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2010

Impact of Global Recession on


The Indian Economy

Submitted By:
FMG 18 A - Group 6

Mayank Sharma (91031)


M. Faraz Khan (91033)
Mudita Maheshwari
(91034)
Naveen Yadav (91035)
Neha Arya (91036)
Impact of Global Recession on the Indian Economy

ACKNOWLEDGEMENT

We would like to thank all those people whose contribution in any way whatsoever has aided in
the completion of this report.

We express our gratitude to Dr. K.L Chawla, Faculty of Business Environment, FORE School of
Management, New Delhi for providing us the knowledge of Business Environment prevailing in
the current global scenario. We are indebted to her for guiding and supporting us throughout
this project.

Last, but not the least, our heartfelt thanks to all our friends for sharing their valuable insights
and suggestions with us.

Thanks and Regards

Mayank Sharma (91031)

Faraz Khan (91033)

Mudita Maheshwari (91034)

Naveen Yadav (91035)

Neha Arya (91036)

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Table of Contents
Abstract ......................................................................................................................................................... 5
Introduction: The Global Meltdown ............................................................................................................. 6
Impact of Global Meltdown on India ............................................................................................................ 7
1. Financial Sector ......................................................................................................................................... 8
The impact on stock market ................................................................................................................... 10
Analysis of variation in stock markets..................................................................................................... 10
Impact of recession on exchange rate .................................................................................................... 12
Analysis ............................................................................................................................................... 12
Reason of Strengthening of rupee in 2007 ........................................................................................ 12
Reasons of weakening of rupee from mid 2008 to early 2009 ............................................................... 13
Impact of recession on inflation ............................................................................................................. 14
Analysis of inflation rise before financial crisis ................................................................................... 14
Inflation fall and deflation after financial crisis .................................................................................. 14
Falling Rupee ........................................................................................................................................... 15
Banks ................................................................................................................................................... 16
Credit cutbacks.................................................................................................................................... 16
2. Impact on Foreign Exchange Reserve ..................................................................................................... 17
3. IT Industry ............................................................................................................................................... 20
4. Real Estate market ................................................................................................................................. 20
5. Automobile Industry ............................................................................................................................... 21
6. Impact on Job Sector............................................................................................................................... 21
7. EFFECT OF RECESSION ON EXPORTS AND IMPORTS OF INDIA ............................................................... 22
Impact on GDP: ........................................................................................................................................... 25
Case of The Indian Jewel Industry............................................................................................................... 28
Share of World market............................................................................................................................ 28
How does the Indian Diamond Industry Operate? ................................................................................. 28
Impact of Global Recession on Jewel industry........................................................................................ 29
Case of Economic slowdown and the Indian corporate sector .................................................................. 31
Export Blues ............................................................................................................................................ 32
Burst Bubble Syndrome .......................................................................................................................... 33

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Global Acquisitions Impact ..................................................................................................................... 34


Outlook for India ......................................................................................................................................... 35
Conclusion ................................................................................................................................................... 36
Bibliography and References ...................................................................................................................... 39

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ABSTRACT
It all began with the one and all American dream, that every American should have a home.
Regardless of whom you are and what you do, if you are an American, you should have
something called a home. Real Estate business was in a boom, and financial agents thought that
there wasn’t a better time to give away loans. The Household sector was given a boost with
increased monetary supply by commercial financial companies, and people were given loans
regardless of the credit rating they received. It was never expected that the boom in the Real
Estate business would come to such an abrupt end, and the prices would reach all time low.
The US economy being a capitalist driven economy didn’t bother to indulge itself in the policies
pursued by the then prominent financial giants. Gradually these financial giants in this business
started feeling the heat as “sub-prime” clients started defaulting in their repayment of loans.
The properties which were mortgaged by the clients weren’t even covering the principal
amount of the loan, leave alone the interest commitments. The credit offered to the people in
indiscriminate fashion, achieving short term goals and ignoring warnings from leading
economists about long term sustainability of the policy, backfired completely and companies
like Lehmann Brothers, Merill Lynch, Freddie Mac and Fannie Mae’s “bad assets” reached
magnanimous proportions. An acute credit shortage was experienced in the economy, and
simultaneous negative effects started occurring. The credit crunch meant that borrowing
interest rates shot up in the market, companies slowed down their investment policies,
production declined, layoffs increased, consumption decreased and the whole economy
followed the downward spiral. The unemployment rate in the US reached an all time high of
6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. Thus
in this paper the major issues, concern and challenges by India will be discussed in detail. The
paper presentation will cover the different perspective from each of the industries, needs and
impact in future. The major chunk will deal with the solution of the current scenario and its
future betterment and implementation.

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INTRODUCTION: The Global Meltdown


The global meltdown has devastated many an economy. It has wiped out trillions of dollar in
global investor wealth. It has turned epitomes of capitalism into staunch socialists. It has put
world’s growth back by many years. Global meltdown means economic slowdown of the
economies of the countries around the world. The global meltdown of economy 2007-2009
appears to be very sulky. It is considered to be very worst related to great depression of 1930.
It causes financial tsunami. It contributed to failures of key business decline in consumer
estimated in trillions of U.S dollars estimated substantial commitment and a significant decline
in economic activity.

The U.S real estate market burst and swamped the finance sector with subprime
mortgages turned sour. Federal Reserve board chairman Bernanke and secretary of treasury
Henry Paulson appeared before congress on September 18,2008 during stunned lawmakers
were told we are totally away from a complete meltdown of our financial system with all
implication here at home and globally.

Though the initial impact of global crises has been limited to the stock market and foreign
exchange market it is spreading to the rest of financial system and all of these are bound to
affect the real economy.

Industries have stated cutting jobs and people are spending less. Business ranging from a
one man operated and people are spending less. Business ranging from a one man operated
small business to those employing thousands of workers is closing at an unprecedented rate.
Rising unemployment in consumer spending and business investment plan, job cuts have
started provoking further cycle of contraction. The word business investment plans, job cuts,
have started provoking further cycle of contraction.

The loss of world output in the calendar 2009 is expected to reach U.S $ 2.5 million. It is
likely to have long term implications for developing countries. The World Bank said in a March 8
report that international economy was likely to shrink for first time bank. It is likely to have long
term implication in developing countries. In addition exchange rate and a sudden increase in

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dollar against Indian Rupee have contributed to slowdown. India may claim to have escaped the
full burnt of global crises.

