Background Of Global Crisis And Its Occurrence

Published Date: 02 Nov 2017

Recession is defined as period of decline in gross national or domestic product for two or more consecutive quarters. A recession would be indicated by a slowing of a nation’s production, rising unemployment and falling interest rates, usually following a decline in the demand for money. An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle.

A recession normally takes place when consumers lose confidence in the growth of the economy and start spending 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 stocks values will fall and thus stock markets fall.

BACKGROUND OF GLOBAL CRISIS AND ITS OCCURRENCE IN INDIA

During 2006-2007 the US housing prices started to fall which resulted into many of the sub- prime housing loans as bad loans. This meant that hundreds of billions of dollars of financial derivatives which were based on these underlying mortgage loans had lost most of their value. Thus, by the summer of 2007 "the house of financial cards" began to collapse and a growing number of American and European banks announced the huge losses on their mortgage related securities and investments.

In spite of trillions of dollars of bail-outs and fiscal stimulus, bank credit continued to be almost frozen, leading to sharp falls in consumer spending, investment, production and foreign trade. The sharp slowdown in economic activity in the US and Europe quickly spread across the world through the channels of a global credit squeeze and a massive drop in demand for goods and services from major exporting nations like China, Japan, Germany and India. In this way the financial crisis in the US and parts of Europe not only damaged production and growth in these countries but led to sharp drops in exports and production throughout all those countries.

The Economists called the financial crisis of the 2007 - 2009 as the "Great Recession", since it was not only a critical factor and vital cause for the failure of many businesses but also significant influencer that worsened many economies. After US busted out the housing bubble, this raised the rates of sub-prime and mortgage rates.

India being the country which was a fully an export driven economy like many other countries whose GDP mainly lies on domestic consumption was also affected due to recession. The software industry though is not a prime deterministic factor for Indian economy contributes notable financial transactions towards Indian economy. It brings major flow of foreign funds in to the Indian economy. The portfolio investments are visible in the Indian stock exchanges where foreign borrowings and FDI inflows remained less visible. When the global economies started decelerating, all these three factors bound to decease, which caused an impact on India's emerging economy.

FACTORS OF GLOBAL RECCESSION

The major factors of the crisis were due to

Prolonged boom in house prices-

The House prices in emerging market countries saw the boom over the last ten years. While Britain’s housing market fared better than many other developed countries. Research has revealed that India topped the table with house prices in the country increasing by a staggering 284 per cent since 2001. Just behind India in the table is Russia and South Africa, which saw house values rise by 209 per cent and 161 per cent respectively. At the other end of the scale, three of the six countries that recorded a fall in house prices over the past decade are members of the G8, the world’s eighth largest economies. Japan recorded the biggest fall in house prices, 30 per cent, while house prices in Germany are down 17 per cent and United States 2 per cent. Britain fared well in comparison, with house prices rising by 50 per cent over the past decade, putting it 13th out of 32 countries covered in the list. However, despite this, it is one of the worst performing countries in the past year, with prices down 8.3 per cent – only a handful of countries including Ireland, Greece and Bulgaria fared worse in 2011. According to the data, Hong Kong experienced the largest rise in house prices last year, with the average property rising 14 per cent. The substantial rise in Indian house prices over the past decade is partly a reflection of the 280 per cent rise in Indian Gross Domestic Product (GDP) over the same period.

House prices in India which have more than doubled in the past five years will keep rising 2012 even as the economy slows although prices in the country's financial capital. Mumbai look ripe for a fall. The first such survey of 19 property market analysts, consultants, developers and data firms taken over the past few weeks pointed to a median 7.5 percent rise for house prices this year in Asia's third largest economy. This comes despite a slowdown in home sales and a rapid deceleration in economic growth to 5.3 percent at the latest read, its weakest in nearly a decade, from a nearly 10 percent pace before the global financial crisis in 2008.

