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The financial crisis, which started in mid-2007 with soaring insolvencies and the devaluation of real estate and assets related to high-risk (subprime) mortgages in the United States, reached systemic proportions following the bankruptcy of many banking and non-banking institutions. Investors distrust in financial systems became widespread, leading to panic-driven movements in stock exchanges and in derivative and credit markets worldwide. Given the magnitude of the losses and of the public resources raised in order to re-establish trust, weaknesses in the deregulated and liberalized financial system and in the model of credit generation and distribution involving a large number of institutions and markets the so-called global shadow banking system have become evident (Farhi and Cintra, 2008).

The crisis spread to developing countries, many of which were forced to provide rescue package to bolster their respective financial systems and/or to implement expansionary monetary policy. Further aggravating the scenario of uncertainty, commodity prices collapsed during the second half of 2008 due to the financial turmoil and to a sharp deterioration of global economic prospects, reinforcing pressures for currency depreciation in these countries.


Therefore the current crisis has shown that the adoption of prudent macroeconomic policies and the accumulation of foreign currency reserves by emerging-market economies have been insufficient to immunize them against the systemic risks inherent in financial globalization. Yet so far, proposals for improving regulatory mechanisms have focused on the configuration of financial systems in developed countries without taking into account the hierarchical and asymmetrical nature of the present international financial and monetary architecture and its implications for the emerging-market economies.

It is organized as follows the regulatory system in developed countries. The second section analyses the impacts of the crisis on the emerging-market economies. It argues that proposals for reform have so far ignored these implications, which are specific to and associated with these countries subordinate position in the international monetary and financial system. Finally the third section offers concluding remarks and argues that emerging-market economies should review their strategies implemented after the financial crises of the 1990s (which have proved insufficient to protect them from the intrinsic volatility of international capital flows) and adopt instruments of capital flow management.

The word 'Recession' denotes a temporary period of economic decline during which trade and Individual activities are reduced. Till date, the world has witnessed a number of economic recessions that brought the trade market to a standstill and left the economists and analysts with valuable lessons to be learnt for future. Globalization and liberalization have contributed a lot in making the entire world a close knit economic unit. In an interconnected global economy recession and economic turbulence in one part of the world has the potential to disrupt the

economies of other countries in a major way. The economic slowdown in US economy in 2008 caused by the burst of housing bubble engulfed the entire world in its grip. This research paper aims to give a detailed account of US Recession-2008 and its impact on Indian Economy. The financial crisis has not only affected United States of America, but also European Union, U.K and Asia. The Indian Economy too has felt the impact of the crisis to some extent. Though it is difficult to quantify the impact of the crisis on India, it is felt that certain sectors of the economy would be affected by the spillover effects of the financial crisis.

The current global financial crisis is rooted in the subprime crisis which surfaced over a year ago in the United States of America. During the boom years, mortgage brokers attracted by the big commissions, encouraged buyers with poor credit to accept housing mortgages with little or no down payment and without credit checks. A combination of low interest rates and large inflow of foreign funds during the booming years helped the banks to create easy credit conditions for many years. Banks lent money on the assumption that housing prices would continue to rise. Also the real estate bubble encouraged the demand for houses as financial assets. Banks and financial institutions later repackaged these debts with other high-risk debts and sold them to world- wide investors creating financial instruments called CDOs or Collateralized Debt Obligations (Sadhu2008). In this way risk was passed on multifold through derivatives trade.



Recession can be defined as a period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

An economy which grows over a period of time tends to slow down as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stock values will fall and thus stock markets fall on negative sentiment.



The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative. Economists at the International Monetary Fund (IMF) state that a global recession would take a slowdown in global growth to three percent or less. By this measure, four periods since 1985 qualify: 1990-1993, 1998, 2001-2002 and 2008-2009.

The Indian economy exhibited significant resilience in 2008-09 in the face of an intense global financial crisis and the subsequent severe global recession. In a globalised world, however, the natural process of transmission of contagion operating through the trade, capital flows and confidence channels affected the domestic economic and financial conditions. Real GDP growth, which had averaged at 8.8 per cent during 2003-08, decelerated to 6.7 per cent in 2008-09.


The financial crisis of 2008present is a crisis triggered by an insolvent United States banking system. It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It contributed to the failure of key businesses, declines in consumer Wealth


estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to real estate pricing to plummet thereafter, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and early 2009. Economies worldwide slowed during this period as credit tightened and international trade declined.


1.3 Impact of the current financial crisis on developing countries

The current financial crisis affects developing countries in two possible ways. First, there could be financial contagion and spillovers for stock markets in emerging markets. The Russian stock market had to stop trading twice; the India stock market dropped by 8% in one day at the same time as stock markets in the USA and Brazil plunged. Stock markets across the world developed and developing have all dropped substantially since May 2008. We have seen share prices tumble between 12 and 19% in the USA, UK and Japan in just one week, while the MSCI emerging market index fell 23%. This includes stock markets in Brazil, South Africa, India and China. We need to better understand the nature of the financial linkages, how they occur (as they do appear to occur) and whether anything can be done to minimise contagion. Second, the economic downturn in developed countries may also have significant impact on developing countries. The channels of impact on developing countries include: Trade and trade prices. Growth in China and India has increased imports and pushed up the demand for copper, oil and other natural resources, which has led to greater exports and higher prices, including from African countries. Eventually, growth in China and India is likely to slow down, which will have knock on effects on other poorer countries.

Remittances. Remittances to developing countries will decline. There will be fewer economic migrants coming to developed countries when they are in a recession, so fewer remittances and also probably lower volumes of remittances per migrant.

Foreign direct investment (FDI) and equity investment. These will come under pressure. While 2007 was a record year for FDI to developing countries, equity finance is under pressure and corporate and project finance is already weakening. The proposed Xstrata takeover of a South African mining conglomerate was put on hold as the financing was harder due to the credit crunch. There are several other examples e.g. in India.

Commercial lending. Banks under pressure in developed countries may not be able to lend as much as they have done in the past. Investors are, increasingly, factoring in the risk of some emerging market countries defaulting on their debt, following the financial collapse of Iceland. This would limit investment in such countries as Argentina, Iceland, Pakistan and Ukraine.

Aid. Aid budgets are under pressure because of debt problems and weak fiscal positions, e.g. in the UK and other European countries and in the USA. While the promises of increased aid at the Gleneagles summit in 2005 were already off track just three years later, aid budgets are now likely to be under increased pressure.

Other official flows. Capital adequacy ratios of development finance institutions will be under pressure. However these have been relatively high recently, so there is scope for taking on more risks.


Equity Price in US Dollar - Period to Period Percentage Change Country China India Indonesia Korea Malaysia Pakistan Philippines Taiwan Thailand Turkey 2003-07 502 349 30 136 67 28 25 55 78 332 2007-08 -51.9 -65.1 -57.6 -55.9 -43.4 -75.7 -53.8 -48.7 -50.3 -63.4

It has been observed from the above data that all the Asian countries have lost more than 50 percent in their equity prices during the crisis. The loss of financial wealth is enormous, and the consequences for the economies of the world, had been unfortunately commensurate. The increased foreign presence associated with the surge in non-resident capital inflows and domestic liquidity expansion played a major role in generating stock, property and investment bubbles and currency appreciations in several Asian DEEs. Stock market bubbles were most marked in China, India, Turkey and Korea where equity prices in dollars terms rose between 135 and 500 percent during 2003-07. These bubbles came to an end with spillovers from the global crisis. Capital inflows to emerging markets, including bank-related flows, initially kept up, but after the collapse of Lehman Brothers and the deepening of the credit crunch, there was a sharp decline starting in September 2008. Redemption by highly-leveraged hedge funds in


the US and the UK which had been very active in Asian equity markets in earlier years was a main driver of withdrawal of non-resident investment. In a way emerging economies in Asia and elsewhere were providing liquidity to portfolio managers and institutional investors in mature markets in order to cover their mounting losses and margin calls and to reduce debt.

