GLOBAL FINANCIAL CRISIS IMPACT ON INDIA

ECONOMY

By

Mr. AMIT SHRIVASTAVA

A PROJECT REPORT

Submitted to

BHARATI VIDYAPEETH UNIVERSITY

In partial fulfillment of the requirements for the award

of the POST GRADUATION DIPLOAMA

In

INFORMATION TECHNOLOGY MANAGEMENT

Bharati Vidyapeeth University – Amplify DITM,

APRIL 2010

1
 Bonafide Certificate
Certified that this project report titled “Global Financial Crisis Impact On India
Economy” is the bonafide work of Amit Shrivastava who carried out the research
under supervision of Mr.col.V.J.Gomes. It is further Certified, that the work
reported herein does not form part of any other project report or dissertation on the
basis of which a degree or award was conferred on an earlier occasion on me or
any other candidate.

Place: Pune(Maharastra) Signature of the Student

Date:

2
 ABSTRACT

I, Amit Shrivastava Student of PGDITM(IT+Finance) 2008-2010 studying at

BVU-Amplify Mindware DITM Pune , declare that the project work entitled
“Global Financial Crisis Impact On India Economy” was carried by me in the
partial fulfillment of PGDITM program under the University of Pune.

This project was undertaken as a part of academic curriculum according to the

university rules and norms and it has not commercial interest and motive. It is my
original work. It is not submitted to any other organization for any other purpose.

Amit Shrivastava
ITM/08/110
Enro. No. - 0800004253

3
 ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me
during the writing of this book.

This project report could not have been prepared, if not for the help and
encouragement from various people. Hence, for the same reason I would like to
thank my guide Mr.Col. V.J. Gomes. It was for his support that I got proper
guidelines for preparing this project.

I would also thank my Institution and my faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to my
family and well wishers.

4
 Content
No. Page No.

1. Introduction- 9
What is financial crisis-

2. Type of financial crisis:- 9

10
1. Banking crisis
2. Speculative bubbles and crashes 10-11
3. International Financial crisis 11
12
4. Wider economic crisis

3. Causes and consequences of financial crisis 12

1. Strategic complementarities in financial 13
markets
2. Leverage 13

3. Asset-liability mismatch 13-14

4. Uncertainty and herd behavior 14

5. Regulatory failures 14-15

6. Fraud 15

7. Contagion 15
8. Recessionary effects 15

4. Theories of financial crisis 16

1. Marxist theories 16
16-17
2. Minsky's theory

History of the crisis 17

5.

5
6. Literature
18
1. Banking crisis
18
2. Speculative bubbles and crashes
3. International Financial crisis 18
18-19
Severity of current Financial Crisis
20-22
7.
8. Financial Crisis of 2007-10 23

Crisis in the U.S. and its Causes

9. 24-26
Dubai Financial Crisis
10. 27-30
11. Satyam Financial Crisis in India
30-32
Liquidity Crisis
12. 33

Recent Growth Trends in Indian Economy

13. 34-15
The poising factors affect the Indian economy
35
14.
Impact on India
15. 1. Information Technology 36
2. Exchange Rate: 36
36-37
3. Foreign Exchange Outflow 37
4. Investment
5. Real Estate 37
6. Stock Market 37-38
38
7. Exports
8. Increase in Unemployment 39
9. Banks 39
40

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16. Consistent increase in the inflation rate 40-42

17. Industrial production 42-43

44
18. Balance of Payments

19. Investors reaction 44

20.
Impact on the nuclear deal 44-45
21. Indian BPO Companies 45-46

22. Banks wants to be safe: 46

23. Stock market 47

24. Gross domestic product 47

25. Rupee v/s dollar 48-49

26. Impact on India: The Good , Bad & Ugly 50

1. Least Impact
2. Mildly Impact
3. Most Impact
50-53
27. Most Impact

1. Indian Financial Services 50-51

2. Real Estate 51-52
52
3. Infrastructure 53
4. Information Technology

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 54-55
28. Mildly Impact

1. Power Equipment & Services 54

2. Automobiles 55
57
3. Retail
4. Logistics 58

Least Impact 56-58

29.
1. Oil & Gas 56
2. FMCG 57
3. Media and Entertainment 58

30. Action Taken By India Govt. 59-61

31. Indian Govt. Response 62-63

32. What is to be done 64-66

33. Conclusion 66-67

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 INTRODUCTION

What is Financial Crisis?

The term financial crisis is applied broadly to a variety of situations in which
some financial institutions or assets suddenly lose a large part of their value. In the
19th and early 20th centuries, many financial crises were associated with banking
panics, and many recessions coincided with these panics. Other situations that are
often called financial crises include stock market crashes and the bursting of other
financial bubbles, currency crises, and sovereign defaults.

Many economists have offered theories about how financial crises develop and
how they could be prevented. There is little consensus, however, and financial
crises are still a regular occurrence around the world.

Types of financial crisis

1. Banking crisis
2. Speculative bubbles and crashes
3. International financial crises
4. Wider economic crises

_______________________________________________________________

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 1. Banking crisis:-

When a bank suffers a sudden rush of withdrawals by depositors, this is called

a bank run. Since banks lend out most of the cash they receive in deposits
(see fractional-reserve banking), it is difficult for them to quickly pay back all
deposits if these are suddenly demanded, so a run may leave the bank in
bankruptcy, causing many depositors to lose their savings unless they are covered
by deposit insurance. A situation in which bank runs are widespread is called
a systemic banking crisis or just a banking panic. A situation without widespread
bank runs, but in which banks are reluctant to lend, because they worry that they
have insufficient funds available, is often called a credit crunch. In this way, the
banks become an accelerator of a financial crisis.

Examples of bank runs include the run on the Bank of the United States in
1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008
has also sometimes been called a bank run, even though Bear Stearns was
an investment bank rather than a commercial bank. The U.S. savings and loan
crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S.
recession of 1990-91.

2. Speculative bubbles and crashes:-

Economists say that a financial asset (stock, for example) exhibits a bubble when
its price exceeds the present value of the future income (such as interest or
dividends) that would be received by owning it to maturity.[4] If most market
participants buy the asset primarily in hopes of selling it later at a higher price,
instead of buying it for the income it will generate, this could be evidence that a

10
bubble is present. If there is a bubble, there is also a risk of a crash in asset prices:
market participants will go on buying only as long as they expect others to buy,
and when many decide to sell the price will fall. However, it is difficult to tell in
practice whether an asset's price actually equals its fundamental value, so it is hard
to detect bubbles reliably. Some economists insist that bubbles never or almost
never occur.
Well-known examples of bubbles (or purported bubbles) and crashes in stock
prices and other asset prices include the Dutch tulip mania, the Wall Street Crash
of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com
bubble in 2000-2001, and the now-deflating United States housing bubble.

3. International financial crises

When a country that maintains a fixed exchange rate is suddenly forced

to devalue its currency because of a speculative attack, this is called a currency
crisis or balance of payments crisis. When a country fails to pay back its sovereign
debt, this is called a sovereign default. While devaluation and default could both be
voluntary decisions of the government, they are often perceived to be the
involuntary results of a change in investor sentiment that leads to a sudden stop in
capital inflows or a sudden increase in capital flight.
Several currencies that formed part of the European Exchange Rate
Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw
from the mechanism. Another round of currency crises took place in Asia in 1997-
98. Many Latin American countries defaulted on their debt in the early 1980s.
The 1998 Russian financial crisis resulted in a devaluation of the ruble and default
on Russian government bonds.

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 4. Wider economic crises

Negative GDP growth lasting two or more quarters is called a recession. An

especially prolonged recession may be called a depression, while a long period of
slow but not necessarily negative growth is sometimes called economic stagnation.

Since these phenomena affect much more than the financial system, they are not
usually considered financial crises per se. But some economists have argued that
many recessions have been caused in large part by financial crises. One important
example is the Great Depression, which was preceded in many countries by bank
runs and stock market crashes. The subprime mortgage crisis and the bursting of
other real estate bubbles around the world has led to recession in the U.S. and a
number of other countries in late 2008 and 2009.

Causes and consequences of financial crises

1. Strategic complementarities in financial markets

2. Leverage
3. Asset-liability mismatch
4. Uncertainty and herd behavior
5. Regulatory failures
6. Fraud
7. Contagion
8. Recessionary effects
_________________________________________________________________

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 1. Strategic complementarities in financial markets

It is often observed that successful investment requires each investor in a financial

market to guess what other investors will do. George Soros has called this need to
guess the intentions of others 'reflexivity'.[10] Similarly, John Maynard
Keynes compared financial markets to a beauty contest game in which each
participant tries to predict which model other participants will consider most
beautiful

2. Leverage

Leverage, which means borrowing to finance investments, is frequently cited as a

contributor to financial crises. When a financial institution (or an individual) only
invests its own money, it can, in the very worst case, lose its own money. But
when it borrows in order to invest more, it can potentially earn more from its
investment, but it can also lose more than all it has. Therefore leverage magnifies
the potential returns from investment, but also creates a risk of bankruptcy. Since
bankruptcy means that a firm fails to honor all its promised payments to other
firms, it may spread financial troubles from one firm to another
(see 'Contagion' below).

3. Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability mismatch,

a situation in which the risks associated with an institution's debts and assets are
not appropriately aligned. For example, commercial banks offer deposit accounts
which can be withdrawn at any time and they use the proceeds to make long-term
loans to businesses and homeowners. The mismatch between the banks' short-term
liabilities (its deposits) and its long-term assets (its loans) is seen as one of the
reasons bank runs occur (when depositors panic and decide to withdraw their funds

13
more quickly than the bank can get back the proceeds of its loans).
[14]
 Likewise, Bear Stearns failed in 2007-08 because it was unable to renew the
short-term debt it used to finance long-term investments in mortgage securities.

4. Uncertainty and herd behavior

Many analyses of financial crises emphasize the role of investment mistakes

caused by lack of knowledge or the imperfections of human reasoning. Behavioral
finance studies errors in economic and quantitative reasoning. Psychologist
Torbjorn K A Eliazonhas also analyzed failures of economic reasoning in his
concept of 'œcopathy'.[17]
Historians, notably Charles P. Kindleberger, have pointed out that crises often
follow soon after major financial or technical innovations that present investors
with new types of financial opportunities, which he called "displacements" of
investors' expectations.[18][19] Early examples include the South Sea
Bubble and Mississippi Bubble of 1720, which occurred when the notion of
investment in shares of company stock was itself new and unfamiliar,and the Crash
of 1929, which followed the introduction of new electrical and transportation
technologies.[21] More recently, many financial crises followed changes in the
investment environment brought about by financial deregulation, and the crash of
the dot com bubble in 2001 arguably began with "irrational exuberance" about
Internet technology.

5. Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating

the financial sector. One major goal of regulation is transparency: making
institutions' financial situations publicly known by requiring regular reporting
under standardized accounting procedures. Another goal of regulation is making

14
sure institutions have sufficient assets to meet their contractual obligations,
through reserve requirements, capital requirements, and other limits on leverage.

6. Fraud

Fraud has played a role in the collapse of some financial institutions, when
companies have attracted depositors with misleading claims about their investment
strategies, or haveembezzled the resulting income. Examples include Charles
Ponzi's scam in early 20th century Boston, the collapse of the MMM investment
fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of
1997, and the collapse of Madoff Investment Securities in 2008.

7. Contagion

Contagion refers to the idea that financial crises may spread from one institution to
another, as when a bank run spreads from a few banks to many others, or from one
country to another, as when currency crises, sovereign defaults, or stock market
crashes spread across countries. When the failure of one particular financial
institution threatens the stability of many other institutions, this is called systemic
risk.

8. Recessionary effects
Some financial crises have little effect outside of the financial sector, like the Wall
Street crash of 1987, but other crises are believed to have played a role in
decreasing growth in the rest of the economy. There are many theories why a
financial crisis could have a recessionary effect on the rest of the economy. These
theoretical ideas include the 'financial accelerator', 'flight to quality' and 'flight to
liquidity', and the Kiyotaki-Moore model. Some 'third generation' models of
currency crises explore how currency crises and banking crises together can cause
recessions.

15
Theories of financial crises

3. Marxist theories
4. Minsky's theory
5. Herding models and learning models

 Marxist theories
Recurrent major depressions in the world economy at the pace of 20 and 50 years
have been the subject of studies since Jean Charles Léonard de Sismondi (1773-
1842) provided the first theory of crisis in a critique of classical political
economy’s assumption of equilibrium between supply and demand. Developing an
economic crisis theory become the central recurring concept throughout Karl
Marx’s mature work. Marx’s law of the tendency for the rate of profit to
fall borrowed many features of the presentation of John Stuart Mill’s discussion Of
the Tendency of Profits to a Minimum (Principles of Political Economy Book IV
Chapter IV) Empirical and econometric research continue especially in the world
systems theory and in the debate about Nikolai Kondratiev and the so-called 50-
years Kondratiev waves. Major figures of world systems theory, like Andre
Gunder Frank and Immanuel Wallerstein, consistently warned about the crash that
the world economy is now facing.

 Minsky's theory
Hyman Minsky has proposed a post-Keynesian explanation that is most applicable
to a closed economy. He theorized that financial fragility is a typical feature of
any capitalist economy. High fragility leads to a higher risk of a financial crisis. To
facilitate his analysis, Minsky defines three approaches to financing firms may
choose, according to their tolerance of risk. They are hedge finance, speculative
finance, and Ponzi finance. Ponzi finance leads to the most fragility.

 for hedge finance, income flows are expected to meet financial obligations
in every period, including both the principal and the interest on loans.

16
 for speculative finance, a firm must roll over debt because income flows are
expected to only cover interest costs. None of the principal is paid off.
 for Ponzi finance, expected income flows will not even cover interest cost,
so the firm must borrow more or sell off assets simply to service its debt. The
hope is that either the market value of assets or income will rise enough to pay
off interest and principal.

History

A short list of some major financial crises since 20th century

 1910 – Shanghai rubber stock market crisis

 1930s – The Great Depression – the largest and most important economic
depression in the 20th century
 1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock
market crash
 1980s – Latin American debt crisis – beginning in Mexico
 1987 – Black Monday (1987) – the largest one-day percentage decline in
stock market history
 1989-91 – United States Savings & Loan crisis
 1990s – Japanese asset price bubble collapsed
 1992-93 – Black Wednesday – speculative attacks on currencies in
the European Exchange Rate Mechanism
 1994-95 – 1994 economic crisis in Mexico – speculative attack and default
on Mexican debt
 1997-98 – 1997 Asian Financial Crisis – devaluations and banking crises
across Asia
 2001 - dot-com bubble - speculations concerning internet company's crashed
 2007-09 – The financial crisis of 2007–2010 created the late 2000s recession

17
Literature

Banking crises

 Franklin Allen and Douglas Gale (2000), 'Financial contagion'. Journal of

Political Economy 108 (1), pp. 1-33.
 Franklin Allen and Douglas Gale (2007), Understanding Financial Crises.
 Jean-Charles Rochet (2008), Why Are There So Many Banking Crises? The
Politics and Policy of Bank Regulation.
 R. Glenn Hubbard, ed., (1991) Financial Markets and Financial Crises.
 Douglas Diamond and Philip Dybvig (1983), 'Bank runs, deposit insurance,
and liquidity'. Journal of Political Economy 91 (3).
 Luc Laeven and Fabian Valencia (2008), 'Systemic banking crises: a new
database'. International Monetary Fund Working Paper 08/224.

Bubbles and crashes

 Robert J. Shiller (1999, 2006), Irrational Exuberance.

 Markus Brunnermeier (2008), 'Bubbles', New Palgrave Dictionary of

Economics, 2nd ed.

 Markus K. Brunnermeier (2001), Asset Pricing under Asymmetric Information:

Bubbles, Crashes, Technical Analysis, and Herding, Oxford University Press.

International financial crises

 Paul Krugman (1995), Currencies and Crises.

 Craig Burnside, Martin Eichenbaum, and Sergio Rebelo (2008), 'Currency

crisis models', New Palgrave Dictionary of Economics, 2nd ed.

 Maurice Obstfeld (1996), 'Models of currency crises with self-fulfilling

features'. European Economic Review 40.

18
 Stephen Morris and Hyun Song Shin (1998), 'Unique equilibrium in a model of
self-fulfilling currency attacks'. American Economic Review 88 (3).

 Barry Eichengreen (2004), Capital Flows and Crises.

 Charles Goodhart and P. Delargy (1998), 'Financial crises: plus ça change, plus
c'est la même chose'. International Finance 1 (2), pp. 261-87.

 Jean Tirole (2002), Financial Crises, Liquidity, and the International Monetary
System.

 Guillermo Calvo (2005), Emerging Capital Markets in Turmoil: Bad Luck or

Bad Policy?

 Barry Eichengreen (2002), Financial Crises: And What to Do about Them.

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SEVERITY OF THE CURRENT FINANCIAL CRISIS
Banking and financial crises have been a regular feature of modern economic
history. According to one estimate, there have been 86 banking crises since the
Great Depression that have spread beyond national borders. According to a World
Bank study in 2001, the world has witnessed as many as 112 systemic banking
crises from the late 1970s to early 2001. Most crises, including the current one,
share some common features. Some general examples include a search for
increasingly higher yields in financial markets, a lax regulatory regime, a mismatch
in appetite for risk and the capacity for bearing it, and the consequent build up of
asset bubbles, usually in the real estate sector, which for various reasons is
overlooked by the regulators. The recent financial sector crisis shares most, if not
all, of these features. However, what makes the current crisis exceptional is that it
emerged at the very epicentre of global capitalism, the US, and its contagion
spread very quickly to the entire global economy, unlike previous crises that were
usually confined to a region or a small number of countries. Economies like India
and the People’s Republic of China (PRC), where the financial sectors were not as
integrated with the global financial system, were spared the first round adverse
effects of the current crisis and their banks were left mostly unaffected. However,
these giant economies and their Asian neighbors could not escape the second round
effects that severely impacted their trade flows due to the collapse of output and
trade in advanced economies.

The severity of the current crisis can be gauged by the steep decline in the equity
markets of advanced economies. The bursting of the sub-prime housing bubble
caused Wall Street to lose a staggering US$8 trillion in market capitalization in a
very short time (Brunnermier 2009). Interestingly, the loss in market capitalization
and crash in equity prices has been significantly higher in periphery economies as
compared to US markets (Table 1). According to Eichengreen and O’Rourke
(2009) global stock markets fell faster during the current crisis than in 1929.