In Mumbai sales have continuously been going down. It has 37 to 40 months of inventory lying in the market. No efficient market can maintain more than eight months of inventory. But there appears to be little hope for prospective homebuyers in a market which analyst’s rate as too expensive in the urban centres of Delhi and Mumbai but that is still being driven by widespread expectations for hefty capital gains. Developers, who had reaped profits off a booming market, say relatively high borrowing costs and an average 30 percent rise in the cost of cement, steel and labour over the last few years stops them from lowering prices. In addition, some analysts say, speculators with deep pockets act as a buffer, preventing prices from falling or even levelling off and also shutting out many buyers who just need a home. The main reason prices have increased to this extent in India is due to speculators. People those who want to make a quick buck thus drive up prices. Rental yields in Mumbai apartments are 2% and it is not easy to resell. Off plan developments may sell but resell activity is very low.

Securitization and Repackaging of Loans

The mortgage market crisis that originated in the US was a complex matter involving a whole range of instruments of the financial market that transcended the boundaries of sub-prime mortgage. An interesting aspect of the crisis emanated from the fact that the banks/ lenders or the mortgage originators that sold sub-prime housing loans did not hold onto them. They sold them to other banks and investors through a process called securitization. In the context of the boom in the housing sector, the lenders enticed the naive, with poor credit histories, to borrow in the swelling sub-prime mortgage market. They originated and sold poorly underwritten loans without demanding appropriate documentation or performing adequate due diligence and passed the risks along to investors and securitizes without accepting responsibility for subsequent defaults. These sub-prime mortgages were securitized and re-packaged, sold and resold to investors around the world, as products that were rated as profitable investments. They had a strong incentive to lend to risky borrowers as investors, seeking high returns and were eager to purchase securities backed by sub-prime mortgages. The booming housing sector brought to the fore a system of repackaging of loans. It thrived on the back of flourishing mortgage credit market. The system was such that big investment banks such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers or Bears Stearns would encourage the mortgage banks countrywide to make home loans, often providing the capital and then the Huge Investment Banks (HIBs), would purchase these loans and package them into large securities called the Residential Mortgage Backed Securities (RMBS).

Excessive Leverage

It is reported that the final problem came from excessive leverage. Investors bought mortgage-backed securities by borrowing. Some Wall Street Banks had borrowed 40 times more than they were worth. In 1975, the Securities Exchange Commission (SEC) established a net capital rule that required the investment banks who traded securities for customers as well as their own account, to limit their leverage to 12 times. However, in 2004 the Securities and Exchange Commission (SEC) allowed the five largest investment banks Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and Morgan Stanley to more than double the leverage they were allowed to keep on their balance sheets, i.e. to lower their capital adequacy requirements. The institutions that have reported huge losses are those which are highly leveraged. Leveraged investors have had to return the money they borrowed to buy everything from shares to complex derivatives. That sends financial prices even lower. All this led to massive bailout packages in USA, as the government stepped in to buy and lend in a financial market.

Rapid financial innovation and stringent regulations

It is not surprising that governments everywhere seek to regulate financial institutions to avoid crisis and to make sure a country’s financial system efficiently promotes economic growth and opportunity. Striking a balance between freedom and restraint is imperative. It is reported that the financial innovation inevitably exacerbates risks, while a tightly regulated financial system hampers growth. When regulation is either too aggressive or too lax, it damages the very institutions it is meant to protect.

Typical characteristics of US financial system Failure of Global Corporate Governance

One of the reasons for current crisis in the advanced industrial countries related to the failures in corporate governance that led to non-transparent incentive schemes that encouraged bad accounting practices. Rajadhyaksha (2008) studied that there is inadequate representation and in some cases no representation of emerging markets and less developed countries in the govern-acne of the international economic institutions and standard set-ting bodies, like the Basle Committee on Banking Regulation. The IMF has observed and stated in The Hindu, (March 11, 2009) that market discipline still works and that the focus of new regulations should not be on eliminating risk but on improving market discipline and addressing the tendency of market participants to under-estimate the systemic effects of their collective actions. On the contrary, it has often put pressure on the developing countries to pursue such macro-economic policies that are not only disadvantageous to the developing countries, but also contribute to greater global financial instability.