This global meltdown (2007-2009) has been defined as “The Very Great Depression” in the
making. The fallout from the current financial crisis is expected to be without precedent, at
least in a year monetary terms. The IMF estimates that expected losses and writes down on us
assets could total up to $945 billion which is bigger than entire GDP of Australia thus making it
the most expensive financial crisis in history.

Impact of Global Meltdown on India


The Indian economy initially looked to be relatively insulated from the global financial crisis that
started in August 2007 when the sub-prime mortgage’ crisis first surfaced in the US. This is
evident from the fact that RBI raised interest rates till July 2008 to cool down a stupendous
economy growth rate and control inflation. But when the financial meltdown took shape of a
global economic downturn, Indian economy was immediately impacted. One of the most
immediate effects was that the credit inflows suddenly stopped, and the interest rates in
money market spiked to new highs.

Source: Global Financial Crisis: Causes, Impact, Policy Responses and Lessons,
Dr Rakesh Mohan, RBI Speech Abstract, April 23, 2009

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Impact of Global Recession on the Indian Economy

If we look at the broader picture, global crisis have impacted Indian economy through three
different ways – through an impact on the financial sector, decline in exports and fluctuation of
the exchange rates.

1. Financial Sector
The global meltdown has a great impact on financial sector. For the first year it is relatively
unaffected by the sub -prime related crisis on the basis of their generally strong economic
fundamentals and lack of exposure to toxic financial products that undermined the balance
sheets of financial institutions in advanced countries.

As the use of international credit has dried up, the respective currencies of interconnected
economies have depreciated on average by 20 percent and stock markets have tumbled by 30-
50 percent since august. Most of the emerging markets entered 2008 with crisp basis and good
financial cushions and have continued to maintain strong fiscal positions. The primary factor
behind recent pressures was investor fear and herding and the credit squeeze by multinational
banks and financial institutions. Equity market will continue to remain in bearish mood with
reduced off shore flows, limited domestic appetite due to liquidity pressure and pressure on
corporate earnings, while the inflation would stay Under control, increased demand for
domestic liquidity through CRR/SLR cuts maintaining growth beyond 7 percent will be a
struggle. India was only experiencing the ripple effects of global financial crisis without any
direct impact on its economy which would succeed in growing by close to eight percent during
current fiscal. Credit is also due to the government of India and the RBI for having avoided the
temptation of total capital convertibility. While the RBI may legitimately pride itself on better
regulation than U.S federal reserve, It is concerned with distribution of profits of the central
bank .The U.S Federal Reserve had a profit of nearly $ 39 billion in 2006-2007 out of which it
had transferred $ 34 billion to the U.S treasury. This is in sharp contrast to the behavior of the
RBI, which appropriates the bulk of its profit of nearly Rs. 50,000-60,000 crore to the so called
contingency fund and transfers only Rs.10,000 crore to the Government. If the RBI could follow
the example of U.S fed in this matter, Mint Street can fix half the fiscal problems of the North
Block.

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Source: Annual Policy Statement, 2009-10, RBI, Dr. D. Subbarao, Governor

But even though we are slightly better protected from financial meltdown, largely because of
still large role of nationalized banks and other controls on domestic finance, there is certainly
little room for complacency.

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The Impact on Stock Market

Source: Business World27 November 07, 2009

Analysis of variation in stock markets


 Sensex made a high on Jan 21, that is 21000 (all time high). After that it started its
downward journey.
 There were indication of widening subprime crisis in the US and European countries
because of fall in prices in the real estate sector which created negative sentiments for
the markets.
 Then there were concerns because of rising crude oil prices which played a significant
role in dragging the market down
 Rising inflation had also created negative sentiments for the markets. Because rising
inflation forced RBI to intervene which tighten the monetary policy by taking money out
of the system.
 Post official disclosure of recession and Lehman brother collapse there was panic in the
markets and FII did huge sell off and withdrew $15bn in the year 2008.
 After that bad news started to hit the markets one after the other(Mumbai attacks,
Satyam fiasco) and situation become more worse.

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 In march 2009 sensex made a closing low of around 8000 because there was uncertainty
regarding the upcoming government( election time)
 After march 2009 the situation started to improve crude oil prices were under control,
inflation was also under control and improved sentiments in the global markets lead to
surge in the sensex
 FII again came back on Indian bourses and Indian markets started to improve.
 Success of UPA in making stable government with clear majority also contributed a lot
in improving sentiments in the markets and wooing FII. it was like a confidence booster
for the investor. With this retail investor also became bullish and started to invest in the
markets
 Now sensex has reached 17k levels on account major economies being out of recession
and GDP growth of last quarter at 7.9%.

The most immediate effect of the global financial turmoil on India has been an outflow of
foreign institutional investment from the equity market. Foreign institutional investors who
need to retrench assets in order to cover losses in their home countries and are seeking havens
of safety in an uncertain environment, have become major sellers in Indian markets. With the
volatility in portfolio flows having been large during 2007-08 partly because of global market
turmoil, the BSE sensex dropped. The importance of FII investment in driving Indian Stock
Market and fact that cumulative investments by FII stood at $66.5 billion at the beginning of
this calendar year, the pullout triggered collapse in stock prices. As a result, the sensex fell from
it’s closing peak of 20873 on January 8, 2008 to less than 10,000 by October 17, 2008. The
primary market was also seriously affected by the global financial crisis. There were 95 IPOs in
2007 raising in Rs. 45137 crores. This fell to 36 IPOs in 2008 and the amount mobilized fell to Rs
16,927 crore, which is 62.50 present less than the previous year.

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Impact of Recession on Exchange Rate

Source: advfn.com

Analysis
 Over the span of last 2.5 years exchange rate has been very volatile. Rupee has made a
high of 39 Rs per dollar and also made a low of 52 Rs per dollar in early 2009. Both these
extreme conditions are undesirable for any country. Central bank always looks for a
particular (target) exchange rate.
 When rupee was very strong i.e. around 39 Rs that was the worst time for export
oriented companies for example all the IT/ITes companies balance sheet was bleeding
because of less profit margin while India had a advantage because imports were cheap

Reason of Strengthening of Rupee in 2007

 In the year 2007 there was a portfolio investment of around $20 bn in the Indian
economy. We have already discussed various factors which can affect the exchange rate
like relative growth, inflation differentiation, interest rate differentiation, political
environment etc. During this 2 year span the factor which has impacted (exchange rate)
the most is equity flow. All other factors can influence the exchange rate in long term.