20
 Table 1: Stock Market Crash and Exchange Rate Changes of Selected

Countries Stock Market Changes Exchange Rate Changes

June–December 2008 June–December 2008

vis-à-vis US$ (%)

PRC -48 1

Hong Kong, China -40 1

India -41 -13

Republic of Korea -36 -20

Argentina -51 -13

Brazil -49 -31

Mexico -29 -26

Japan -36 18

Eurozone -37 -11

US (S&P 500) -36 -11

The financial crisis soon morphed in to a full-fledged global economic

downturn as credits markets froze, aggregate demand in all advanced economies
fell, and commodity prices crashed, forcing exporters to shelve expenditure and lay
off workers in large numbers. Consequently, industrial production collapsed
worldwide. In the last quarter of the calendar year 2008, advanced economies and
large economies like India and the PRC witnessed a contraction in their industrial
production. In some of the major export-oriented countries like Japan, Germany,
and Brazil, industrial output contracted more than 10% during the third and fourth

21
quarters of fiscal year (FY) 2008. The decline in industrial output made labor
retrenchment and surging unemployment almost inevitable. According to the
International Labour Organisation’s (2009) Global Employment Trends Report
more than 50 million people are expected to lose their jobs due to the crisis.

The severity and suddenness of the crisis can also be judged from the IMF’s
forecast for the global economy. During the last 10 months (July 2008 to April
2009), the IMF revised its forecasts four times, all in the negative direction. In July
2008, it projected a growth rate of 3.9% for the world economy for 2009.
However, this figure was reduced to 2.2% in November 2008 and further to 0.5%
in January 2009. Finally in April 2009, for the first time in 60 years, the IMF
predicted a global recession with negative growth of 1.3% for world GDP in 2009.
Comparisons with the Japanese experience since the bursting of its own real estate
bubble in the late 1980s and the consequent stagnation over the 1990s have been
drawn to suggest a possible long period of weak economic activity in advanced
economies. Initially the IMF projected a positive growth rate of 1.8% for 2010
indicating a somewhat weak V-shape recovery. But by July 2009 this had changed
and the possible recovery in 2010 was forecast to be much stronger. Because the
recession in developed countries is expected to continue, developing countries are
anticipated to lead the global turnaround.

22
Financial crisis of 2007–2010

The financial crisis of 2007–present is a financial crisis triggered by a liquidity

shortfall in the United States banking system. It has resulted in the collapse of large
financial institutions, the "bail out" of banks by national governments and
downturns in stock markets around the world. In many areas, the housing market
has also suffered, resulting in numerous evictions, foreclosures and prolonged
vacancies. It is considered by many economists to be the worst financial
crisis since the Great Depression of the 1930s. It contributed to the failure of key
businesses, declines in consumer wealth estimated in the trillions of U.S. dollars,
substantial financial commitments incurred by governments, and a significant
decline in economic activity. Many causes have been proposed, with varying
weight assigned by experts. Both market-based and regulatory solutions have been
implemented or are under consideration, while significant risks remain for
the world economy over the 2010–2011 periods. Although this economic period
has at times been referred to as "the Great Recession," this same phrase has been
used to refer to every recession of the several preceding decades.

The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused
the values of securities tied to real estate pricing to plummet thereafter, damaging
financial institutions globally. Questions regarding bank solvency, declines in
credit availability, and damaged investor confidence had an impact on global stock
markets, where securities suffered large losses during late 2008 and early 2009.
Economies worldwide slowed during this period as credit tightened and
international trade declined. Critics argued that credit rating agencies and investors
failed to accurately price the risk involved withmortgage-related financial
products, and that governments did not adjust their regulatory practices to address
21st century financial markets. Governments and central banks responded with
unprecedented fiscal stimulus, monetary policy expansion, and
institutional bailouts

23
Crisis In The US

• The United States entered 2008 during a housing market correction, a subprime mortgage

crisis and a declining dollar value

• In February, 63,000 jobs were lost, a 5-year record.

• In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month

from January to September of 2008.

• On September 5, 2008, the United States Department of Labor issued a report that its

unemployment rate rose to 6.1%, the highest in five years

• The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in

the US.

• Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable

incomes. Major banks have landed in trouble after people could not pay back loans.

• The housing market soared on the back of easy availability of loans.

• The realty sector boomed but could not sustain the momentum for long, and it collapsed

under the gargantuan weight of crippling loan defaults

• Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled

with rising oil prices at $100 a barrel, slowed down the growth of the economy.

The subprime mortgage crisis is an ongoing real estate crisis and financial

crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in
the United States, with major adverse consequences for banks and financial
markets around the globe. The crisis, which has its roots in the closing years of the
20th century, became apparent in 2007 and has exposed pervasive weaknesses in
financial industry regulation and the global financial system.

24
Approximately 80% of U.S. mortgages issued in recent years to subprime
borrowers were adjustable-rate mortgages. After U.S. house prices peaked in mid-
2006 and began their steep decline thereafter, refinancing became more difficult.
As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies
soared. Securities backed with subprime mortgages, widely held by financial firms,
lost most of their value. The result has been a large decline in the capital of many
banks and U.S. government sponsored enterprises, tightening credit around the
world.

Causes
Boom and bust in the housing market
Low interest rates and large inflows of foreign funds created easy credit conditions
for a number of years prior to the crisis, fueling a housing market boom and
encouraging debt-financed consumption. The USA home ownership rate increased
from 64% in 1994 (about where it had been since 1980) to an all-time high of
69.2% in 2004. Subprime lending was a major contributor to this increase in home
ownership rates and in the overall demand for housing, which drove prices higher.
Between 1997 and 2006, the price of the typical American house increased by
124%. During the two decades ending in 2001, the national median home price
ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in
2004, and 4.6 in 2006. This housing bubble resulted in quite a few homeowners
refinancing their homes at lower interest rates, or financing consumer spending by
taking out second mortgages secured by the price appreciation. USA household
debt as a percentage of annual disposable personal income was 127% at the end of
2007, versus 77% in 1990.
While housing prices were increasing, consumers were saving less and both
borrowing and spending more. Household debt grew from $705 billion at yearend
1974, 60% of disposable personal income, to $7.4 trillion at yearend 2000, and
finally to $14.5 trillion in midyear 2008, 134% of disposable personal
income. During 2008, the typical USA household owned 13 credit cards, with 40%
of households carrying a balance, up from 6% in 1970. Free cash used by
consumers from home equity extraction doubled from $627 billion in 2001 to
25
$1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion
dollars over the period. U.S. home mortgage debt relative to GDP increased from
an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.
This credit and house price explosion led to a building boom and eventually to a
surplus of unsold homes, which caused U.S. housing prices to peak and begin
declining in mid-2006. Easy credit, and a belief that house prices would continue
to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate
mortgages. These mortgages enticed borrowers with a below market interest rate
for some predetermined period, followed by market interest rates for the remainder
of the mortgage's term. Borrowers who could not make the higher payments once
the initial grace period ended would try to refinance their mortgages. Refinancing
became more difficult, once house prices began to decline in many parts of the
USA. Borrowers who found themselves unable to escape higher monthly payments
by refinancing began to default.

26
Dubai’s Financial Crisis
Dubai announced that it would ask creditors of Dubai World, the conglomerate
behind its rapid expansion (it built the world’s tallest building), and Nakheel, the
builder of its palm-shaped islands, to agree to freeze debt repayments for six
months.
Some commentators are of the view that banks that have lent money to Dubai
World could suffer significant losses if the company were to default on all or part
of its $59 billion debt. Duabi’s total debt stands at $80 billion. If creditors were to
reject proposals to postpone debt repayments for six months, the Dubai
government could be forced to hold a fire sale of its international real estate assets.
Analysts however are of the view that other emirates of the UAE – United Arab
Emirates -such as Abu Dhabi are unlikely to be affected by Dubai’s crisis
significantly since their funding is derived from exporting oil and gas.
The key factor behind the crisis is the boom-bust policy of the UAE central bank.
After closing at 4% in October 2006 the yearly rate of growth of the central bank’s
balance sheet (the pace of monetary pumping) climbed to 177% by December
2007. In response to this pumping the yearly rate of growth of UAE’s monetary
measure AMS jumped from 6% in October 2006 to 62% by April 2008. This
massive pumping has given support to various activities that without the money
pumping wouldn’t have emerged. In short these activities cannot stand on their
own feet without support from monetary pumping.
Since January 2008 the pace of pumping by the central bank has been trending
down. In January this year the yearly rate of growth of the central bank’s balance
sheet plunged to minus 36.5%. As a result the yearly rate of growth of money
supply fell to minus 12.5% by July this year. It is the fall in monetary pumping that
is currently putting pressure on various activities that sprang up on the back of
previous massive monetary pumping.
We suggest that other emirates are unlikely to escape the effects of the boom-bust
policies of the central bank. Also, in other emirates loose monetary policy set the
platform for new activities and the expansion of existing activities. As a result of a
decline in monetary pumping by the central bank these activities are currently also
under pressure.

27
Global Economic Crisis Hits Dubai
The tiny Persian Gulf emirate, Dubai, has long sought to position itself as an
international finance and trading center within today's global economy.  It built an
ultra-modern image, with luxury hotels and resorts and high-profile sporting
events.  But the downturn has already sent some foreign workers packing. For
unemployed workers from South Asia, that is sometimes not an option. 
       
In Dubai's hey day, the sound of construction was everywhere. 
High rises and tourist resorts were built by legions of foreign workers, most of
them from India and Pakistan.  Dubai became an international magnet, reinventing
itself as a financial capital and tourist mecca in the Persian Gulf.  Then the global
crisis reached this outpost and boom turned into bust.

