Project-Subprime Crisis - 2008-09 - Final 10.10.15

SUB-PRIME CRISIS (2008-09):
IMPACT & MANAGEMENT BY

INDIAN ECONOMY
Presented by1. Kush Kumar

2. Ranabir Mullick
3. Shakil Hassain
4. Sudipta Chatterjee
5. Suman Mandal
(MP15021)
(MP15034)
(MP15040)
(MP15045)
(MP15046)
PGDM (PT) 2015-18, XLRI - JAMSHEDPUR
Subprime crisis (2008-09): impact & management by Indian economy
ACKNOWLEDGEMENT
We express our gratitude and respect to our Professor,

Dr. Vishwa Ballabh for her valuable guidance and
encouragement in carrying out the project. His
involvement with the project and efforts helped us to
understand the subject and solve the problems we faced
in doing the project. Also his support about the topic had
helped us to visualize the critical things in a better way.
We are grateful to all the staffs of XLRI who had helped
us in getting the requisite materials for the project from
our library as well as from the e-library.
We would also like to thank our parents, spouse and
friends for their cooperation and valuable suggestion in
finalizing the project within the limited time frame.
PGDM (PT) 2015-18, XLRI JAMSHEDPUR
Table of Contents
1.
Subprime Crisis 2008-09 ......................................................................................................................................3
1.1.
Introduction ......................................................................................................................................................3
1.2.
Objectives of the Study ....................................................................................................................................4
2.
Causes of Global Economic Crisis........................................................................................................................5
2.1.
Sub-prime mortgage .........................................................................................................................................5
2.2.
Securitization and Repackaging of Loans ........................................................................................................6
2.3.
Excessive Leverage ..........................................................................................................................................6
2.4.
Misleading judgments of the Credit-Rating Organizations ..............................................................................7
2.5.
Globalization, technology and the trade deficit ................................................................................................7
3.
Impact of the recession on Indian Economy .........................................................................................................8
3.1.
Offshoot of Globalized Economy .....................................................................................................................8
3.2.
Aspects of Financial Disorder in India due to Economy Crisis ........................................................................8
3.2.1.
Capital Outflow ............................................................................................................................................8
3.2.2.
Impact on Stock and Forex Market ..............................................................................................................9
3.2.3.
Impact on the Indian Banking System .......................................................................................................10
3.2.4.
Impact on Industrial Sector and Export Prospect .......................................................................................10
3.2.5.
Impact on Employment ..............................................................................................................................12
3.2.6.
Impact on poverty ......................................................................................................................................13
4.
Indias Crisis Responses and Challenges ............................................................................................................14
4.1.
Indian Economy during Crisis Time...............................................................................................................14
4.2.
The Risks and Challenges Ahead ...................................................................................................................15
4.3.
RBIs Crisis Response and Monetary Policy Measures .................................................................................15
4.4.
Governments Crisis Response and Fiscal Policy Measures ..........................................................................20
4.5.
Financial stability ...........................................................................................................................................23
5.
Options & Remedies to combat Economic Crisis ...............................................................................................25
5.1.
Diversifying Exports ......................................................................................................................................25
5.2.
Boosting Domestic Consumption ...................................................................................................................25
5.3.
Generating Employment ................................................................................................................................26
5.4.
Provisioning Credit to Productive Sectors ..................................................................................................... 27
5.5.
Need for Structural Reforms ..........................................................................................................................28
5.6.
Increased purchasing power of the people ..................................................................................................... 28
Conclution ...................................................................................................................................................................29
Reference30
1. Subprime Crisis 2008-09
1.1. Introduction
The short run economics fluctuations mainly focus on the behavior of two variables. The first
variable is the market value of all the final good and service produced within a country in a given
period of time i.e. Gross Domestic Product (GDP) and other is the price level of consumer goods
and services purchased by households called consumer price index (CPI)
An adverse economics fluctuation or an overall slowdown of macroeconomics indicators such

as decrease in GDP, low investment spending, production less than potential output, less
household income thus decrease in consumption, decline trade returns, and deflation as well as
rise in unemployment rate in economic movement are the symptom for business cycle
contraction and these situation is referred as a recession in economics.
The economic crisis that developed around 2008-09 in United States of America (USA) due to
the sub-prime crisis in USA, the excessive amounts of loans given to people who could not
afford them to repay and the investors had invested huge amount into the real estate and eager
for high return were resulted in the economic slowdown. The low rate of interest, Community
Reinvestment Act, mortgage agents and creditors as well as rating agencies are the major factor
which played their role in generating crisis. The poor bylaw of investment banks, relaxation in
loaning standards led by greed in an administration of uncontrolled competition and disaster into
asset market due to non-realization of the dues from defaulters (mainly real estate) were the three
important aspects of the sub-prime crisis. It once again proved the fact that financial sector is
typical in nature and can be exposed to uncontrolled competition only at the cost of a complete
peril.
Subprime crisis (2008-09): impact & management

