A Project Report On EFFECT OF GLOBAL ECONOMIC SLOWDOWN ON THE INDIAN ECONOMY

MASTERS IN BUSINESS ADMINISTRATION

Under the guidance of:

Dr. Sanjay Kar
Submitted by: Shekhar Jyoti Dutta

RAJIV GANDHI INSTITUTE OF PETROLEUM TECHNOLOGY

RAE BARELI-UTTAR PRADESH

EFFECT OF GLOBAL ECONOMIC SLOWDOWN ON THE INDIAN ECONOMY

ACKNOWLEDGEMENT
I take this opportunity to express our gratitude to Dr. Sanjay K. Kar, for his assiduous guidance, timely suggestions and co-operation at every step have been invaluable in executing the project. His suggestions & critique form the backbone of this report. Last but not the least, I thank our parents for their hard work and also our classmates who took some time out of their busy schedule to discuss the project report and gave their valuable insights about the manuscript.

Yours Faithfully Shekhar Jyoti Dutta

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ABSTRACT
When Uncle Sam sneezes, the world catches a cold Starting with the sub-prime crisis in the United States in 2008 and recently with the Greek crisis dominating the global economic scenario, the world economy is in turmoil. During the housing bubble burst, India looked insulated from these events primarily because India is a savings driven economy. But as the US recession is spreading to other parts of the world with most of the euro-zone in crisis and with the worlds most powerful economy Germany registering a growth rate of just 0.1 per cent in the second quarter, India also looks to be in trouble. Though completely out of line and even irresponsible, the first-in-history downgrade of US Treasury bonds by Standard and Poor's did reflect the mood in the market. Though the assessment was based on wrong numbers, the fact that the debt of world's most powerful country that was home to its reserve currency was even considered to be of suspect quality was telling. Today, India is much more integrated with the world economy through both the current and capital accounts. The most immediate effect of this global financial crisis on India is an out flow of foreign institutional investment (FII) from the equity market. This withdrawal by the FIIs led to a steep depreciation of the rupee. The banking and nonbanking financial institutions have been suffering losses. The recession generated by the financial crisis in USA and other developed economies have adversely affected Indias exports of software and IT services. What is more of an issue is the fate of the $274 billion of foreign currency assets held by India. While $127 billion of these are held as deposits with central banks, the Bank of International Settlements (BIS) and the IMF, as much as $142.1 billion is invested in securities, consisting largely of government securities. With the uncertainty surrounding the value and soundness of public debt, the danger of the erosion of the value of those assets is now significant.

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Table of Contents
INTRODUCTION ............................................................................................................................................. 5 WHAT CAUSED THE RECESSION? .................................................................................................................. 6 THE HOUSING BUBBLE .............................................................................................................................. 6 HOME PRICES DECLINE ............................................................................................................................. 7 TROUBLE IN THE MORTGAGE-BACKED SECURITIES MARKET ................................................................... 7 GLOBAL IMBALANCES ............................................................................................................................... 8 SOVEREIGN DEBT CRISIS IN EUROPE............................................................................................................. 9 CAUSES OF THE CRISIS ............................................................................................................................ 10 CONCERNS IN DEVELOPING COUNTRIES REMAIN .................................................................................. 10 ANALYSIS OF ECONOMIC FACTORS ............................................................................................................ 11 GROSS DOMESTIC PRODUCT .................................................................................................................. 11 INDEX OF INDUSTRIAL PRODUCTIVITY.................................................................................................... 12 OUTFLOW OF FII AND THE SENSEX ......................................................................................................... 13 DEPRECIATION OF THE RUPEE ................................................................................................................ 15 INFLATION ............................................................................................................................................... 16 FOREIGN EXCHANGE MARKETS .............................................................................................................. 17 EXPORTS AND BALANCE OF TRADE ........................................................................................................ 18 FOREIGN DIRECT INVESTMENT ............................................................................................................... 19 PUBLIC DEBT ........................................................................................................................................... 20 MANUFACTURING SECTOR ......................................................................................................................... 21 SERVICE SECTOR.......................................................................................................................................... 22 AGRICULTURE SECTOR ................................................................................................................................ 22 CONCLUSION............................................................................................................................................... 23 REFERENCES ................................................................................................................................................ 23 APPENDIX- I ................................................................................................................................................. 24 APPENDIX- II ................................................................................................................................................ 26

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INTRODUCTION
At the dawn of the new millennium, global financial markets entered a period that came to be defined by low interest rates and below-average volatility. This period, sometimes referred to as "the great moderation", was characterized by a global savings glut that saw emerging-market and oil-producing countries supply the developed world with enormous amounts of capital. This capital helped keep interest rates at historically low levels in much of the developed world and prompted investors to seek out new investment opportunities in a search of higher yields than those available in traditional asset classes. This search for yield eventually led to an increased willingness among some market participants to accept greater levels of risk for lower levels of compensation. This increased willingness to accept risk combined with excessive leverage, a housing bull market and widespread securitization would sow the seeds of the 2008 financial crisis. The remainder of this chapter will take a closer look at this greater willingness to accept risk, as well as the increased use of leverage, home price appreciation and securitization.