Now, these men - like thousands of others - are out of work.  They are all from
South Asia - 20 or so men sharing a room to cut down on rent as they wait for
work.  Zafar Abbasi is a steel worker.  He came to the United Arab Emirates two
years ago, but says he recently lost his job.  And, now, without money coming in,
lifeishard.

"No money for the foods [sic], everything is so expensive, medicine and rents,"
saidAbbasi.

These men were among the army of foreign laborers that built Dubai when the
economy was booming.  Many have been unemployed for more than a month. 
They say they cannot return home because their employers are holding their
passports and have ordered them to wait until work picks up.

More than half of the construction projects in the United Arab Emirates, worth
$582 billion, have been put on hold, according to the market research firm,
Proleads.  Some projects are still going ahead, thanks, in part, to the $10 billion
bailout from the UAE's capital, Abu Dhabi.  But, many workers are unemployed an
stuckhere. 

Worker advocacy groups - including the United Nations International Labor

Organization - have increased pressure for wider protection covering the hundreds
of thousands of unskilled construction workers who flooded regions of the Gulf
during the building boom and now face the fallout from leaner times.
28
The demands include ending the illegal-but-common practice of companies
holding workers' passports, effectively blocking their chances of looking for other
jobs under the country's sponsorship system.

In the meantime, many Western professionals have

simply left.   Foreign news reports claim 3,000 cars have been abandoned at the
Dubai Airport parking lot - left behind by debt-ridden foreigners fleeing the
country. Dubai's police chief has angrily refuted the claim.

Marie-Josee Primeau is a businesswoman in Dubai.  She says some of her friends

havealreadyleft.                  

"Mid-January, it was drastic and definitely people have lost their jobs because the
economy is based on real estate and also tourism.  Definitely it affects a lot of
people,"shesaid.

Still, Primeau says she is staying.  She says the economic crisis is a challenge.

"It is a chess game.  We have to react.  I am

driven by challenges, so I'm seeing it in a different way," she said.
                  
Richard Thompson, editor of the Middle East Economic Digest, says the region is
starting to react to the economic downturn.  Dubai has moved to stabilize its
economy with its $20 billion sovereign bond program. For the short term, it should
be sufficient to meet the city's refinancing needs this year and lend stability to the
economy.  He says there are reasons to be cautiously optimistic here.              

"People are losing their jobs here," he said.  "Money is being lost.  There is an
uncertainty about how long the credit crisis will last.  However, we are optimistic
of oil prices returning.  Banks should start leading at the latter half of this year
when the bailouts start filtering through. There will be a very quick rebound in
Dubai."
                  
But the foreign laborers say time is not
on their side.  Zafar Abbasi says he needs to find work soon.
          

29
"That is my hope, but I cannot see that.  I can hope, only for hope," he said.                  

It is a hope to return to boom times and to complete a skyline of half-finished

buildings - a hope that now seems distant.

Satyam Financial Crisis

The Satyam Computer Services scandal was publicly announced on 7 January
2009, when Chairman Ramalinga Raju confessed that Satyam's accounts had been
falsified.

Details
On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying
board members and the Securities and Exchange Board of India (SEBI) that
Satyam's accounts had been falsified .
Raju confessed that Satyam's balance sheet of 30 September 2008 contained:
 inflated figures for cash and bank balances of INR 5,040 crore (as against
INR 5,361 crore reflected in the books).
 An accrued interest of INR 376 crore which was non-existent.
 an understated liability of INR 1,230 crore on account of funds was arranged
by himself.
 an overstated debtors' position of INR 490 crore (as against INR 2,651 crore
in the books).
Raju claimed in the same letter that neither he nor the managing director had
benefited financially from the inflated revenues. He claimed that none of the board
members had any knowledge of the situation in which the company was placed.
He stated that
"What started as a marginal gap between actual operating profit and the one
reflected in the books of accounts continued to grow over the years. It has attained
unmanageable proportions as the size of company operations grew significantly
(annualised revenue run rate of Rs 11,276 crore in the September quarter of 2008
and official reserves of Rs 8,392 crore). As the promoters held a small percentage
of equity, the concern was that poor performance would result in a takeover,
thereby exposing the gap. The aborted Maytas acquisition deal was the last

30
 attempt to fill the fictitious assets with real ones. It was like riding a tiger, not
knowing how to get off without being eaten.”
In 2008, Satyam attempted to acquire two infrastructure companies (Maytas
Infrastructure and Maytas Properties) founded by family relations of company
founder Ramalinga Raju for $1.6 billion, despite concerns raised by independent
board directors. Both companies are owned by Raju's sons. This eventually led to a
review of the deal by the government, a veiled criticism by the vice president of
India and Satyam's clients re-evaluating their relationship with the company.
Satyam's investors lost about INR 3,400 crore in the related panic selling. The
USD $1.6 billion (INR 8,000 crore) acquisition was met with scepticism as
Satyam's shares fell 55% on the New York Stock Exchange. Three members of the
board of directors resigned on 29th December 2008.

Raju had appointed a task force to address the Maytas situation in the last few days
before revealing the news of the accounting fraud. After the scandal broke, the then-
board members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's
statement on Satyam's website said:
"We are obviously shocked by the contents of the letter. The senior leaders of
Satyam stand united in their commitment to customers, associates, suppliers and
all shareholders. We have gathered together at Hyderabad to strategize the way
forward in light of this startling revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of
Satyam from functioning and appoint 10 nominal directors. "The current board has
failed to do what they are supposed to do. The credibility of the IT industry should
not be allowed to suffer." said Corporate Affairs Minister Prem Chand Gupta.
Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor
PricewaterhouseCoopers (PwC) on the accounts fudging. "We have asked PwC to
reply within 21 days," ICAI President Ved Jain said.
On the same day, the Crime Investigation Department (CID) team picked up
Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested later and
kept in judicial custody.

31
On 11 January 2009, the government nominated noted banker Deepak Parekh,
former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to
Satyam's board.
Analysts in India have termed the Satyam scandal as India's own Enron scandal.
Immediately following the news, Merrill Lynch (Now with Bank of America)
terminated its engagement with the company. Also, Credit Suisse suspended its
coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing
firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal.
SEBI, the stock market regulator, also said that, if found guilty, its license to work
in India may be revoked. Satyam was the 2008 winner of the coveted Golden
Peacock Award for Corporate Governance under Risk Management and
Compliance Issues, which was stripped from them in the aftermath of the scandal.
The New York Stock Exchange has halted trading in Satyam stock as of 7 January
2009.[15] India's National Stock Exchange has announced that it will remove
Satyam from its S&P CNX Nifty 50-share index on January 12.[16]The founder of
Satyam was arrested two days after he admitted to falsifying the firm's accounts.
Ramalinga Raju is charged with several offences, including criminal conspiracy,
breach of trust, and forgery.
Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since
March 1998, compared to a high of 544 rupees in 2008[17]. In New York Stock
Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were
trading around US $1.80.
The Indian Government has stated that it may provide temporary direct or indirect
liquidity support to the company. However, whether employment will continue at
pre-crisis levels, particularly for new recruits, is questionable .
On 14 January 2009, Price Waterhouse, the Indian division of
PricewaterhouseCoopers, announced that its reliance on potentially false
information provided by the management of Satyam may have rendered its audit
reports "inaccurate and unreliable.
On 22 January 2009, CID told in court that the actual number of employees is only
40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly
withdrawing INR 20 crore rupees every month for paying these 13,000 non-
existent employees .

32
Ramalinga Raju is currently in a Hyderabad prison along with his brother and
former board member Rama Raju, and the former CFO Vadlamani Srinivas.

Liquidity Crisis
• In early July, depositors at the Los Angeles offices of Indy Mac Bank frantically
lined up in the street to withdraw their money.

• On July 11, Indy Mac - the largest mortgage lender in the US - was seized by
federal regulators.

• The mortgage lender succumbed to the pressures of tighter credit, tumbling

home prices and rising foreclosures.

• During the weekend of September 13–14, Lehman Brothers declared bankruptcy

after failing to find a buyer

• Bank of America agreed to purchase Merrill Lynch, the insurance company AIG
sought a bridge loan from the Federal Reserve

• and a consortium of 10 banks created an emergency fund of at least $70 billion

to deal with the effects of Lehman's closure

• The biggest bank failure in history occurred on September 25 when JP Morgan

Chase agreed to purchase the banking assets of Washington Mutual

The year 2008 as of September 17 has seen 81 public corporations file for bankruptcy
in the United States, already higher than the 78 in 2007

• Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a
record year in terms of assets with Lehman's $691 billion in assets all past
annual totals.

• The year also saw the ninth biggest bankruptcy with the failure of Indy Mac Bank

• On September 29, Citigroup beat out Wells Fargo to acquire the ailing
Wachovia's assets will pay $1 a share, or about $2.2 billion.

• In addition, the FDIC said that the agency would absorb the company's losses
above $42 billion; in exchange they would receive $12 billion in preferred stock
and warrants from Citigroup in return for assuming that risk

33
Recent Growth Trends in Indian Economy

India’s Economy has grown by more than 9% for three years

running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%,
but with 60% of India’s 1.1 billion population living off agriculture and with
droughts and floods increasing, poverty alleviation is still a major challenge.

The structural transformation that has been adopted by the

national government in recent times has reduced growth constraints and
contributed greatly to the overall growth and prosperity of the country. However
there are still major issues around federal vs state bureaucracy, corruption and
tariffs that require addressing. India’s public debt is 58% of GDP according to the
CIA World Fact book, and this represents another challenge.