ent by Indian economy
Though the recession due to sub

sub-prime crisis originated at USA but the tremors are being felt in
almost entire parts of the world so in India also. During post economic reforms Indians GDP
growth rates were around 8-9%
9% achieved due to new economic policy of 1991 which is based on
Liberalization, Privatization and Globalization which boost
boosted the rates of economic expansion as
a result all macroeconomic indicators such as consumption,, investment,
investment Government
expenditure, net export and employment rate increased in a substantial manner. The waves of
global economic crisis are giving some trouble to India
Indian economy also but we do not see
intensive atmosphere of recession in internal India. Though it is true in some way
wa but still Indian
economy was
as received a great blow of economic crisis, and it restricted our fast run of
development completely.
1.2. Objectives of the Study
To know the causes of recession (sub-prime crisis)
To analyze the emerging economic trends due to global recession
To know the impact of global recession on Indian economy
The management of global recession on Indian economy.
2. Causes of Global Economic Crisis
Sub-prime, as the word suggests, is anything that is not prime. In the sub-prime crisis situation it
simply means lending money to sub-prime borrowers i.e. lending to people with low or poor
credit worthiness. The crisis may be a traumatic change in, political, social, economic, military
affairs and large-scale environmental event. There are a number of opinions as to what led to the
sub-prime crisis. It is combination of a number of factors in which subprime lending played a
major part. The some of the major factor which contributed most are explain below.
2.1. Sub-prime mortgage

During the period of 1997-2005 US home-ownership rates rose significantly. The house buyers
and banks both were started to believe that the price of housing keep going up as there is boom
in real estate sector hence housing finance appeared to be safe and banks were desperate to lend
to sub-prime borrowers who had no collateral assets.
The sub-prime borrowers were ever
keen to become house-owners and
they were also offered easy loans
though they were not in a position to
repay their loan in the event of the
adverse situation. In 2007 the myth
on housing price burst. Housing
prices fell around 20% to 35% from
their peak and in some areas more
than 40%; mortgage rates also rose.
Sub-prime
borrowers
started
defaulting in large numbers.


2.2. Securitization and Repackaging of Loan

Loans
The above sub-prime mortgages were assessed as profitable investments and were securitized
and re-packaged, sold and resoldd to investors
around the world. The investors were seeking
high returns
urns and were eager to purchase
securities backed by sub-prime
prime m
mortgages
which resulted as lend to risky borrowers
borrowers.
The securitized share of subprime mortgages,
those
passed
to
third-party
party
investors
investors,
increased from 54 percent in 2001, to 75

percent in 2006.
2.3. Excessive Leverage

Due to the excessive leverage at the end of 2007 the leverage ratio for the big five investment
banks was 27.8 times for Merrill Lynch, 30.7 times for Lehman Bros., 32.8 times for Bear
Stearns, 32.6 times for Morgan Stanley and 26.2 times for Goldman Sachs. The year 2008 will
w
go as the worst year in the history of
modern finance as highly leveraged
banks are reported huge losses. From
1978 to 2007, the amount of de
debt held
by the financial sector ascended fr
from $3
trillion to $36 trillion, which more th
than
double as a share of gross domestic
product as reported by The Financial
Crisis Inquiry Commission
ission in January
2011.
2.4. Misleading judgments of the Credit-Rating Organizations

The Credit-Rating Organizations (CROs) were contributed towards the sub-prime crisis by
creating an artificial sense of security through complex procedure of grading. These credit rating
agencies used poorly tested statistical models
and issued positive judgments about the
underlying loans. As a result, risky products
were sold as rewarding ones. The rating
agencies may suffered from conflicts of
interest, as they were paid by investment
banks and other firms that organize and sell
structured securities to investors as suspected
by Criticizers
2.5.
Globalization, technology and the trade deficit
During the period of sub-prime mortgage boom the United States investments were more than
its national savings which means its imports exceeding exports as result the current account
deficit was increased day by day. There was approximately $ 650 billion increased in current
account deficit which was 5.8% on 2004 from 1.5% on 1996 of GDP. Mainly from the emerging
economies in Asia and oil-exporting nations were attracted for investment at USA. These
Foreign investors had their funds to lend, either
because they had very high personal savings rates
(as high as 40% in China), or because of high oil
prices. On the other hand, used funds borrowed
from foreigners to finance consumption or to bid
up the prices of housing and financial assets.
Financial institutions invested foreign funds in
mortgage-backed securities. American housing
and financial assets dramatically declined in value
after the housing bubble burst.
3. Impact of the recession on Indian Economy
The Indian economy had performed well during the last two decades, resulting in high growth
rate of real Gross Domestic Product (GDP), besides increase in domestic savings as well as
increase in investment and productivity. Though the economic crisis was originated at US subprime mortgage market, its effects were felt in global financial markets. Initially Indian officials
were denied the impact on Indian economy but later on the government acknowledged the fact
that there was substantial impact on the Indian economy.
3.1.
Offshoot of Globalized Economy
It was recognized that the Indian economy may face some downside risk with its increasing trend
of integration with rest of the world. The above threat mainly from the potential reversal of
capital flows from the projected slowdown of the global economy. In India, the adverse effects
had so far been mainly in the equity markets because of reversal of portfolio equity flows, and
the concomitant effects on the domestic forex market. There was no such substantial effect on
macro aggregates due to overall strength of domestic demand, the healthy balance sheets of the
Indian corporate sector, and the leading domestic financing of investment. However certain
sectors like exports and services sector took a major blow due to recession which had adverse
effects on GDP of an emerging economy like India.
3.2.
Aspects of Financial Disorder in India due to Economy Crisis
3.2.1. Capital Outflow