RISK
As the global savings glut contributed to extremely low interest rates in many traditional asset classes, investors sought higher returns wherever they could find them. Asset classes such as emerging market stocks, private equity, real estate and hedge funds became increasingly popular. In many instances, investors also found above-average returns in staggeringly complex fixed-income securities. This global search for yield was prompted not only by historically low interest rates, but also by very low levels of volatility in many financial markets. These low levels of volatility made many risky asset classes appear safer than they actually were. Computerized models used to price complicated fixed-income securities assumed a continuing low-volatility environment and moderate price movements. This mispricing of risk contributed to inflated asset values and much greater market exposures than originally intended.

LEVERAGE
The use of leverage can enhance returns and does not appear to carry much additional risk during periods of low volatility. The "great moderation" featured two forms of leverage. Investors used derivatives, structured products and short-term borrowing to control far larger positions than their asset bases would have otherwise allowed. At the same time, consumers made increasing use of leverage in the form of easy credit to make possible a lifestyle that would have otherwise exceeded their means. The early parts of the decade provided a near-perfect environment for this increasing use of leverage. Low interest rates and minimal volatility allowed investors to employ leverage to magnify otherwise subpar returns without exposure to excessive risk levels (or so it seemed). Consumers also found the

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environment conducive for increasing their use of leverage. Low interest rates and lax lending standards facilitated the expansion of a consumer credit bubble. In the U.S., the savings ratio (a good approximation of how much use consumers are making of leverage) dropped from nearly 8% in the 1990s to less than 1% in the years leading up to the credit crisis. As long as interest rates and volatility remained low and credit was easily available, there seemed to be no end in sight to the era of leverage. But the increased use of leverage and increasing indebtedness were placing consumers in a dangerous situation. At the same time, higher leverage ratios and an increasing willingness to accept risk were creating a scenario in which investors had priced financial markets for a near-perfect future.

SECURITIZATION
Securitization describes the process of pooling financial assets and turning them into tradable securities. The first products to be securitized were home mortgages, and these were followed by commercial mortgages, credit card receivables, auto loans, student loans and many other financial instruments. Securitization provides several benefits to market participants and the economy including: 1. Providing financial institutions with a mechanism to remove assets from their balance sheets and increasing the available pool of capital. 2. Lowering interest rates on loans and mortgages. 3. Increasing liquidity in a variety of previously illiquid financial products by turning them into tradable assets. 4. Spreading the ownership of risk and allowing for greater ability to diversify risk In addition to its benefits, securitization has two drawbacks. The first is that it results in lenders that do not hold the loans they make on their own balance sheets. This "originate to distribute" business model puts less of an impetus on lenders to ensure that borrowers can eventually repay their debts and therefore lowers credit standards. The second problem lies with securitization's distribution of risk among a wider variety of investors. During normal cycles, this is one of securitization's benefits, but during times of crisis the distribution of risk also results in more widespread losses than otherwise would have occurred. In the years leading up to the credit crisis, investors searching for yield often focused on securitized products that seemed to offer an attractive combination of high yields and low risk. As long as home prices stayed relatively stable and home owners continued to pay their mortgages, there seemed to be little reason not to purchase 'AAA'-rated securitized products.

WHAT CAUSED THE RECESSION?

THE HOUSING BUBBLE
It is a widely held belief that home prices do not decline and it is this belief that led generations of consumers to regard a home purchase as the foundation of their financial programs. More recently, speculators have used this logic as part of their rationale for purchasing homes with the intention of "flipping" them. As the rate of appreciation in home values dramatically increased during the early years of the 21st century, many people began to believe that not only would home values not decline, but that they would also continue to rise indefinitely. The belief that home prices would not decline was also fundamental to the structuring and sale of

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mortgage-backed securities. Therefore, the models that investment firms used to structure mortgagebacked securities did not adequately account for the possibility that home prices could slide. Likewise, the ratings agencies assigned their highest rating, 'AAA', to many mortgage-backed securities based partly on the assumption that home prices would not fall. Investors then purchased these securities believing they were safe and that principal and interest would be repaid in a timely fashion.

HOME PRICES DECLINE

Unfortunately, in 2008, the belief that home prices do not decline turned out to be incorrect; home prices began to slide in 2006 and by 2008, they had declined at rates not seen since the Great Depression. According to Standard & Poor's, as of 2008, home prices were down 20% from their 2006 peaks, and in some hard-hit areas, that number was even higher. As prices began to decline, homeowners who had planned to sell for a profit found themselves unable to do so. Other homeowners found that the outstanding balance on their mortgages was greater than the market value of their homes. This condition, known as an "upside down" mortgage, reduced the incentive for homeowners to continue to make their mortgage payments. One particular corner of the housing sector that experienced a dramatic bubble and subsequent collapse was the subprime mortgage market. Subprime mortgages are issued to households with below-average credit or income histories and are generally considered more risky than traditional "prime" mortgages. Although they constitute a minority of the overall market, subprime mortgages became increasingly important over the years. Many people who took out subprime mortgages during the real estate boom did so with the hope of "flipping" the house for a large gain; in fact, this tactic worked well when home prices were soaring. Other subprime borrowers were lured into their mortgages by the initially low payments, but when these "teaser" rates reset to current market rates, many homeowners could not afford the new, much higher payments.
The graph below displays home price values as measured by the S&P Home Price Index. As the graph demonstrates, following a run-up in prices 1999-2006, prices dropped significantly. Source: Standard & Poor's

TROUBLE IN THE MORTGAGE-BACKED SECURITIES MARKET

As the decline in home prices accelerated, an increasing number of people found themselves struggling