During this period of stable growth, the performance of the Indian service sector
has been particularly significant. The growth rate of the service sector was 11.18%
in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in
the same period and is now 29% of GDP. Agriculture is 17% of the Indian
economy.

Growth in the manufacturing sector has also complemented the country’s

excellent growth momentum. The growth rate of the manufacturing sector rose
steadily from 8.98% in 2005, to 12% in 2006. The storage and communication
sector also registered a significant growth rate of 16.64% in the same year.

34
 Additional factors that have contributed to this robust environment are
sustained in investment and high savings rates. As far as the percentage of gross
capital formation in GDP is concerned, there has been a significant rise from
22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross
rate of savings as a proportion to GDP registered solid growth from 23.5% to
34.8% for the same period.

The poising factors affect the Indian economy

Stocks
GDP
Inflation

Consumers

Impact on Indian economy

Industrial growth

Banks
Employment

B.O.P Companies

35
Impact on India
Due to globalization, the Indian economy cannot be insulated from the present
financial crisis in the developed economies. The development in the U.S financial
sector has affected not only America but also European Union, U.K and Asia. The
Indian economy too has felt the impact of the crisis though not to the same extent.
It is premature to try to quantify the consequences of the crisis on the Indian
economy. However the impact will be multi-fold.

1. Information Technology:
With the global financial system getting trapped in the quicksand, there is
uncertainty across the Indian Software industry. The U.S. banks have huge running
relations with Indian Software Companies. A rough estimate suggests that at least a
minimum of 30,000 Indian jobs could be impacted immediately in the wake of
happenings in the U.S. financial system.

Approximately 61 per cent of the Indian IT Sector revenues are

from U.S financial corporations like Goldman Sachs, Washington Mutual,
Citigroup, Bank of America, Morgan Stanley and Lehman Brothers. The top five
Indian players account for 46 per cent of the IT industry revenues. The revenue
contribution from U.S clients is approximately 58 percent. About 30 percent of the
industry revenues are estimated to be from financial services (Atreya 2008). The
software companies may face hard days ahead.

2. Exchange Rate:
Exchange rate volatility in India has increased in the year 2008-09 compared to
previous years. Massive selling by Foreign Institutional Investors and conversion
of their holdings from rupees to dollars for repatriation has resulted in the rupee
depreciating sharply against the dollar. Between January 1 and October 16, 2008,
the Reserve Bank of India (RBI) reference rate for the rupee fell by nearly 25
percent, from Rs.39.20 per dollar to Rs.48.86 (Chandrasekhar and Gosh 2008).
This depre-ciation may be good for India’s exports that are adversely affected by

36
the slowdown in global markets but it is not so good for those who have
accumulated foreign exchange payment commitments.

3. Foreign Exchange Outflow:

After the macro-economic reforms in 1991, the Indian economy has been
increasingly integrated with the global economy. The financial institutions in India
are exposed to the world financial market. Foreign institutional investment (FII) is
largely open to India’s equity, debt markets and market for mutual funds. The most
immediate effect of the crisis has been an outflow of foreign institutional
investment from the equity market. There is a serious concern about the likely
impact on the economy because of the heavy foreign exchange outflows in the
wake of sustained selling by Foreign Institutional Investors in the stock markets
and withdrawal of funds by others. The crisis resulted in net outflow of $
10.1billion from the equity and debt markets in India till 22 nd Oct, 2008(Kundu
2008). There is even the prospect of emergence of deficit in the balance of
payments in the near future.

4. Investment:
The tumbling economy in the U.S is going to dampen the investment flow. It is
expected that the capital inflows into the country will dry up. Investments in mega
projects, which are under implementation and in the pipeline, are bound to buy
more time before injecting funds into infrastructure and other ventures. The
buoyancy in the economy is absent in all the sectors. Investment in tourism,
hospitality and healthcare has slowed down. Fresh investment flows into India is in
doubt.

5. Real Estate:
One of the casualties of the crisis is the real estate. The crisis will hit the Indian
real estate sector hard (Sinha 2008). The realty sector is witnessing a sudden slump
in demand because of the global economic slowdown. The recession has forced the
real estate players to curtail their expansion plans. Many on-going real estate
37
projects are suffering due to lack of capital, both from buyers and bankers. Some
realtors have already defaulted on delivery dates and commitments. The steel
producers have decided to resort to production cuts following a decline in demand
for the commodity.

6. Stock Market:
The financial turmoil affected the stock markets even in India. The combination of
a rapid sell off by financial institutions and the prospect of economic slowdown
have pulled down the stocks and commodities market. Foreign institutional
investors pulled out close to $ 11 billion from India, dragging the capital market
down with it (Lakshman 2008). Stock prices have fallen by 60 percent. India’s
stock market index—Sensex—touched above 21,000 mark in the month of
January,2008 and has plunged below 10,000 during October 2008 ( Kundu
2008).The movement of Sensex shows a positive and significant relation with
Foreign Institutional Investment flows into the market. This also has an effect on
the Primary Market. In 2007-08, the net Foreign Institutional Investment inflows
into India amounted to $20.3 billion. As compared to this, they pulled out $11.1
billion during the first nine-and-a-half months of the calendar year 2008, of which
$8.3 billion occurred over the first six-and-a-half months of the financial year
2008-09 (April 1 to October 16).

38
 7. Exports:
The crisis will sharply contract the demand for exports adversely affecting the
country’s growth prospects. It will have an impact on merchandise exports and
service exports. The decline in export growth may sharply affect some segments of
the Indian Economy that are export- oriented. The slowdown in the world economy
has affected the garment industry. The orders for factories which are dependent on
exports, mainly to the U.S have come down following deferred buying by big
apparel brands. Rising unemployment and reduced spending by the Americans
have forced some of the leading brands in the U.S to close down their outlets,
which in turn has affected the apparel industry here in India. The U.S accounts for
55 per cent of all global apparel imports (Bageshree and Srivatsa 2008). The global
recession will undermine other major export sectors of the Indian economy like sea
foods, gems and jewellery

8. Increase in Unemployment:
One danger is of a dip in the employment market. The global financial crisis could
increase unemployment. Layoffs and wage cuts are certain to take place in many
companies where young employees are working in Business Process Outsourcing
and Information Technology sectors (Ratnayake 2008). With job losses, the gap
between the rich and the poor will be widened. It is estimated that there would be
downsizing in many other fields as companies cut costs. The International Labor
Organization predicted that millions of jobs will be lost by the end of 2009 due to
the crisis – mostly in “construction, real estate, financial services, and the auto
sector.” The Global Wage Report 2008-09 of International Labour Organization
warns that tensions are likely to intensify over the issue of wages. There would
also be a significant drop in new hiring (The Hindu 2008) All these will change the
complexion of the job market.

39
 9. Banks:
The ongoing crisis will have an adverse impact on some of the Indian banks. Some
of the Indian banks have invested in derivatives which might have exposure to
investment bankers in U.S.A. However, Indian banks in general, have very little
exposure to the asset markets of the developed world. Effectively speaking, the
Indian banks and financial institutions have not experienced the kind of losses and
write-downs that banks and financial institutions in the Western world have faced
(Venkitaramanan 2008). Indian banks have very few branches abroad. Our Indian
banks are slightly better protected from the financial meltdown, largely because of
the greater role of the nationalized banks even today and other controls on
domestic finance. Strict regulation and conservative policies adopted by the
Reserve Bank of India have ensured that banks in India are relatively insulated
from the travails of their western counterparts (Kundu 2008).

Consistent increase in the inflation rate:

The market remain under pressure after inflation recorded fastest rise in more than
16 years in early August 2008, increasing the likelihood of the Reserve Bank of
India (RBI) raising interest rates again. With no major key events scheduled in the
forthcoming week, the market will closely watch global stock market cues. But it
may turn volatile on account of expiry of August 2008 derivatives contracts on
Thursday, 28 August 2008

The wholesale price index rose 12.63% in 12 months to

9 August 2008, above the previous week's annual rise of 12.44%, government data
released on Thursday, 21 August 2008, showed. Inflation for the week ended 14

40
June 2008 was revised upwards to 11.80% from 11.42%.

Rising inflation rate has dashed hopes of any relaxation

in the monetary policy. Market expects Reserve Bank of India (RBI) to raise the
rates further in its next monetary policy review two months from now.
On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly policy review,
raised repo rate by 50 basis points to a seven-year high of 9% to curb inflation and
dampen inflationary expectations. RBI also raised the cash reserve ratio (CRR), the
proportion of funds that banks must keep on deposit with it, by 25 basis points to
9%.
Market will closely watch developments on the Indo-US nuclear
deal. A two-day meeting of the 45 countries of the Nuclear Suppliers Group (NSG)
began in Vienna on Thursday, 21 August 2008. A green signal by the NSG is
required for the deal to proceed to the US Congress for final ratification. As per
reports, nuclear supplier nations at a meeting on Thursday, 21 August 2008,
proposed conditions for lifting a global ban on fuel and technology exports to
India, a step required to implement a US-India nuclear cooperation deal.

A further rise in crude oil prices may act as a dampener for the stock markets.
Light, sweet crude for September 2008 delivery surged $5.62 to $121.18 a barrel
on Thursday, 21 August 2008 on the New York Mercantile Exchange (NYMEX)
on weaker dollar and worries about tightening output from OPEC countries.

Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore in August
2008 (till 20 August 2008). FIIs sold shares worth Rs 28,133.40 crore in the

41
calendar year 2008. Mutual funds sold shares worth Rs 886 crore in August 2008
(till 20 August 2008).

