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Abstract Global recession: Impact & opportunities for India

The financial crisis hit the Wall Street; there were some premature thoughts among Indian policymakers and media persons about the success of India to overcome recession. It has been argued that India would be relatively immune to this crisis, because of the "strong fundamentals" of the economy and the supposedly well-regulated banking system. These effects have been most marked among those developing countries where the foreign ownership of banks has been already well advanced, and when US-style financial sectors with the merging of banking and investment functions have been created. There have been warning signals and signs of fragility in Indian finance for some time now, and these are likely to be compounded by trends in the real economy. This paper explains that global financial crisis has had three major impacts on the Indian economy, i.e. Economic Downturn, Exposure of banks, Domestic policy. The paper also explains that how India is confronting the global financial crisis & the opportunity available before India from Global recession. Key words:- economic downturn, global financial crisis, opportunity Submitted by: Prof. Shailesh Kediya, HOD- MBA department, Datta Meghe Institute of Engineering Technology and Research, Savangi, Wardha – 442 004 M. 9890833172

and when US-style financial sectors with the merging of banking and investment functions have been created. . the current account deficit was widening. Individual bias has been minimized but may not be eliminated completely. The most immediate effect of that crisis on India had been an outflow of foreign institutional investment from the equity market during this period. As compared with this. To study the impact of recession on India for the period 2007-08 & 2008-09 2. In 2007-08. Industrial growth has been faltering. they pulled out $11. It has been argued that India would be relatively immune to this crisis. The last two features can also be directly related to the international crisis. The study is based on secondary data.3 billion. The study mainly covers the statistics of 2007-08 & 2008-09.1 billion during the first nine-and-a-half months of calendar year 2008. the Indian economy was experiencing a downturn in 200809.Global recession: Impact & opportunities for India INTRODUCTION:The financial crisis hit the Wall Street. This has had two effects: in the stock market and in the currency market. ECONOMIC DOWNTURN in 2008-09:After a long spell of growth. there were some premature thoughts among Indian policymakers and media persons about the success of India to overcome recession. net FII inflows into India amounted to $20. inflation remains at double-digit levels. Objectives: 1. who needed to retrench assets in order to cover losses in their home countries and were seeking havens of safety in an uncertain environment.3 billion occurred over the first six-and-a-half months of financial year 2008-09 (April 1 to October 16). These effects have been most marked among those developing countries where the foreign ownership of banks has been already well advanced. 3. had become major sellers in Indian markets. Foreign institutional investors. To analyze the opportunities created by recession before India Scope: 1. as the impact of recession was very powerful during this period. 2. of which $8. because of the "strong fundamentals" of the economy and the supposedly well-regulated banking system. foreign exchange reserves were depleting and the rupee was depreciating.

This was despite the sale of dollars by the RBI. As a result. 2008. which was reflected in a decline of $25. this withdrawal by the FIIs led to a sharp depreciation of the rupee. which shows that downturn continued till this period.Given the importance of FII investment in driving Indian stock markets and the fact that cumulative investments by FIIs stood at $66. Between January 1 and October 16. even relative to a weak currency like the dollar. to less than 10. 2008. Falling rupee In addition. 2008 (Chart 1). .000 by October 17. the Sensex fell from its closing peak of 20.86 (Chart 2). the RBI reference rate for the rupee fell by nearly 25 per cent.873 on January 8. the sensex was recorded at 9568. 2008. On 30th March 2009.20 to the dollar to Rs 48. the pullout triggered a collapse in stock prices.5 billion at the beginning of year 2008. from Rs 39.8 billion in its foreign currency assets between the end of March 2008 and October 3.