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to make their monthly mortgage payments. This situation eventually led to higher levels of mortgage defaults. Many of these mortgages had been "securitized" and resold in the marketplace. This dispersion of risk is generally a good thing, but in this instance it also meant that potential losses from defaults were spread more widely than they otherwise might have been. Defaults had an inordinate impact on certain bond issues. This is because in a typical mortgage-backed security deal, any mortgage defaults initially affect only the lowest-rated tranches. This means that even if the overall default rate for the pool of mortgages is relatively low, the loss for a particular tranche of mortgage-backed securities could be substantial. When the investors that hold these tranches employ leverage, losses can be even greater. As concerns about the housing decline grew, market participants began avoiding mortgage-related risks. Investors became even more nervous after Bear Stearns was forced to close two hedge funds that had suffered very large losses on mortgage-backedsecurities. Financial firms had previously used actual market prices in order to value their holdings, but in the absence of trading activity, firms were forced to use computerized models to approximate their holdings' value. As the market continued its decline, investors began to question the accuracy of these models. The implementation of new mark-to-market accounting rules exacerbated the situation by requiring financial firms to continually report losses on securities, even if they did not intend to sell them. This wellintentioned rule was implemented at precisely the wrong time and had the effect of adding fuel to a fire. The proximate cause of the current financial turbulence is attributed to the sub-prime mortgage sector in the USA.

GLOBAL IMBALANCES
Global imbalances have been manifested through a substantial increase in the current account deficit of the US mirrored by the substantial surplus in Asia, particularly in China, and in oil exporting countries in the Middle East and Russia. These imbalances in the current account are often seen as the consequence of the relative inflexibility of the currency regimes in China and some other EMEs. These savinginvestment imbalances and consequent huge cross-border financial flows put great stress on the financial intermediation process. The global imbalances interacted with the flaws in financial markets and instruments to generate the specific features of the crisis. The role of monetary policy in the major advanced economies, particularly that in the United States, over the same time period needs to be analyzed for a more balanced analysis. Excessively loose monetary policy in the post dot com period boosted consumption and investment in the US and, it was made with purposeful and careful consideration by monetary policy makers. As might be expected, with such low nominal and real interest rates, asset prices also recorded strong gains, particularly in housing and real estate, providing further impetus to consumption and investment through wealth effects. Thus, aggregate demand consistently exceeded domestic output in the US and, given the macroeconomic identity, this was mirrored in large and growing current account deficits in the US over the period. The large domestic demand of the US was met by the rest of the world, especially China and other East Asian economies, which provided goods and services at relatively low costs leading to growing surpluses in these countries. Sustained current account surpluses in some of these EMEs also reflected the lessons learnt from the Asian financial crisis. Furthermore, the availability of relatively cheaper goods and services from China and other EMEs also helped to maintain price stability in the US and elsewhere, which might have not been possible otherwise. Thus measured inflation in the advanced economies remained low, contributing to the persistence of accommodative monetary policy.

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Country China France Germany India Japan Korea Malaysia Philippines Russia Saudi Arabia South Africa Switzerland Thailand Turkey United Arab Emirates

Table 1: Current Account Balance (per cent to GDP) 1990-94 1995-99 2000-04 1.4 1.9 2.4 0.0 2.0 1.3 -0.4 -0.8 1.4 -1.3 -1.3 0.5 2.4 2.3 2.9 -1.0 1.9 2.1 -5.2 1.8 9.8 -4.0 -2.8 -0.7 0.9 3.5 11.2 -11.7 -2.4 10.6 1.2 -1.3 -0.7 5.7 8.8 10.8 -6.4 1.0 4.2 -0.9 -0.8 -1.6 8.3 4.6 9.9

2005 7.2 -0.6 5.1 -1.3 3.6 1.8 15.0 2.0 11.0 28.7 -4.0 13.6 -4.3 -4.6 18.0

2006 9.5 -0.6 6.1 -1.1 3.9 0.6 16.7 4.5 9.5 27.9 -6.3 14.5 1.1 -6.0 22.6 -3.4 -6.0 0.3 21.0

2007 11.0 -1.0 7.5 -1.0 4.8 0.6 15.4 4.9 5.9 25.1 -7.3 10.1 5.7 -5.8 16.1 -2.9 -5.3 0.2 18.2

2008 10.0 -1.6 6.4 -2.8 3.2 -0.7 17.4 2.5 6.1 28.9 -7.4 9.1 -0.1 -5.7 15.8 -1.7 -4.7 -0.7 18.8

United Kingdom -2.1 -1.0 -2.0 -2.6 United States -1.0 -2.1 -4.5 -5.9 Memo: Euro area n.a. 0.9@ 0.4 0.4 Middle East -5.1 1.0 8.4 19.7 Source: World Economic Outlook Database, April 2009, International Monetary Fund (2009c). Note: (-) indicates deficit.