Complex Interplay of multiple factors

It may be said with a measure of certainty that the global economic crisis is not alone due to subprime mortgage. There are a host of factors that led to a crisis of such an enormous magnitude. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes.

DRIVERS THAT LED GLOBAL RECESSION

Gross Domestic Product (GDP)

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product or GDP. The GDP stands for the money value of all final goods and services produced within the domestic territory of a country during a fiscal year. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. GDP per capita is often considered as an indicator of a country's standard of living. The growth rate of Indian economy for the fiscal years from 2003-04 to 2011-12. The GDP was growing at the rate of 8.5%, 7.5%, 9.5%, 9.6% and 9.3%, respectively, for the five years leading up to the crisis. However, the crisis affected external as well as internal sectors of the national economy led to a reduced growth of the domestic economy. That is the GDP growth rate declined from 9.3 per cent to 6.8 per cent during 2008- 09. In 2011-12, the growth rate was reduced to 8.2. During 2012-13, it may decline to 7.50 and by 2014-2018, it will reach 8.5 %. The main reason for decline in the GDP growth is slowdown in industrial growth.

Inflation rate

By January 2010, the domestic growth signals were pointing towards a consolidation of the recovery process. However, the sustained increase in food prices was beginning to spill over to manufactured products. Inflation in primary commodities moved up 8.2 in August 2009 to 22.2 per cent by March 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of inflation are the consumer price index which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. The inflation rate in 2008 stood at 8.349, and then there is a continuous increase up to 2010. In 2012 the inflation rate was decreased to 6.50. It is forecasted that in 2013 the inflation rate will reach 5.90 and in 2014-18 the rate will reduce to 5.5.

Current account deficit

The current account deficit occurs when a country's total imports of goods, services and transfers are greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. India reported a current account deficit equivalent to 16.9 billion USD in the third quarter of 2011. India is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union, the United States, China and UAE. India’s current account deficit has surged to 4.1% of GDP during second quarter of the fiscal year 2011 as against 3.2% the previous year. Merchandise trade deficit widened to $35.4 billion during quarter fiscal year 2011 as against $31.6 billion in previous quarter as growth in imports far outpaced the progress in exports. According to directorate general of foreign trade, India’s trade deficit for the year 2012 is likely to range between $115-125 billion.

Industrial growth

The volatility in the industrial output numbers announced over the last few months has left economists high-and-dry with regard to arriving at any type of conclusion on growth figures for the economy. In latest, the core growth (country’s infrastructure sector output) registered a smart comeback in December 2010 with 6.6% growth. These core sectors crude oil, petroleum refinery products, coal, cement and steel accounts for almost a quarter of the country’s index of industrial production. The index of industrial production compares the growth in the general level of industrial activity in the economy with reference to a comparable base year. However, in November 2010 the slowdown in industrial production had hit an 18-month low of 2.7%, raising questions on the veracity of an index data. Further, lower growth in manufacturing and electricity has pulled down index of industrial production growth in august 2010.

Rising interest rates

Rising interest rate scenario can directly impact the growth prospects of a nation as it sums up to costly working conditions and operating environment. The repo rate has been increased from 4.75 in 2009 to 8.5 in 2012. The reverse repo rate has been increased from 3.25 in 2009 to 7.5 in 2012. The Marginal standing facility rate has been increased from 9.25 in 2009 to 9.5 in 2012. The CRR rate has been increased from 6.00 in 2009 to 5.5 in 2012. The Bank rate has been increased from 6.00 in 2009 to 9.5 in 2012.

Fiscal deficit

When a government’s expenditures exceed the revenue that it generates, it is a case of fiscal deficit. Though, fiscal deficit is not necessarily a negative economic event, a controlled fiscal situation points towards a balanced budget policy of a country. More recently, Rib had indicated that managing inflation through monetary policy becomes more of a challenge if the fiscal deficit goes unguarded. The government has set a deficit target of 4.8% of GDP for fy12. Analysts are of the opinion that delays in reform rollover such as implementation of Goods and Services Tax, adoption of food security bill, pass on of the oil subsidies to the final consumers could affect growth and delay fiscal consolidation.

