Background Of Global Crisis And Occurrence

Published Date: 02 Nov 2017

The global recession is defined as a decline in the growth of gross domestic product of the country for more than two successive quarters of a year. The recession said to occur when the confidence of consumers is lost in the growth of the economy. The consumers start spending less causing in decrease of demand for goods and services. This caused decrease in production of goods and increased unemployment all over the world.

BACKGROUND OF GLOBAL CRISIS AND ITS OCCURRENCE IN INDIA

In the year 2006, the real estate prices in United States had started to decline which resulted in turning the subprime housing loans into high risk loans. The financial derivatives worth of $100 billion lost its value as it was based on subprime loans i.e. mortgage loans. By the end of 2006, a growing number of banks of American and European origin faced major losses on their collateral related assets, sureties and investitures.

Though there was $1000000000000 of monetary assistance in the form of bail outs, the borrowing capacity provided by the bank to the customers in the form of credit continued to remain blocked. This caused a steep fall in spending by the customers, in making investments, for production of goods and decline in foreign trade. The fall in the economic activity in United States and Europe spread all over the world through the routes of global restriction in bank lending, restriction in credit sales, increase in interest rates and decline in desire to purchase goods and services from leading exporters of China, Japan, Germany and India. The financial crisis which started in United States and parts of Europe not only harmed the production and growth in these nations but also declined the exports and production of all the countries around the world. The Financial crisis of the 2007 to 2009 is called as Great Recession because it was not only the important factor and cause for the failure of many businesses but also a major influencer for worsening many economies of the world.

India was the country which had a fully export driven economy like many other countries. The Gross Domestic Product of India was mainly depended on domestic consumption. The Information technology industry which was not the greatest productivity factor for Indian economy contributes worthy financial transactions towards Indian economy. It brings majority of foreign funds to the Indian economy. In the stock exchanges the portfolio investments are apparent whereas the foreign borrowings and FDI inflows remained less apparent. When the global economies started decelerating, all these three factors started to decease, which caused a major impact on India's emerging economy.

FACTORS OF GLOBAL RECCESSION

The major factors of the Global Recession were due to

Prolonged boom in house prices

In last ten years, the real estate prices in emerging market countries saw the economy growing stronger. The Britain’s real estate market got along better than many other developed countries. As per the research, India topped with increasing house prices in the country followed by Russia and South Africa respectively. Out of six, three countries that showed a fall in house prices are the members of the G8, the world’s eighth largest economies. Japan had thirty percent fall in house prices, the Germany by seventeen percent and United States by two per cent. As per the research, the Hong Kong experienced the largest rise in house prices in 2011 with the fourteen percent rise. This fairly rise in Indian real estate prices over the past decade is actually the contemplation of the two hundred and eighty per cent rise in Gross Domestic Product of India.

The prices of Indian real estate companies were increased to two fold compared to last five years including the year 2012. Though the economy is slowing down, the prices of the real estate properties are booming in the country's financial capital Mumbai. There was seven point five percent rise for house prices in Mumbai for the year 2012. There is decline in sales at Mumbai as inventory of many companies are brooding in the market from thirty seven days to forty days. Those Real Estate Developers who had gained profits from profitable market say that the prices of real estate properties cannot be lowered due to the high borrowing costs and there is an average thirty percent increase in price of cement, steel and labour. There are speculators who act as mediators. They preclude the prices from declining and also prevent the buyers from purchasing the desired property. The amount generated from rents in Mumbai apartments are two percent and to do reselling of the property is difficult.

Securitization and Repackaging of Loans

The crisis of mortgage market which originated in the United States was a complicated matter that involved an entire chain of financial market that exceeded the limits of sub-prime mortgage. The banks or lenders or the mortgage originators did not hold the sub-prime housing loans with them but sold these mortgage loans to other banks and investors through a process called securitization. At the time of growth in the housing sector, the lenders lured the inexperienced investors with poor credit histories to borrow in the abnormally expanded sub-prime mortgage market. The lenders sold indisposed underwritten loans without demanding authenticated documents and by not performing adequate investigation of the business or person before signing the loan contract. They passed the risks to investors and issued bonds in groups without accepting the responsibility for future non payments. 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 motivator to lend to risky borrowers because the investors those who wanted high returns and were eager to purchase securities backed by sub-prime mortgages. The prospering Real estate sector contributed towards the arrangement of repackaging of loans. It expanded its business by booming the mortgage credit market. The arrangement of repackaging loans was such a big investment that the multinational banks such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers or Bears Stearns promoted the mortgage banks worldwide to take property loans by offering capital. The Huge Investment Banks would purchase these property loans and package them into large securities called the Residential Mortgage Backed Securities.