FINANCIAL LIBERALISATION IN DEVELOPING COUNTRIES Developing countries are no strangers to financial crises, which have marked the history of some regions such as Latin America for more than a century (Eichengreen 1991) but became particularly prevalent since the early 1980s. The proclivity to crisis and to financial boom-bust cycles was especially evident in more financially open and deregulated developing economies. It is now well known that financial liberalization has resulted in an increase in financial fragility in developing countries, making them prone to periodic financial and currency crises, not just 3 internal banking and related crises, and currency crises stemming from more open capital accounts. Greater freedom to invest, including in sensitive sectors such as real estate and stock markets, ability to increase exposure to particular sectors and individual clients and increased regulatory forbearance all lead to increased instances of financial failure. In addition, the emergence of universal banks or financial supermarkets increases the degree of entanglement of different agents within the financial system and increases the domino effects of individual financial failures. Indeed, the major financial crises of the recent past in the developing world the 1982 Latin American debt crisis, the 1994 Mexican crisis, the Southeast Asian financial crisis of 1997-98, the 2001 Argentine crisis - can be described as endogenous market failures

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resulting from under-regulated and excessively liquid financial markets (Palma 1998). In addition, open capital accounts generate tendencies whereby capital movements occur because of unpredictable changes in investor confidence (Ghosh and Chandrasekhar 2008). This affects both inflows and outflows in ways that the governments concerned cannot control. One very common conclusion that has been constantly repeated since the start of the Asian crisis in mid 1997 is the importance of sound macroeconomic policies, once financial flows have been liberalised. It has been suggested that many emerging markets have faced problems because they allowed their current account deficits to become too large, reflecting too great an excess of private domestic investment over private savings. This belated realization is a change from the earlier obsession with government fiscal deficits as the only macroeconomic imbalance worth caring about, but it still misses the basic point. With unregulated capital flows, it is not possible for a country to control the amount of capital inflow or outflow, and both movements can create consequences which are undesirable. If, for example, a country is suddenly chosen as a preferred site for foreign portfolio investment, it can lead to huge inflows which in turn cause the currency to appreciate, thus encouraging investment in non-tradeables rather than tradeables, and altering domestic relative prices and therefore incentives. Simultaneously, unless the inflows of capital are simply (and wastefully) stored up in the form of accumulated foreign exchange reserves, they must necessarily be associated with current account deficits. Thus, it was no accident that all the emerging market economies that received substantial financial capital inflows also experienced property and real estate booms, as well as stock market booms around the same time, even while the real economy may have been

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stagnating or even declining. These booms, in turn, generated the incomes to keep domestic demand and growth in certain sectors growing at relatively high rates. This soon resulted in signs of macroeconomic imbalance, not in the form of rising fiscal deficits of the government, but a current account deficit reflecting the consequences of debt-financed private profligacy. Large current deficits are therefore necessary by-products of the surge in capital inflow, and that is the basic macroeconomic problem. This means that any country which does not exercise some sort of control or moderation over private capital inflows can be subject to very similar pressures. These then create the conditions for their own eventual reversal, when the current account deficits are suddenly perceived to be too large or unsustainable. What all this means is that once there are completely free capital flows and completely open access to external borrowing by private domestic agents, there can be no prudent macroeconomic policy; the overall domestic balances or imbalances will change according to the behaviour of capital flows, which will themselves respond to the economic dynamics that they have set into motion. This knowledge is at least partly responsible for the paradoxical tendency of developing countries across the globe to hold excess reserves, even when they reflect capital inflow, rather than use such resources to increase domestic absorption. This strategy of increasing reserves not only builds a cushion against capital flight in the event of a change in investor confidence, but also prevents the currency from appreciating. But it creates the bizarre global result of financial 4 liberalization , that poor countries end up financing the expansion and consumption of the richest economies, especially the US, rather than investing in their own development. That is why the current liberalized system did not provide for a net transfer of resources to

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the developing world. In the past six years, there has been a net flow of financial resources from every developing region to the North, primarily the US, even as global income disparities have increased. In addition to creating the conditions for greater internal and external fragility, financial liberalization has generated a bias towards deflationary macroeconomic policies in developing countries. To begin with, the need to attract internationally mobile capital means that there are limits to the possibilities of enhancing taxation, especially on capital. Typically, prior or simultaneous trade liberalization already reduces indirect tax revenues, and so tax-GDP ratios deteriorate further. This then imposes limits on government spending, since finance capital is generally opposed to large fiscal deficits and fear of capital flight will restrict governments from running deficits in such a context. This not only affects the possibilities for countercyclical macroeconomic stances of the state but also reduces the developmental or growth-oriented government. Activities of the such a tendency is exacerbated by the fact that financial deregulation can lead to the dismantling of the financial structures that are crucial for growth and development (Chandrasekhar 2008a). While the relationship between financial structure, financial growth and overall economic development is complex, the basic issue of financing for development is really a question of mobilizing or creating real resources. In the old development literature, finance in the sense of money or financial assets came in only when looking at the ability of the state to tax away a part of the surplus to finance its development expenditures, and the obstacles to deficit-financed spending, given the possible inflationary consequences if real constraints to growth were not overcome. By and large, the financial sector was seen as adjusting to the requirements of the real sector. But this need not happen when

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the financial sector is unregulated or covered by a minimum of regulation, since market signals then determine the allocation of investible resources and therefore the demand for and the allocation of savings intermediated by financial enterprises. This aggravates the inherent tendency in markets to direct credit to non-priority and import-intensive but more profitable sectors, to concentrate investible funds in the hands of a few large players and to direct savings to already well-developed centers of economic activity. The socially necessary role of financial intermediation therefore becomes muted. This certainly affects employment-intensive sectors such as agriculture and small-scale enterprises, where the transaction costs of lending tend to be high, risks are many and collateral not easy to ensure. The agrarian crisis in most parts of the developing world is at least partly, and often substantially, related to the decline in the access of peasant farmers to institutional finance, which is the direct result of financial liberalization (Patnaik 2005). Measures which have reduced directed credit towards farmers and small producers have contributed to rising costs, greater difficulty of accessing necessary working capital for cultivation and other activities, and reduced the economic viability of cultivation, thereby adding directly to rural distress. In India, for example, there is strong evidence that the deep crisis of the cultivating community, which has been associated with to a proliferation of farmers suicides and other evidence of distress such as mass migrations and even hunger deaths in different parts of rural India, has been related to the decline of institutional credit, which has forced farmers to turn to private moneylenders and involved them once more in interlinked transactions to their substantial detriment (Ramachandran and Swaminathan 2005). It also has a negative impact on any medium term strategy of ensuring growth in particular

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sectors through directed credit, which has been the basis for the industrialization process through much of the 20th century. Indeed, it is hard to think of any country that has reached 5 developed status without relying to greater or lesser extent on directed credit. For late industrializes, the necessity is even more evident, because capital requirements for entry in most areas are high; because technology for factory production has evolved in a capital-intensive direction from its primitive industrial revolution level; because of competition from established producers within and outside the country.

