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Chronicle Of The Neville Wadia Institute Of Management Studies And ResearchISSN 2230-9667

Feb., 2012

251

Financial management

Current Financial Crisis in India

Prof. Dr. T. G. GiteEx. Chairman of BOS in Business Economics

University of Pune H.R. College, Rajgurunagar Dist. Pune 410505

Abstract: India is developing into an open-market economy, yet traces of its past autarkic policies remain. Eco-nomic liberalization, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth, which has averaged more than 7% per year since 1997.The worst affected countries are one developing economies where a sharp fall in the export earnings and further pressure on current account and balance of payments were recorded, besides decline in workers’ remittances, liquidity crunch and loss of confidence of consumers and investors. The most worrying offshoots of the crisis were the lower investment and growth rates and significant loss of employment.Indian economic and production growth was suffering an artificial boom that reached the height in 2008 and it caused a situation of bust. Indian middle class and poor citizens were sacrificed twice. Firstly, the economic stimulus and bailout money was provided to industrialist by borrowing and that money is to be paid back by the common Indian citizen.Given the increasing integration of Indian economy with rest of the world, the slowdown of Indian economy is expected to be reversed only with the recovery of global markets. Until then, the only policy option before the Government of India and RBI is to stimulate the domestic demand through fiscal and monetary measures.Key words: Financial crisis, developing economies, GDP, recession, government stimulus, fiscal measures.

Introduction:In the backdrop of surging world economy prior to 2007, generating overjoyed optimism about future with the prediction of Brazil, Russia, India and China (BRIC) countries led economic growth in coming times, the onset of protracted recession – greatest ever after 1930s, through financial meltdown in US and elsewhere in early 2007, has knock-on effect on such projections. International financial and trade flows have contracted at unprecedented rates for the first time in the past 50 years; will all advanced countries in deepest post Second World War recession, with a job crisis intensifying across the board. The worst affected countries are one developing economies where a sharp fall in the export earnings and further pressure on current account and balance of payments were recorded, besides decline in workers’ remittances, liquidity crunch and loss of confidence of consumers and investors. The most worrying

Chronicle Of The Neville Wadia Institute Of Management Studies And Research ISSN 2230-9667

Feb., 2012

252


offshoots of the crisis were the lower investment and growth rates and significant loss of employment. Much of the Asia, which was the engine of recent word economic growth, has also started manifesting the signs of a slowdown, cutting into the considerable economic progress accomplished in recent years. The growth forecasts for the fast emerging Asian economies such as India and China have also been downgraded by Asian Development Bank. The IMF growth forecasts have been revised significantly, for India – 1.1 percentage points down to 6.9 per cent real GDP growth, and China and Africa both down by -0.5 percentage points to 9.3 per cent and 6.3 per cent respectively (te Velde, 2008). In view of this backdrop, this paper attempts to explore the impact of recession on Indian Economy.

Overview of Indian Economy: India is developing into an open-market economy, yet traces of its past autarkic policies remain. Eco-nomic liberalization, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth, which has averaged more than 7% per year since 1997. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern in-dustries, and a multitude of services. Slightly more than half of the work force is in agriculture, but services are the major source of economic growth, accounting for more than half of India's output, with only one-third of its labor force. India has capitalized on its large educated English-speaking popula-tion to become a major exporter of information technology services and software workers. In 2010, the Indian economy rebounded robustly from the global financial crisis - in large part because of strong domestic demand - and growth exceeded 8% year-on-year in real terms. Merchandise exports, which account for about 15% of GDP, returned to pre-financial crisis levels. An industrial expansion and high food prices, resulting from the combined effects of the weak 2009 monsoon and inefficiencies in the government's food distribution system, fueled inflation which peaked at about 11% in the first half of 2010, but has gradually decreased to single digits following a series of central bank interest rate hikes. In 2010 New Delhi reduced subsidies for fuel and fertilizers, sold a small percentage of its shares in some state-owned enterprises and auctioned off rights to radio bandwidth for 3G telecommunications in part to lower the government's deficit. The Indian Government seeks to hold its budget deficit to 5.5% of GDP in FY 2010-11, down from 6.8% in the previous fiscal year. India's long term challenges include widespread poverty, inadequate physical and social infrastructure, limited non-agricultural employment opportunities, insufficient access to quality basic and higher education, and accommodating rural-to-urban migration.Global financial companies have begun cutting jobs in India as the worsening financial crisis in the West dims business outlook, forcing companies to scrap fund-raising and M&A plans. Bank of America Mer-rill Lynch, Nomura, UBS and HSBC are among the companies sacking employees in the third wave of financial market job cuts since the Asian crisis of 1997.India may face its worst financial crisis in decades if it fails to stem a slide in the rupee, leaving the Reserve Bank of India (RBI) with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors. If the central bank is too timid, it risks adding fuel to the ire of portfolio investors, which India relies on heavily to cover its imports tab. Aggressive intervention would leave the central bank open to criticism that it is wasting precious money on problems that are beyond India's control anyhow, notably Europe's debt crisis. Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits.