(Source: Investopedia)

SOVEREIGN DEBT CRISIS IN EUROPE

The European sovereign debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to re-finance their government debt without the assistance of third parties. From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising government debt levels around the world together with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 and thereafter, leading Europe's finance ministers on 9 May 2010 to approve a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011 and February 2012, the euro zone leaders agreed on more measures designed to prevent the collapse of member economies. This included an agreement whereby banks would accept a 53.5% write-off of Greek debt owed to private creditors, increasing the EFSF to about 1 trillion, and requiring European banks to achieve 9% capitalization. To restore confidence in Europe, EU leaders also agreed to create a common fiscal union including the commitment of each participating country to introduce a balanced budget amendment. While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for the area as a whole. Nevertheless, the European currency has remained stable. As of mid-

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November 2011, the euro was even trading slightly higher against the bloc's major trading partners than at the beginning of the crisis. The three countries most affected, Greece, Ireland and Portugal, collectively
Table 1: Credit Default Swap Rate for a select few countries CREDIT DEFAULT SWAP RATES 1st August 2011 18.56 9.06 7.75 3.06 3.03 3.56 1.95 1.20 0.92 0.62 0.72 0.75

% Greece Portugal Ireland Hungary Italy Spain Belgium France Austria Germany UK US

30th November 77.2 10.86 7.47 6.18 5.34 4.66 3.78 2.36 2.22 1.1 0.99 0.54

account for six percent of the eurozone's gross domestic product (GDP).Credit Default Swaps (CDS) provides a unique window of viewing the state of uncertainty in any country. The table below provides information on the CDS for a set of countries at two points of time. It shows the severity in the crisis which has eroded the creditworthiness of various countries as the euro crisis spread. The CDS spreads have increased for countries which have now come in the forefront of the crisis like Italy, Hungary and Spain. They have increased 4-fold in case of Greece and remained at higher levels for the others. This reflects that the crisis is still some way from being resolved. An important outcome of the developments in this area and the solution being worked out is that European banks have to improve their capital ratios and would have to either: raise new equity, use retained profits or shrink the balance sheet. Raising new capital is a challenge given the rising distrust amongst investors continuously. Increasing profits is difficult as the outlook deteriorates as illustrated by the CDS spread. Therefore, the banks appear to be left with little choice but to shrink their balance sheet. This would lead to lowering credit which will further exacerbate the crisis.

CAUSES OF THE CRISIS

a. b. c. d. Rising government debt levels Trade imbalances Monetary policy inflexibility Loss of confidence

CONCERNS IN DEVELOPING COUNTRIES REMAIN

The rather unsatisfactory outlook of the advanced economies on account of: 1. 2. 3. Maintenance of interest rates at near-zero levels Uncertainties over the euro region sovereign debt crisis Rising US fiscal deficit problems and slowing economic growth has had an impact on the developing countries. (Source: Wikipedia)

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ANALYSIS OF ECONOMIC FACTORS

GROSS DOMESTIC PRODUCT
From a bare 1.4 % in 1991-92 the economy of India rose to 5.81 % during 2001-02 ( Planning Commission , GOI) after the liberalization during the congress regime when Mr. Manmohan Singh was the finance Minister of India . This long spell of growth carried on till 2007 as the worl economy grew as a whole. India and China were two countries which were growing at breakneck speed as the whole world watched. Before the recession, The economy grew at 9.6% GDP during 2006-07 ( PC, GOI) and in 200809 when the US economy collapsed, the Indian economy was also hard hit and GDP fell to a miserly 6.8%The International Monetary Fund (IMF) had also projected the growth prospects for Indian economy to 5.1 % in next year. And the RBI annual policy statement 2009 presented on July 28, 2009, projected GDP growth at 6 % for 2009-10. This declining trend has affected adversely the industrial activity, especially, in the manufacturing, infrastructure and in service sectors mainly in the construction, transport and communication, trade, hotels etc. as is shown in the APPENDIX I at the end. Service export growth was also likely to slow as the recession deepens and financial services firms, traditionally large users of out-sourcing services were restructured. The financial crisis in the advanced economies and likely slow down in developing economies had an adverse impact on the services sector which was mainly dependent on the businesses generated in these advanced economies. About 15 to 18 percent of the business coming to Indian out-sources includes projects from banking, insurance and the financial services sector which was uncertain at that time. A financial crisis could cause workers earnings to fall as jobs were lost in formal sector demand for services provided by the informal sector declined and working hours and real wages were cut. When formal sector workers who have lost their jobs entered the informal sector, they put additional pressure on informal LABOUR markets. During recession industrial growth was also faltering. Agricultural and industrial growth also dropped to -0.1 and 4.4 (PC,GOI) from 5.8% and 9.7% respectively. As we see in the graph below, only china and India were relatively insulated from the ripples of the shockwave that engulfed most of the major economies of the world. Finally the sharp drop in GDP of India, Brazil and Germany show the impact of the recent Euro crisis and global slowdown in Europe. Though India is primarily a domestic economy, Indias exports are positively linked to the global economic growth. This is likely to adversely impact Indias export growth in the coming months. However, growth will be only marginally affected by the slowdown in the euro region debt stricken countries as our exposure is low.
India 4.4 3.9 4.6 6.9 8.1 9.2 9.7 9.9 6.4 6.8 China 8.4 8.3 9.1 10.1 10.1 11.3 12.7 14.2 9.6 9.2 Brazil 4.3 1.3 2.7 1.1 5.7 3.2 4 6.1 5.1 -0.6 USA 4.1 1.1 1.8 2.5 3.6 3.1 2.7 1.9 0 -2.5 UK 3.9 2.5 2.1 2.8 3 2.2 2.8 2.7 -0.1 -4.9 Germany 3.2 1.2 0 -0.2 1.2 0.8 3.4 2.7 1 -4.7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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2010 2011

10.4 8.2

10.3 9.6

7.5 4.5

2.8 2.8

1.3 1.7

3.5 2.5

20 15 10 5 0 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 India China Brazil USA UK Germany

Source: IMF

INDEX OF INDUSTRIAL PRODUCTIVITY

Indias industrial sector has suffered from the depressed demand conditions in its export markets, as well as from suppressed domestic demand due to the slow generation of employment. As per the index of industrial production (IIP) data released by CSO, the overall growth in 2008-2009 was 3.2 percent compared to a growth of 8.7 percent in 2007-08.The recent crash in the Sensex was not simply an indicator of the impact of international contagion. There have been warning signals and signs of fragility in Indian finance during that time and those were likely to be compounded by trends in real economy.