FDI inflows

Foreign Direct Investment (FDI) inflow into the core sectors plays a significant role as a source of capital, management, and technology in transitional economies. It implies that FDI can have positive effects on the host economy’s developmental efforts. India has opened its economy and has allowed the entry of multinational corporations (MNCs) as a part of the reform process started in the beginning of 1990s. Like many other countries, India has offered greater incentives to encourage FDI inflows into its economy. The presence of FDI inflow in India was negligible till 1991, but there has been a steady build-up in the actual FDI inflows in the post-liberalisation period. The share of FDI in GDP was merely 0.03 per cent in 1991, which rose to about 3 per cent in 2009-10. Its annual growth during this period was phenomenal. The FDI inflow has been growing rapidly since then with a quantum jump after 2004-05. From US $3250 million in 2004-05, the FDI has leaped to over US $247329 million in 2008-09. However, since February 2008, a reversal in the trend has been observed. A perusal of the monthly inflow of FDI between January 2008 and January 2010 suggests a clear decline over a period of 24 months.

FII selling

In the present global scenario, India has been considered as the most promising and fast growing economy in the world. Due to the liberalized rules for foreign direct investment in India, the real estate, telecommunication, services, construction activities, power etc have become very attractive investment avenues for both the domestic as well as foreign investors. Similarly, due to the increased activities of foreign institutional investors (FIIS) like mutual funds, pension funds etc, and the foreign portfolio investment in the country has witnessed tremendous upswing during 2008. The overall foreign investment in India met serious setback during the crisis. That the foreign investment in India has been growing at a faster rate since 2003-04. However, during 2008-09, the very year hit by the crisis, the foreign investment declined significantly showing a negative growth rate of 31.82 per cent. It was seen that the net portfolio flows to India soon turned negative during the financial crisis as foreign institutional investors rushed to sell equity stakes in a bid to replenish overseas cash. A similar trend of negative growth is found in case of income flow to India – including investment income and compensation of employees- during 2008-09 and 2009-10.

Merchandize export and Import

The worldwide financial crisis has caused fall in India’s merchandise exports and imports. Other sectors like tea and carpets were also down by 20 percent and 32 percent, respectively. Overall merchandise export and import have been significantly improving since 2001-02. The growth momentum continued till 2008-09. The merchandise export which recorded a growth rate of 28.29 per cent during 2008-09, immediately turned down with major growth of only 0.06 per cent. The very similar trend is found in case of India’s merchandise imports. It slid down from a growth rate of 35.75% during 2008-09 to 0.13 % during 2009-2010

THE PROBLEMS FACED BY INDIAN INDUSTRIES DURING GLOBAL RECESSION.

Unemployment. The biggest problem of a recession was a rise in cyclical unemployment. Because firms produced less, they demanded fewer workers leading to a rise in unemployment.

Higher Government Borrowing. During recession, the government finances tend to deteriorate. People paid fewer taxes because of higher unemployment and they had to spend more on unemployment benefits. This deterioration in government finances caused markets to be worried about levels of government borrowing leading to higher interest rate costs. This rise in bond yields pressurized the Indian government to reduce budget deficits through spending cuts and tax rises.

Devaluation in exchange rate. Currencies tend to devalue in a recession because, in a recession, people expect lower interest rates and so there is less demand for the currency. The uncertain exchange rate and a sudden increase in dollar value against Indian Rupee had contributed to the slowdown. Increasing dollar value has raised the landed cost of imported machine tools and even raw materials required for production by about 14%. Alloy and steel prices have also not shown any reduction in their prices and this high price has actually forced the automobile manufacturers to hike the automobiles prices. It is believed that steel manufacturers across the country are looking for re-imposition of custom duty on steel. Increased cost of raw materials directly affected the cost of the car rolled out, eventually tagging a particular automobile model with a higher price tag.

Falling asset prices. During recession, there was less demand for buying fixed assets such as making investments in commercial real estate properties. Falling Rates in Shops and flats aggravated the fall in consumer spending and also increased bank losses.