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 In 2007 there were bullish sentiments in the markets so there was huge inflow from
USA into Indian markets.
 Supply of dollar in the Indian markets increased which lead to weakening of dollar and
it made a low 39 Rs per dollar.
 According to demand supply curve when supply increases then its demand decreases
and its price falls. The same law is applicable here.

Reasons of weakening of rupee from mid 2008 to early 2009


 Due to widening subprime crisis in USA and many European countries many major banks filed
bankruptcy. The major shock came to the whole world from the bankruptcy of one of the
biggest bank Lehman Brother. There was pessimism everywhere. Investor lost their confidence
in the markets because experts were comparing this recession with depression of 1929-1939.
 FII stated to withdraw money from the Indian markets as there was panic everywhere.
 So there was huge equity outflow of 15bn within a single year which leads to the shortage of
dollar.
 Demand of dollar increased and dollar appreciated and touched a high 52 Rs per dollar which
was like a nightmare for the Indian government or central bank.
 Speculators also contributed a lot in weakening of rupee. Hedge funds start to sell rupee
heavily and become bullish on dollar. That is they make the situation worse.
 The others factors like relative growth, inflation differential, interest rate differential etc must
have also impacted the exchange rate but the influence was very less. Because of recession
equity flow has contributed the most.
 After March 2009 when situation in the global economy improved again there was huge inflow
from FII that is $17bn which again helped rupee to appreciate and dollar to weaken. Now the
dollar is hovering around 46 Rs per dollar.

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Impact of Recession on Inflation

Source: Global Financial Crisis: Causes, Impact, Policy Responses and Lessons,
Dr Rakesh Mohan, RBI Speech Abstract, April 23, 2009

Analysis of inflation rise before financial crisis


 The major reason for the increase in inflation in 2008 was the rising crude oil prices in
the international markets. As India is still dependent on gulf countries for the oil so
rising crude oil prices hit India a lot.
 In India it was demand push inflation not because of less supply.
 There was huge liquidity in the system which was the reason for the huge demand
 Inflation numbers touched a 13 year high of 12.63. it was not due to domestic factors
but actually every country was reeling under the pressure of high inflation. So it was a
global phenomenon.

Inflation fall and deflation after financial crisis


 For a developing economy some inflation is important that is between 4-5%. Once the
inflation crosses this number RBI starts to intervene by tightening monetary policy.

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 When inflation was out of control RBI intervened at regular interval of time by
increasing CRR, SLR, repo rate and reverse repo rate etc
 But tightening of monetary policy was not effective in the starting but only after few
months it started to show its colours.
 Crude oil made a high of $147 per barrel which had a negative impact on inflation.
When crude oil prices started falling after the financial crisis then only inflation came
under control. Tightening of monetary policy also made contribution in controlling the
inflation
 After the disclosure of recession in some powerful nations there was panic everywhere.
There was a drastic fall in the demand of commodities due to recession.
 Crude oil prices made a low $34 per barrel because of drastic fall in demand across the
world mainly USA which has supported a lot in controlling the inflation
 In WPI index major contribution is done by manufactured products. There was huge fall
in prices of all commodities inflation fell because of slower industrial activity in India and
lower metal and oil prices
 In June 2009 Indian economy was under the grip of deflation which is very much
undesirable for a developing economy. It happened because of recession.
 One of the reasons for the inflation in the negative territory is the high base effect one
year before.
 To control deflation RBI should put more money into the system into the system by
slashing CRR,SLR etc and reducing income taxes through fiscal policy
 Now the inflation has again become positive because of improved sentiments in the
global markets and major economies are out of recession now. Low base is also the
reason for rising inflation nov-dec 2009

Falling Rupee
There is a sharp depreciation of the rupee. Between January 1 and October 16, 2008, the RBI
reference rate for the rupee fell by nearly 25 percent, even relative to a weak currency like the
dollar from Rs 39.20 to the dollar to Rs 48.86. This was despite the sale of dollars by the RBI,

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which was reflected in a decline of $25.8 billion in its foreign currency assets between the end
of March 2008 and october3, 2008.

The depreciation of rupee against dollar may good for India’s exports that are adversely
affected due to slowdown in global markets but it will have negative impact on accumulated
forex payment commitments. The depreciation of rupee will also come in the way of
government efforts to rein in inflation. There is an argument that forex position is still very
strong with $ 275 billion reserve which is sufficient to stall and reserve any further appreciation.
But it is important to note that due to sudden exit by the FIIs and slow down of exports during
the crisis period the forex reserves have fallen from $310 billion.

Banks
RBI has claimed that the exposure of Indian bank to assets impaired by the financial crisis is
small. It had estimated that as a result of exposure to collateralized debt obligations and credit
default swaps, the combined market losses of Indian banks is about $ 450 million.

It is roughly estimated that the public sector banks have incurred loss of $ 90 million while that
for aggressive private sector banks were $ 360 million.

Credit cutbacks
This global meltdown has impact on consumer durable market as the loans to this segment fell
from around Rs. 6000 crore in June 2007 to over Rs. 4000 crores in June, 2008. Direct housing
loans which have increased by25 percent during 2006-2007 decreased to 11 percent growth in
2007-08 and 12 percent over the year ending June 2008. The fear is spreaded in metropolitan
areas dealing with foreign banks that have expanded their presence in India whose global
exposure to toxic assets must be substantial.

There is also having touched a high of about $ 147 a barrel in June, the slipped to about $91 per
barrel, thereby putting pressure on the government to reduce the prices of petroleum products
in the domestic market.

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2. Impact on Foreign Exchange Reserve


The most immediate effect of the crisis on India has been an outflow of FII, current account
deficit, depletion of foreign exchange reserve and depreciation of rupee. India’s export growth
has become negative for the first time in five years.

Exports have fallen to $ 12.8 billion in October 2008 from $ 14.8 billion in October 2007.there is
a 60% trade deficit. There is fall in exports due to low demand from key market like U.S,
European Union and Japan. The foreign exchange reserve has declined from U.S $ 309.7 billion
during 2007-2008 to US$ 286.3 billion at the end of September 2008 due to valuation of loss of
US$ 20.9 billion.