The most immediate effect of that crisis on India has been an outflow of foreign institutional
investment from the equity market. Foreign Institutional Investment (FIIs), which need to
retrench assets in order to cover losses in their home countries and were seeking havens of safety
in an uncertain environment, have become major sellers in Indian markets. As FIIs pull out their
money from the stock market, the large
FII amount in $ Millions
corporate no doubt have affected, the worst

affected was likely to be the exports and
20000
small
10000
and
marginal
enterprises
that
contribute significantly to employment

generation. In 2008-2009 the Foreign
Institutional Investment went negative
0
-10000
-20000
3.2.2. Impact on Stock and Forex Market

With the volatility in portfolio flows having been large during 2007 and 2008, the impact of
global financial turmoil has been felt particularly in the equity market. Indian stock prices have
been severely affected by foreign institutional investors' (FIIs') withdrawals. Sensex fell from
closing of 20,873 on January 2008 to nearly 8000 in October-November 2008. It has seriously
crippled the liquidity in the stock market. The withdrawal by the FIIs corporate who were
converting the funds rose locally into foreign currency to meet their external obligations led to
sharp depreciation of the rupee. The foreign exchange market came under pressure because of
reversal of capital flows as part of the global decelerating process. Foreign exchange reserves
were depleting. It was $ 309.7 billion in 2007-08 and came down to $252.0 billion in 2008-09,
which shows the direct impact of the financial crisis
Year
on India's foreign exchange reserves. Within the

country also there has been a flight to safety.
Investors have shifted from stocks and mutual funds
to bank deposits and from private to public sector
banks. Highly leveraged mutual funds and nonbanking finance companies (NBFCs) have been the
worst affected.
Foreign exchange reserves

(In US $ billion )
2005-06
151.6
2006-07
199.2
2007-08
309.7
2008-09
252
2009-10
279.1
3.2.3. Impact on the Indian Banking System

The Indian banking system has not experienced any contagion as the Indian banking system was
not directly exposed to the sub-prime mortgage assets and it was very limited indirect exposure
to the US mortgage market. Indian banks, both in the public sector and in the private sector, were
financially sound, well capitalized and well regulated. The average capital to risk-weighted
assets ratio (CRAR) for the Indian banking system, as at end-March 2008, was 12.6% only, as
against the regulatory minimum of 9%. A detailed study undertaken by the RBI in September
2007 on the impact of the sub-prime episode on the Indian banks had revealed that none of the
Indian banks had any direct exposure to the sub-prime markets in the USA. However, a few
Indian banks had invested in the collateralized debt obligations (CDOs) bonds which had a few
underlying entities with sub-prime exposures. Thus, there was no direct impact on account of
direct exposure to the sub-prime. Consequent upon filling of bankruptcy by Lehman Brothers, all
banks were advised to report the details of their exposures to Lehman Brothers and related
entities both in India and abroad. Out of 77 reporting banks, 14 reported exposures to Lehman
Brothers and its related entities either in India or abroad.
3.2.4. Impact on Industrial Sector and Export Prospect

The financial crisis has clearly spilled over to the real world. It has slowed down GDP growth as
well as the industrial sector. The GDP and industrial growth declined from 9.3% to 6.8% and
8.7% to 3.2 % from year (2007-2008) to year (2008-09) respectively.
GDP Growth Rate
Index of Industrial Production
12
9.6
9.3
8
6.8
6
4
2
11.9
10.5
12
Percentage
Percentage
10
14
9.5
10
8.7
8
6
4
3.2
0
2005-062006-07 2007-08 2008-092009-10
2005-06 2006-07 2007-08 2008-09 2009-10
10
The consumer goods category showed a sharp decline in growth rate compared to previous year
in both durable as well as non-durable goods. Consumer durable goods growth rate declined up
to 11.1% and consumer non durable goods growth rate turned out to be negative compared to
pre-crisis year.
Consumer
goods durable
10.0
25.3
30.0
17.0
16.2
20.0
12.3
15.0
33.1
Percentage
Percentage
40.0
Consumer goods non-durable
11.1
10.0
10.2
8.6
5.0
1.4
0.0
-5.0
0.0
-5.0
2005-06 2006-07 2007-08 2008-09 2009-10
-10.0
For the first time in seven years, exports have declined in absolute terms. Indias exports are
adversely affected by the slowdown in global markets. This is already evident in certain
industries like the garments industries where there have been significant job losses with the onset
of the crisis. Export growth is critical to the growth of Indian economy. Export as a percentage of
GDP in India is closer to 20 per cent. Therefore, the adverse impact of the global crisis on our
export sector should have been marginal. But, the reality is that export is being and will continue
to be adversely affected by the recession
in
the
developed
merchandise
world.
exporters
are
Export growth rate
Indian
under
26
extraordinary pressure as global demand
had been negative in recent months and

the government was scaled down the
export target for the current year to $175
billion from $200 billion. For 2009-10,
the target has been set at $200 billion.
23.4
22.6
21
Percentage
is set to slump alarmingly. Export growth
29
31
16
13.3
11
6
1
-4
2005-06 2006-07 2007-08 2008-09 2009-10