THE INDIAN GOVERNMENTS RESPONSE The initial responses of the government focused on the financial side of the current crisis. There were measures to infuse liquidity into a banking system that had become very constrained by reducing the Cash Reserve Ratio and the Statutory Liquidity Ratio, to reduce interest rates by bringing down repo and reverse repo rates, and to provide some relief to non-bank financial institutions, particularly insurance companies. These were confidence-building measures that became necessary not because the international contagion was spreading to the banking system but because the Indian banking system had (in a less extreme form) several of the fragilities that undermined the US banks. But these monetary all proved to be lacking and did not ease credit conditions in any meaningful way. This was of the liquidity trap characteristics of the situation: banks were unwilling to lend to any but the most credit-worthy potential borrowers, but such potential borrowers were unwilling to borrow because of the prevailing uncertainties and expectations of slowdown. Meanwhile, all other enterprises, even those who desperately required working capital just to stay afloat, found it increasingly

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difficult to access bank credit even as they faced more stringent demand conditions. Some of the measures seemed to be more designed to push up the stock market than to revive the real economy, but even this was unsuccessful because of dampened expectations of real revival. 17 In such a situation, reducing interest rates does not solve the basic problem of tightened credit provision, even though it may marginally reduce costs for those who are able to access bank credit. And the real economy cannot be revived through such measures in the absence of a strong fiscal stimulus. It is well known that there is really no alternative to the standard Keynesian device of using an expansionary fiscal stance to create more economic activity and demand, and thereby lift the economy from slump. Even so, the Government of India took an inordinately long time to announce the required fiscal stimulus, and when the much awaited fiscal package was finally announced, it turned out to be relatively small. It allowed for only up to Rs. 20,000 crore of direct additional spending through the Planning Commission in unspecified areas. This would be less than 0.5 per cent of GDP, a tiny fiscal input which is too small to be really countercyclical or even to change the expectations of private agents in any meaningful way. This direct spending was combined with a tax cut measure, on domestic duties reducing the ad valorem Cenvat rate by 4 percentage points. But the point about such economic situations is that price responses do not work, and therefore output has to be addressed directly through spending. In any case, even price changes would not necessarily follow, since tax cuts would have an impact in terms of supporting economic activity only if producers respond by cutting prices, and such price cuts generate demand responses. But neither is inevitable. For

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example, the Government of India cut the administered price of aviation fuel in October 2008, but this was not passed on to consumers by the airline companies, and even two months later only one carrier the public sector Air India promised to reduce the aviation fuel surcharge. So that particular measure simply became an additional subsidy to shore up profits of airline companies. Across the world, governments have been finding that in these times of economic uncertainty, tax cuts are much less effective in stimulating activity than direct government expenditure. Similarly, measures that try to provide additional export incentives (such as interest reductions for export credit) to exporting sectors such as textiles, garments and leather would not counteract the effect of big losses of export orders as the major markets start shrinking. What is required was a more serious and systematic attempt to allow these industries to keep producing at technologically efficient levels and shift demand to other markets. But what is even more significant is what the stimulus package announced in November 2008 left out. Not only was the overall size of the package too small to have much effect, but some of the most critical areas of spending were ignored or neglected. These areas include resource allocation to state governments, direct investment to ensure mass and middle-class housing, interventions to improve the livelihood conditions of farmers and enlargement of employment schemes to provide relief to working people as well as a macroeconomic stabilizer with positive multiplier effects. The Interim Budget of the UPA government the last chance to provide some macroeconomic stimulus to counteract the downturn, was even more disappointing. For the first four months of 2009-10, the UPA has proposed hardly any increase in expenditure, along with a recovery of revenues, such that the

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fiscal deficit is actually projected to come down to 5.5 per cent of GDP compared with the current year. What is even worse is that while the amount of revenue receipts that state governments are projected to receive is even less than was budgeted for the current year, there is hardly any proposed increase in central assistance to state plans compared to the current year. Similarly, there is no evidence of particular attention to employment-intensive sector like construction, which surely could have benefited from a large dose of public investment for affordable housing. The chance of a proper relief package for agriculturists to cope with the price shocks appears to be remote when the total expenditure for the Ministry of Agriculture is projected to be flat. Food has emerged as a critical issue, and central PDS 18 allocations to the states have been cut at a time when food prices are very high. Yet the allocation for the Department of Food and Public Distribution, which manages the food distribution and accounts for the food subsidy, has actually been reduced, falling from an estimated Rs 45,536 crore in the current year to a budgeted Rs 44,744 crore in the coming year! Despite the claim that an impetus would be provided to rural infrastructure through additional spending, the Ministry of Rural Development is actually slated to receive less money in 2009-10 than it is getting in the current year. By the middle of 2008, state governments had already started feeling the resource constraint as their tax revenues were affected by the economic downturn. Yet they are responsible for most of the public services that directly affect people, such as those relating to agriculture and rural development, health, sanitation, education and so on, but unlike the Centre, the States face a hard budget constraint. So the overall conditions of life of the citizenry are likely to be

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affected. Yet the Centre could so easily have announced some measures to provide fiscal relief to the States to help them cope with the adverse effects of the downturn. Such measures could include reducing interest rates, providing more central funds and most of all relaxing fiscal responsibility norms that are inappropriate for the current situation and which the Centre itself has already discarded. Similarly, the food crisis has been forgotten in all the excitement about the financial crisis, but food insecurity remains widespread and may even be spreading, given the significant rise in prices over the past two years. While overall inflation has been easing, food inflation in India continues despite large food grain stocks. And the real incomes of workers and cash crop cultivators have not kept pace with this. Poor or inadequate nutrition is already a big problem, which will deteriorate as the downturn worsens. A major positive role of crisis management would be played if it involved the allocation of significantly increased resources towards expanding, universalising and improving the functioning of the Public Distribution System. This would at least partly alleviate the problems of those who are already at the margin of survival, as well as those who could be tipped over into poverty by recent economic processes. Similarly, specific interventions are required to ensure the financial viability of cultivators, especially those who have been hit by falling output prices even as their own costs have kept rising. The construction industry is a major employer and it has been hard hit already by the downturn. Yet the shortage of affordable housing remains acute across our cities and towns. Part of the problem is that private developers have increasingly focused on the luxury segment of the market, without addressing this very

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obvious and basic need. It is important to expand the provision of middle class and mass housing, which is easily possible through public sector organisations, and can even be done through schemes that will be largely self-financing. While monetary policies are not sufficient to address the current economic problems in India, this does not mean that the financial sector can be neglected. In particular, what is most obvious is that financial sector liberalisation has to be reversed, given the knowledge of the huge imperfections in such markets and the ability of unregulated finance to create massive scams that also destabilise real economies. Across the world, and especially in the major industrial countries, banking and insurance institutions are being effectively nationalised yet in India there are moves towards more privatization! The UPA government in midDecember actually placed a bill in Parliament that would raise the cap on FDI in the insurance sector to 49 per cent, along with several other liberalizing moves, even though the need is so obvious to exercise strong and effective regulation on insurance companies and prevent private domestic savings from being misused and exported out of the country. Further, the rapid expansion of retail credit since the early 2000s with very large volumes of often unsecured lending in the form of housing loans, vehicle loans and credit card debt provokes concerns about domestic financial fragility, especially as the economic slowdown bites into incomes and employment.