2005-06

2006-07

2007-08

2008-09

2009-10

Index Industrial Production (Growth)

8%

11.90%

8.70%

3.20%

10.50%

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Index Of Industrial Production (Growth)

15% 10% 5% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 Index Of Industrial Production (Growth)

Source: Central Statistical Organization (CSO)

OUTFLOW OF FII AND THE SENSEX

300,000,000,000 250,000,000,000 200,000,000,000 150,000,000,000 100,000,000,000 50,000,000,000 0 -50,000,000,000 -100,000,000,000 Brazil China Germany India United Kingdom United States

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 corporations were no doubt affected, the worst affected were likely to be the exports and small and marginal enterprises that contribute significantly to employment generation. In 2007-08, net Foreign Institutional Investments (FIIs). Inflows into India amounted to $16040 million. But in April-November 2008 it was negative to $8857 million. Due to this, there was a collapse in stock prices. As a result, the Sensex fell from its closing peak of 20873 on January 2008 to nearly 8000 in October-November 2008.Investors started to look for safer investments and as we see UK was one of the most favoured destinations as the US was under crisis. The outflow of FDIs from Indian markets showed that India was still considered a risky investment even though India was more or less insulated from the crisis. But as of 2010, Indias FII were greater as

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compared to even Chinas which only meant that due to Indias relatively good performance during the recession, investors are again turning to India during the European crisis. Due to this, there was a collapse in stock prices. As a result, the Sensex fell from its closing peak of 20873 on January 2008 to nearly 8000 in October-November 2008. 20000 15000 10000 5000 0 -5000 -10000 -15000 Amount

After the stock market crash of 2008-09 the stock market again fell to a low during 2011 and is yet to recover to previous levels. The euro zone crisis has been blamed primarily for it for reducing the credit of the country.

50,000,000,000,000 40,000,000,000,000 30,000,000,000,000 20,000,000,000,000 10,000,000,000,000 0 Brazil China Germany India United Kingdom

2001

1997

1998

1999

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

United States

Stocks traded, total value (current US$)

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1,500,000,000,000 1,000,000,000,000 Brazil 500,000,000,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 India

Stocks traded, total value (current US$): comparison between India and Brazil

DEPRECIATION OF THE RUPEE

As FII withdrawal was increased, the demand for the dollar increased and that for the rupee decreased leading to a depreciation in the value of the rupee. Between April 2008 and November 2008, the RBI reference rate for the rupee fell by nearly 25 percent, rupees per unit dollar gone up from Rs.40.02 in April 2008 to Rs.49.00 in November 2008. The currency depreciation may also affect consumer prices and the higher cost of imported food hurt poor individuals and households that spend much of their income on food. Due to global uncertainties, the Indian exchange rate has depreciated 17.4% against the US Dollar during the current financial year. This has been higher than that observed in other markets like Euro and Pound depreciated by around 5.3% each against the Dollar during the same period. The depreciating rupee is likely to add further pressure on domestic inflation and Indias import bills. The rupee depreciation will hit the business community very hard and many items like oil, imported coal, metals and minerals would get affected. However, it is believed that the IT services sector, textile sector and other such export-oriented industries in India are likely to benefit from the depreciating rupee as their business is mainly export oriented.

Currency Current Price USD vs. INR 53.4235 (on 04/05/2012)

60 50 40 30 20 10 0 India Brazil China Germany United Kingdom

2005

1997

1998

1999

2000

2001

2002

2003

2004

2006

2007

2008

2009

We see that Indias currency fluctuates the most during this period when most of the other currencies are relatively stable. The rupee has been slowly depreciating after the post recessionary period and touched

2010

United States

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a new high of 1$= Rs. 53 during 2011-12. This just shows that more and more people are selling off the rupee in exchange of stronger currencies which are much safer investments.