-3.5
11
3.2.5. Impact on Employment

Large chunk of employment comes from Industry sector. Any fluctuation in industrial sector has
cascading effect on employment scenario. The total estimated employment in entire sector cover
by the survey went down from 16.2 million during September, 2008 to 15.7 million during
December, 2008 resulting in job loss of about half a million. It is seen that the employment
declined every month during this period. One of the most affected sectors is Automobiles where
the employment was decreased by
12.37 per cent followed by 9.93 per
cent in Transport sector. For the direct
category of workers the most affected
sector is Gems & Jewellery 9.27 per
cent followed by Textiles 1.11 per cent.
The overall decline in the direct and
contract category of workers is 0.63 per
cent and 3.88 per cent respectively.
In addition to assess the loss in employment, information on the regular earnings of workers was
also collected with a view to see whether these have been affected by the economic slowdown in
the economy. The regular earnings include regular wages or salaries, payment of allowances like
dearness, overtime, compensatory, house rent and production bonus, which are paid more or less
regularly for each pay period. Trends in average earnings have been presented in Table for that
period. This along with a squeeze in the high-income service sectors like financial services,
hospitality and tourism etc. led to a
reduction in consumption spending and
overall demand with the domestic
economy. A direct consequence of this
was a simultaneous loss of informal
employment and lower generation of
new non-farm
employment
in
the
economy.
12
3.2.6. Impact on poverty
The slowdown of manufacturing sector and continued decline in the export sector resulted in
increased job losses mainly contract category which forced many to live in poverty. The World
Bank was served a warning through its report, The Global Economic Crisis: Assessing
Vulnerability with a Poverty Lens, which indicated India among countries that had a high
exposure to increased risk of poverty due to the global economic slowdown.
The Food and Agriculture Organization said that the financial crisis had contributed towards the
growth of hunger at global level. Pre-financial crisis around 17 per cent of the world's population
were hungry. India felt the hit hard because even before crisis, the country had approx. 230
million starved people, the highest number for any one country in the world.
13
4. Indias Crisis Responses and Challenges
4.1.
Indian Economy during Crisis Time
The Subprime mortgage crisis that emerged in the US housing mortgage market in 2007
snowballed into a global financial crisis, leading to a global economic recession and intensified
significantly after the Bankruptcy of Lehman Brothers in September 2008. But India played
rather safe during the crisis because of the following:
First, Indias financial markets, particularly Indian banks, have continued to function
normally as because Indian Banks are very strict in proving home loans and mortgages.
Second, Indias comfortable foreign exchange reserves provide confidence in managing

the balance of payments apart from lower export demand and dampened capital flows.
Third, headline inflation, as measured by the wholesale price index (WPI), was declined
sharply. Consumer price inflation too was begun to moderate.
Fourth, because of mandated agricultural lending and social safety-net programmers,

rural demand continued to be strong.
India had maintained an averaging 9.0% growth over the last 4 years since 2004; economic
activity in India begun decline since the last quarter of 2008. The Economic Advisory Council to
the Prime Minister in its review of the economy for the year 2008-09 was revised the GDP
growth to 7.1%. However, the Annual Policy Statement of RBI was projected real GDP growth
of 6.0% for 2009/10. Domestic demand, both private consumption and investment expenditure,
was slackened although government final consumption rose on account of discretionary fiscal
stimulus measures. The global crisis brought to the fore the strong interactions between funding
liquidity and market conditions. Both the Government and the Reserve Bank responded to the
challenge of minimizing the impact of the crisis on India in a coordinated and consultative
manner.
14
Quarterly Growth rates at constant 2004-05 prices
4.2.
Source: RBI
The Risks and Challenges Ahead
While the risks from the uncertainties in the global financial markets continue to persist during
2008-09, there are risks on the domestic front too as growth rate sharply declined. The challenge
is how to manage the recovery. If the global recovery takes root and private investment demand
revives faster, there could be less of a case for further stimulus. Risk management in the macroeconomy is a formidable challenge. Clearly there are no easy ways; however, three aspects:
monetary policy, fiscal policy, and financial stability merit special mention to understand the
contour of uncertainties.
4.3.
RBIs Crisis Response and Monetary Policy Measures
India has a very good central bank, RBI, which is managed by some of the best finance guys.
Both Dr. Subbarao and his predecessor YV Reddy are very prudent bankers. They applied brakes
on banking loans even before the crisis. On the financial side, the Reserve Bank of India took a
series of measures in matching risk management with fiduciary and regulatory actions. The
Reserve Banks policy response was aimed maintaining comfortable domestic and forex
liquidity. The Reserve Bank shifted its policy stance from monetary contraction or tightening in
response to the elevated inflationary pressures in the first half of 08-09 to monetary expansion or
easing in response to facilitate inflationary pressures and moderation of growth caused by crisis.
15
Before the spread of the global crisis, rising inflation was one major downside risk for the Indian
economy. But the fall of prices of oil and other commodities and overall fall in demand as a
result of recession in major developed countries has pushed down the rate of inflation in India.
Inflation measured by the wholesale price index (WPI) had peaked at 12.9 per cent in early
August 2008 and had declined since then. WPI inflation dropped to 4.4 per cent by end of
January 2009 and just 2.4 per cent as on end of February 2009. Monetary policy shifted gear and
became expansionary from October after the scale of the US financial sector meltdown and its
likely adverse effects on the Indian economy became evident. The policy focus has shifted from
containing inflation to promoting growth. The RBI thus acted with considerable quickness in
infusing considerable liquidity in to the economic system.
Trends on Inflation based on WPI & CPIs