It could be argued that the $275 billion the RBI still has in its kitty is adequate to stall and reverse any further depreciation if needed. These losses are bound to render some institutions fragile. According to reports. although these rumors had been strongly denied by the bank and later word it was found that the rumor was not correct. EXPOSURE OF BANKS: A second route through which the global financial crisis could affect India was through the exposure of Indian banks or banks operating in India to the impaired assets resulting from the sub-prime crisis. there were no clear estimates of the extent of that exposure. A third indirect fallout of the global crisis and its ripples in India was in the form of the losses sustained by non-bank financial institutions (especially mutual funds) and corporate. Such losses were expected to be large. more than 60 per cent of which were directed to the US. the MTM losses incurred by public sector banks were estimated at $90 million. Given the aggressive strategies adopted by the private sector banks. especially its exports of software and IT-enabled services. While this depreciation was good for India's exports that are adversely affected by the slowdown in global markets. adversely affected India's exports. International banks and financial institutions in the US and EU were important sources of demand for such services. And exactly this is what happened with banks. the RBI was clearly not keen to deplete its reserves too fast and risk a foreign exchange crisis. So far the RBI had claimed that the exposure of Indian banks to assets impaired by the financial crisis was small. while that for private banks was around $360 million. But given the sudden exit by the FIIs. As yet these losses are on paper. but the RBI believed that even if they were to be provided for. Unfortunately. giving room for rumor in determining market trends. ICICI Bank was found to be the victim of a run for a short period because of rumors that sub-prime exposure had badly damaged its balance sheet. these banks were well capitalized and can easily take the hit. the recession generated by the financial crisis in the advanced economies as a group and the US in particular. as signaled by the decision of the RBI to allow banks to provide loans to mutual funds against certificates of deposit (CDs) or buyback their own CDs before maturity. 2008 was around $450 million. and the difficulties they face resulted in some curtailment of . The result had been the observed sharp depreciation of the rupee. Nor does it assist the Government's effort to rein in inflation. it was not so good for those who had accumulated foreign exchange payment commitments. the RBI had estimated that as a result of exposure to collateralized debt obligations and credit default swaps. the combined markto-market losses of Indian banks at the end of July. as a result of their exposure to domestic stock and currency markets. Thus. with implications that would become clear only in the coming months Finally.

creating difficult choices for economic and financial policy. And looking at scenario in 2010-11. They were not the only causes for the downturn the economy had been experiencing. their effects were already being felt. the basic financial machinery of the country remained relatively robust. The net result was smaller export stimulus and a widening trade deficit. This growth slowdown was initially welcomed by the RBI. it was indicating that it hoped that more of what created the problem would help solve it. therefore. DOMESTIC POLICY: While these trends were still in process. By deciding to relax conditions that apply to FII investments in the vain hope of attracting them back and by focusing on pumping liquidity into the system rather than using public expenditure and investment to stall a recession. and the slowdown in growth in the world's rich economies. so that the economy can return quickly to a nine per cent growth rate. the Indian economy started to slow in the year 2007-08. the Government was juggling multiple considerations: the state of the domestic business cycle. but they were found to be important contributory factors. despite the backlash against neo-liberalism worldwide. that when faced with this crisis the Government was not rethinking its own liberalization strategy. it is expected that we will be getting 9 percent growth. In common with its East Asian neighbors. And the slowing of growth outside of the financial sector too had implications for both merchandise and services exports. which had been gradually tightening monetary policy (since 2004) in a fight against inflation. They had been induced by domestic policy as well. Although India did experience a period of slow growth in the years that followed that crisis. ensuring financing for the balance of payments deficit. The extent of imported difficulties would have been far less if the Government had not increased the vulnerability of the country to external shocks by drastically opening up the real and financial sectors. investment-led growth. In charting its course. India was grappling once again with many of the same challenges that the region faced a decade ago. India's PM Dr. Yet. INDIA: TURNING CRISIS INTO OPPORTUNITY:India's economic managers and particularly the Reserve Bank of India (RBI) take considerable pride in having protected India from Asia's financial crisis in 1997-98. this does not justify the argument that India's difficulties were all imported. . Manmohan Singh said that the broad goal of India's policy was to try to ensure that any reduction in India's growth was temporary. It was disconcerting. In his statement. providing a solid foundation for the much more rapid growth that has taken place this decade. the sharp shift in the availability of global risk capital for financing Indian investment. After three years of buoyant.their demand.

however. Government attitudes changed sharply in September. The political cycle was at an awkward point. Thanks. and the overnight secured lending rate at which the RBI lends to banks. policy action was based on the assumption that India could remain largely unscathed.Price pressures were further exacerbated by the sharp rise in commodity prices late last year and early this year. Notwithstanding the generally sound domestic financial position of India's commercial banks. India continues to suffer a series of terrorist incidents in its larger cities. and by a variety of institutional features. Looking into year 2010-11. 2008. That was the year when India suffered a major external payments crisis and was obliged to apply to the IMF for assistance. it can be said that the reforms played vital role and contributed to the success of the economy. and the political and economic instability in Pakistan adds another layer of uncertainty. Taking economic and political pressures together. as well as to increase the current account deficit in the balance of payments. Parliamentary elections were due 2009. The net effect had been partially to reverse the measured (but inadequate) progress toward fiscal consolidation. to use the crisis also to resume the momentum of reforms that had largely stalled. and there is considerable uncertainty as to the government that was to follow. that payments crisis was turned into an opportunity for major structural reform from which India continues to benefit till this day. Yet by itself this was not enough: the larger challenge was. Over the course of October. Even though the financial crisis had been underway for almost a year from 2007. India's policymakers had both the experience and the tools to ride out the recession storm. the RBI has sharply reversed course on the two key instruments at its disposal: the cash-reserve ratio (that is. They got assistance by India's lower integration with world trade and finance. it was perhaps not surprising that. to inspired political and economic leadership at that time. bank liquidity came under strain as banks' overseas subsidiaries found their sources of wholesale finance withdrawn. reserve requirements) that banks are required to hold in their accounts with the RBI. for many Indians the present moment is compared less with 1997 than with 1990-91. Policy until late August 2008 operated on a business-as-usual basis. The interesting question was whether a similar opportunity can be created again. as in 1991. This effect was compounded by the intensified sell-off by foreign investors in domestic equity markets and the repatriation of funds to meet liquidity calls abroad. India after Recession – The Asian scene: .