Reduction in demand for Real Estate Properties- The demand for houses have reduced significantly and property prices across India has registered 15-20% fall. The woes of real estate have spread to construction industry as well. Because of less demand for houses, construction companies are going to suffer big time. Property prices and rentals are correcting which have led to the erosion in market capitalization of many listed players like DLF and Unitech. Many current projects of real estate developers have been stalled due to lack of funds and investors either do not have funds to invest or are reluctant to do so. Consequently, companies are forced to sell of the properties at a lower value. Rising costs, lack of capital, reluctance of buyers have all contributed to the current scenario.

Several IT companies are looking to pre-lease office space to take advantage of the favourable commercial terms currently being proposed by commercial office space developers. Demand for offices is expected to remain stable. However, supply is expected to outweigh demand in most prime cities of India. Commercial office space rents and capital values are expected to increase across all cities.

Interest from international real estate investors in Indian real estate has been limited in 2012. Broadly, India has seen roughly 18 Billion US$ being invested in RE over the past 7 years. With 3.4 Billion US$ of exits, Indian real estate performance has not seen exciting for the foreign investor with average multiple of 1.25.

Rise in Protectionism-In response to a global downturn, countries are often encouraged to respond with protectionist measures (e.g. raising import duties). This leads to retaliation and a general decline in trade which has adverse effects.

Reduction in the Demand for Air Travel -The airline industry had also been impacted by the recent economic recession, which had reduced the public’s ability to purchase air travel. Consequently, the demand for air travel had dropped as consumers experienced the impact of growing unemployment and rising expenses for basic necessities affected by petroleum prices. For example - commuting, utilities, and food.

Major and Regional Airlines Had Faced Increased Financial Strain -Fuel costs, economic pressures, and competition had forced airlines into bankruptcy and reorganization to address accumulated losses, mounting debt, and labour issues (e.g., wages, benefits, and work rules).

The Slowdown in freight and cargo movement- As a result of slowdown in freight and cargo movement, the replacement market which accounts for 66% of the market had taken a hammering. The major players MRF, CEAT, APOLL and J.K. who account for a 68% market share either had to cut down their production or pile up inventories During April 2008-February 2009, tyre production in volume terms had witnessed a decline of around 0.4 per cent year-on-year across main categories (truck and bus, light commercial vehicles, cars and jeep).

Decline in Growth- Growth slowed down due to the deceleration in medium and heavy commercial vehicles (MHCV) production coupled with slowing replacement demand with increasing idle capacities. The light commercial vehicle (LCV) tyre segment grew by a mere 1.6 per cent year-on-year while the passenger car tyre segment remained almost at the same level (0.1 per cent growth year-on-year). CRISIL Research estimates tyre demand to decline by around 1.0 per cent in 2008-09 mainly due to slowdown in off-take of commercial vehicles

Reduction in foreign tourists to India and Domestic Tourists within India. The recession leads to less tourists coming to India and less domestic tourists within India. Occupancy rate in Hotels were very low. This in turn negatively affected tours and travels industry

Reduction in Exports- India faced a sudden decline in its exports during the economic crisis. The exports decreased from 35% to 15%, and shipments decreased to 33.33%. This drop affected many industrial sectors right from the manufacturing goods to jeweller’s exports.

Delay or Deferred Loans from Banks and Financers- Banks and financers have disbursed the approved loan because of the cash crunch. Payments from the Original Equipment Manufacturer have also been delayed and in most cases banks have deferred or disbursed the approved loan. Original Equipment Manufacturers take this loan from banks and financers for establishments, capacity expansions, or even for the requirement of high-end equipments for car designing and production.

Fund commitments and dispositions made in Special Purpose Vehicles could be temporarily suspended. Funds that have already been committed will have to comply with increased levels of disclosures, both with investors as well as regulators.