Source: Department of Industrial Policy and Promotion, Labour Bureau and Central Statistical Organization (CSO). IW: Industrial
Workers, RL: Rural Labor
Falling inflation, a positive byproduct of global crisis, enabled the central bank to take
contractionary monetary policy measures more aggressively. As indicated earlier, the RBI
lowered the Cash Reserve Ratio (CRR) requirements of banks from 9 per cent to 5 per cent,
Statutory Liquidity Ratio (SLR) requirements from 25 per cent to 24 per cent and the Repo Rate
(the rate at which it lends to banks overnight), from 9 per cent to 5 per cent and Reverse Repo
Rate (the rate at which RBI borrows from banks) from 6 per cent to 3.5 per cent. It also opened a
special window for banks for short-term funds for on lending to mutual funds, NBFCs and
housing finance companies. It has also started the buy-back of the market stabilization scheme
(MSS) securities from mid- November. RBI has opened a refinance facility to Small Industrial
Development Bank of India (SIDBI), National Housing Bank (NHB) and EXIM Bank and a
16
liquidity facility to NBFCs through a SPV. It also has opened a dollar swap arrangement for
banks for their overseas operations. The actual or potential liquidity injection under all these
measures has been estimated at Rs. 3, 88,045 crores equivalent to over 7 per cent of GDP.
Movement of Money Market Rates (Source: RBI)

The liquidity crisis and credit crunch felt in the economy from mid-September to October 2008
has turned into a situation of deep demand contraction for bank finance as the effects of global
recession has spread to India. In fact the expansion of bank finance in January 2009 has been
negative at Rs.11, 218 crore as against an expansion of Rs. 70,396 crore in the same month of
2008. In the last four months from November 2008 to February 2009, expansion of bank finance
to the commercial sector has been just Rs. 60,862 crore as compared to Rs. 2,36,227 crore in the
same period last year. This reflects a very soft investment sentiment in the economy which may
persist in the coming months.
17

Through the Reserve Banks actions, the cumulative amount of primary liquidity potentially
available to the financial system is about 7 per cent of GDP. Taking a cuee from the Reserve
Banks monetary easing; most banks have reduced their deposit and lending rates. Besides, a
calibrated regulatory framework was put in place by the RBI to address the issue of systemic
risk, which included prudential capital requirements
requirements,, exposure norms, liquidity management,
asset liability management, creation of entity profile and reporting requirements, corporate
governance and disclosure norms for non
non-banking
banking finance companies defined as systemically
important.
Monetary Policy Model
Expansionary Monetary Policy of RBI results in the following:
18

Effect of interest rate with inflation (Price levels)
Expansionary Monetary policy curves
Effect of Investment subsidy
19
4.4.
Governments Crisis Response and Fiscal Policy Measures
The fiscal space generated in the 2004-05 to 2007-08 periods, following the Fiscal Responsibility
Budget Management Act (FRBMA) mandate, mitigated the knock on effects of global financial
and economic crisis in 2008-09 through facilitation of an expansionary fiscal stance to boost
aggregate demand. The Government launched three fiscal stimulus packages between December
2008 and February 2009. As per the national accounts data, in 2008-09, the deceleration in
growth in private final consumption expenditure was partly made up for by the growth in
Government consumption expenditure (over 2007-08), which resulted in a shoring up of the
overall economic growth rate. The reversal in major fiscal deficit indicators in 2008-09 and
2009-10 constitutes a conscious policy-driven stimulus to counter the demand slowdown. The
challenge for fiscal policy is to balance immediate support for the economy with the need to get
back on track on the medium-term fiscal consolidation process. The fiscal stimulus packages and
other measures have led to sharp increase in the revenue and fiscal deficits which, in the face of
slowing private investment, have cushioned the pace of economic activity. Providing stimulus
packages may be a short-term help, but sustainability of the recovery requires returning to
responsible fiscal consolidation. The borrowing programme of the Government has already
expanded rapidly. The Reserve Bank has been able to manage the large borrowing programme in
an orderly manner. Large borrowings by the Government run against the low interest rate
environment that the Reserve Bank is trying to maintain to spur investment demand in keeping
with the stance of monetary policy.
Trends in Deficit of Central Government due to Govt. Expenditure