Indian Outsourcing industry. which have entered in to the growth phase. The only major difference between India and China is the sector of economy through which to acquire this status. The advanced economy enters into declining phase and may not be able to maintain its status quo and may give in to the nascent economies. automobile. Several industries in India such as Telecommunication. This is a temporary phase in the growth spectrum of Indian economy. India too has entered into the cyclical phase to move toward a super economic power in the near future. China has taken lot of advantage of American Economy into amassing billions of dollars into is coffer and is almost ready to supersede the present super power. which converted millions of its talented Indians into becoming truly internationalized personality with very high level of confidence and Indian pride. India has entered into long term growth cyclical phase in 2003 itself and is going to sustain it for very long period. Indians are one of the best managers in the world who can enable India to fight the temporary economic nightmare and to reach to the helm. The basic reason is the deteriorating economic fundamentals in USA and the commitment of Barrack Obama to keep American employment at an appreciable level at the cost of BPO. Today Indians are harvesting on this and have been building one of the strongest fortes to compete any one in the world. Of course 2009 and parts of 2010 will not prove good for out sourcing industry for Indian business. The present recession is going to have long term impact on advanced economies such as USA and Japan and not on India and China. India need not worry much about the impending recession that has set in today. The industry created sizable employment in India and generated revenue equal to 1percent of Indian GDP. This the typical sign of a growing economy in the economic cycle phase. Many industries are becoming multinationals ready to spread far and wide. With India entering the growth cyclical phase Indian industries have grown fast and high to attain world scale. China has shown its superiority in manufacturing and exporting goods at rock bottom prices to Americans and others and India is doing the same by selling the services of its English speaking talented young adults in BPO and KPO sectors. is perhaps collapsing under the pressure of American Recession. . The addition was made when India badly needed it at its threshold of take off to super economy. Indian Outsourcing industry owe to the English speaking youths for its success. This foundation was laid in the 19th and 20th centuries during the British rein in India which taught the international language and the fine democratic system to the Indians. oil and Gases are growing gigantic to create opportunities for domestic BPO that may gradually compensate the loss the outsourcing industries are suffering. Indians need to have patience and persistence to fight out to sustain the Resurgent India. This is in the natural process in economic growth cycle that older super economy supports another economy to grow from baby to adulthood. The foundation for growth is laid not in one day but for several years. The Economic Times 3. There was a slowdown in India's growth performance — but not a collapse. Real GDP growth and major sectors had shown strong signs of slipping but in 2009-10 it again started to climb www.html http://www. REFERENCE: Newspaper www. ii) The growing trade links between India and the rest of the world indicate that exports would decline quite sharply. the growing integration of India's financial markets with global financial _______________________________________________________________________ Author: Prof. The short-run outlook for the Indian economy is unclear.7). The Times of India Websites ) .thehindubusinessline. The ratio of exports plus imports to GDP increased by more than 50 per cent between 1997–98 and 2007–08 (from 21.investopedia. It is assumed that Indian economy should be in very good position within a year. The Hitavada 2. Impact of recession is reduced to large extent in India in 2010-11. Surely. iii) A final avenue is the confidence channel.CONCLUSION The Indian economy has globalized rapidly during the past few years.e. the stimulus packages announced by the government and the RBI have had their desired effect. Savangi ( ked_sk@rediffmail..2 per cent to www. The tightened global liquidity situation following from the failure of Lehman brothers in September 2008 increased the risk-aversion of several banks and other lending institutions. Shailesh Kediya. i.wikipedia. DMIETR. Three different channels of the GFC's impact on India can be identified: i) The financial channel. The growth of financial integration has been even more www. and.