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That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

India Growth Rates of Real GDP 2000-2009 (%)

Sector 2000-01

To 2007-08

200-06 2006-07 2007-082008-09 (Revised

estimated) 1. Agriculture & Allied Activities 2.8 5.3 3.8 4.5 1.6

2. Industry2.1 Mining & Quarrying2.2 Manufacturing2.3Electricity, Gas & Water Supply

7.14.97.84.8

8.04.99.04.7

10.65.712.06.0

8.14.78.86.3

3.93.62.43.4

3 Services3.1 Trade, Hotels, Restaurants, Transport, Storage & Communication3.2 Financing, Insurance, Real Estate & Business Services3.3 Community, Social & Personal Services3.4 Construction

9.010.3

8.8

5.8

10.6

11.011.5

11.4

7.2

16.2

11.211.8

13.9

6.9

11.8

10.712.0

11.8

7.3

10.1

9.79.0

7.8

13.1

7.2

Real GDP at factor cost 7.3 9.4 9.6 9.0 6.7

Source: RBI & Ministry of Finance Govt. of India

It can be seen from the above table over the period 2000-09 India’s growth rates of Real GDP have gradually fallen down only with the exception that of Community, Social and Personal Services in which case it has shown an increasing trend. The step fall in the growth rate in the Agriculture sector is a causing concern.

Reasons behind Indian Economic CrisisSo, despite of all the bailouts and economic stimulus that government provided for Industrial sector and the aviation sector why is the production rate going so abysmally low?The reason is simple. Indian economic and production growth was suffering an artificial boom that reached the height in 2008 and it caused a situation of bust. Despite all the strict regulation of Indian banks, India was a victim of huge recession and to defy and deny it, Indian government provided eco-nomic stimulus to avoid the ignominy of being a failed government and centralized state. However, such tricks never work because the artificial boom simply means wastage of resources and mal invest-ment. By promoting economic stimulus and bailout package, government only created further artificial demand to increase supply which meant more wastage of resources and mal investment. It was simply like a person suffering a weight of say 80 Kilogram is burdened with another 100 kilogram by saying that it will help. But how could it help? The person who was feeling unable to lift 80 kilograms could never succeed in lifting and balancing 180 kilogram.

Chronicle Of The Neville Wadia Institute Of Management Studies And Research ISSN 2230-9667

Feb., 2012

254


Just to help the Indian industrialists and the Indian PSUs, the UPA government burdened Indian middle class and poor citizens with extreme national debt (Indian national debt is alarmingly increasing) and cruel inflation. Thus, Indian middle class and poor citizens were sacrificed twice. Firstly, the economic stimulus and bailout money was provided to industrialist by borrowing and that money is to be paid back by the common Indian citizen. On the other hand, the same money that was flooded in market caused incessant inflation and continuous price rise of food articles, petrol and every other thing that a common man uses daily.Now the UPA government is again discussing with the players of Industrial sector and certainly, they will try to plan something artificial demand again to support the industrial sector and to increase the growth rate again while the common Indian man will suffer more inflation, more price rise and more poverty. Same is the case of every other country that provided huge economic stimulus and bailout packages for failing industries. However, none of the government accepts their failure. The US Presi-dent Obama believes that he actually saved America against a bigger disaster; Indian Finance Minister Pranab Mukherjee believes that India is growing irrespective of negative Industrial production rate and huge slump in GDP growth rate. The Euro Zone is already suffering and China is also facing burden of increasing inflation and economic depression.