20

Subsidies
safety
programme
These stimulus packages came on top of an already announced expanded safety-net
for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission
Report, all of which added to stimulating demand. The combined impact of these fiscal measures
is about 3 per cent of GDP. It is believed that the fiscal and monetary stimulus measures
initiated during 2008- 09 coupled with lower commodity prices will cushion the downturn by
stabilizing domestic economic activity. On balance, real GDP grow
growth
th for 2009-10
2009
is placed at
around 6.0 per cent. Inflation, as measured by variations in WPI, is projected to be around 4.0 by
end-March,
March, 2010. Consumer price inflation too is declining, albeit less sharply. Notwithstanding
several challenges, the Indian eeconomy remains resilient with well-functioning
functioning markets and
sound financial institutions. The macro
macro-economic
economic management has helped in maintaining lower
volatility in both financial and real sectors in India relative to several other advanced and
emerging market
rket economies. The Government pursued the opening of the economy and
globalization in a way that blends the market and the state in a more judicious way than some of
the other economies.
Fiscal Policy Model
Expansionary Fiscal Policy of Government results in the following:
21

Expansionary Fiscal policy is important tool for combating recession: decreases in taxes or
increases in government spending or both increases aggregate demand.
Crowding Out Effect due to Expansionary Fiscal Policy
22
4.5.
Financial stability
Beyond monetary and fiscal policies, preserving financial stability is the key to navigating these
uncertain times. A sound and resilient banking sector, well-functioning financial markets,
robust liquidity management and payment and settlement infrastructure are the prerequisites for financial stability. The banking sector in India is sound, adequately capitalized
and well-regulated. By all counts, Indian financial markets are capable of withstanding the global
shock, perhaps somewhat bruised but definitely not battered. In March this year, the Government
and RBI jointly released the report of the Committee on Financial Sector Assessment (CFSA)
that was co-chaired by Deputy Governor, RBI and Finance Secretary, Government of India. The
report is the culmination of work started in September 2006 to undertake a comprehensive selfassessment of Indias financial sector, particularly focusing on stability assessment and stress
testing and compliance with all financial standards and codes.
Policy Mix Models
RBIs Expansionary Monetary Policy and Governments Expansionary Fiscal Policy
helped to stabilize the Indian economy during recession. The policy makers, however,
chooses a combination of fiscal and monetary policies which would not only bring the economy
to full employment level but also help to solve other policy problems.
23

Expansionary monetary Policy Increases the income level but decreases the interest rate on the
other hand, expansionary Fiscal Policy Increases both the income level and the interest rate.
24
5. Options & Remedies to combat Economic Crisis

5.1.
Diversifying Exports
To enhance the potential output, we have to increase the supply of goods and service to the
foreign countries to maintain and increase our GDP, but keeping in mind that financial turmoil of
the whole world, we also have to develop new diversified channels to improve competitiveness
in world market. We need to imaginatively think where else can we sell our products and what
would be the preferred consumption patterns of these newer markets. India developed a trade
policy for 2009-2014 on 27th August, 2009 to increase the export rate to 15% by 2011 and up to
25% by 2015 by implementing policy measures such as fiscal incentives, diversification of
export market, reduction in transaction cost and provision of full refund on indirect taxes and
levies.
EXPORTS (including re-exports)
2008-2009 (in billion US$)
%Growth 2009-2010/ 2008-2009
IMPORTS
%Growth 2009-2010/ 2008-2009
TRADE BALANCE
DECEMBER
APRIL-DECEMBER
13368
14606
9.3
147569
117587
-20.3
19456
24753
27.2
253809
193829
-23.6
-6088
-10147
-106240
-76242
Source: Press Release; Ministry of Commerce, 01 Feb 2010
5.2.
Boosting Domestic Consumption
One of the hallmarks of Indias robust economic growth in 2003-2008 has been the strong
Domestic demand. This formed the platform for Indias strong resilience to the global trade
shock created by the recession of the west. The contribution of private consumption increased
from 46.3 % in 2005-06 to 53.8% in 2007-08. However during 2008 as the global economy crisis
hit the real sector growth the contribution of private consumption to GDP growth dipped sharply
but was supported by the contribution of government consumption to aggregate growth. Thus, in
200809, the contribution of domestic demand to the GDP growth increased from 44.5 per cent
25
in 200708 to 59.5 per cent in 200809, while external demand, as seen by the net exports of
goods and services as a percentage of GDP, dropped from (-) 4.6 per cent in 200708 to (-) 6.05
in 2008 09.8 Therefore, it was possible to moderate the GDP growth despite the decline in the
external demand.
Contribution of domestic & external demand to GDP growth
Thus it is very important that we boost our domestic consumption to compensate for the loss of
external demand rising out of external squeeze. But it is quite a challenge, as to suit the domestic
demand the production process needs to be modified which in turn requires in-depth analysis and
commencing newlines of production and processes.
5.3. Generating Employment