Decline in Sales and Profit – The Indian automobile market had recorded a continuous growth of about 17.2% over the last few years but the recession had brought the growth to about 7-8%. Be it Tata Motors or Maruti Suzuki or even Mercedes-Benz, the automobile market had gone down to a tremendously negative terrain. Tata had reported that its profit fell from 34.1 percent to 3.47 billion rupees because of the slower growth in the industrial production. Further, the company had also recorded a 20% decline in the sales as compared to last year. And with its Nano making a big impact before the downturn as such, but after the downturn may hold a bleak future for the world's cheapest car, because the consumer spending has gone very low. Even Maruti Suzuki reported a 7% decline in sales due to rising cost of the materials and a falling rupee value. Even Mahindra & Mahindra, the India's largest SUV and tractor manufacturer, is not immunized, showing profit fall of 20.6%.

Cost of Land-The High cost of land in the country often discourages an investor to invest money in construction of new hotels. The Construction of hotels is highly capital intensive and it is estimated that to construct a single five-star room it costs around Rs 1.25 crore. As a result there is a mismatch between demand and supply leading to higher occupancy rates and increasing prices. In fact, average rate of hotel rooms in five-stars has gone up from Rs 4,000 five years ago to Rs 16,000 now. Though this rate can be affordable for business travellers, it is very difficult for leisure travellers to pay such exorbitant rates.

Rationalization of Taxes- There is no rationalization of taxes across the country as states charge different rates. The Tax holidays are available only to hotels which are at heritage sites. This becomes a restriction for the growth of the hotel industry.

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IMPACT OF RECESSION ON GLOBAL ECONOMY

The collapse of Lehman Brothers in September 2008, lead the global inter-bank financial markets to freeze in view of large losses suffered by the major financial institutions and the extreme uncertainty over the health of the counterparty balance sheets. This had a knock on effect on various segments of financial markets, including inter-bank markets. Heightened risk aversion and search for safe havens led to deleveraging by investors and consequent sharp and substantial retrenchment in capital flows to emerging and developing economies. All this turmoil in various segments of the financial markets led to a sharp decline in economic activity in the major advanced economies. Unemployment rates soared and labour markets became weak.

The GDP growth in advanced economies turned negative in 2009 - 3.7 per cent) from the strong pace of 2.9 per cent during 2004-07. Growth recovered modestly in 2010, but again turned anaemic in 2011 (1.6 per cent). Growth in advanced economies averaged a mere 0.3 per cent during 2008-11 and output still remains well below potential.

In the global credit and money markets, the risk spreads had ballooned during the crisis period. The huge risk aversion was reflected in sharp decline in the stock indices across the globe and heightened volatility. Global equity markets witnessed major sell-offs in March 2009. The Dow Jones Industrial Average (DJIA) registered the new twelve-year low of 6,547.05 (on closing basis) on March 9, 2009 and had lost 20% of its value. The VIX index –a widely used measure of market risk and often referred to as the "investor fear gauge" – rose to a record high of 80.86 on November 20, 2008. The yields of the treasury securities plummeted on the back of safe haven demands, with the 10 year US Treasury yield touching a low of 2.05% on Dec 30, 2008. The three month T-Bill yield fell to (-) 4 basis points, the lowest it had been since 1954 reflecting unprecedented flight-to-safety. In a parallel development, while other asset classes had fallen in value, commodity prices surged during this period. Both Gold and Crude oil prices had spiralled during the period.

Global crisis has also severely affected the growth and health of global banking sector. Bank credit growth in major economies such as US, UK, and the Euro zone secularly declined throughout 2009. The asset quality was also been adversely impacted with NPA (as % of total loans) rising to higher levels. The NPAs in the UK and US had risen from 0.9 per cent and 1.4 per cent in 2007 to 4.0 per cent and 4.9 per cent in 2009 respectively.

IMPACT OF RECESSION IN INDIAN ECONOMY

India, after a subsequent growth, experienced a decline in its economy due to the global economic downturn. Faced many uncertainties like stumbling industrial growth, reduced foreign exchange and diminishing rupee value. This economic instability gave a worst hit in Indian economic portfolio by acutely affecting Indian banks. Many public sector units and banks, who invested money into derivatives, were funded by Lehman Brothers Inc and Meryl Lynch Inc for the exposure in the derivatives market. As Lehman Brothers Inc dissolved, many companies including leading banks in India filed losses for few hundred million dollars.