Excessive Leverage

The mortgage securities were bought by the investors by borrowing. There were incidents that few banks of Wall Street had borrowed more than forty times than their capacity to repay. The Securities Exchange Commission of United states in 1975 had constituted a net capital rule which required that those investment banks which traded securities for customers as well as for their own account had to limit their leverage to twelve times. But in 2004, the Securities and Exchange Commission granted the five major investment banks i.e. Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and Morgan Stanley to duplicate their leverage that they were allowed to keep on their balance sheets by lowering their capital adequacy requirements. These institutions went into huge losses due to leveraging. The investors who had went through leveraging were supposed to return the money they borrowed in order to buy everything from shares to derivatives which resulted in lowering of prices.

Rapid financial innovation and stringent regulations

The governments all over the world try to govern the financial institutions to confront crisis. They try to make certain that the country’s financial system works efficiently towards the promotion of economic growth and opportunity. When there is financial innovation there are chances of unavoidable risks and with stringent regulations towards the financial system hampers the growth. When the regulation is either too pushy or too lenient, it harms the purpose i.e. protection of financial institutions for which the rules were made.

Typical characteristics of United S financial system Failure of Global Corporate Governance

As per the suggestions given by the International Monetary Fund in The Hindu, dated March 11, 2009. It propagates that, the focus of new rules should not be on eradicating risk but on ameliorating market discipline and directing the propensity of market participants to under-rate the systemic effects of their joint actions. On the contrast, there is always pressure on the developing countries to pursue macro-economic policies which are not only less advantageous to the developing countries but also contribute towards the financial imbalance all over the globe.

Complex Interplay of multiple factors

The global financial crisis is not only caused by sub -prime mortgage but also there are lots of factors which led the crisis to the tremendous level .At the time, when there was substantial development around the globe with expanding flow of capital and extended constancy, the market players looked for mellower returns without enough perceptiveness of the risks and failed to do proper investigation. The other factors were fragile underwriting criteria, dilapidated practices of risk management, progressively complicated and incomprehensible financial products, subsequent undue leverages, discrepant and inefficiently organised policies and deficient morphologic reforms which created exposures in the financial system.

DRIVERS THAT LED GLOBAL RECESSION

Gross Domestic Product

The economic growth is defined as the gain in value of the goods and services produced by an economy. This is measured as the percent rate of gain in real gross domestic product. The Gross Domestic Product stands for the money value of all final goods and services produced within the domestic territory of a country during a fiscal year. The Gross Domestic Product per capita is frequently considered as an indicator of a country's standard of living. The financial crisis affected both the external as well as internal sectors of the national economy which led to the decline in the growth of the domestic economy. The Gross Domestic Product growth rate for the financial year 2008- 09 declined from nine point three per cent to six point eight per cent. For the financial year 2011-12, the growth rate was reduced to eight point two per cent. During the financial year 2012-13, the growth rate has dropped to four point five per cent and for financial year 2014, the growth rate is forecasted to six point one to six point seven per cent. The main reason for decline in the Gross Domestic Product growth is due to slowdown in industrial growth.

Inflation rate

Though in 2010 the growth in domestic economy signalled the recovery from recession but the prolonged rise in food prices was beginning to spill over to manufactured products. The Inflation in primary commodities moved up to eight point two percent in August 2009 to twenty two point two per cent by March 2010. Inflation rate denotes to, a mass increase in prices which are evaluated against the criterion level of purchasing index. The familiar measures of inflation are the consumer price index which measures the consumer prices, and the Gross Domestic Product deflator which measures inflation in the whole of the domestic economy. The inflation rate in 2008 stood at eight point three percent, and then there was a continuous rise up to 2010. In 2012 the inflation rate was decreased to six point five percent. It is forecasted that in 2013 the inflation rate will reach five point nine percent and in 2014-18 the rate will reduce to five point five percent.