Sectors greatly affected by the economic slowdown were the textile gems and jewellery, metals,
automobiles, transport, IT/BPO, leather and handloom or power loom industries, etc.
Government emphasized on more labor intensive policies to be introduced by the corporate
sectors. To develop a fiscal policy to define sustainable economic growth was influenced by an
increase in government spending and reducing taxes by encouraging investment in infrastructure
and development of new technologies. One positive step was towards focusing on development
of renewable clean energy in place of greenhouse content energy. The policy was closely
monitored such that the growth income and productivity is shared among the society.
26
With investment in such sectors,

world
energy
prices
would
decrease resulting in a decrease in

food prices also in medium run.
Hence there would be an increase
in productivity of more food
grains and exporting the excess to
the foreign countries. To maintain
this
more
employment
was
required, showing a growth in

employment rate.
Fig: Showing increase in unemployment rate in 2008-2009 up to 11%
5.4. Provisioning Credit to Productive Sectors

The RBI with the help of the Government had planned to provide additional credit to the Small
and Medium Scale (SME) which mainly suffered from non-availability of credit. RBI instructed
banks to change their policies which would help the borrowers who are already in debt due to the
current situation. Farm-loan waivers in the agricultural field were introduced to reduce the
farmers growing debt.
Government of India also introduced fiscal policy measures to combat the financial crisis to
enhance the demand of countrys output and help the SME who are mainly affected by these. In
December 2008, India adopted three strategies that lowered tax rate and increased tax subsidies,
increased government expenditure and provided incentives to promote demand in consumption.
Government also initiated spending on capital projects and introduced infrastructure bonds to
provide credit to the SMEs and exporters, which would help to reduce the debt in loan and in
some case government also waived off the loans.
27
5.5. Need for Structural Reforms

Alongside Fiscal & monetary policies, structural reforms is required for sustainable growth.
For instance India has to go for agrarian reforms, as the government investment in agriculture
has declined for years.
We also need to look forward for implementing eco-friendly technology & promoting
environment friendly projects for sustainable development.
The regulatory framework needs to be revamped for achieving a high growth trajectory.
Minimization of supply constraints in the energy, mining, and power sectors for rapid growth.
Last month, the RBI cut its policy Interest rate by higher than expected 50 basis points to a 41/2 year low of 6.75 percent, in an effort to stoke a slowing economy.
Recent measures including accelerating environmental clearances, easing of the land
acquisition process for infrastructure & industrial corridors, transparent coal mines auction
process, easing the compliance burden of labor laws in small & medium-sized industries.
Also governments MAKE IN INDIA campaign will further boost the manufacturing
industries and urbanization and in turn will create employment.
Implementation of GST can be a significant breakthrough towards an all-inclusive indirect tax
reform in the country.
o
o
It will be beneficial for Centre as well as state as it will promote more exports, create
more employment opportunities and will trigger growth.
Individuals will be benefited as prices will come down and lower prices mean more
consumption and hence more production and thereby helping in the growth of the
companies and ultimately growth of the economic condition of the country.
5.6. Increased purchasing power of the people

Enhancing the purchasing power of people is one of the ways to combat economic crisis. When
the consumer economy grows the overall economy of the country grows. The benefits of the
economic development should reach the poorest in order to increase their purchasing capability.
The purchasing capacity of Indian consumers is projected to be $1 trillion by 2021 driven by
rising prosperity of the middle class people whose population would be 570 million by the same
time according to a PWC report. According to the report, companies across the world are
looking towards India as their business destination because of the huge market that India holds.
28
Conclusion
India was by-and-large been spared of global financial contagion due to the sub-prime crisis for a
variety of reasons. Indias growth process has been largely domestic demand driven. The credit
derivatives market is in emerging stage; the innovations of the financial sector in India is not
comparable to the ones prevailing in advanced markets; there are restrictions on investments by
residents in such products issued abroad; and regulatory guidelines on securitization do not
permit ardent profit making. Excessive risk taking by financial institute and financial markets
becoming extremely volatile and turbulent was prevented through resolution of sensible which
helps to achieve the financial stability in India.
Despite all these, the global economic slowdown were hit the vital sectors of our economy,
posing serious threats to economic growth and livelihood security. The crisis was forced
countries around the world to test the limits of their fiscal and monetary tools. India is no
exception. A series of fiscal and monetary measures have been taken by the Government and the
RBI to minimize the impact of the slowdown as also to restore the economic buoyancy.
India has been consciously pursuing a high growth path in order to achieve the key objectives of
rural redevelopment, poverty mitigation, comprehensiveness and sustainable development. Only
growth without comprehensiveness, or growth without jobs, will not ensure balanced and allround development of all sections of the society. Thats why, in the crisis situation, the questions
arose that how long it would last and how much it would impinge on the growth rates. The
impact of the slowdown on Indias growth rate was indeed not upsetting. India still was one of
the fastest growing economies in the world. Indian managed sustains the GDP growth rate of
around 10.7 per cent in the year 2010. The absolute size of Indian economy helped to regain its
lost ground. With the right mix of monetary and fiscal policies plus domestic reforms of the
productive sectors, as an economy, India was emerged from the effect global recession much
before than assumed.
29
Reference
Global Economic Crisis and Its Impact on India; Rajya Sabha Secretariat New Delhi June 2009
Dr. B. Shekhar; Global Economic Recession And Its Impact On Indian Economy; International
Journal of Advanced Research in Management and Social Sciences; ISSN: 2278-6236
Suraj Walia; Impact Of Global Economic Crisis On Indian Economy: An Analysis; International
Journal of Latest Trends in Engineering and Technology (IJLTET); Vol. 1 Issue 2 July 2012
ISSN: 2278-621X
Report of Research Unit (LARRDIS), Rajya Sabha Secretariat, New Delhi, June 2009
The Financial Crisis Inquiry Report by The Financial Crisis Inquiry Commission, Pursuant to
Public Law 111-21, January 2011, United states of America
Economic Survey-2009-10; (http://www.indiabudget.nic.in/es2009-10/esmain.htm)
Indian Economic Outlook 2008-09 and 2009-10; Indian Council for Research on International
Economic Relations, March 2009, Working Paper No. 234.
Creative Commons Attribution-Share Alike 3.0 Unported (http://www.creativecommons.org /