What forex reserves of a country indicates?

 Forex reserves tell us the ability of the country to repay foreign debt and to control currency
fluctuation. It also give an indication of the credit rating of the country
 If a country has large forex reserves then government can easily manipulate exchange rates or
we can say that it can also defend itself from speculative attacks on currency.
 If any country maintains large forex reserves then there is a cost associated with it.
Fluctuation in the currency markets leads to profit and loss in terms of purchasing power of
reserves. Example..India’s forex reserve is dominated by US dollar. if in case US dollar
depreciates then the value of forex reserves will fall.
 Central bank of every country should gradually increase their forex reserve to maintain the
same amount of power to manipulate in the currency markets

 The monetary policy implemented by central bank affects the quantity of forex reserve a
country maintains

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Reasons for rise in forex reserves

Huge FII inflow in 2007 beacuse of good sentiments in the markets

So there was huge supply of dollar in the indian markets

This led to weakning of dollar and appreciation of domestic currency(rupee)

When rupee apreciates then export oriented companies have to incur big
losses

RBI intervenes and purchases dollar by selling rupee which leads to increase in
forex reserves and also stablise the currency rates

Why forex reserves have fallen after june 2008?

Huge FII outflow because US and many european countries were under the grip of
recession. so there was pessimism everywhere.

so there was crunch of dollar which lead to increase in demand of dollar

domestic currency(rupee) weakens and dollar appreciates. rupee was depreciated upto
52 rs per dollar

RBI intervenes and started purchasing rupee by selling dollar in the currency market.
RBI intervenes to control currency fluctuation

this has to lead to fall in forex reserves gradually to avoid huge depreciation of rupee

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 When in September 2008 lehman brother filed bankruptcy because of subprime crisis. Then
foreign institutional investor started to pull out money out of Indian equity markets which
lead to the shortage of dollar. The aftermath of this was that dollar became very strong with
respect to rupee and rupee touched a low 52 rs per dollar. From june 2008 RBI continuously
intervened in the currency market by buying rupee and selling dollar. Which lead to depletion
of forex reserves.

Forex reserves in bn dollar

18.1 5.1
1.42

(a) Foreign Currency Assets +

(b) Gold $

(c) SDRs @
258.7
(d) Reserve Position in the
IMF**

Data Source: indiastat.com

Analysis and Recommendation

 This was the composition of forex reserve on 25 dec 2009. Here major contribution is given by
foreign currency assets.
 Significant changes occur only in foreign currency assets due FII inflow and outflow. While the
other three gold, SDRs, reserve position in the IMF remains almost same
 Recently on November 3 RBI declared to buy 200 metric ton of gold from IMF. This has helped
them to diversify their forex reserve. in percentage terms gold % increased from 3.5% to 6.5%.

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 As in the days to come it is expected dollar will remain weak so it is a good decision by RBI to
decrease their dependence on dollar and diversify their forex reserve by purchasing gold.
 Gold is used as a hedge against inflation
 Overdependence on dollar is not considered good. Because in case dollar depreciates in future
then it will adversely affect the real value of forex reserves .
 Indian should also diversify their foreign currency assets also by increasing their stake in EURO
and in other strong currencies of the world.

3. IT Industry
The IT sector is major component of India’s growth. For the Indian IT Industry, the slowdown
could pace growth rates by around 3-5%.The dip in IT industry could also hit by cross currency
rate fluctuations, which could knock off another 3% of 2008-09 growth estimates.

Export oriented small and mid tier IT companies in the 2008 they faced stack reality of
dwindling orders as global financial crisis cause meltdown across countries and industries. Amid
fears of global recession companies especially back hit by credit crisis have already spreading
information technology such as consultancy and software development. TCS is like to be worse
off then its peers because of its significant expansion to Merrill Lynch. Merrill lynch is also a
significant client for Satyam computers services and is evident from July-September 2008
results a net profit of Rs 1271crores up only 1.5% as compared to corresponding a period a year
ago. Infosys also accounts for almost 35.7% share from BSFI and 62% from America while Wipro
accounts for 25% and 35% and will be severely hit. HCL Technologies at the least because of its
low exposure to financial clients.

4. Real Estate market


The 2008 global financial crisis largely triggered by the bursting of the U.S Real Estate Bubble
will be considered one of the most serious global financial system meltdown. The U.S economy
massive size and wide global depression of bubble’s damage .The 2008 financial crisis of the
United States has affected the whole world. Real estate sector including mortgages and other
sophisticated financial instruments used in securitization were downgraded. In India there was

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a very high prices of the land, flats, houses, commercial properties like mall, shops, offices etc.
but after financial crisis there was fall in price of property and after sometimes the property
prices have been stabled and the financers are purchasing the property in the period of crisis at
low prices so that they can earn huge profit at the period of boom.

5. Automobile Industry
The meltdown affected European and Asian automobile manufactures. The automotive fuels
linked to the sports utility vehicles. Car companies in Asia, Europe, North America and
elsewhere have implemented creative marketing strategies to entire reluctant consumers as
most expensive double digit decline in sales. Major manufactures including the Toyota,
mitushbhishi etc. The financial crisis play a role in General Motors was unable to obtain credit.

In Indian industry there is 1.9% fall in Indian Car Industry. Be it Tata motors or Maruti Suzuki
even Mercedes Benz the car market has down to a tremendously negative terrain. The interest
rates have also been affected on loans that have reduced the sale of cars.

6. Impact on Job Sector

The global meltdown led to job lay –offs across the world. According to the labor Department’s
Report, the unemployment rolls swelled by 2.2 million over the last year to 9.5 million.
Different CEOs of multinational companies have started feeling the heat. The recent downturns
are weighing on the minds of employers. Earlier there was a huge employment in IT & BPO
sector due to global meltdown there was a huge unemployment in IT & BPO sector. Many
people in India lost jobs at the time of crisis in Finance, IT & BPO and many other sectors. This
meltdown has frailed the Indian economy to some extent.

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7. EFFECT OF RECESSION ON EXPORTS AND IMPORTS OF INDIA


To analyze the impact of global recession on Exports and Imports, we forecasted the exports
and imports using time-series forecasting for the data available up to 2007, for various ports.
And since we have the actual figures available for 2008, we can thus compare the severity of
recession on exports and imports.