(source: economy watch Friday august 8, 2008)

Industrial production:
Falling crude oil prices and improvement in south west
monsoon will provide some relief to investors. Rising inflation remains a major
worry for the markets in the medium term.

The government will release June 2008 industrial production data at

12:00 IST on 12 August 2008. Reserve Bank of India’s recipe to contain inflation
by increasing the lending rates is expected to hurt industry, manufacturing sector
and the overall growth momentum. Industrial production grew at the slowest pace
in more than six years in May 2008, at 3.8%, as against 10.6% in the same month
of 2007, with manufacturing showing signs of acute deceleration.

Inflation remains a major concern for the central bank.

Inflation based on the wholesale price index rose 12.01% in 12 months to 26 July
2008, slightly above the previous week's annual rise of 11.98%, government data
released on 7 August 2008 showed.

Reserve Bank of India (RBI) on 29 July 2008, raised repo

rate by 50 basis points to a seven-year high of 9% to curb inflation and dampen
inflationary expectations. RBI also raised the cash reserve ratio (CRR), the
proportion of funds that banks must keep on deposit with it, by 25 basis points to
9%. The central bank left its reverse repo and bank rates unchanged. Responding to

42
the RBI's monetary tightening, top lenders HDFC and ICICI Bank and a number of
state run bank have raised interest rates.

The aggregate results of 2,988 companies showed 5.1% rise in net profit to Rs
63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June 2008 over Q1
June 2007. The net profit growth is now in single digits the lowest in the past 20
quarters. In the June 2008 quarter, a number of companies were hit by mark-to-
market (MTM) losses on their foreign exchange (forex) exposure.
Crude oil prices have declined sharply from record high $147.27 a barrel hit on 11
July 2008. Oil held near $118 a barrel on Friday 8 August 2008. India imports 70%
of its crude requirement. The rising crude oil prices affects the fiscal deficit
position of the country and its sovereign rating.

Market men will keenly watch the development of India’s nuclear deal with US.
The Board of Governor of the International Atomic Energy Agency (IAEA) on 1
August 2008 unanimously adopted the India-specific safeguards agreement, a key
step in operationalization of the Indo-US nuclear deal.

Foreign institutional investors (FII)’s bought shares worth Rs 1,527.90 in the first
few days of August 2008 (till 7 August 2008). FIIs sold shares worth Rs 25,774.20
in the calendar year 2008, till 7 August 2008. Mutual funds sold shares worth
Rs286.10 in the month of August 2008 (till 7 August 2008).

43
Balance of Payments

Balance of Payments Anything that we buy or sell to the rest of the world
must be paid for. The current account (CA) tracks the flow of goods and services
between the US and the rest of the world and Net Exports of Goods and Services,
Net Income (from investments and wages) and Net transfers The capital &
financial account tracks the payments for those goods & services (KFA) and
records the purchase and sale of financial and non-financial assets. It includes
Official international transactions which central banks collect as reserves.

Investors reaction

Most investments conversations in India obsessed about precisely

picking the bottom while this may be worthwhile past time for a few professional
investors for most others it exposes the exact opposite which is to say they remain
under invested when things began to work again. India never did shine as brightly
as people thought in 2006 nor is as dull as the people are thinking now the truth is
in the middle and there is money to be had for the long term investors in
recognizing that..

Impact on the nuclear deal.

US administration and the congressed bogged down over the

financial crisis in the country.The focus has shifted to bail out the country from the
economy turmoil and administration is trying hard to iron out the parameters and
specifics of the nearly 1 trillion dollar package that is being put through stabilize

44
frighten markets one of the legislative strategies being discussed recently is that of
attaching the financial package to continue in resolution that is needed to fund the
government the end of the month. Some are hoping that the civilian nuclear deal
will also be attached to this resolution so that the congress can pass one omnibus
major prior to its adjournment for the season.

Indian BPO Companies

India’s outsourcing story has become the un Intended victim of the
collapse of some of the most venerable wall street firms such as Lehman brothers
& Meryl lynch since the subprime crisis began to unrevealed idea can no longer
claim that the BPO or KPO operation will escape unscathed from troubles of the
Us financial sector already hundred of jobs have been lost following the
downsizing of the operation and closing down of back offices in India the tall of
the collapse of Lehman is reportedly about the 2200 jobs several other global
financial services companies to have been force to cut the strength of back office
operations in India. Laying of people across various functions as their incomes
were hurt by crash of stock market software majors such as TCS Infosys, Wipro &
satyam that earn a significant portion of their revenues from the banking. Financial
services and insurance sector would njedd to be prepared for loss of business
needless to say the loss of several well paying jobs would dampened demand in
some product segment as well as the real estate which is already suffering door to
the sluggish sales. Indian companies which have partnered this institution for
business collaboration or funds would have to be prepared for a change in the
partners an even the stake sale by distressed institution.

45
However that is not to say the collapse of the financial sector would make the
outlook for India and its market more gloomy their have been a few positive
developments over the past couple of weeks for instance the industrial production
for july 2008 looks healthier rising 7.1% over the same month last year. In
particular the robust growth of the capital goods sector [albeit over a low basin
July 2007]and consumer durable [perhaps in anticipation of the festival season of
demand] are definitely encouraging the decline in the global commodity prices
particularly crude oil now inching close q$90 a barrel should spell good news for
inflation control beside the first quarter GDP growth at 7.9% although slows in 3
years. Reflects that the fundamental of the economy still varies from that should
inspire confidence in the performance of our stock market.

Banks wants to be safe:

Even Indian banks have started tightening the news the noose on
the credit most banks have started going slow on proposals and are looking not
only at the best possible returns but also at the safety factors because of the sub
prime collapse financial cost of these for these banks have also gone up drastically
in past few month most Indian banks not tapped the international debt market.
Financing cost for the more corporate have gone up to 5 times in the past one year.
Financing coming under pressure fees on loans have atleast doubled in the past one
year. Most Indians and foreign banks feel that the prices could last till next year
and they now want to play safe.

46
Stock market:

One often wonders why the Indian stock markets reacts more
than the US markets and an American financial institution goes burst. Close look at
the extreme volatility off course markets will lead to one to conclude that the
Indian markets provides neither adequate liquidity nor value share efficiently. The
result is that the very purpose for which exchanges are constituted and shares are
listed is defeated low floating stock and low public share holding result in extreme
volatility forcing retail investors to shy away from the market.

Gross domestic product:

Earlier projection of 8% no they are predicting it as 7.4% . the

multilateral lending agencies has revised country’s growth projection dur to current
global financial turmoil and weekend investment outlook the bank revised its
growth projection for the developing Asian economies as a whole to 7.5% this year
& 7.2% next year from earlier projections of 7.6% & 7.8% respectively. These
economies posted the fastest growth of 9% in nearly two decade in 2007

(source: Asian development bank)

47
Rupee v/s dollar:

The issue concerning the rupee exchange rate to the case of either near zero
volatility or sudden excessive volatility it is unfortunate that we have never
witnessed orderly moves on the exchange rate base on pure economic macro or
micro fundamentals this makes the task of managing the exchange rate risk very
difficult for the market participants who run a multicurrency balance sheet having
either import or export or foreign currency lending or borrowing ideally,
rupee(against dollar) should depreciate by inflation adjusted interest rate
differential added to that is the trade gap (on the current account) and net flows
through the capital; account (debt & equity) while the inflation adjusted interest
differential and the negative trade gap would guide rupee depreciation the flows in
48
the capital account will cushion the rupee depreciation hence flows in the capital
account

( through FII/FDI/PE/VC/ECB/FCCB/DR etc) are very critical to guide rupee

exchange rate.)

the three core issues to be addressed to guide orderly exchange moves are to
move in to current account surplus by boosting exports and other receivable to
build long term capital account flows to minimize the risk from volatile short term
flows and to hedge risk on crude oil prices at appropriate levels to address the said
issues rupee exchange rates should remain attractive through exporters should not
give exchange rate benefits to short term foreign investors and to reduce volatility
in the oil import bill, gradual rupee depreciation by 2-4% per annum will be in
order and to undue the recent damage rupee reversal (the mid point of 39 & 47)
43.00 should help the Indian economy.

I would look gor the rupee to settle in the range of 43-43.80 by march 2009 with
the support of the RBI. Till the said core issues are addressed yes as rupee
appreciates to much to 39. now it has depreciated too much at to 47. mainly ion
volatility in trade gap and capital account flows it is time for market participants to
move away from windfall gains and to focus on students risk management
practices to arrest the downside

49
Impact on India: The Good , Bad & Ugly

Least Impact Mildly Impact Most Impact

Pharmaceuticals Power equipment& Services Banks

Oil & Gas Auto Financial services

FMCG Retail Real Estate

Media & Entertainment Logistics Infrastructure

Hospitality and tourism Information

Technology

Indian Financial Services

Impact : Most impacted

 The US sub-prime market crisis, which so far caused losses worth $181 billion to the
world’s top 45 banks by the end of FY08, has started hitting Indian banks also

 India’s largest private sector bank ICICI Bank was the first bank to announce a loss of
about Rs. 1056 crores owing to the sub prime crisis of US in the FY08 results.

 The public sector banks have had a limited position in the structured products and therefore
impact is expected to be minimal. However negative sentiments will hit harder.

50
  Punjab national Bank, Bank of India, State Bank of India, Bank of Baroda were major
banks having an exposure to the instruments issued by Lehman and Merrill Lynch.