Current account deficit

The current account deficit happens when the country's aggregate imports of goods, services and transfers are bigger than the country's aggregate export of goods, services and transfers. This position makes the country an obligation of paying a debt to the rest of the world. India had current account deficit equivalent to $sixteen point nine billion in the third quarter of financial year 2011-2012. Though India is leading exporter of precious stones, jewelleries, fabrics, chemicals, goods made of leather, products of engineering made and other services but India is misfortunate in terms of resources like oil and coal which is scarce in our country. The current account deficit of India has heaved to four point one percent of GDP during the fiscal year 2011 as against three point two percent of 2010. As per the directorate general of foreign trade the India’s trade deficit for the year 2012 is arrayed between $one hundred and fifteen to one hundred twenty five billion. Currently for the financial year 2013-2014 the current account deficit remains to be mellow due to our exuberant habituation on imports of oil, coal, gold, and decline in exports. We are in need of $seventy five billion to finance the current account deficit.

Industrial growth

The unpredictability in the industrial production numbers announced over the last few months of 2012 have created hue and cry with respect to the economic growth. The major sectors which contribute a quarter of the country’s industrial production index are fossil oil, products of petroleum refinery, coal, cement and steel. The growth in the overall degree of industrial activity in the economy is compared with respect to a base year. But in 2010 the decline in industrial production had crashed with an eighteen month low of two point seven percent.

Rising interest rates

The increase in interest rates has direct impact on the national growth as it adds up to high priced working and operating surroundings. 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

A fiscal deficit is outlined as when the government expenditures are greater than the revenue that it brings forth. The Indian government has set a deficit target of 5.3% of GDP for Financial year 2012-2013. The reform delays like Goods and Services Tax implementation, acceptance of food security bill, distribution of oil subsidies to the final consumers will affect the development and hold up the integration of fiscal responsibilities of the country.

Foreign Direct Investment inflows

The inflows of Foreign Direct Investment into the major sectors play an important role in the form of capital, management, and technology in transitional economies. It connotes that Foreign Direct Investment has incontrovertible outcomes on the host country’s developmental activities. India has offered bigger incentives to boost Foreign Direct Investment inflows into its economy. The share of Foreign Direct Investment in Gross Domestic Product was merely point zero three per cent in 1991 which rose to about three per cent in 2009-10. From dollar three thousand two hundred and fifty million in 2004-05, the Foreign Direct Investment has leaped to over dollar two lakh forty seven three hundred and twenty nine million in 2008-09. From February 2008, retroversion in the course of Foreign Direct Investment inflows has been ascertained.

Foreign Institutional Investors 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 for foreign investors. Likewise, due to the increased activities of foreign institutional investors like mutual funds, pension funds 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. The foreign investment declined significantly during 2008-2009 showing a negative growth rate of approximately thirty two percent. The total portfolio flows to India became negative during the financial crisis as foreign institutional investors rushed to sell equity stakes in a bid to replenish overseas cash.

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 twenty percent and thirty two percent, respectively. Overall merchandise export and import have been effectively improving since 2001-02. The development continued till 2008-09. The merchandise export which showed a growth rate of twenty eight point two nine per cent during 2008-09, immediately turned down with major growth of only point zero six per cent. The similar trend is found in case of India’s merchandise imports. It declined from a growth rate of thirty five point three seven percent during 2008-09 to point thirteen percent during 2009-2010

THE PROBLEMS FACED BY INDIAN INDUSTRIES DURING GLOBAL RECESSION.

Unemployment. At the time of recession most of the companies/firms had their production and sales declined which resulted in fewer earnings towards the industrial sector. To manage and to provide salary to large number of workers became difficult so most of the workers were laid off resulting in rise of unemployment.

Higher Government Borrowing. At the time of recession, the finances of the public sector i.e. government began to drop. People paid fewer taxes because of most of the people in India were unemployment. This decline in financial status of government stimulated the markets to think about intensity at which government was borrowing. This gave rise to huge increase in rate of interest and ultimately the earnings from bonds controlled the government of India to decrease the deficits of fiscal and current account by initiating outlay cuts and increasing the tax.

Devaluation in exchange rate- The currencies are inclined to devalue during recession, as people anticipate lower interest rates and there is less demand for the currency. The changeable rate of exchange and an unforeseen growth in dollar value against Indian Rupee had imparted to the slowdown. The increasing value in dollar currency has increased the cost of imported machine tools and raw materials required for production by about fourteen percent. The hikes in prices of Alloy and steel prices have driven the automobile manufacturers to hike the price of automobiles. The increased prices of raw materials have directly affected the price of the car.