INFLATION
According to the CSO, the rate of inflation has gone down to 8.98% in the last week of November 2008 from the peak of 12.9 % in first week of August, 2008 and again rose to 10.88% in 2009. The faster than expected reduction in inflation should be supported by consumption demand and reduced input costs for corporate. From the external sector perspective, it is projected that imports will shrink more than exports keeping the current account deficit modest. But the current account deficit is widening which caused the inflation to rise further. Whilst the major economies were experiencing WPI inflation rates of around 2-4% Indias inflation were skyrocketing nearly upto 10-12% touching a high of over 16.2% during 2009. The RBI in an effort to control has raised lending rates nearly 5 times(175 basis points) in 2010-11 . Global inflation (CPI) in 2011 increased to 4.2% from 3.3% seen for the same period in 2010. Inflation in the advanced economies rose sharply from 1.6% in 2010 till Jul to 2.6% in 2011. Similarly, inflation in the emerging economies increased to 6.5% in 2011 from 5.8% in 2010. 16 14 12 10 8 6 4 2 0 -2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Brazil China Germany India United Kingdom United States

Since May 2011 with an exception in July 2011 international commodity prices and metal prices in particular are moderating. Compared with Apr 2011 the international metal index showed a decline of 19.7% with copper declining by 22%, aluminium 18% and zinc 21%. Food inflation which had become a major cause of concern has also started moderating. 200 150 100 50 0 Brazil China Germany India United Kingdom United States

Consumer Price Index

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Domestic inflation for the month of Oct 2011 stood at 9.7%, while the international commodity prices where moderating. This implies that the moderation in the international commodity prices has not been translated in to the domestic commodity prices. This just means that the Indian economy is again relatively insulated from the major economies and a host of internal factors have led to such high inflation rates.

FOREIGN EXCHANGE MARKETS

3,500,000,000,000 3,000,000,000,000 2,500,000,000,000 2,000,000,000,000 1,500,000,000,000 1,000,000,000,000 500,000,000,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

FOREIGN EXCHANGE RESERVES Brazil

China Germany India United Kingdom United States

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 on India's foreign exchange reserves.

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India's Foreign Exchange Reserves

400,000,000,000 300,000,000,000 200,000,000,000 100,000,000,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 India

EXPORTS AND BALANCE OF TRADE

The shrinking of aggregate in the world market as a consequence of the crisis has hurt the exporting manufacturing industries in the country. In 2007-08, Indias export and import were $162904 million and $251439 million respectively and balance of payment was $ -88535 million. And in 2008-09, export and import were $185295 million and $303696 million respectively. The balance of payment was $ -118401 million. The growth rate of export and import also declined to 13.3 percent and 20.7 percent from 29.0 and 35.5 percent respectively during that period. In 2009-10 the export and import further declined very much to $178751 million and $288373 million respectively. In 2009-10 the export growth rate was -3.5 percent and import growth rate was -5.0 percent. The balance of payment was $ -109622. This shows that 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. 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. 2,000,000,000,000 1,500,000,000,000 1,000,000,000,000 500,000,000,000 0

EXPORTS Brazil
China Germany India United Kingdom United States

A direct consequence of this was a simultaneous loss of informal employment and lower generation of new non-farm employment in the economy. The depreciation of rupee could not positively affect the exports bill of India. The other direct impact of the global financial crisis has occurred in the area of credit availability to the small-scale agriculture and other rural livelihoods. The impact of the crisis on the rural sector, originated from the slowdown experienced by secondary and tertiary sectors. The fact that the present crisis adversely affected the manufacturing and service sectors imply that occupational diversification is more difficult to achieve.

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The financial crisis, therefore threatens to intensify the income deflation that is already a feature of the rural economy and simultaneously aggregate the alarming levels of hunger and malnutrition that currently exist in India. 600,000,000,000 400,000,000,000 200,000,000,000 0 -200,000,000,000 -400,000,000,000 -600,000,000,000 -800,000,000,000 -1,000,000,000,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BALANCE OF Brazil PAYMENTS

China Germany India United Kingdom United States

FOREIGN DIRECT INVESTMENT

FDI as a sector is relatively new in India and the sector is opening up with more avenues each passing year. As compared to other developing countries in which FDI outflows occurs, FDI inflows have started taking place in India. During the recessionary period FDI investment was the highest in India. This could be because of a perceived notion of India as a safe investing option or India remains insulated from the effects of the global economic slowdown. FDI inflows in India during 2011-12 (Apr-Sept) increased by 74% to $19,136 mn from $11,005 mn for the same period last year. FDI inflows peaked to $5,656 mn in Jun 2011 and declined thereafter. Mauritius has been the top investing country in India through FDI in equity, with a historical share of around 41%. Considering the share of euro zone in FDI equity inflows for cumulative period of Apr 2000 to Feb 2011 was 14.7% with share of Netherlands, Cyprus and Germany has been around 4.4% and 3.7% and 2.9% respectively. The share of the other euro zone countries has been marginal. Further, the share of the euro countries in distress namely, Italy (0.7%), Spain (0.6%) and Greece (0%) together contribute a marginal share of 1.3% to Indias FDI flows. Hence, it can be drawn that euro zone slowdown would not have a significant impact on the India economy. The share of Indias FDI in the emerging and developing markets is low at 5.2% in 2011. Therefore, the FDI flows have been less volatile to the global slowdown.

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200,000,000,000 150,000,000,000 100,000,000,000 50,000,000,000 0 -50,000,000,000 -100,000,000,000 -150,000,000,000 -200,000,000,000 -250,000,000,000 Brazil China Germany India United Kingdom United States

PUBLIC DEBT
Indias rising Public debt has become another major cause of concern for the country. Within a span of 19 years, the public debt has increased from $11 billion to over $34 billion and this debt has been increasing linearly. With the recent downgrade of US from AAA to AA+ by Standard and Poors, Even Indias public debt has come into focus. Even though Indias credit rating was improved by S&P in the wake of the crisis prevailing in Europe as many other countries like Portugal, Spain and Italy have been downgraded to junk status, the linear rise in public debt has become a major cause of concern. Even though there has been no significant impact on the public debt, the euro crisis has made people sit up and notice the huge public debt that is accumulating. Public debt in India increases mostly due to the active involvement of public sector companies in government policies and also the huge amount of subsidies being provided by the Government. But as a step forward, the government has started freeing up subsidies given in fertilizer and also petroleum sector thus reducing government control over the markets.