 However the banking sector in general will have to face tight liquidity conditions apart
from further mark-to-market losses. The net non performing assets of entire banking sector
is less than 2% and it is well capitalized. The capital adequacy ratio is around 13% as
against the statutory requirement of 8 to 9%.

Real Estate
Impact : Most impacted

With the sudden collapse of world leading financial houses, the Indian real estate
players who were already facing the problem of lack of funds due to economic
slowdown & correction in prices would find it difficult to raise further funds.
• Among the US Financial Houses --- Lehman Brothers was very bullish on Indian
Reality Sector and had an investment in excess of US$ 700 mn (maximum amongst
peers)
Lehman's PE investments in India
Amt (US$ Mn) Year
Hyderabad IT Park Project of Peninsula Land 12.5 2008
Unitech's Mumbai Pune Expressway 175 2008
Hotel Project of Future Capital 200 2007
DLF Assets Pvt. Ltd. 200 2007
Anant Raj Industries 66 2006
Unitech's Mumbai Project 16 2008
Source: Published Reports

• Lehman’s real estate investments at project levels (including the big ones like
DLF, Unitech & Future Capital) have been disbursed & it will not affect the ongoing
projects
• RBI’s directive not to remit investments made by US financial houses in India
without permission is also a step in positive direction and would restrict flight of
capital.

51
• However, stocks of companies in which sunked financial institutions have a direct
exposure (as FII investments especially Lehman) would see selling pressure.
Stocks to get affected: Anant Raj Industries, Orbit Corporation, Ganesh Housing, DSK
Kulkarni Dev, Ajmera Reality, Ansal Housing, Ansal Properties, Purvankara
Projects

Infrastructure

Impact : Most impacted

•Adverse impact on the infrastructure companies as it disturbs the financial

atmosphere for the companies which are in the growth stage.

•Lately, after having raised money through IPO’s many Indian infrastructure
companies have gone in for QIP issues with the financial majors across the world.

•Thus, the current situation might not affect the companies at the project
implementation level, however we might see heavy selling pressure in the stocks of

these companies by the sinking US financial institutions which have an exposure to

these companies.

• Going forward, if there is no change in the scenario, fund raising by infrastructure

companies could become a problem.

•Stocks to get affected: Reliance Infrastructure, Prajay Engg, Triveni Engg, Pratibha
Inds, Unity Infra, BSEL Infra, Nagarjuna Construction, Sujana Tower, Madhucon
Projects, Jyoti Structures, Action Construction.

52
Information Technology
Impact : Most impacted

% Revenue Share TCS Infosys Wipro

(Consolidated)
BFSI 44.14 35.7 25

Americas 50.77 62 63

Application 48.3 45.4/23.7 55

Development
&
Maintenance

•USA as a region and Banking Financial Services and Insurance as a vertical are most
critical for top Indian IT companies as shown above
•Lesser probability of immediate cancellation of orders or vendor consolidation
•Sales cycle would become longer and hence top line impact should be visible after
two-three quarters due to this crisis
• Large investment banks had significant discretionary IT spend, which should
reduce now resulting in reduction of outsourcing pie

53
Power equipments & services
Impact : Mildly impacted

Demand slowdown

• Customers mainly include Govt, PSUs and power generation cos.

• Delay in fresh capacity addition may lead to delayed order inflows for these cos.
• Availability of funds with client is important, but high interest rates make
fresh fund raising costly
• However, replacement demand not affected by the ongoing crisis

Raw material prices

• Main raw materials: Copper, Steel

• Copper:
• Prices falling for more than a year
• Record inventories putting further downward pressure
• Steel:

•Demand for steel products has been on the decline due exorbitant hike
in prices over the past year and a decline in demand from the US and
European markets.
On account of foreign investment outflows, the rupee depreciation will offset the gains due to falling
raw material prices.

54
Automobiles
Impact : Mildly impacted

In the event of credit crunch spreading to India from US, we might see auto sales
getting impacted due to tougher credit availability

• Auto companies have been seeing sluggish sales for the past
few months due to higher interest rates and higher fuel prices:, two
wheelers have shown decent sales growth in the last 2 months,
more due to the low base effect

• It would get tougher for passenger and commercial vehicles and it

might start impacting two wheeler vehicle sales negatively.

• Exports of auto companies might take some hit, however, the impact on
exports might not have significant impact on the top-line of auto companies, as the
percentage sales contribution from exports is less for Indian auto companies; but this
might cause the auto companies to cut their export targets for the next two or three
years
• Sector Picks: Maruti Suzuki Ltd, M&M

Sales growth (YoY)

Jul-08 Aug-08
Passenger Vehicles -1.40% -4.35%
Commercial 2% -6.33%
Vehicles
Three-wheelers 1.50% -3.19%
Two-wheelers 19.50% 14.24%

55
56
Oil & Gas

Impact : Least impacted: Oil marketing companies

Mildly impacted private oil exploration companies

As subprime crisis deepens with the extinction of Wall street giants, it would extend the
pressure in the credit markets/lending segment of the banking sector. This along
with massive job losses is likely to constrain consumer spending and thereby put
pressure on demand for petro products. This demand destruction in the developed
economies would put pressure on the crude oil prices.

Falling crude prices would be broadly good for the Indian economy and the Indian oil
sector.
Sector Picks: ONGC

Private exploration companies As prices fall, realization of these companies

is expected to fall, which would reduce their revenues and earnings growth.

However, as the long term trend is up, the fall in prices would be temporary and thus
would benefit these companies over a long period.

Oil Marketing companies (OMCs) In an environment of rising oil prices and the limited
pass-through of these through subsidies, OMCs are unable to benefit from higher
prices. Their margins suffer and the subsidy burden increases which is shared among
OMCs and ONGC. As oil prices cool off, their margins increases and the subsidy
burden decreases, giving them flexibility to focus on long term growth plans.

57
Consumer Driven Sectors
Impact : Retail - Mildly impacted FMCG – Least Impact

World Financial crisis has in turn affected the risk appetite for lending
institutions. This has resulted in an increase in cost of capital and tight
credit appraisal in the system. Due to this, Indian retail companies are
facing problem in execution of Capex program. This will put brakes on
the aggressive expansion of the companies in the sector.

Retail: Sizeable young population in India generates income from

ITES/BPO and spends on Movies, Hotels, and Malls etc. With possible
job losses in ITES/BPO, falling consumer confidence, personal
consumption expenditure is expected to fall. This will reduce the
customer traffic in organized retail outlets.

FMCG: As rural India is on radar of FMCG companies, the effect on these

companies will not have major impact on their top-line. However,
bottom-line might be under pressure as the premium products will not be
favored in the market. Sector Picks: HUL, ITC Ltd, Shree Renuka
Sugar Ltd

58
Consumer Driven Sectors

Impact : Logistics - Mildly & impacted Media & Entertainment - Least

impacted

Logistics sector would be impacted from the offshoot of the current

crisis.Organized logistics is still a very nascent industry and requires continuous

funding.

FDI inflows which have rather remained unaffected by the credit crisis are themain
source for funding the capex plans.

Rail & Road Infrastructure: Built mostly through PPP or 100% government
funding.

Shipping: Projects might get delayed in the rising interest rate scenario, otherwise
is insulated from sub prime.

Air Freight Logistics: Very small share in logistics space. No direct impact.

Sector Picks: Gateway Distriparks Ltd, Gati Ltd.

Media & Entertainment: The demand for news and entertainment will not be
notably impacted by slow down in world economies. Recently, there has been a
significant increase in investments in M&E sector which is not expected to
significantly slow down due to the sector low price elastic 18% CAGR for the next
5 years to reach Rs. 1.157 trillion in 2012.
Sector Picks: UTV Software, PVR Ltd

59
Action taken by Indian Govt.
 CRR is cut by 1 per cent to inject Rs 40,000 crore 

 To provide Rs 25,000 crore to banks against their outgo on farm debt

waiver 

 To double the limit of FII investment in corporate bonds to $6 billion 

 To provide banks access to finance for raising Capital Adequacy Ratio to 12

per cent 

 To keep the RBI's window for mutual funds open till Rs 20,000 crore is
exhausted 

 To issue advisory to PSU banks to give credit against sanctioned limits 

 To ask PSU banks to continue to actively participate in call money market 

 To increase the interest rate ceiling on non-resident deposits denominated in

foreign currency by 50 basis points 

 To increase interest rate ceiling on non-resident deposits denominated in

rupee by 50 basis points 

 To allow banks to borrow funds from their overseas branches up to an

increased limit of 50 per cent of their capital. 

 The Reserve Bank of India announced a host of measures

including a one percentage point reduction in Cash Reserve Ratio (CRR) to infuse
60
more money into the liquidity-starved economy. Similar cuts announced by RBI
since October 6 has injected Rs 60,000 crore and along with the latest cut, banks
would get Rs 1,00,000 crore. The first set of measures announced by the regulators
earlier, including removal of restrictions on P-notes and a CRR cut, failed to
enthuse the market which saw continued selling by FIIs.

The cut in CRR, the second in quick succession will release another Rs 40,000
crore to banks. With this, the additional funds made available to banks stands at Rs
100,000 crore. Last week, RBI had announced a 150 basis points reduction in
CRR. Both CRR revisions will be effective from the fortnight beginning October
11. CRR, the portion of deposits banks have to keep with RBI, has now been
reduced from 7.5 per cent to 6.5 per cent. 