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

Reduction in demand for Real Estate Properties-The demands for houses have reduced and prices of property across India have registered fifteen to twenty percent fall. The sufferings of real estate have spread to the construction industry. The Property prices and rentals 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. Various Information Technology companies are depending on before lease office space to take privilege of the commercial office space. The need for offices is awaited but the supply is expected to exceed the need in most prime cities of India. The international real estate investors have shown less interest in Indian real estate in 2012. Generally the foreign investors have invested roughly $ Eighteen Billion in Indian Real Estate properties over the past seven years.

Rise in Economic policy-In response to a global downturn the countries are frequently 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 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 sixty six percent of the market had taken a hammering. The major players MRF, CEAT, APOLL and J.K. who accounted for a sixty eight percent of 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 point four per cent year-on-year across main categories like 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 production coupled with slowing replacement demand with increasing idle capacities. The light commercial vehicle tyre segment grew by a mere one point six 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 estimated that demand for tyre would decline by one per cent in 2008-09 mainly due to the slowdown in off-take of commercial vehicles.

Reduction in foreign tourists to India and Domestic Tourists within India. The recession leads to fewer tourists coming to India and fewer 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 thirty five percent to fifteen percent and shipments decreased to thirty three percent. This drop affected many industrial sectors right from the manufacturing goods to jeweller’s exports.

Delay or Deferred Loans from Banks and Financers- The payments from the Original Equipment Manufacturer are delayed and in most of the cases, the banks have postponed or paid out the approved loan. Original Equipment Manufacturers borrow funds from banks and financers for construction of establishments, expansions of capacity of the machines or equipments required for designing and production of automobiles.

Decline in Sales and Profit – The automobile industries in India had commemorated an uninterrupted growth of about 17.2% over the last few years but the recession had declined the growth to 7-8%. The automobile giant Tata had mentioned that its earnings were reduced to three billion rupees as the industrial production had decreased tremendously and also there was twenty percent decline in the sales as compared to year 2011. The Maruti Suzuki also had seven percent decline in sales as there was increase in the price of the materials and rupee value was decreasing. The Mahindra & Mahindra Company also had decline in their earnings by twenty one percent.

Cost of Land-The price hike in the cost of land of any country actually deters an investor to invest money in construction of new hotels. To build a hotel it involves large investment of capital and it is calculated that to build an exclusive five-star room its monetary value is around rupees one crore twenty five lakhs. Actually the rate of hotel rooms in five-stars has risen from Rupees four thousand to sixteen thousand compared to five years ago.

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

IMPACT OF RECESSION ON GLOBAL ECONOMY

The breakdown of Lehman Brothers in September 2008, made the global inter-bank financial markets to block in view of losses suffered by major financial institutions. This affected many segments of Banking and Financial institutions including inter-bank markets. The deepened aversion of risk and search for security took to deleveraging by investors. The frequent steep and significant downsizing of flow of capital towards the growth and development of economies. The rate of Unemployment increased and labour markets became powerless.

The growth in Gross Domestic Product for boosted economies turned to be negative approx four per cent during 2009 compared to approx three per cent during the period 2004-07. Though the growth of Gross Domestic Product recouped in 2010, it declined in 2011 with approx two per cent.

At the time of crisis the risk spreads in the money market had become turbid. The major risk averting was contemplated with sudden decline in the stock indices across the world which enhanced the unpredictability of the market. The world equity markets saw that there was leading sell-offs in the year 2009. The Dow Jones Industrial Average showed that there was twelve-year low of twenty percent of its value. With linear development of the market and the value of other asset classes had declined. The prices of the commodity, gold and crude oil soared up at the time of crisis.

The world crisis had seriously impacted the development of banking sector around the world. There was decline in the growth of bank credit in leading economies especially United States, United Kingdom, and the Euro zone for the year 2009. The quality of assets had been seriously impacted with non performing assets reaching to greater levels. The Non Performing Assets in the United Kingdom and United States had increased from point nine per cent and one point four per cent in the year 2007 to four per cent and approximately five per cent in 2009 respectively.