The impact of this huge financial crisis affected not only the financial markets primarily, but also the Indian IT industry, availability of global funds, and decrease in exports.

Reduced Availability of Global Funds

The availability of the global funds, which is accounted as one of the major driving force of the emerging economies like India, was considerably less. The initial stage experienced a rise in the interest rates and the equity prices were affected as the funds transformed into bonds. This less inflow didn't affect the GDP of the Indian economy, since it held the larger share on its domestic household savings. Indian companies, which relied on the foreign funds for its trading activities, were allowed less access, which in turn affected the corporate profitability due to high interest rates, created large demand for the domestic fund access and peer supply pressure was restricted from capacity increase.

Effects in Indian Exports

India faced a sudden decline in its exports during this economic crisis, as a piece of Indian economy is a sole dependent on exports. In October 2008, after 35% growth in the previous months, filed its decrease in exports calculated to 15%, and shipments decreased to 33.33%, recorded to be a largest drop ever. This drop affected many industrial sectors right from the manufacturing goods to jewellery exports. This fall in the exports which lead to many job losses estimated to be 1million and closure of many small units. Global recession had adversely affected the Indian exports resulting in widening of current account deficit (CAD). Exports which grew at 25 per cent during 2005/08 decelerated to 13.6 per cent in the crisis year (2008-09) and registered a negative growth of 3.5 per cent in 2009-10. Output growth, which averaged little less than 9 per cent in the previous five years and 9.5 per cent during the three year period 2005-08, dropped to 6.8 per cent in the crisis year (2008-09). Global crisis also affect the Indian export-import market. In 2008-09, export-import both had been reduced due to crisis of 2007. In fact in 2009-10 export and import of India reached in negative. Demand for Indian product has reduced in international market as a result export gone under negative in 2009-10.

Effects in Indian IT Industry

The one of the main tools to transact and access the flow of foreign funds is the Indian IT industry, which contributes significantly a mind share towards the Indian GDP. Indian IT companies are well accredited for its quality software and services, well stated to be a major employment opportunity creator. Since, India has abundant labour resources and plays a major service provider across the globe. Many foreign companies are attracted to the Indian IT companies for its software development and for its service outsourcings. The recent outsourcing boom into India from the foreign countries mainly from US left an impact in the in the IT industry, which is accounted to be a major player in employment and foreign exchange. Approximately 60% of the Indian IT sector's revenue is fully based only on the US suppliers. Around 30% of the industry's revenue is generated from the financial services companies from US. Indian companies were appreciated for its flexibility in work, Quality product deliveries and for its efficient services. As there were no intense partnering between Indian firms and major financial services, major share of the IT firms were saved from the impact of the recession. Even though, some Indian IT companies partnered with US financial companies like Lehman Brothers Inc and Meryl Lynch Inc affected a little. This slowdown in the US economy lead 70% of the firms to negotiate for lower rates with their suppliers and nearly 60% had cut back the contracts. The sudden fall in the US economy reduced the growth of Indian IT firms down by 2-3%.

Effect on Indian Agriculture

India has opened its market since the beginning of the past decade (more precisely since July 1991) by lowering tariff and non- tariff barriers, as well as liberalising investment policies. Still Indi-agriculture is far less vulnerable to the external economic shocks than agriculture in many developing countries. Agricultural trade still accounts for less than 10 per cent of agricultural gross domestic product (Ag. GDP). However, Indian agriculture cannot be completely insulated from the global and domestic economic recessions. The impact of economic crisis is transmitted through three distinct channels, viz., financial sector, exports and ex-change rates, and the impact manifests itself in several direct and indirect ways. Some of the implications of the economic crisis are discernible in the short-run, while others may be visible only in the long run. It is difficult to gauge the impact of economic crisis on Indian agriculture in the short run. However, the trends in some broad parameters may indicate its implications and the possible options can be worked out to mitigate its adverse impact. The broad indicators for assessing the impact of economic recession on Indian agriculture could be the trends agricultural exports and agriculture GDP.