Elaborating on the measures taken, Finance Minister P. Chidambaram said the

government would provide Rs 25,000 crore as first installment (against the farm
debt waiver scheme) to commercial banks, Regional Rural Banks, and cooperative
credit institutions. The RBI has agreed to provide this sum with immediate effect.
Of the Rs 25,000 crore, commercial banks will get Rs 7,500 crore and Nabard Rs
17,500 crore. The banks will get this liquidity without providing any collateral. 

Allaying fears of credit crunch, the Finance Minister once again said “our banks
are well capitalised”. The finance minister revealed the capital strength of the
banks by saying that the capital adequacy ratio of Indian banks was well above the
international requirements (Basel norms) of 8 per cent. However, Indian banks
have capital adequacy ratio of above 9 -10 per cent, as is required by the RBI. 

Nevertheless, the government has decided to provide the banks access to finance in
order to raise the capital adequacy ratio, which will strengthen them further and
bring the CAR to around 12 per cent. 

RBI has already issued an advisory to the banks to enable smooth flow of credit to
borrowers of term loans as well as working capital. The government is also issuing

61
an advisory to public sector banks to ensure easy drawdown against sanctioned
limits, appraise promptly requests for enhancement of credit limits, and continue to
participate actively in the inter-bank call money market. 

The RBI further said Rs 20,000 crore repo auction facility to enable banks to meet
liquidity requirements of mutual funds will continue till the entire amount is
auctioned. 

Similar facility will be made available for the oil bonds which were
instituted under the Special Market Operations (SMO) for public sector oil
marketing companies in June-July earlier. 

In order to lure non-resident deposits, the RBI has increased the interest rate
ceiling by 50 basis points on FCNR(B) and NR(E)RA deposits. Currently, the
interest rate ceiling on FCNR (B) deposits is Libor minus 25 basis points. Now the
ceiling has been increased by 50 basis points, which is Libor plus 25 basis points.
On NRE deposits, the interest rate ceiling has been increased to Libor plus 100
basis points, from the current ceiling of Libor plus 50 basis points. 

RBI has also allowed banks to borrow funds from their overseas branches and
correspondent banks, up to a limit of 50 per cent of their unimpaired Tier-I capital
as at the close of the previous quarter or $10 million, whichever is higher, as
against the existing limit of 25 per cent. 

THE INDIAN GOVERNMENT’S RESPONSE

62
The initial responses of the government focussed on the financial side of the
current crisis. There were measures to infuse liquidity into a banking system that
had become very constrained by reducing the Cash Reserve Ratio and the Statutory
Liquidity Ratio, to reduce interest rates by bringing down repo and reverse repo
rates, and to provide some relief to non-bank financial institutions, particularly
insurance companies. These were confidence-building measures that became
necessary not because the international contagion was spreading to the banking
system but because the Indian banking system had (in a less extreme form) several
of the fragilities that undermined the US banks. But these monetary all proved to
be lacking and did not ease credit conditions in any meaningful way. This was of
the liquidity trap characteristics of the situation: banks were unwilling to lend to
any but the most credit-worthy potential borrowers, but such potential borrowers
were unwilling to borrow because of the prevailing uncertainties and expectations
of slowdown. Meanwhile, all other enterprises, even those who desperately
required working capital just to stay afloat, found it increasingly difficult to access
bank credit even as they faced more stringent demand conditions. Some of the
measures seemed to be more designed to push up the stock market than to revive
the real economy, but even this was unsuccessful because of dampened
expectations of real revival.

In such a situation, reducing interest rates does not solve the basic problem of
tightened credit provision, even though it may marginally reduce costs for those
who are able to access bank credit. And the real economy cannot be revived
through such measures in the absence of a strong fiscal stimulus. It is well known
that there is really no alternative to the standard Keynesian device of using an
expansionary fiscal stance to create more economic activity and demand, and
thereby lift the economy from slump. Even so, the Government of India took an

63
inordinately long time to announce the required fiscal stimulus, and when the much
awaited fiscal package was finally announced, it turned out to be relatively small.
It allowed for only up to Rs. 20,000 crore of direct additional spending through the
Planning Commission in unspecified areas. This would be less than 0.5 per cent of
GDP, a tiny fiscal input which is too small to be really countercyclical or even to
change the expectations of private agents in any meaningful way. This direct
spending was combined with a tax cut measure, on domestic duties – reducing the
ad valorem Cenvat rate by 4 percentage points. But the point about such economic
situations is that price responses do not work, and therefore output has to be
addressed directly through spending. In any case, even price changes would not
necessarily follow, since tax cuts would have an impact in terms of supporting
economic activity only if producers respond by cutting prices, and such price cuts
generate demand responses. But neither is inevitable. For example, the
Government of India cut the administered price of aviation fuel in October 2008,
but this was not passed on to consumers by the airline companies, and even two
months later only one carrier – the public sector Air India - promised to reduce the
aviation fuel surcharge. So that particular measure simply became an additional
subsidy to shore up profits of airline companies. Across the world, governments
have been finding that in these times of economic uncertainty, tax cuts are much
less effective in stimulating activity than direct government expenditure. Similarly,
measures that try to provide additional export incentives (such as interest
reductions for export credit) to exporting sectors such as textiles, garments and
leather would not counteract the effect of big losses of export orders as the major
markets start shrinking. What is required was a more serious and systematic
attempt to allow these industries to keep producing at technologically efficient
levels and shift demand to other markets.

64
WHAT IS TO BE DONE?
It is more than obvious that the current global crisis provides a real opportunity to
initiate and develop alternative policies, both internally and domestically. A
change in economic paradigm is essential; without it the international economy
will continue to lurch from crisis to crisis and the developing world will not be able
to advance and provide basic needs to citizens. The need for more state
intervention in economies is now recognised everywhere: the concern now is to
ensure that such state involvement is more democratic and more accountable to the
people. Everyone now recognises the need to reform the international economic
regime. But the idea should not simply be to fix a system that is obviously broken:
we need to exchange it for a better model. That is because, as noted above, the
current financial architecture has failed to meet two obvious requirements: of
preventing instability and crises, and of transferring resources from richer to poorer
economies. Not only have we experienced much greater volatility and propensity
to financial meltdown across emerging markets and now even industrial countries,
but even the periods of economic expansion have been based on the global poor
subsidising the rich. These global failures are so immense that they constitute
enough reason to abandon this system. But there are other associated failures in
terms of what the regime has implied within national economies: it has encouraged
pro-cyclicality; it has rendered national financial systems opaque and impossible to
regulate; it has encouraged bubbles and speculative fervour rather than real
productive investment for future growth; it has allowed for the proliferation of
parallel transactions through tax havens and looser domestic controls; it has
reduced the crucial developmental role of directed credit.
So we clearly need a new system, even if the goals remain the same as tha of the
original Bretton Woods: to ensure currency stabilisation through international

65
monetary co-operation; to encourage the expansion of international trade in a
stable way; and to promote development by facilitating productive investment. To
achieve this in the current context, four elements are crucial. First, the belief that
self-regulation supported with external risk assessment by rating agencies is an
adequate way to run a financial system has been blown sky-high. There is no
alternative, therefore, to systematic state regulation of finance. Second, since
private players will inevitably attempt to circumvent regulation, the core of the
financial system - banking - must be protected, and this is only possible through
social ownership. Therefore, some degree of the socialisation of banking (and not
just socialisation of the risks inherent in finance) is also inevitable. In developing
countries it is also important because it enables public control over the direction of
credit, without which no country has industrialised. Third, to cope with the adverse
real economy effects of the current crisis, fiscal stimulation is essential in both
developed and developing countries. Enhanced public expenditure is required to
prevent economic activity and employment from falling, to manage the effects of
climate change and promote greener technologies (Pollin 2008), and to advance the
development project in the South. Fourth, the international economic framework
must support all this, which in turns means that capital flows must be controlled
and regulated so that they do not destabilise any of these strategies.
In India too, a major change in economic paradigm is required along these lines.
But first of all, it is necessary to ensure that Indian economic policy makers
remember the basic Keynesian principles that are now back in fashion everywhere
else in the world, such as that direct public spending is the best countercyclical
measure, especially in a situation of liquidity trap. Such public spending will be
more economically effective and more welfare -improving if it is directed
dominantly towards employment schemes, social spending and rural and urban
infrastructure for mass use. This will also enable more progress towards meeting

66
developmental goals, but this also requires that government spending be made
more democratically accountable and more directed towards altering consumption
and production patterns in more sustainable directions.

Conclusion

 The Indian economy is already under the impact of global

financial crisis.
 Government has taken various steps but as of now there are no
signs of recovery.
 Share prices have steadily fallen, rupee has lost ground to the
dollar, exports have been hit, various sectors of the economy
have seen decline in demand and even the Prime Minister has
gone on record to say that that India has to bear the pain.
The point is that we have to live with the present scenario for some
more time to come
While the developed world, including the U.S, the Euro Zone and Japan,
have plunged into recession, the Indian Economy is being affected by
the spill-over effects of the global financial crisis (Chidambaram 2008).
Great savings habit among people, strong fundamentals, strong
conservative and regulatory regime have saved Indian economy from
going out of gear, though significant parts of the economy have slowed
down and there is a wide variance of opinion about how long it will
continue. It is expected that growth will be moderate in India. The most
important lesson that we must learn from the crisis is that we must be

67
self-reliant. Though World Trade Organization (WTO) propagates free
trade, we must adopt protectionist measures in certain sectors of the
economy so that recession in any part of the globe does not affect our
country.

68