the most dynamic service sector has been facing a slowdown. Exports
and industrial growth are down as is credit off take.
The stimulus packages announced by the government and the Reserve bank of India have had
their desired effect. For example, the Indian auto industry, which was heading towards a decline
recorded positive growth of 0.71 per cent in total vehicle sales in fiscal 200809. In terms of
components of the auto industry domestic passenger car sales rose by 1.31 per cent to 1, 219,473
up from 1,203, 733 units in the previous year, similarly sales of two wheelers recorded positive
growth. There is widespread optimism that the services and manufacturing sector will also record
reasonable growth. The sharp fall in the rate of inflation has provided room for more aggressive
interest rate cuts by the Reserve Bank of India. Indias banking system remains robust, although
the burden of servicing the larger debt because of the stimulus packages will not be insignificant.
Furthermore, although equity markets have registered steep declines the wealth impact on
domestic residents is limited since a large number of Indians do not participate in equity markets.
Assuming that the global economy starts picking up in 200910, which it shows some signs of
doing, and provided developed countries do not resort to widespread protectionism, the Indian
economy should be in a good position to register a strong comeback. Given that the stimulus
packages have already imposed a significant fiscal burden, the new central government would
need to eschew undue populism, failing which high fiscal deficits could again restrict Indias
growth between potential as was the case in the mid to late 1990s. However, the chances of this
happening are lower now. The Indian economy has certainly grown in terms of sophistication
and depth since the 1990s. On balance, there is reason to be guardedly optimistic about the
Indian economy in the short run.
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2.4.2 AFTERMATHS OF THE CRISIS
The likelihood of an economic slowdown in the world economy will mean a slowdown in
economic performance in most developing countries during 2009. The epicenter of the financial
crisis is in the US and EU, and this is also where the most substantial economic slowdown will
be experienced. Although developing countries will be affected in the form of lower growth,
higher unemployment and poverty, and changes in inequality, it has been argued in this paper
that there are many and various channels for the impact to affect countries differently, depending
on the extent to which they are vulnerable to particular channels. Smaller, highly indebted
countries significantly dependent on the US economy will be most severely affected. However,
many developing countries, from many in Africa to the large emerging markets of Brazil, China
and India, will continue to grow at relatively strong rates, cushioning the impact for others. The
financial crisis has occurred at a time when many developing economies have been enjoying
years of good growth, and this together with improved macroeconomic management (many
countries have learned important lessons during the previous financial crises) have resulted in
more robust economies in the developing world (there are, of course, exceptions). So this
analysis suggests a more optimistic prognosis of the current situation. It is unlikely to turn out to
be a crisis of the same magnitude as the great depression. Indeed, the US and EU countries have
introduced and will continue introduce appropriate countercyclical policies that will in all
likelihood reverse further declines in stock and housing prices, and that will boost investment
and growth. In line with this more optimistic prognosis, it may be possible for many individual
developing countries to manage the impact of the crisis through appropriate policy responses.
Just as fundamental as the need for appropriate short-term crisis management is the need for
developing countries to further their financial development. Despite progress over the past
decade, much remains to be done. This crisis has shown how important credit and risk-
management institutions are to economic growth, and it has shown how important appropriate
institutions (including appropriate regulation) are for the correct functioning of the financial
sector. It has also shown how important the international financial architecture, including
international cooperation, is for mitigating financial crisis.
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CHAPTER 3: CONCLUSION
The study concludes that the financial crisis can be to an important extent attributed to failures
and weaknesses in corporate governance arrangements. When they were put to a test, corporate
governance routines did not serve their purpose to safeguard against excessive risk taking in a
number of financial services companies. A number of weaknesses have been apparent. The risk
management systems have failed in many cases due to corporate governance procedures rather
than the inadequacy of computer models alone. In other cases, boards had approved strategy but
then did not establish suitable metrics to monitor its implementation. Company disclosures about
foreseeable risk factors and about the systems in place for monitoring and managing risk have
also left a lot to be desired even though this is a key element of the Principles.
Accounting standards and regulatory requirements have also proved insufficient in some areas
leading the relevant standard setters to undertake a review. Last but not least, remuneration
systems have in a number of cases not been closely related to the strategy and risk appetite of the
company and its longer term interests.
The US meltdown which shook the world had little impact on India, because of Indias strong
fundamental and less exposure of Indian financial sector with the global financial market.
Perhaps this had saved the Indian economy from being swayed over instantly. Unlike in US
where capitalism dominates the market, in India, market is closely regulated by the SEBI, RBI
and government.
Top executives in the Wall Street walked away with their personal fortunes intact. The
executives had hand-picked their boards of directors, which handed out billions in bonuses after
the government bailout. The major banks grew in power and doubled anti-reform efforts.
Academic economists had for decades advocated for deregulation and helped shape U.S. policy.
They still opposed reform after the 2008 crisis. Many of these economists had conflicts of
interest, collecting sums as consultants to companies and other groups involved in the financial
crisis.
http://en.wikipedia.org/wiki/Board_of_directors
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BIBLIOGRAPHY
C. Thanga Lakshmi & Dr. Isacc Bala Singh (2013): Financial Crisis and its Impact on Selected
IT Industries in India Indian Journal of Applied Research, Vol3(12).
Carmen M. Reinhart Kenneth S. Rogoff (2008): Is the 2007 U.S. sub-prime financial crisis so
different? An International Historical Comparison National Bureau of Economic Research.
C.P. Chandrasekhar (2008): Global Liquidity and Financial Flows to Developing Countries:
New trends in emerging markets and their implications
Dr. Sumanjeet Singh (2010): Global Financial Crisis and Indian Economy: Impact Assessment,
Policy Responses and Recovery Global Journal of International Business Research, Vol3(3).
Dr. Kaushal Bhatt (2012): Impact of US Subprime Crisis on Indian Economy Indian Journal
of Applied Research, Vol2(1).
Michael D. Hurd & Susann Rohwedder (2010): Effects of The Financial Crisis and Great
Recession on American Households National Bureau of Economic Research.
Pallav Das(2012): Global Recession Impact of Global Meltdown on the Indian Economy
National Monthly Refereed Journal of Research In Commerce & Management, Vol2(3).
Raghbendra Jha (2009):The Global Financial Crisis and Short-run Prospects for India
Australia South Asia Research Centre.
Naud, Wim (2009):The financial crisis of 2008 and the developing countries World Institute
for Development Economics.
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