PUBLIC DEBT
40,000,000,000,000 20,000,000,000,000 0 2001 2002 2003 India 2004 2005 2006 2007 2008 2009 Germany United Kingdom United States

Indias credit rating outlook was raised to stable from negative by Standard & Poors on the optimism that faster growth in Asias third-largest economy will help the government cut its budget deficit while maintaining the nations long-term local and foreign-currency rating at BBB-, the lowest investment grade. Moodys Investors Service ranks Indias rupee-denominated debt at Ba2, two levels below investment grade, while Fitch Ratings has a BBB- rating, the lowest investment grade. That puts India below its socalled BRIC counterparts, which include China, Russia and Brazil. Both Moodys and Fitch have a stable outlook on Indias debt rating.

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Indian stocks and bonds rose on speculation the change in the outlook may attract overseas investors. The change in rating outlook will raise global investors confidence in India. The benchmark Sensitive Index rose 0.2 percent to 17,519.26, the highest in two months. The yield on the benchmark 10-year government bond fell 6 basis points to 7.90 percent as of 5:30 p.m. close in Mumbai. S&P expects Indias $1.2 trillion economy to expand 8 percent in the year starting April 1. Indias foreignexchange reserves, which stand at four-times the countrys short-term external debt, also boost confidence in the economy. The government plans to cut its debt to 68 percent of GDP by 2015 from about 80 percent of GDP currently as recommended by the 13th Finance Commission. Indias rating is constrained by the high government debt. Accelerating inflation may also derail the stable macroeconomic and interest rate environment. Indias WPI rate rose to 9.89 % in February which was a 16-month high, driven by food and manufactured- product prices. This just shows the reverse impact of the crisis in the Euro zone which has contributed to high prices in the region. Reserve Bank of India Governor D. Subbarao has kept the central banks benchmark reverse repurchase rate unchanged at 3.25 percent since April, awaiting further evidence of a strengthening economy. In the last policy statement in January, he opted to order banks to hold more assets in reserves, raising the cash reserve ratio to 5.75 percent from 5 percent.

MANUFACTURING SECTOR
The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector of any country. The PMI index is based on five major indicators namely, new orders, inventory levels, production, supplier deliveries and the employment environment in a country. A PMI of more than 50 represents expansion of the manufacturing sector, compared with the previous month. If the PMI is below 50 then it represents a contraction, while a PMI at 50 indicates no change in the manufacturing sector.
Monthly Trends in PMI (manufacturing) % Apr Brazil China India Russia HK South Korea PMI May 50.7 51.8 58.0 52.1 55.3 51.7 Jun 50.8 51.6 57.5 50.7 53.2 51.2 49.0 50.1 55.3 50.6 52.6 51.1 Jul 47.8 49.3 53.6 49.8 51.4 51.3 Aug 46.0 49.9 52.6 49.9 47.8 49.7 Sept 45.5 49.9 50.4 50.0 NA 47.5 Oct 46.5 51.0 52.0 50.4 NA 48.0

The below table reveals that the PMI has been declining since April reflecting the effect of the slowdown on the developing economies. However, the PMI has remained above the 50 mark for most of the countries till Jun 2011. In Aug 2011, when the PMI for all the 5 countries in the table illustrated a contraction in the manufacturing sector, India continued to be over the 50 mark.

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35 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Brazil China Germany India United Kingdom United States

Manufacturing, value added (% of GDP)( Worldbank)

In the above graph we see how Indias and Chinas manufacturing sector is relatively insulated from the impact of the global market as compared to Germany, USA and UK who see a dip in the manufacturing sector. But in 2009-10 as compared to other countries, India had to face a dip in the manufacturing sector as a result of reduced exports to the European countries who were embroiled in the credit default crisis in Europe.

SERVICE SECTOR
The service Industry employs nearly 12.62%(CSO) of the Indian population in the unorganized sector. Also, more than 20% of the FDI inflows to India occur in the services sector amounting to ober 15500 crores.Also it is the single largest positive contributor to the Balance of payments of the economy. As such this industry is very closely related to the world economy and accordingly should be adversely impacted in case the world economy goes into a recession. Indias earnings from the software sector have been increasing steadily over the years at a CAGR of 27.7%. In FY09, the world economic growth slowed to -0.7% but software services continued to increase, albeit at a slower rate. Net software earnings growth rate declined from 28.8% in 2007-08 to 14.9% in 2008-09 and further to 7.4% in 2009-10. In the first eight months of 2011, the rupee had been stable in the range of Rs. 44-45 per Dollar. A depreciating trend became stark since Aug 2011. The rupee has depreciated by 18% against the Dollar and by around 9% against the euro since Aug 2011. This trend is likely to improve the competitiveness of this sector. The negative impact, if any, will be marginal.