The formula that we used for forecasting is:

• Growth rate for a ‘X’ year = Volume for yr ‘X’


Volume for yr ‘X-1’

• Average Growth rate = ∑ (growth rate over the years)


No. of years

• Forecasted volume for yr 2008-09 = Volume for yr 2007-08 * Avg. growth rate

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Below is the value of exports and imports for various ports:


Actual Imports Forecasted Imports Actual Exports Forecasted Exports
PORT
(‘000 tones) (‘000 tones) (‘000 tones) (‘000 tones)

CALCUTTA 5793 6161 2592 3844

HALDIA 29231 31131 11731 16465

PARADIP 17233 16086 16982 24577

25421 21032
VISAKHAPATNAM 28948 28549

CHENNAI 31845 35206 13952 23269

TUTICORIN 13562 17108 3517 4180

COCHIN 10839 11377 3174 3345

NEW MANGALORE 22675 23196 15265 19341

MORMUGAO 126241 137044 23829 27424

MUMBAI 27023 28142 12348 14101

JNPT 29326 26824 17932 19484

ENNORE 5342 5253 129 176

KANDLA 39873 41800 8611 11749

TOTAL 384404 408274 151094 196505

Source of data: www.ipa.nic.in (website of Indian ports association)

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From the above figures we can see that imports for most of the ports have been relatively
stable, this can be attributed to the strong domestic demand that was there during the times of
recession. Whereas, if see for exports there is a sharp difference between the forecasted
exports and actual exports. Now to have a clearer picture let us look at the trend for overall
exports and imports.

450000 250000

400000
200000
350000

300000
150000
250000

200000
100000
150000

100000 50000
50000

0 0

Imports Exports

Blue: actual, Red: forecasted

Data Source: www.ipa.nic.in (website of Indian ports association)

So, from here also we can see that because of recession there was sharp decrease in exports.
On the other part the imports remained relatively stable because of strong domestic demand .

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Impact on GDP:

The overall growth of GDP at factor cost at constant prices in 2008-09, as per revised estimates
released by the Central Statistical Organisation (CSO) (May 29, 2009) was 6.7 per cent. This is
lower than the 7 per cent projection in the Mid-Year Review 2008-09 (Economic Division,
Department of Economic Affairs (DEA), December 2008) and the advance estimate of 7.1 per
cent, released subsequently by CSO in February 2009. With the CSO drastically reducing their
estimate of GDP from agriculture (based on third advance estimates), and given that the DEA’s
7 per cent estimate assumed normal agricultural growth, it would have had to be adjusted for
any shortfall. The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent in
2008-09 nevertheless represents a deceleration from high growth of 9.0 per cent and 9.7 per
cent in 2007-08 and 2006-07 respectively. India's real GDP growth will average at 7.2 per cent
over the next five years even as risks to the global economy continue to remain high, the
Economist Intelligence Unit (EIU) has said. The world's second-fastest growing economy may
also see negative inflation for the next 3-6 months triggering expectation of rate cuts by banks,
the research arm of London-based Economist added. "Emerging Asia will be the world's fastest-
growing region over the next five years (2010-13), but this mainly reflects a relatively strong
growth performance by India and China. The EIU expects India's real GDP growth to average 7.2
per cent over the next five years," it said. Global share prices have been boosted on
expectations that the worst of the global economic meltdown is over, however, a sustainable
recovery is distant, it maintained.

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Source: http://www.marketoracle.co.uk/images/2009/Dec/India-gdp.png

"India is likely to see negative inflation for three to six months, making a case for further rate
cuts by the central bank. We expect the repo rate to be cut by a further 50 basis points, to 4.25
per cent, in the next few months," EIU Director of Research Manoj Vohra said. Inflation turned
negative 1.61 per cent for the first time in 30 years for the week ended June 6. He, however,
said negative inflation is not a grave concern for India. There may be more green shoots of
recovery in the global economy as fiscal and monetary stimulus packages start to have an
impact, but "growth over the next two years will be marked by a high degree of volatility",
Vohra said. There will be a substantial slowdown in quarter-on- quarter growth rates once the
stimulus fades, he added. "Risks to the global economy remain high. The most serious concern
is that various stimulus packages being implemented globally will not be sufficient to trigger
self-sustaining recovery," the Economist said. "For India, the biggest risk to growth remains its
ballooning fiscal deficit," it added. It is also possible that there may be a much sharper snap
back in growth over the coming months led by aggressiveness of the global macroeconomic
response. It may, however, not be sustainable and would create problems for policy-makers,
Vohra said. India's growth rate in 2008-09 was 6.7 per cent as compared to 9 per cent in the
previous year. "Prospects for the current fiscal do not appear to be better. While in 2008-09,
the first half escaped the impact of global recession, in the current year the impact will be felt

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throughout the year. The slowdown in growth of GDP is more clearly visible from the growth
rates over successive quarters of 2008-09. In the first two quarters of 2008- 09, the growth in
GDP was 7.8 and 7.7 per cent respectively. The growth fell to 5.8 per cent in the third and in the
fourth quarters of 2008-09 (compared to 9.3 and 8.6 per cent in Q3 and Q4 of 2007-08). The
third quarter witnessed a sharp fall in the growth of manufacturing, construction, trade, hotels
and restaurants. Agriculture growth also turned negative adding a further dampener. On the
other hand, community, social and personal services showed a large increase from the second
quarter, mainly due to a step up in government expenditure. The last quarter saw an added
deterioration in manufacturing due to the deepening impact of the global crisis and a slowdown
in domestic demand. The International Monetary Fund’s (IMF) latest World Economic Outlook
sharply reduces its forecast for world gross domestic product (GDP) growth to 3% in 2009,
whittling it down from the 3.76% predicted in April. A global GDP growth rate of 4.21% is now
forecast for 2010, compared with 4.76% earlier. The report says the current crisis is “the most
dangerous shock in mature financial markets since the 1930s”. It’s difficult to see how that
squares with the 3% growth rate in world GDP forecast for next year. In 2009, China and India
are expected to grow at 9.2% and 6.9% respectively. Contrast that with the 2001 recession,
when China grew at 8.3% and India 3.8%. The agriculture sector recorded an average annual
growth rate of 4.9 per cent during 2003-08, and expanded only by 1.6 per cent during 2008-09.
In 2008-09, food grains production was 233.9 million tonnes, up from 230.8 million tonnes last
year. This was also an all-time high. Allied activities – horticulture, floriculture, forestry,
livestock and fisheries – which account for a substantial share in agriculture remained buoyant.
However, the production of commercial crops such as major oilseeds, cotton, jute and
sugarcane was lower. Looking ahead to the current year, the progress of the south-west
monsoon has been slow and halting. By July 22, 2009, monsoon rainfall was 19 per cent below
normal in the country as a whole. At a disaggregated level, rainfall was deficient/scanty in 19 of
the 36 meteorological sub-divisions. While kharif sowing has picked up in July, the delayed
monsoon can impact agricultural output. Although the share of agriculture and allied activities
in GDP has declined over the years and is currently at 17.5 per cent, good agricultural
performance is critical not only because it employs over 55 per cent of the labour force but also
for ensuring stability in food prices.