licenses /by-sa/3.0/)
Macroeconomic and Monetary Developments Third Quarter Review 2008-09 by Reserve Bank of
India.
Annual Policy Statement (2009-10), Reserve Bank of India.
Internet site visited
https://www.wikipedia.org/
https://www.google.co.in
http://www.ijmr.net
http://planningcommission.gov.in
http://www.digitaleconomist.org/policy_4020.html
http://www.economicsdiscussion.net/microeconomics/how-to-prevent-the-crowding-out-ofunemployment-using-monetary-policy/2892
http://www.economist.com
http://www.londonsummit.gov.uk
http://www.rbi.org.in
http://www.telegraph.co.uk
https://www.usa.gov
https:// www.worldbank.org.in
http:// www.imf.org
30

Project-Subprime Crisis - 2008-09 - Final 10.10.15

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Project-Subprime Crisis - 2008-09 - Final 10.10.15

Caricato da

Copyright:

Formati disponibili

SUB-PRIME CRISIS (2008-09):

IMPACT & MANAGEMENT BY

Presented by1. Kush Kumar

PGDM (PT) 2015-18, XLRI - JAMSHEDPUR

Subprime crisis (2008-09): impact & management by Indian economy

We express our gratitude and respect to our Professor,

PGDM (PT) 2015-18, XLRI JAMSHEDPUR

Subprime crisis (2008-09): impact & management by Indian economy

Subprime Crisis 2008-09 ......................................................................................................................................3

Objectives of the Study ....................................................................................................................................4

Causes of Global Economic Crisis........................................................................................................................5

Sub-prime mortgage .........................................................................................................................................5

Securitization and Repackaging of Loans ........................................................................................................6

Excessive Leverage ..........................................................................................................................................6

Misleading judgments of the Credit-Rating Organizations ..............................................................................7

Globalization, technology and the trade deficit ................................................................................................7

Impact of the recession on Indian Economy .........................................................................................................8

Offshoot of Globalized Economy .....................................................................................................................8

Aspects of Financial Disorder in India due to Economy Crisis ........................................................................8

Capital Outflow ............................................................................................................................................8

Impact on Stock and Forex Market ..............................................................................................................9

Impact on the Indian Banking System .......................................................................................................10

Impact on Industrial Sector and Export Prospect .......................................................................................10

Impact on Employment ..............................................................................................................................12

Impact on poverty ......................................................................................................................................13

Indias Crisis Responses and Challenges ............................................................................................................14

Indian Economy during Crisis Time...............................................................................................................14

The Risks and Challenges Ahead ...................................................................................................................15

RBIs Crisis Response and Monetary Policy Measures .................................................................................15

Governments Crisis Response and Fiscal Policy Measures ..........................................................................20

Financial stability ...........................................................................................................................................23

Options & Remedies to combat Economic Crisis ...............................................................................................25

Diversifying Exports ......................................................................................................................................25

Boosting Domestic Consumption ...................................................................................................................25

Generating Employment ................................................................................................................................26

Provisioning Credit to Productive Sectors ..................................................................................................... 27

Need for Structural Reforms ..........................................................................................................................28

Increased purchasing power of the people ..................................................................................................... 28

Subprime crisis (2008-09): impact & management by Indian economy

1. Subprime Crisis 2008-09

An adverse economics fluctuation or an overall slowdown of macroeconomics indicators such

PGDM (PT) 2015-18, XLRI JAMSHEDPUR

Subprime crisis (2008-09): impact & management

Though the recession due to sub

1.2. Objectives of the Study

To know the causes of recession (sub-prime crisis)

To analyze the emerging economic trends due to global recession

To know the impact of global recession on Indian economy

The management of global recession on Indian economy.

PGDM (PT) 2015-18, XLRI JAMSHEDPUR

Subprime crisis (2008-09): impact & management by Indian economy

2. Causes of Global Economic Crisis

2.1. Sub-prime mortgage

defaulting in large numbers.

Subprime crisis (2008-09): impact & management

2.2. Securitization and Repackaging of Loan

increased from 54 percent in 2001, to 75

2.3. Excessive Leverage

PGDM (PT) 2015-18, XLRI JAMSHEDPUR

Subprime crisis (2008-09): impact & management by Indian economy

2.4. Misleading judgments of the Credit-Rating Organizations

Globalization, technology and the trade deficit

Subprime crisis (2008-09): impact & management by Indian economy