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WHAT IS TO BE DONE? It is more than obvious that the current global crisis provides a real opportunity to initiate and develop alternative policies, both internally and domestically. A change in economic paradigm is essential; without it the international economy will continue to lurch from crisis to crisis and the developing world will not be able to advance and provide basic needs to citizens. The need for more state intervention in economies is now recognised everywhere: the concern now is to ensure that such state involvement is more democratic and more accountable to the people. Everyone now recognises the need to reform the international economic regime. But the idea should not simply be to fix a system that is obviously broken: we need to exchange it for a better model. That is because, as noted above, the current financial architecture has failed to meet two obvious requirements: of preventing instability and crises, and of transferring resources from richer to poorer economies. Not only have we experienced much greater volatility and propensity to financial meltdown across emerging markets and now even industrial countries, but even the periods of economic expansion have been based on the global poor subsidising the rich. These global failures are so immense that they constitute enough reason to abandon this system. But there are other associated failures in terms of what the regime has implied within national economies: it has encouraged pro-cyclicality; it has rendered national financial systems opaque and impossible to regulate; it has encouraged bubbles and speculative fervour rather than real productive investment for future growth; it has allowed for the proliferation of parallel transactions through tax havens and looser domestic controls; it has reduced the crucial developmental role of directed credit.

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So we clearly need a new system, even if the goals remain the same as that of the original Bretton Woods: to ensure currency stabilisation through international monetary co-operation; to encourage the expansion of international trade in a stable way; and to promote development by facilitating productive investment. To achieve this in the current context, four elements are crucial. First, the belief that self-regulation supported with external risk assessment by rating agencies is an adequate way to run a financial system has been blown sky-high. There is no alternative, therefore, to systematic state regulation of finance. Second, since private players will inevitably attempt to circumvent regulation, the core of the financial system - banking - must be protected, and this is only possible through social ownership. Therefore, some degree of the socialisation of banking (and not just socialisation of the risks inherent in finance) is also inevitable. In developing countries it is also important because it enables public control over the direction of credit, without which no country has industrialised. Third, to cope with the adverse real economy effects of the current crisis, fiscal stimulation is essential in both developed and developing countries. Enhanced public expenditure is required to prevent economic activity and employment from falling, to manage the effects of climate change and promote greener technologies (Pollin 2008), and to advance the development project in the South. Fourth, the international economic framework must support all this, which in turns means that capital flows must be controlled and regulated so that they do not destabilise any of these strategies. In India too, a major change in economic paradigm is required along these lines. But first of all, it is necessary to ensure that Indian economic policy makers remember the basic Keynesian principles that are now back in fashion everywhere else in the world, such as that direct public 20

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spending is the best countercyclical measure, especially in a situation of liquidity trap. Such public spending will be more economically effective and more welfare improving if it is directed dominantly towards employment schemes, social spending and rural and urban infrastructure for mass use. This will also enable more progress towards meeting developmental goals, but this also requires that government spending be made more democratically accountable and more directed towards altering consumption and production patterns in more sustainable directions.

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1.1 Company History & Background

Asit C. Mehta Investment Interrmediates Ltd. (ACMIIL) was established in the year 1986 with a view to offer a one stop solution to Indian entities for their needs in financial services. Over the last two decades it has achieved the distinction of being amongst the most trusted and reputed brokerage houses in India. It provides a complete bouquet of products in equity, debt, commodities, forex, depository, derivatives and allied services in India. The company is jointly promoted by noted stock market professionals, Mr. Asit C. Mehta and Mrs. Deena A. Mehta, and is a part of the Mumbai-based Nucleus Group of Companies. The other group companies are engaged in IT and IT related services such as development of databases, back-office applications for banks, corporate document management solutions and geographical information systems (GIS).

1.5 Vision, Mission & Quality:

Envisioned to be the Trusted Financial Intermediary, the group has etched out a very specific corporate purpose To reach appropriate financial products, services and solutions to every Indian entity.

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Our Services: Equity and Derivatives Trading: Equity trading is offered to retail client through different channels in the Bombay Stock Exchange (BSE) & the national stock exchange of India (NSE), of the cash and the derivatives segments. Investors are serviced through a PAN India network of over 650 associates/ locations comprising of 585 franchisee and 65 company branches. (as on July 2009)

Online Trading: Investmentz.com is our trading portal that offers online trading to retail investors in the BSE and NSE cash and derivatives segments. The investors can do their own trading through a browser-based interface as well as a streamer-based solution called live exchange. This service is also available through an Interactive Voice Response (IVR) facility for those clients who are unable to access the Internet service at any time. The company has tied up with leading nationalized, private and co-operative banks to offer share trading services to the banks' customers. A seamless gateway has been established between the banking and depository softwares of the bank.

Institutional Desk: Equity trade execution services are provided to institutional investors both domestic and FII by our institutional desk. Research and market information is provided to

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mutual funds and banks to support them in making investment decisions. These services are provided with seamless connectivity to custodians.

Portfolio Advisory Service: ACMIIL holds a portfolio management license issued by SEBI. It service is available to Resident Indian and Non-Resident India (NRI), for managing their equity & mutual fund portfolio.

Commodity trading services are provided through our associate, Asit C. Mehta Commodity Services Pvt. Ltd. The company is member of Indias premier commodity exchanges, namely, the Multi Commodity Exchange of India Ltd. (MCX), the National Commodity & Derivatives Exchange, India (NCDEX) and the East India Cotton Exchange Association (EICA). The online trading portal also provides facility to trade on NCDEX. One of the group company is a member of Dubai Gold & Commodity Exchange (DGCX).

Mutual Fund and IPO distribution service Are provided to retail investors directly and indirectly through our Branch/Business Associate network. Seminars are conducted regularly to highlight the importance of investment in mutual funds, especially through Systemic Income Plans (SIP). Advice is provided on initial public offerings and only public issues that have merit are marketed to retail investors.

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Debt Market Desk: We are members of the Wholesale Debt Market (WDM) segment of the National Stock Exchange of India (NSE). The service involves providing quotes and executing trades in government securities (G-Sec), treasury bills and other state-guaranteed bonds. We are empaneled with most nationalized, foreign, private and major cooperative banks. We are also empaneled with most primary dealers, mutual funds, insurance companies and institutions for trading in debt market instruments.

Inter-bank Forex Desk: Our associate company, Asit C Mehta Forex Pvt. Ltd., undertakes inter-bank forex order execution. Accredited by the Foreign Exchange Dealers Association of India (FEDAI), the company is empaneled with approximately 60 banks and has a reasonable presence in the market.

Depository services are provided to investors. The company is a depository participant with the Central Depository Service of India Ltd. (CDSL). We are also authorized to provide depository services for commodity trades.

Support Services: Research: Investors are provided with extensive information on markets and companies through hourly market reviews, periodic market commentary and recommendations, which enable them to make informed decisions. The company firmly believes that providing continuous and accurate decision making tools can add substantial value to its investors.

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Advisory services: Are provided as a value-added service to all retail and institutional clients. This service is delivered through the hourly, daily, weekly, fortnightly and monthly publication of fundamental and technical research. Calls are made through broadcast services on our private VSAT network, SMS and e-mail.

Accounts information Accounts information to the retail clients is provided through access on our website. This assists clients in knowing details about their trading accounts and their resultant obligations through various reports like Bill, Contract, Financial Ledger, Transaction Register, Stock Register, Portfolio Tracker, Stock holding position, etc. E-contracts are generated for investors giving trade details.

Potential Growth Areas

India is amongst the least affected countries in the 2008 global meltdown. May 2009 general election in the country provided a fairly stable government. We see great potential for the country in general and financial market in particular in the years to come. Investor participation, product innovations, volume growth is likely to be in exponential proportion. Our company is well poised to build a great institution in India to service the Indian and global investors for their financial services needs. The company has created a strong organization driven by processes to handle multifold volume growth.