Agricultural Exports

Two remarkable developments have taken place in India’s agricultural exports during the post-liberalisation period. one, the agricultural exports have grown at a much faster rate since the initiation of liberal economic policies where agricultural exports in value terms have grown annually from 18.9 per cent during 1990s to 15.2 per cent during 2000s but after 2000 it reduced gradually . It would be interesting to see whether mere has been any divergence from the long-term trend in the export of important agricultural commodities due to economic recession. For this, share of export of agricultural products (including livestock products) in total national export during 2007-08 and 2009-10 can be com-pared. However, the decline or slowdown in exports cannot be entirely attributed to the economic recession.

Agricultural GDP -The trend in agricultural GDP during the past two decades suggests that the sector has been growing slowly and steadily, but with occasional slumps. The reasons for slow growth during the 1990s and early 2000s are many, ranging from poor monsoons to depressed agricultural commodity prices in the world market. The current crisis is expected to have a modest effect on the GDP of agricultural and allied products. Recent trends indicate that the sector is not witnessing similar growth achieved during the previous year. Agricultural GDP is declined by -0.1 per cent in 2008-09 as compared to 5.8 per cent in 2007-08. In 2009-10 and 2010-11 GDP growth rate for agriculture sector was 0.4 percent and 6.6 percent respectively. In spite of government’s efforts, farm income is expected to have slightly adverse impact due to economic recession. It is important to note that rainfall and other weather parameters influence agricultural growth significantly.

Effects in Indian Financial Industry

The Indian financial market remained resilient, when the foreign institutional investors disappeared. As the impact of the economic crisis, the mental attitude of investors took a drift to withdraw from risky markets ended with substantial capital outflow that led to a liquidity crunch putting Indian stock market under huge pressure .Even though the domestic banking was termed to be secure as the nationalized banks remain the core of the system. This economic crisis created fragility as many banks invested the investments of US financial firms into the derivatives. Many other factors like decline in the foreign exchange reserves held by Reserve Bank of India, diminished value of rupee with respect to US dollar value, and decline in the share value of the stocks.

1) If our share markets ever touched new heights, it was due to investments from international banks. The immediate impact of the crisis was felt through large capital outflows and consequent fall in the domestic stock markets on account of sell-off by Foreign Institutional Investors and steep depreciation of the Rupee against US Dollar. The BSE Sensex (on closing basis), which had touched a peak of 20873 on January 8, 2008, declined to a low of 8160 on March 9, 2009. While the capital outflows led to decline in the domestic forex liquidity.

2) Before recession, banks continued to buy stock from India but now they are selling. In the pre-crisis years, capital inflows were far in excess of the current account deficit (CAD) and the Reserve Bank had to absorb these flows in its balance sheet. As global investors tried to rebalance their portfolios during the crisis period, the country witnessed large capital outflows immediately after the collapse of Lehman Brothers leading to a downward pressure on the rupee. The exchange rate depreciated from Rs. 39.37 per dollar in January 2008 to Rs. 51.23 per dollar in March 2009.

3) As banks kept giving loans and funds at reasonable terms. At the end of the day, they were left with nothing. The spillover effects of the crisis were, however, most visible in the credit growth of banking sector. Since September 2008, the growth rate of advances, as also of assets, started witnessing a declining trend which continued for almost one year up to September 2009. The Y-o-Y growth in advances fell from 28.5 per cent at the end March 2007 to 12.3 per cent by end Sept 2009 while the Y-o-Y growth in assets fell from 22.9 per cent to 15.1 per cent during the same period. The credit markets also came under pressure as corporate found it difficult to raise resources through external sources of funding, turned to domestic bank and non-bank institutions for funding and also withdrew their investments from the liquid schemes of mutual funds. This, in turn, put redemption pressure on mutual funds (MFs) and, further along the chain, on non-banking financial companies (NBFCs) for whom MFs were a significant source of funding.