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Case of the Indian Jewel Industry

Gem and jewellery industry is one of the most dynamic and fast growing sectors of the Indian
economy and a major contributor to the country’s export-led growth. In 2008-09 the industry
accounted for 19.1 per cent of the total Indian exports, to the tune of US $21.11 billion. Export
of cut and polished diamonds (CPD) accounts for 67 per cent of the export basket of Indian
Gems and Jewellery and is therefore a leading foreign exchange earner for India. No diamond
mines exist in India today, and hence the rough stone (raw material) has to be entirely procured
as imports. The rough diamond is mined in South Africa, Botswana, Canada, Russia, and
Australia; traded mainly in Antwerp, Belgium, and processed (cut and polished) in India, Israel,
and now also in China; thereafter, the polished diamond is exported across the world, USA
being the major consumer.

Share of World market


Of the world’s total export of cut and polished diamonds, the Indian diamond cutting and
polishing industry accounts for 95 per cent share in terms of pieces, 80 per cent share in terms
of caratage, and 57 per cent in terms of value; 11 out of every 12 diamonds set in jewellery
worldwide are cut and polished in India, 90 per cent of the work being done in Surat. (Source :
GJEPC).

How does the Indian Diamond Industry Operate?


The industry resembles a close-knit community that thrives in the atmosphere of secrecy and
informality that envelops the diamond trade. A majority of India’s skilled diamond workforce is
employed by small family-owned firms or units that process diamonds on a job-lot basis. In the
’80s and ’90s, the diamond industry was in the eye of the storm for the poor working conditions
of the hundreds of one- and two-room units mushrooming in Surat and nearby places. Even
today, there exists a huge network of traders, manufacturers, artisans, and brokers engaging

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more than five million people who have little or no education. It is difficult to predict the actual
number of diamond manufacturing units or the number of people employed, as the processing
is done in large, medium, and small units, which are spread across the state, reaching many
villages and even homes for which there are no records.
The trading across various levels between importers, exporters, and manufacturers is carried
out through thousands of brokers on open streets in markets called ‘Heera Bazaar’ for which
there is no way of tracking. The transportation of diamond packets, both rough and polished, is
done through Angadias, members of Unja Patels, a local community who have specialized in
carrying diamonds safely within the industry and achieved trustworthiness of the highest order.
There are often no written contracts; many transactions occur in cash; and stones worth
millions of dollars are transported with virtually no security. The entire industry seems to be
working on trust. No small feat, then, that the local entrepreneurs captured a lion’s share of the
global diamond exports.

Impact of Global Recession on Jewel industry


In November 2008, the workers of Indian diamond industry had a tryst with destiny. An
estimated one million workers returned after a customary five-week Diwali vacation, just to
find that owners of the diamond processing units would not open gates for them. Thousands of
such units in Gujarat, India, which cut and polished diamonds mainly for export, had shut down.
The decades old, and now US $14.2 billion Indian diamond industry, witnessed the severest
recession in its history (Source: GJEPC).

“Around 6 lakh people lost their jobs from October 2008, following the impact of recession and
most of them were from Surat’s diamond and jewellery industry. About 500,000 people lost
their jobs in the October-December 2008 period, while over 100,000 were shed in January this
year.” The Economic Survey presented in the Indian Parliament on July 3, 2009, reported.

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many diamond workers who were immigrants from Saurashtra, Bihar, and Uttar Pradesh, and
whose families were totally dependent on their jobs in Surat, were left stranded during the
crisis; some tried to commit suicide, others who struggled for a few months, either switched
over to other businesses or withdrew their children from local schools and packed their bags for
their native places. “Diamond had become as good as stone,” said a middle-aged artisan. Six
months later, the industry has somewhat recovered from its lows with around a quarter million
jobs added after January, following signs of global recovery. But it has been difficult for several
units whose workers did not return.

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Case of Economic Slowdown and the Indian Corporate Sector

While the firms exposed to foreign currency have become victims of volatility, those in the IT-
related services faced export blues. The firms in the financial and real estate sectors
experienced the burst bubble syndrome, whereas the acquirers faced multiple financial issues.
Despite the prevalence of pockets of weakness, in general, the the Indian banks, financial
institutions, and the corporate sector as strong and less exposed to the vagaries of the global
recession

Source: Reserve bank of India bulletin Jan 2009

Companies exposed to foreign currency either through debt or through trade could not manage
the swift depreciation of rupee from Rs.39 to Rs.45 (per US dollar) over a short span of eight
months in 2008. It was a lost cause especially when the rupee had shown a secular tendency to
appreciate over the same range in the reverse direction over the previous few years generating
a conviction of its further strengthening. The strength of the Indian economy and massive
capital inflows lent further credence to this belief. When the tide turned the other way the

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implication was straightforward: the burden of foreign currency debt increased lot more in
rupee terms. Many a balance sheet saw red ink on that count, even abstracting from
accounting valuation rules. The real victims of currency volatility were those daring – in
hindsight, foolish firms who chose to play —the honorable expression being to hedge — the
derivative game. One company in the silk export business, on a sales turnover of Rs.600 crores,
lost close toRs.100 crores during April-September, 2008, on cur ranch fluctuation and
unwinding of derivatives exposures.