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Address: Asit C Mehta Investment Interrmediates Ltd. Nucleus House, Saki Vihar Road, Andheri (E), Mumbai 400 072. India. Call: 91-22-28583333. Fax: 91-22-28577647. Email: acmill@acm.co.in SEBI Registration No: BSE CM: INB 010607233 & Derivatives: INF 010607233 NSE CM: INB 230607239 & Derivatives: INF 230607239 & WDM: INB 230607239 PMS: INP000001920 Merchant Banking: INM000010973 Depository (CM & Derivatives): IN-DP-CDSL-28-99 Management: Chief Executive Officer : Mrs. Deena Asit Mehta Whole-time Director Membership Cash Market: BSE, NSE Derivatives: BSE, NSE Debt: NSE Foreign Exchange: Accredited by FEDAI PMS under SEBI License Merchant Banking: Approved by SEBI under Category I Commodities: NCDEX MCX, DGCX, EAST INDIA COTTON
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: Mr. Kirit H Vora

Depository: CDSL

Clearing Bank: State Bank of India

1.6 Products and Services

1) Equity Initial Public Offering (IPO) 2) Equity Secondary trading (cash and derivative) 3) Equity PMS 4) Equity Online Trading 5) Equity Depository Services 6) Equity Investment Advisory (fundamental and technical) 7) Equity Mutual Fund 8) Equity - Arbitrage 9) Commodity - Derivatives 10) Debt Government Securities 11) Debt Primary Placements 12) Debt Advisory 13) Debt Mutual Funds 14) Debt Relief bonds, etc. 15) Forex Interbank broking 16) Merchant Banking Amalgamation & Mergers 17) Merchant Banking Private Equity Merchant Banking Public Offering

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1.7 COMPANY PROFILE Name: BALAJI SECURITIES & FINANCIAL SERVICES. Date of establishment: 21/06/2004. Nature of organization: partnership firm Name of partner: 1. Jay Kumar p. motwani (51%) (B.COM, MBA) 2. Rakes Kumar m. prajapati (49%) (B.COM, L.L.B) Product profile: 1. Equity Trading. 2. Derivative. 3. Mutual fund. 4. Initial public offering (IPO). 5. Commodity. 6. Portfolio Management Services.

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Firm address: 53, Govida Complex. Opp. Panchratna GIDC, Char Rasta. Vapi. (396191)

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C Co om mm mo od diitty y D e a l i n g Dealing

E Eq qu uiitty yD De ea alliin ng g

M Ma arrk ke ettiin ng g D e a l i n g Dealing

B Ba ac ck kO Offffiic ce e

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To deliver superior services to our valued clients, using appropriate technology and well motivated and committed staff.

Our vision is to be the most respected company in the financial services space

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REVIEW OF LITERATURE: Many studies has been made by the various researcher many of them delved into various aspects of Banking and the practices followed by the commercial banks to check performance of banks. These studies are given as follows:

(1)Demirgic-Kunt ,Asli, and Hary Huizinga (1998) ,

In international cross-section study of banking performance suggests that any attempt to explain cross banking NPA variation would do better to capture bank efficiency through operating profits or return to assets which are less ambiguous in terms of direction then the net interest margin.

(2)Shirai (2002),

In his studies concludes that ". Even though foreign banks and private sector banks generally perform better than public sector banks in terms of profitability, earnings efficiency and cost efficiency in the initial stage [of reforms], such differences have diminished as public sector banks have improved profitability and cost Efficiency.

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(3)B.Satish Kumar (2008),

In his article on an evaluation of the financial performance of Indian private sector banks wrote Private sector banks play an important role in development of Indian economy. After liberalization the banking industry underwent major changes. The economic reforms totally have changed the banking sector. RBI permitted new banks to be started in the private sector as per the recommendation of Narashiman committee. The Indian banking industry was dominated by public sector banks. But now the situations have changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry.

(4)Vradi, Vijay, Mauluri, Nagarjuna (2006),

In his study on Measurement of efficiency of bank in India concluded that in modern world performance of banking is more important to stable the economy .in order to see the efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity, assets, quality and financial management for all banks includes public sector, private sector banks in India for the period2000 and 1999 to 2002-2003. For measuring efficiency of banks we have adopted development envelopment analysis and found that public sectors banks are more efficient then other banks in India.

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(5) Subash C.Ray (2000),

Indias public sector banks (PSBs) are compared unfavorably with their private sector counterparts, domestic and foreign. This comparison rests, for the most part, on financial measures of performance, and such a comparison provides much of the rationale for privatization of PSBs. In this paper, we attempt a comparison between PSBs and their private sector counterparts based on measures of efficiency and productivity that use quantities of outputs and inputs. Efficiency measures a firms performance relative to a benchmark at a given point in time; productivity measures a firms performance over time. Both measures are relevant in attempting a comparison between the private and public sectors. We employ three measures: Torques total factor productivity growth, Malmquist efficiency and revenue maximization efficiency. We attempt these comparisons over the period 1992-2000, comparing PSBs with both domestic private and foreign banks. Out of a total of six comparisons we have made, there are no differences in three cases, PSBs do better in two, and foreign banks in one. To put it differently, PSBs are seen to be at a disadvantage in only one out of six comparisons. It is difficult, therefore, to sustain the proposition that efficiency and productivity have been lower in public sector banks relative to their peers in the private sector.

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(6) Galagedera, Don U A, Edirisuriya, Piyadasa (1995-2002),

In his article on Performance of Indian Commercial Banks investigates the efficiency and productivity in a sample of Indian commercial banks over the period 1995-2002. We measure efficiency using the data envelopment analysis technique and productivity change using Malmquist productivity index. The results reveal that there has been no significant growth in productivity during the sample period. When analyzed separately, the public sector banks reveal a modest growth in productivity that appears to have been brought about by technological change. The private sector banks indicate no growth. In general, smaller banks are less efficient and highly efficient banks have a high equity to assets and high return to average equity ratios.

(7) Ram Pratap Sinha (2008),

In his study abstract that after the onset of banking sector reform in India, the Reserve Bank of India initiated a system of Prompt Corrective Action with various trigger points and mandatory and discretionary responses by the supervising authority on a real time basis. The PCA framework relies on three major indicators of banking sector performance. Net Non- Performing Asset (NPA), Capital-To-RiskWeighted Assets Ratio and Return on Assets. The present paper seeks to combine the ratio approach adopted by the Reserve Bank of India with the Assurance Region based measure of technical efficiency to find out a composite Data Envelopment Analysis based efficiency indicator of 28 observed commercial banks for 2002-03 to 2004-05. The results show that the observed private sector commercial banks have

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higher mean technical efficiency score compared to those of the public sector commercial banks. Out of the 28 observed commercial banks considered for the study, six were found to be efficient. A study of the technical efficiency scores across ownership groups reveal that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts. Finally, most of the observed commercial banks exhibit decreasing returns to scale for the period under observation.

(8) Brijesh K. Saho, Anandeep Singh (2007),

This paper attempts to examine, the performance trends of the Indian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are indicative in many ways. First, the increasing average annual trends in technical efficiency for all ownership groups indicate an affirmative gesture about the effect of the reform process on the performance of the Indian banking sector. Second, the higher cost efficiency accrual of private banks over nationalized banks indicate that nationalized banks, though old, do not reflect their learning experience in their cost minimizing behavior due to X-inefficiency factors arising from government ownership. This finding also highlights the possible stronger disciplining role played by the capital market indicating a strong link between market for corporate control and efficiency of private enterprise assumed by property right hypothesis. And, finally, concerning the scale elasticity behavior, the technology and market-based results differ significantly supporting the empirical distinction between returns to scale and economies of scale, often used interchangeably in the literature.