Policy Measures:Given the increasing integration of Indian economy with rest of the world, the slowdown of Indian economy is expected to be reversed only with the recovery of global markets. Until then, the only policy option before the Government of India and RBI is to stimulate the domestic demand through fiscal and monetary measures. While government could put more disposable income in the hands of the taxpayers. RBI could stimulate the demand for credit by facilitating monetary expansion and reduction in the cost of borrowing through infusion of additional liquidity by cutting the cash reserve ratio (CRR) , lower-ing the statutory liquidity ratio (SLR) and unwinding the market stabilization scheme (MSS). Both the policy measures, however have their own limitations which has been evident from the current economic situation.

Conclusion: Economic meltdown occurs because of centralized banking and mixed economy. Economic cycles are result of governmental interventionism in market. More intervention in form of bailouts and economic stimulus cannot help, rather it created huge crisis. Yet, governments never accept this and keep follow-ing same old failed path because the government have nothing to do with poverty and unemployment of common citizens, the government always thinks about the super rich and offer them bailouts and economic stimulus in bribery and in return, these super rich offer bribery to politicians and government officers. all bad nexus of Crony-capitalism Mixed economy.The outlook for GDP growth in 2010-11 has improved significantly, given the broad based, robust recov-ery seen in the last quarter of 2009-10. Although concern about a possible weakening of global recovery persists, domestic risks to growth have receded significantly. As a result, the Reserve Bank revised upwards its GDP growth projection for 2010-11 to 8.5 per cent in July 2010, from 8 per cent with an upward bias in April 2010. Inflation now remains the dominant concern in macroeconomic management though there has been moderation in the provisional WPI inflation to 8.6 per cent in September from 10.0 per cent in July 2010 reflecting improved supply conditions and lagged impact of policy actions. What is worrying, however, is that food inflation remains elevated in double digits reflecting a shift in


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consumption demand. If supply response is not commensurate, there is a risk that food price inflation could acquire a structural character. Nevertheless, the overall inflation rate seems to have peaked.The Reserve Bank projects the headline inflation rate to moderate to 6 per cent by end-March 2011. The Reserve Bank’s projections of growth and inflation will be revised in the second quarter review of monetary policy on November 2, 2010. To sum up, despite sound fundamentals and no direct exposure to the sub-prime assets, India was af-fected by global financial crisis through all the channels – trade, financial and confidence channels – re-flecting increasing globalization of the Indian economy than what is apparent in terms of traditional in-dicators. The policy responses to the global crisis were swift and timely and have transited through three distinct phases since the second half of 2008-09. During the first phase, crisis management assumed policy priorities and, hence, the Reserve Bank introduced a comprehensive range of conventional and unconventional measures to limit the impact of the adverse global developments on the domestic finan-cial system and the economy. Monetary policy focused on augmenting liquidity – both domestic rupee and foreign exchange liquidity – and making them available at lower rates. This was supported by the fiscal stimulus measures aimed at cushioning the deficiency in demand. In the second phase, monetary policy was confronted with the tasks of supporting the recovery process without compromising on price stability. Accordingly, while policy rates were left unchanged signifying accommodative policy stance, most unconventional measures undertaken in response to the crisis were terminated signifying return to normal pace of activity. During the current phase, with strengthening of domestic growth prospects, inflation management assumed prime importance and, accordingly, the normalization process of mon-etary policy gathered momentum. Going forward, the outlook for growth remains favourable and infla-tion is expected to moderate. There are, however, risks from sluggish global economy, rebound in global commodity prices, volatile capital flows and high domestic food prices.

References: 1. Pranab Mukherjee Clarifies his claim that Growth Causes Inflation and Price Rice, Aug 5, Chennai Online 2. Indian Economy has hit a Rough Patch, Dec 12, Times of India 3. “Mr. Obama is fiercely proud of the record he achieved in keeping not just the United States but also the entire world out of an acute financial meltdown

after 2008, presiding over enormous stimulus spending in tandem with unrestrained support from the Federal Reserve. The president and his allies now say that in doing so, they may well have prevented the world from falling into another Great Depression.”, The New York Times

4. Subbarao D. (2009) “Impact of the Global Financial Crisis on India Collateral Damae and Response”, Speech delivered at the Symposium on the Global Economic Crisis and Challenges for the Asian Economy in a Changing World organized by the Institute for International Monetary Affairs, Tokyo on February 18, 2009. Accessed from site: http//rbi.org.in/scripts/BS_SpeechesView.ospdx?Id=410

5. Balatagi,Badi H.(2001) “Economic Analysis of Panel Data”, 2nd edition, John Willey &Sons.6. The Indian Economic Journal, Volume58, November 4, January-March, 2011.

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