IMPACT OF RECESSION IN INDIAN ECONOMY

India underwent a slump in its economy due to the economic downturn around the globe. It had to face lots of improbabilities like tripping up of growth in the industrial sector, decline in foreign exchange and diminishing rupee value. The 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 Information Technology sector, 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. At the time of crisis the Indian companies experienced a rise in the interest rates and the equity prices were affected as the funds got transformed into bonds. This less inflow didn't affect the Gross Domestic Product of the Indian economy since it held the larger share on its domestic household savings. The Indian companies which trusted on the foreign funds for its trading activities were allowed less access which in turn affected the corporate profitability due to the increase in interest rates.

Effects in Indian Exports

India faced an unexpected decline in its exports during the economic crisis, as the composition of Indian economy is based on exports. After thirty five percent growths in the exports during 2008, there was decrease in exports which calculated to be fifteen percent, and shipments decreased to thirty three percent. 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 one million and closure of many small units. The recession had seriously affected the Indian exports which resulted in broadening of current account deficit. The Exports which grew at twenty five per cent during 2005 to 2008 retarded to fourteen per cent in the year 2008 - 2009 and recorded a negative growth of three point five per cent in 2009-2010. The Output growth which was approximately nine per cent to nine point five percent during last five years was dropped to six point eight per cent in the year 2008-2009. The economic crisis around the globe affected the export and import market of India.

Effects in Indian Information Technology Industry

The one of the main tools to transact and access the flow of foreign funds is the Indian Information Technology industry, which contributes significantly a mind share towards the Indian Gross Domestic Product. Indian Information Technology 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 Information Technology companies for its software development and for its service outsourcings. The recent outsourcing boom into India from the foreign countries mainly from United States left an impact in the Information Technology industry which is accounted to be a major player in employment and foreign exchange. Approximately sixty percent of the Indian Information Technology sector's revenue is fully based only on the United States suppliers. Around thirty percent of the industry's revenue is generated from the financial services companies from United States. Indian companies were appreciated for its flexibility in work, quality product deliveries and for its efficient services. Some Indian Information Technology companies which were partnered with United States financial companies like Lehman Brothers Inc and Meryl Lynch Inc were affected a little. This slowdown in the United States economy lead seventy percent of the firms to negotiate for lower rates with their suppliers and nearly sixty percent had cut back in their contracts. The sudden fall in the United States economy reduced the growth of Indian Information Technology firms down by two to three percent.

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 ten per cent of agricultural gross domestic product. 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 Gross Domestic Product.

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 approx nineteen per cent during 1990s to fifteen per cent during 2000s but after 2000 it reduced gradually . It would be interesting to see whether there has been any divergence from the long-term trend in the export of important agricultural commodities due to economic recession. For this, the share of export of agricultural products (including livestock products) in total national export during 2007-08 and 2009-10 can be com-pared.

Agricultural Gross Domestic Product -The trend in agricultural Gross Domestic Product 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 Gross Domestic Product of agricultural and allied products. Recent trends indicate that the sector is not witnessing similar growth achieved during the previous year. Agricultural Gross Domestic Product 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 Gross Domestic Product 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 untoward impact due to economic recession.

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 United States 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 United States dollar value, and decline in the share value of the stocks.

1) Whenever our share markets have touched to new peak, it was always due to the foreign banks investments. The close impact of the crisis was felt when expectant capital outflows and resultant Indian stock markets fell. The Sensex of Bombay Stock exchange at its closure had touched a height of Twenty thousand eight hundred and seventy three on 8th of January 2008, declined to eight thousand one hundred and sixty on 9th March, 2009.

2) The foreign banks continued to buy stock from India prior to recession but now they are selling. Before the crisis, the inflows from capital were extra compared to the current account deficit. The Reserve Bank had to engross these flows in its balance sheet. As and when the foreign investors have tried to build their portfolios during the difficult times, the country has always found that there is a major outflow of capital. The exchange rate was depreciated from Rupees thirty nine point three seven per dollar in year 2008 to Rupees fifty one point two three per dollar in year 2009.

3) The overflow effects of the crisis were felt in the growth of credit of banking sector. The growth rate of advances and assets had felt the trend of declining. The year on year growth in advances fell from twenty eight point five per cent at the end of year 2007 to twelve point three per cent by end of year 2009 while the year on year growth in assets fell from twenty two point nine per cent to fifteen point one per cent during the same period. The credit markets were also under pressure as corporate found it difficult to raise resources through external sources of funding. To find resources, the industry tried to shift itself to domestic bank and non-bank institutions for funding and also withdrew their investments from the liquid schemes of mutual funds.