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(9) Roma Mitra, Shankar Ravi (2008),

A stable and efficient banking sector is an essential precondition to increase the economic level of a country. This paper tries to model and evaluate the efficiency of 50 Indian banks. The Inefficiency can be analyzed and quantified for every evaluated unit. The aim of this paper is to estimate and compare efficiency of the banking sector in India. The analysis is supposed to verify or reject the hypothesis whether the banking sector fulfils its intermediation function sufficiently to compete with the global players. The results are insightful to the financial policy planner as it identifies priority areas for different banks, which can improve the performance. This paper evaluates the performance of Banking Sectors in India.

(10) Petya Koeva( July 2003) , In his study on The Performance of Indian Banks During Financial Liberalization states that new empirical evidence on the impact of financial liberalization on the performance of Indian commercial banks. The analysis focuses on examining the behavior and determinants of bank intermediation costs and profitability during the liberalization period. The empirical results suggest that ownership type has a significant effect on some performance indicators and that the observed increase in competition during financial liberalization has been associated with lower intermediation costs and profitability of the Indian banks.

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Significance of performance evaluation in an Indian Economy, for sustainable growth and development, has been recognized since long. This calls for a system that first measures and evaluates the performance, and then brings out the strengths and weaknesses of the economy for the purpose of further improvement. Efficient performance evaluation system encompasses all aspects of an economy. With the advances in computational tools, performance evaluation systems have evolved over a period of time from single-aspect systems to more comprehensive systems covering all aspects of an economy. Such an improvement was inevitable as the traditional performance measurement systems, with financial aspects in isolation were ill suited to meet demands of modern business world characterized by value creation stemming from intangible assets such a s employee know-how, strong customer relationship and cultures capable of innovation and change. It prove to be better for performance measurement, evaluation and strategic planning for future growth and development of the Indian economy in the light of changing requirements of all sector.


Performance evaluation of INDIAN economy- a study during recession period.

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Main three methods are as follow:
Exploratory Study: Exploratory studies are used when the research question is still fluid or undetermined. The goal of exploration is to develop hypotheses or questions for future research. It means in which study not define actual problem this type of study knows as exploratory study.

Descriptive Studies: The purpose of the study asks whether the research is
concerned with describing the populations characteristics or with trying to explain the relationships among variables. Descriptive studies discover the answers to the questions who, what, when, where, or how much.

Causal Studies: Causal studies are differentiated by their ability to control and manipulate variables. Causal studies may be experiments or ex post facto studies. Experiments are studies involving the manipulation of one or more variables to determine the effect on another variable. For example, direct marketers can use split tests on mailings to test which mailing resulted in the highest response rate.

My research study is EXPLORATORY design.

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3.4 Objective of the study

1. To measure the impact of global financial crisis on GDP, export growth, Industrial Production Growth, import growth. 2. To know the impact on foreign remittances, foreign exchange reserves, foreign trade in US.


It involves decision on data sources & research instrument.


Secondary data used to solve the research problem. Secondary data collected through the available websites related to banks, RBI, etc.

3.7 Scope of the study:

This study is to find volatility of growth in Indian economy. This study gives the brief information about the Indian economy.

The study was done by using secondary data and that data put in chart manually.

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Since US is one of the major super powers, a recessionmild or deeper will have eventual global Consequences? The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indices, and large reductions in the market value of equities and commodities A slowdown in the US economy was definitely a bad news for India because Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. But inspite of all this India has successfully weathered the great financial crisis of September 2008. Indian gross domestic product (GDP) has grown around 6% in every quarter of the most difficult 12 months in recent history.

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When the crisis first broke internationally, within India there was much talk of how the Indian economy is less likely to be affected and how the Indian financial sector will be relatively immune to the winds from the international financial implosion. But it is clear that important elements of the balance of payments and the domestic financial sector have been affected. There are significant implications for domestic banking, which are already reflected in the credit crunch that has dramatically affected access to credit especially for small and medium enterprises. There are effects on some important macroeconomic prices in particular the exchange rate. And there are direct and indirect effects on employment, with falling export employment generating negative multiplier effects.

Despite all this, Indian policy makers still seem to be caught in some complacent time-warp, whereby they proudly point to the GDP growth rate (now spluttering, but still high by international standards) and to the supposed resilience of the domestic financial sector. Of course, neither of these is as positive as the government would like to make out. The current slowdown in GDP is sharper than the government would like to admit, and more significantly it has been accompanied by a much steeper than expected reduction in employment, especially in export sectors. Domestic banking is still generally secure, especially because nationalised banking remains the core of the system, largely thanks to resistance from the Left parties to government attempts to privatise it. Even so, there are clear signs of fragility and inadequacy within the banking sector: the recent rapid growth of often dodgy retail credit, associated attempts to securitise such debt, the emergence of a credit crunch in the face of macroeconomic uncertainty, and the inability or
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unwillingness of the banking system to provide loans to medium and small borrowers other than in the form of personal credit.

Beyond these implications, the effects of the global crisis have directly impacted upon some important macroeconomic variables. Three such indicators stand out in terms of their quite sudden deterioration since the middle of last year: the decline in the foreign exchange reserves held by the Reserve Bank of India; the fall in the external value of the rupee, especially vis--vis the US dollar; and the decline in stock market indices.


Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

GDP (at 2004-05) 3254216 3566011 3898958 4162509 4493743 4879232

Growth in % 9.5 9.6 9.3 6.8 8 8.6

Source: Central Statistical Organization, Government of India

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Growth in %
12 10 8 6.8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Growth in % 9.5 9.6 9.3 8


Chart-1 shows that in 2006-07 the GDP growth rate was 9.6% which became 9.3% in 2007-08 and due to the impact of recent global financial crisis and global recession, the growth rate of Indian economy became declining. In 2008-09, it reduced to 6.8%. The International Monetary Fund (IMF) had also projected the growth prospects for Indian economy to 5.1 % in next year. And the RBI annual policy statement 2009 presented on July 28, 2009, projected GDP growth at 6 % for 2009-10. This declining trend has affected adversely the industrial activity, especially, in the manufacturing, infrastructure and in service sectors mainly in the construction, transport and Communication, trade, hotels etc.

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Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Index of Industrial Production (Growth) 8 11.9 8.7 3.2 10.5 N.A

Source: Central Statistical Organization, Government of India.


Index of Industrial Production (Growth)

14 12 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 3.2 8 8.7 Index of Industrial Production (Growth) 11.9 10.5

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During recession industrial growth was also faltering. Indias industrial sector has suffered from the depressed demand conditions in its export markets, as well as from suppressed domestic demand due to the slow generation of employment. As per the index of industrial production data released by CSO, the overall growth in 2008-2009 was 3.2 percent compared to a growth of 8.7 percent in 2007-08.

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Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*

Amount (IN US $ MILLION) 2339 2160 1846 562 9949 10272 9332 6707 16040 -8857

Source: Security and Exchange Board of India (SEBI)

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20000 15000 10000 5000 0 -5000 -10000 -15000 -8857 2339 2160 10272 9949 9332 6707 1846 562 Amount 16040

Foreign Institutional Investment (FIIs), which need to retrench assets in order to cover losses in their home countries and were seeking havens of safety in an uncertain environment, have become major sellers in Indian markets. As FIIs pull out their money from the stock market, the large corporate no doubt have affected, the worst affected was likely to be the exports and small and marginal enterprises that contribute significantly to employment generation. In 2007-08, net Foreign Institutional Investments (FIIs) inflows into India amounted to $16040 million. But in April-November 2008 it was negative to $8857 million.