Companies using commodities—metals, chemicals, and others—as inputs found it impossible to


manage costs in the face of wildly fluctuating (mostly rising) input prices. Companies in the
auto-component sector, whose operating margins are ordinarily in the region of 8-12 per cent,
saw those dropping all the way down in the -2 to 2 per cent range. Similar trends were
observed in the chemicals business as well. It was a situation of getting damned any which way.
You either held raw material inventory bought at higher cost whose prices had now fallen or
held finished goods made at high costs whose demand appeared to vanish all of a sudden.

Export Blues
The second set of firms received direct hit from the recessionary conditions in the Western
markets, mainly the US. Exports of software and other IT related services experienced perhaps
the sharpest decline. Net export (exports net of imports) of services increased from around US
$8 billion during the first quarter of 2006-07

to reach the peak of US $13.3 billion during the second quarter of 2008-09. The trend reversed
swiftly thereafter and during the last quarter of 2008-09, net export of services dropped by 23
per cent to settle at just over US $10 billion. What took several quarters to gain seemed to have
been lost in a couple. The issue for growth in this sector is not “if” but rather “when”. Not
without reason therefore, we find software exporting firms even of the size and might of
Infosys a little wary of offering optimism on their top line guidance. Another category in the
export blues is textiles. This sector had to suffer a double whammy. Several companies in this
industry are exposed to the American market in two ways. They sell garments and other textile

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products directly in that market and also supply fabric to domestic firms who in turn convert it
into garments for exports. Both segments suffered setback. The most prominent member of
this group is Arvind. Though its top line did not experience a serious dent, the bottom line took
a Rs.100 crores swing During 2008-09, largely in the last two quarters.

Burst Bubble Syndrome


In the third set are the firms that from a business classification standpoint ought not to be
clubbed into one. We have done so for a good reason. One sub-sector can be broadly defined
as stock broking/investment banking/private equity/ wealth management. In the other sub-
sector are the real estate developers.

They are clubbed for two reasons. Both of them are the newest elements on the capital market
block and the fortunes of both have moved in tandem with the capital market. Majority of the
firms in this set are the product of recent listings via the IPO route. Edelwise Capital, Motilal
Oswal and others are from the financial market sub-sector whereas DLF, Unitech, Ackruti and
others belong to the real estate development segment. More fundamentally, both prospered in
the recent times by the predominant play of the speculative motive. Both therefore rode on the
exceptional boom in the equityand property markets and consequently bore the brunt of a 180
degree turn in the speculative motive of investors and consumers. For quite a while it seemed
as if investors were buying houses and equities as if there was no tomorrow. When the tide
turned for the worse, roughly six months prior to the bursting of the global financial bubble, the
financial fortunes of both swung sharply.

Those in the financial arena took some exceptional measures and by and large protected the
bottom lines. Those in the real estate fields were left holding unsold inventories of homes and
offices and a host of incomplete projects waiting to find both buyers and money. Unlike
equities, homes and offices cannot gets old on the computer screens of the stock exchanges.
Secondly, the cost structures of financial firms can be nimble whereas those of real estate
developers cannot be. Two sample cases should suffice to highlight both the differences and
the similarities. Edelwise Capital booked total income of Rs. 406 crores in the last quarter of
2007-08 and from then on it tumbled all the way down to Rs.183 crore in the last quarter of

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2008-09. Operating PBT too fell from Rs. 147 crore to Rs. 68crore over the same period but the
company retained its overall margin percentage exceptionally well, at around 36-37 per cent
almost through the turbulent period. Not all the firms in this segment could protect their
overall margins as well. Incidentally, much of the pain in the business school placements for the
graduating class of 2009 came from this sub-sector. On the real estate side of the story, DLFs
top line tumbled from Rs. 4,306 crore in the last quarter of 2007-08 to just Rs. 1,122 crore in
the same quarter of 2008-09. The toll on the operating PBT was devastating – a sharp fall from
Rs. 2,400 crore to a loss of Rs. 60 crore over just five quarters. Propped up by a good dose of
“other income,” DLF could report a consolidated operating PBT of Rs.170 crore.

Global Acquisitions Impact


The fourth set of firms is those that had begun their march toward becoming global entities by
buying into Western firms in the recent past. These firms may be at the receiving end of the
global recession for some time more, not in the least reflecting the strategic wisdom behind the
big moves they made. During the four year period, 2005-06 to 2008-09, gross Indian direct
foreign investment abroad was almost US $50 billion. A number of these acquisitions were
financed at least partly by debt. Such investments can never be truly assessed from an
immediate context but the adverse consequences stick for a long time.

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Outlook for India

India has several advantages in the fall out of the global crisis. Some of these advantages
include the headline inflation has eased out. Even accounting for the high base effect the prices
for certain commodities have fallen, though there is a regrettable trend in the food prices
which have increased35. The decline in inflation should support consumption demand and
reduce input costs for corporates. Also, the decline in global crude prices and naphtha prices
will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for
infrastructure spending. From the external sector perspective, it is projected that imports will
shrink more than exports keeping the current account deficit modest. There are also several
structural factors that have come to India's aid. (Subbarao, Impact of the Global Financial Crisis
on India-Collatral Damange and Response, 2009). First India's banking system remains sound,
healthy, well capitalized and prudently regulated. Second, our comfortable reserve position
provides confidence to overseas investors. Third, since a large majority of Indians do not
participate in equity and asset markets, the negative impact of the wealth loss effect that is
plaguing the advanced economies should be quite muted. Consequently, consumption demand
should hold up well. Fourth, because of India's mandated priority sector lending, institutional
credit for agriculture will be unaffected by the
credit squeeze. Thus it is expected that though the situation would not return to normal as
defined by the pre crisis era, India has a big opportunity to leverage the crisis to gain advantage
and become the leading economic powerhouse in the future along with China.