AGRICULTURE SECTOR
The agriculture sector is the life blood of the Indian economy and is one of the largest contributors to the GDP at nearly 20%.The agricultural sector has been growing steadily from 0.1% of GDP in 2004-05 to 5.8% during 2006-07. But during recession the sector was moderately affected and the GDP dropped to a -0.1% of GDP. The primary reason was because of reduced exports to developing countries by the agricultural sector. A key reason for this resilience, despite the turmoil in global markets, has been the well-timed and mass-based initiatives like the National Food Security Mission, Rashtriya Krishi Vikas Yojana, expansion of agricultural credit, agricultural farm loan waiver scheme and enhanced allocation towards subsidies on fertilizers and electricity has ensured a steady growth for Indian agriculture and would continue to do the same even if the global crisis lingers on for long.

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CONCLUSION
Indias growing integration into the world markets has made the impact of the current recession very visible to the whole world. The strategy to counter these effects of the global crisis on the Indian economy and prevent the latter from any further collapse would require an effective departure from the dominant economic philosophy of the neo-liberalism. The first such departure should be a return to Food-First policy, not only to ensure food security of the large population but also due to the fact that food production will be more profitable given the current signs of a shrinking market for export oriented commercial crops and shrinking manufacturing sector. The other important initiative that needs to be adopted is the building of institutions based on the principle of cooperation that will provide an alternative frame work of livelihood generation in the rural economy as opposed to the dominant logic of markets under capitalism. Institutions like cooperative markets and credit cooperatives can go a long way in addressing the lack of economically viable producer prices and loaning credit availability for economic activities in the primary sector. These alternative policies ask for increased government expenditure. We see that governments engagement generally arrives very late to solve the financial crisis by which time many financial firms are near insolvency. This generates larger cost for the economy and exchequer. Our key goal today should be to avoid these costs through rapid action. The need of today is not just the pumping of liquidity in to the Indian economy but also in addition the injection of demand. The recent depreciation of the rupee has shown the adverse consequences of pumping in cash purely due to political and not economical reasons. In India, larger government expenditure has to be oriented towards agriculture, rural development, health, human resources and infrastructure to make inclusive and balanced growth. The biggest challenges before India are to ensure monetary and fiscal stimuli work, returning to fiscal consolidation, supporting drivers of growth and managing policy in globalizing world. There is also need to study the viability of fiscal stimulus in India and economic policy makers should shift their attention from crisis management to providing the basis for a return to fast growth. Over the next year, sources of growth should shift to manufacturing and possibly a recovering agriculture. India has come back to high growth but this new growth but this has been driven by increased expenditure by the government. The pumping of excess cash alongwith speculation going around the world markets has caused the economy to react to the euro crisis in a negative way. Also with the service sector growing very strongly, it has become Indias core competency alongwith agriculture. This should give the government impetus to help these sectors so that they go on to contribute to the GDP in a big way in the future instead of getting diverted to other developing countries. India being a unique country, the best bet we have against the world is agriculture. The new paradigm must entail infrastructure and food grain-led growth strategy on the basis of peasant agriculture which can simultaneously sustain the growth and remove the food crisis in India.

REFERENCES
1. Mohan, D. R. (2009). Global Financial Crisis:Causes, Impact, Policy Responses and Lessons1. New Delhi: RBI

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2. Bhatt, R.K.,Recent Global Recession and Indian Economy: An Analysis, International Journal of Trade, Economics and Finance, Vol. 2, No. 3, June 2011 3. Paul Krugman, 2009, Return of depression economics and the crisis of 2008, W. W. Norton & Company Ltd. 4. Report, S. (2009). The Long Climb. Economist , 63102. 5. Reuters. (2009, May 06). Worst Over, Indian Economy on the road to recovery. Retrieved November01, 2009, from IBNLive. http://ibnlive.in.com/news/worstoverindianeconomyonroadtorecovery/919507.html 6. Subbarao, D. (2009). Impact of the global financial crisis on Indiacollateral damage and response.New Delhi: RBI. 7. Global Developments And The Indian Economy, 2008-09, Indian Economic Survey Report. 8. Andrew Beatie, Investopedia http://www.investopedia.com/features/crashes/crashes9.asp#axzz1ttA0zLz2). 9. Wikipedia :http://en.wikipedia.org/wiki/Sovereign_default 10. Verick,S. & Islam,I. , The Great Recession Of 2008-2009: Causes, consequences and Policy Responses, May 2010. 11. Economic Crisis in Europe: Causes, Consequences and Responses, European Economy 7, 2009.

12. Eurozone Crisis: Causes and Consequences for the Euro-Atlantic Region, Report for the commission of the Euro-Atlantic Security Initiative(EASI), July 2010 13. Chand, Raju & Pandey, Effect of global Recession on Indian Agriculture, Indian Journal Of Agri. Econ., July-Sept, 2010.
14. Akyuz, Yilmaz (2008), The Global Financial Crisis and Developing Countries, Resurgence, December, Penang, Third World Network. 15. Athukorala, P. and Sen, K. (2002), Saving, Investment and Growth in India, Oxford University Press, New Delhi. 16. Central Statistical Organization, Government of India. 17. Chandrasekhar, C.P. and Ghosh, Jayati (2004), The Market that Failed: Neoliberal Economic Reforms in India, Left World Books,New Delhi. 18. World bank, www.worldbank.org 19. International Monetary Fund, www.imf.org 20. Planning Commission Of India, http://planningcommission.gov.in 21. Department Of Commerce, Economic Division. 22. Databook for DCCH, 1st Nov., 2011.

APPENDIX- I

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APPENDIX- II

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