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Table-4 Movements of BSE Sensex

Year 2008-09 2009-10 2010-11**

BSE sensex* 9708.5 17527.8 17558.7

Source: SEBI Bulletin, June 2010, Vol.8, Number-06.

Chart-4 Movements of BSE Sensex

BSE sensex*
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2008-09 2009-10 2010-11** 9708.5 BSE sensex* 17527.8 17558.7

Chart-4 Movements of BSE Sensex shows that in 2008-09 stock market was down due to recession and after recession in 2009-10 the market going up and become stable in 2010-11.

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Month Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Rupees per unit of Dollar 40.36 40.02 42.13 42.82 42.84 42.91 45.56 48.66 49 48.63


0.85 -4.2 -5.74 -5.79 -5.95 -11.42 -17.05 -17.64 -17.01

Source: Monthly Economic Report, Ministry of Finance, Government of India.

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Rupees per unit of Dollar

60 50 40 30 Rupees per unit of Dollar 20 10 0

Between April 2008 and November 2008, the RBI reference rate for the rupee fell by nearly 25 percent, rupees per unit dollar gone up from Rs.40.02 in April 2008 to Rs.49.00 in November 2008. The currency depreciation may also affect consumer prices and the higher cost of imported food hurt poor individuals and households that spend much of their income on food.

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Export (% Growth)

Import Growth)

(% Balance Trade -46075 -59321 -88535 -118401 -108622 -55987


2005-06 2006-07 2007-08 2008-09 2009-10 2010-11*

103091 (23.4) 126414 (22.6) 162904 (29.0) 185295 (13.3) 178751 (-3.5) 105064 (29.5)

149166 (33.8) 185735 (24.5) 251439 (35.5) 303696 (20.7) 288373 (-5.0) 161051 (19.0)

Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11*

Export (% Growth) 23.4 22.6 29 13.3 -3.5 29.5

Import (% Growth) 33.8 24.5 35.5 20.7 -5 19

Source: DGCI&S, Kolkata, India

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70 35.5 60 50 40 20.7 30 20 10 0 2005-06 -10 -20 2006-07 2007-08 2008-09 -3.5 2010-11* 2009-10 -5 23.4 22.6 13.3 29 29.5 Import (% Growth) Export (% Growth) 33.8 24.5 19


Indias Foreign Trade shows that in 2007-08, Indias export and import were $162904 million and $251439 million respectively and balance of payment was $ 88535 million. And in 2008-09, export and import were $185295 million and $303696 million respectively. The balance of payment was $ -118401 million. The growth rate of export and import also declined to 13.3 percent and 20.7 percent from 29.0 and 35.5 percent respectively during that period. In 2009-10 the export and import further declined very much to $178751 million and $288373 million respectively. In 2009-10 the export growth rate was -3.5 percent and import growth rate was -5.0 percent. The balance of payment was $ -109622. This shows that Indias exports are adversely affected by the slowdown in global markets.

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This is already evident in certain industries like the garments industries where there have been significant job losses with the onset of the crisis. This along with a squeeze in the high-income service sectors like financial services, hospitality and tourism etc. led to a reduction in consumption spending and overall demand with the domestic economy.

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Table-7 Impact on Output of Different Countries

SubDeveloping Years 2003-07 2007-08 2008-09 2009-10 All 7.4 6.1 2.4 6.3 CEE CIS 6 3 -3.7 2.8 7.9 5.5 -6.6 4 Asia 9.2 7.9 6.6 8.7 MENA 5.9 5.1 2.4 4.5 Saharan Africa 6.3 5.5 2.1 4.7 Western Hemisphere 4.9 4.3 -1.8 4

Source: International Monetary Fund 2010

Chart- 7 Impact on Output of Different Countries

10 8 6 4 2003-07 2 0 -2 -4 -6 -8 2007-08 2008-09 2009-10

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The simple way to measure the impact of the crisis on emerging and developing economies is to compare GDP growth over the period 2003 07 with growth in 2008, 2009 and 2010. It is found that a shortfall of 1.3 per cent in 2008, 5 per cent in 2009 and 1.1 per cent in 2010 or a cumulative loss of around 7.5 per cent by 2010.

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Table-8 Impact on Export Growth of Different Countries

SubDeveloping Years 2003-07 2007-08 All CEE CIS 10 -1.4 Asia 16.2 6.2 MENA 7 2.4 Saharan Africa 6.4 0.3 Western Hemisphere 8.3 3.1

11.5 10.6 4 7 -

2008-09 2009-10

-8.2 8.3

10.8 4.8

-9.5 7.7

-8 11

-6.4 4.2

-7 7

-8.3 8.6

Source: International Monetary Fund 2010

Chart- 8 Impact on Export Growth of Different Countries



10 2003-07 5 2007-08 2008-09 0 2009-10




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INTERPRETATION The main channel through which the crisis affected emerging and developing economies is trade. The sharp fall in demand in advanced economies led to a collapse in world trade and substantial declines in exports. All regions were badly affected. Countries in Developing Asia, Central and Eastern Europe and the Commonwealth of Independent States suffered the biggest falls in exports in 2009, both in absolute terms and relative to expectations, but even sub-Saharan Africa, which is less well integrated into the global economy, experienced a fall of 7 per cent in exports in 2009.

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Chart- 9 Foreign Exchange Reserves

Foreign Exchange Reserves


Shows how foreign exchange reserves, which had been increasingly steadily over the past few years, started declining after June 2008. It must be noted that the earlier build-up of reserves did not reflect any real macroeconomic strength, since unlike China it was not based on current account surpluses. Instead, the Indian economy experienced an inflow of hot money, especially in the form of portfolio capital of FII investment.

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Domestic macro policies combined with the need to prevent exchange rate appreciation to prevent increased domestic absorption of such resources, as a result of which these were largely added to reserves. Since they were based on hot money inflows, it was only to be expected that they would reverse with any bad news, and that is essentially what has happened over the past eight months, with the bad news coming from the US and other developed markets rather than from the Indian economy.

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Chart -10 Rupees per US $

Rupees per US $


This movement of foreign institutional investors was in turn related to the sudden collapse of the rupee, shown in Chart 10. Early in March 2009 the rupee even breached the line of Rs 51 per dollar, and currently continues to fall. There are those who argue that this depreciation is positive since it will help exports, but conditions prevailing in the world trade market, with falling export volumes and values, does not give rise to much optimism in that context.

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India currently has a current account deficit including a large trade deficit and also quite significant factor payments abroad. The falling rupee implies rising factor payments (such as debt repayment and profit repatriation) in rupee terms, which has adverse implications for many companies and for the balance of payments.

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Chart -11 Daily Movements in the Sensex

Daily Movements in the Sensex


Associated with all this is the evidence of falling business confidence expressed in the stock market indicators. The Sensex, shown in Chart 11, had reached historically high levels in the early part of 2008, capping an almost hysterical rise over the previous three years in which it more than tripled in value. But it has plummeted since then, with high volatility around an overall declining trend, such that its levels in early March were below the levels attained in December 2005.

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Chart -12 Net Foreign Investments

Net Foreign Investment

Chart 12 tracks the changes in total foreign investment, split up into direct investment and portfolio investment, over the period since April 2007. It is evident that both have shown a trend of increase followed by decline. FDI has been more stable with relatively moderate fluctuations (even though it does include some portfolio-type investments that get categorized as foreign direct investment). It peaked in February 2008 and thereafter has been coming down but is still positive.