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Conclusion
India is one of the countries who are least affected by the global meltdown, but still some effect
was necessarily made because we cannot be immune from it as so many things depends on
international trade export and import. Indian government and RBI took so many measures to
come out from this recession and definitely those measures have worked. In 2008 the RBI
reduced the CRR, from 5.5% to 5.0%, it also reduced SLR, from 25% to 24%. To lift the economy
out of the recession the Government announced a package of Rs 35,000 crores in the first
instance on December 7, 2008. A refinance facility of Rs 4000 crores was provided to the
National Housing Bank. Following this, public sector banks announced to provide small home
loans seekers loans at reduced rates to step up demand in retail housing sector. On February
24, 2009, the government announced a slashing down of excise duty from 10 per cent to eight
per cent—a reduction by two percent. Since 90 per cent of the manufactured goods attract 10
per cent excise duty, this measure is designed to reduce the prices of colour TV sets, washing
machines, refrigerators, soap, detergents, colas, cars and commercial vehicles. Commerce and
Industry Minister Kamal Nath announced a small relief package of Rs 325 crores for leather,
textiles, gems and jewellery on February 26, 2009. There is no doubt that the government is
motivated with good intentions and is thus aiming to spend a huge amount of Rs 1,00,000
crores for developing infrastructure in roads, ports etc. which pose a serious handicap to
growth. As against the US package of $ 800 billion to bail out the US economy and the Chinese
package to $ 580 billion to salvage its economy, the Indian fiscal package of Rs 35,000 crores ($
7.3 billion approximately) is a small measure to boost the Indian economy. It is due to this
reason that the chieftains of industry want a much bigger package to bail out the Indian
economy, as against the minuscule announced by the government. Owing to the fiscal stimulus
packages as also additional post-budget items of expenditure, the combined net market
borrowings of the Central and State Governments in 2008-09 were nearly two and half times
their net borrowings in 2007-08. As per budget estimates, the combined net borrowing
requirements of the Central and State Governments for 2009-10 are estimated to be higher
than the 2008-09 actual

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borrowings by as much as 34 per cent. The initial responses of the government focused on the
financial side of the current crisis, with four major components to the first stimulus package
adopted in late 2008: reducing interest rates; increasing access to credit for companies, from
both domestic and foreign banking sources; getting state governments and public sector
enterprises to borrow more for spending on infrastructure; and providing credit for more
consumer spending, especially on automobiles and other durable consumer goods. RBI cut key
rates in April 2009 by 25 basis points in a move to infuse more liquidity into the system and
stimulate lending growth. The RBI cut the repo rate by 25 basis points from the current 5
percent to 4.75 percent, while the reverse repo rate has been brought down to 3.25 percent
from 3.5 percent earlier. The repo rate is the rate at which the RBI borrows from the banks,
while the reverse repo rate is the interest rate paid to banks for RBI’s borrowings from them.
The overall growth of GDP at factor cost at constant prices in 2008-09, as per revised estimates
released by the Central Statistical Organization (CSO) (May 29, 2009) was 6.7 per cent. India's
real GDP growth will average at 7.2 per cent over the next five years even as risks to the global
economy continue to remain high, the Economist Intelligence Unit (EIU) has said. The impact of
the monetary measures is visible from the point that India is one of the two economies which
will be growing more than 5% (the second is China) growth. The position of the Indian Financial
sector is also good in comparison of other countries. The flow of foreign exchange deposits in
2008-09 by non-resident Indians to banks has risen by almost 22 times over the previous year
to $3.99 billion (Rs19,671 crore) as the Reserve Bank of India (RBI) increased interest rate
ceilings during the year. But there are some loop-holes which could be covered by a better
policy we can point out some of them. It shows the even the NRI have more faith in Indian
national institutions than other international financial institutions.

 Government borrowings have gone up “rapidly and abruptly”, hindering transmission of


monetary measures to bring about lowering of interest rates, so it is a very serious
matter.
 One of the major stumbling blocks which may neutralise the positive effects of large
expenditure on infrastructure is corruption. In case corruption is not simultaneously
curbed to reasonably low levels, it may delay and reduce the much-desired effect in

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enlarging infrastructure. It may result in the Indian infrastructure network being geared
into a temporary employment generation programme with much smaller impact on the
economy as against the intended objectives.
 There is a need to orient the fiscal package towards inclusive growth so that the weaker
sections benefit. This would require special emphasis, for instance, on rural
infrastructure—rural roads and housing, instead of only highways and urban housing.
 The position of a foreign lender in India is very bad, a foreign lender cannot even take
the advantage of debt recovery tribunals, so such type of anomalies should be
abolished, it discourage the foreign lenders.
 There is a great need for an inclusive approach in our financial sector, and the organized
sector (local money lender) which is very important should also be included in official
finance.
 A comprehensive policy should be made for the development of the microfinance.
 There is great lack of supervision on the Non Banking Financial Companies, and
Cooperative Banks, but there is great need of are regulatory framework for these
financial institutions. Also, there is great lack of competitiveness in cooperative banks.
 We have to make more efforts to bring the money from the Swiss accounts of Indians,
which contains illegal money. American government has made the Swiss government
agreed for providing information about American accounts; we should also make more
efforts.

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Bibliography and References


1. . Avinash Paranjape(JULY - SEPTEMBER 2009), Economic Slowdown and the Indian Corporate
Sector, volume 34,VIKALPA .
2. December, 2008, Offshore Outsourcing and Economic Recession: Impact on Global, Indian and
European Outsourcers, CIO MAGAZINE.
3. Gajra, R. (2009, November 04). On A Roller Coaster Ride. BusinessWorld , p. 12.
4. Indu Rao and Deepti Bhatnagar(JULY - SEPTEMBER 2009), Surviving the Recession:Venus Jewel -
A Case Study from the Indian Diamond Industry, volume 34,VIKALPA
5. Love, B. (2009, 16 10). Asia helps feeble West in global recovery ‐ OECD. Retrieved 11 17, 2009,
from Yahoo Finance: http://in.biz.yahoo.com/091119/137/baum6d.html
6. Mohan, D. R. (2009). Global Financial Crisis:Causes, Impact, Policy Responses and Lessons1.
New Delhi: RBI
7. Paul Krugman, 2009, Return of depression economics and the crisis of 2008, W. W. Norton &
Company Ltd.
8. Report, S. (2009). The Long Climb. Economist , 63‐102.
9. Reuters. (2009, May 06). Worst Over, Indian Economy on the road to recovery. Retrieved
November01, 2009, from IBNLive.
http://ibnlive.in.com/news/worst‐over‐indian‐economy‐on‐road‐torecovery/91950‐7.html
10. Subbarao, D. (2009). Impact of the global financial crisis on India‐collateral damage and
response.New Delhi: RBI.

Sources of data
1. Indiastat.com
2. Bseindia.com
3. Capitaline database
4. Indiastat.com
5. Ipa.nic.in
6. Rbi.org.in

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