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Portfolio investment (which includes both FII investment in the domestic share market and GDRs/ADRs) has been extremely volatile and largely negative (indicating net outflows) since the beginning of 2008, and this has dominated the overall foreign investment trend.

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Chart 13 Cumulative FII investment in equity ($ bn)

Cumulative FII investment in equity ($ bn)


As a result, as Chart 13 shows, the cumulative value of the stock of Indian equity held by FIIs fell quite sharply, by 24 per cent between May 2008 and February 2009. This is not likely to be due to any dramatically changed investor perceptions of the Indian economy, since if anything GDP growth prospects in India remain somewhat higher than in most other developed or emerging markets. Rather, it is because portfolio investors have been repatriating capital back to the US and other Northern markets.

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This reflects not so much a flight to safety (for clearly US securities are not that safe anymore either) as the need to cover losses that have been incurred in sub-prime mortgages and other asset markets in the North, and to ensure liquidity for transactions as the credit crunch began to bite.

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Chart 14 FIIs and the stock market

FIIs and the stock market


Whatever the causes, the impact on the domestic stock market has been sharp and direct. Since the Indian stock market is still relatively shallow, and FII activities play a disproportionately strong role in determing the movement of the indices, it is not surprising that this outward flow has been associated with the overall decline in stock market valuations.

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As Chart 14 shows, the Sensex has moved generally in the same direction as net FII inflows. In fact movements in the latter have been much sharper and more volatile, suggesting that domestic investors have played a more stabilizing role over this period. Overall foreign investment flows (including not just FII but direct investment) have also, predictably, played a role in determining the level of external reserves.

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Chart 15 Foreign investment and change in forex reserves

Foreign investment and change in forex reserves


Chart 15 shows the pattern of aggregate net foreign investment and change in reserves since April 2007. Once again the two move together. In this case, however, foreign investment has been less volatile than the change in reserves, suggesting that other components of the balance of payments have been important as well. The changes in external commercial borrowing are likely to have been significant.

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We found that trends in GDP growth in percentage shows that in 2006-07 the

GDP growth rate was 9.6% which became 9.3% in 2007-08 and due to the impact of recent global financial crisis and global recession, the growth rate of Indian economy became declining.

We found that index of industrial production (growth) the overall growth in 2008-2009 was 3.2 percent compared to a growth of 8.7 percent in 2007-08.

We found that Net investment of FIIS at monthly exchange rate (in us $ million). In 2007-08, net Foreign Institutional Investments (FIIs) inflows into India amounted to $16040 million. But in April-November 2008 it was negative to $8857 million.

We found that movements of BSE sensex. Movements of BSE Sensex shows that in 2008-09 stock market was down due to recession and after recession in 2009-10 the market going up and become stable in 2010-11.

We found that foreign exchange rate between April 2008 and November 2008, the RBI reference rate for the rupee fell by nearly 25 percent, rupees per unit dollar gone up from Rs.40.02 in April 2008 to Rs.49.00 in November 2008.

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We found that Indias Foreign Trade shows that in 2007-08, Indias export and import were $162904 million and $251439 million respectively and balance of payment was $ -88535 million. And in 2008-09, export and import were $185295 million and $303696 million respectively. The balance of payment was $ -118401 million. The growth rate of export and import also declined to 13.3 percent and 20.7 percent from 29.0 and 35.5 percent respectively during that period. In 2009-10 the export and import further declined very much to $178751 million and $288373 million respectively. In 2009-10 the export growth rate was -3.5 percent and import growth rate was 5.0 percent. The balance of payment was $ -109622.

We found that Impact on output of different countries is to measure the impact of the crisis on emerging and developing economies is to compare GDP growth over the period 200307 with growth in 2008, 2009 and 2010. It is found that a shortfall of 1.3 per cent in 2008, 5 per cent in 2009 and 1.1 per cent in 2010 or a cumulative loss of around 7.5 per cent by 2010.

We found that Impact on Export Growth of Different Countries. All regions

were badly affected. Countries in Developing Asia, Central and Eastern Europe and the Commonwealth of Independent States suffered the biggest falls in exports in 2009, both in absolute terms and relative to expectations, but even sub-Saharan Africa, which is less well integrated into the global economy, experienced a fall of 7 per cent in exports in 2009.

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We found that foreign exchange reserves, which had been increasingly steadily over the past few years, started declining after June 2008.

We found that Rupees per US $ Early in March 2009 the rupee even breached the line of Rs 51 per dollar, and currently continues to fall.

We found that the Sensex had reached historically high levels in the early part of 2008, capping an almost hysterical rise over the previous three years in which it more than tripled in value. But it has plummeted since then, with high volatility around an overall declining trend, such that its levels in early March were below the levels attained in December 2005.

We found that the changes in total Net foreign investment split up into direct investment and portfolio investment, over the period since April 2007. It is evident that both have shown a trend of increase followed by decline. FDI has been more stable with relatively moderate fluctuations It peaked in February 2008 and thereafter has been coming down but is still positive. Portfolio investment has been extremely volatile and largely negative.

We found that Cumulative FII investment in equity the cumulative value of the stock of Indian equity held by FIIs fell quite sharply, by 24 per cent between May 2008 and February 2009.

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We found that FIIs and the stock market the Sensex has moved generally in the same direction as net FII inflows. In fact movements in the latter have been much sharper and more volatile, suggesting that domestic investors have played a more stabilizing role over this period.

We found that Foreign investment and change in forex reserves the foreign investment has been less volatile than the change in reserves, suggesting that other components of the balance of payments have been important as well. The changes in external commercial borrowing are likely to have been significant.

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The biggest challenges before India are to ensure monetary and fiscal stimuli work, returning to fiscal consolidation, supporting drivers of growth and managing policy in globalizing world. There is also need to study the viability of fiscal stimulus in India and economic policy makers should shift their attention from crisis management to providing the basis for a return to fast growth. Over the next year, sources of growth should shift to manufacturing and possibly a recovering agriculture. No doubt, India has come back to high growth but this new growth should have to come not from some new speculative bubble but from enlarged government expenditure that directly improves the livelihoods of the people and that is geared towards improving the production of food grains through a changing of peasant agriculture and not through corporate farming since that would reduce purchasing power in the hands of the peasantry and perpetuate its distress. In short, the new paradigm must entail infrastructure and food grain-led growth strategy on the basis of peasant agriculture sustained through larger government spending towards the agriculture and rural sector, which can simultaneously sustain the growth and remove the food crisis in India.

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Akyuz, Yilmaz (2008), The Global Financial Crisis and Developing Countries, Resurgence, December, Penang, Third World Network.

A and Chappell L (2009) The Impact of the Global Economic Downturn on Migration: Monitoring Report 4 London: ippr (unpublished)

Latorre M and Chappell L (2009) The Impact of the Global Economic Downturn on Migration: Monitoring Report 2 London: ippr (unpublished)

International Monetary Fund (2008) World Economic Outlook, Washington, D.C., October.

Chandrasekhar, C. P. (2008a) Global liquidity and financial flows to developing countries: new trends in emerging markets and their implications

Reserve Bank of India (2008), Annual Policy Statement for the Year 2008 09, April. Reserve Bank of India, Mumbai.

Reserve Bank of India, Weekly Statistical Supplement, Reserve Bank of India, Mumbai.

SEBI Bulletin, June 2010, Vol.8, Number-06 Security and Exchange Board of India (SEBI). Mumbai.
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