Times Of Crisis

The global financial crisis, which had its roots buried deep into the prospering U.S and some other European economies, started to show its effects in the middle of 2007 and into 2008. Around the world, people lost much of their savings and nearly all industries and governments have felt the effect of the crisis. Growth rates of many countries have recorded negative values and had to shed trillions of dollars of their taxpayers’ money in order to recover from the crisis. The collapse of the irresponsible US mortgage market and the bursting of the housing boom bubble can be seen as the main and immediate causes for this financial meltdown. In this essay, I shall discuss the immediate effects of the blackout and the government responses to the crisis.

When the sub-prime debtors started defaulting on huge scales in the U.S, the stock markets around the world collapsed and the investors started withdrawing their money from the financial system. The value of Collateralized Debt Obligations(CDOs) and their derivatives which were the main instruments of investment in the U.S housing sector and considered to be very safe(most of them had AAA ratings) fell down drastically. Until that point of time investment banks like Morgan Stanley, Lehman Brothers, Goldman Sachs etc. had most of their assets in the form of these CDOs. When their value went down, their asset values decreased tremendously and were on the brink of bankruptcy thereby leading to further instability in the financial markets and crisis.

In times of a financial crisis, the banks lose confidence in debtors and essentially stop lending money to other banks and commercial structures transactions—fearing the borrowers would be unable to repay the loans there by resulting in a freeze of credit in the system. This is a big problem to many industries and firms in the U.S and Europe since they mainly depend on short term loans from banks to perform their operations and transactions and when banks stopped giving these loans, they actually had to function at huge losses or cease to function.

The crisis spread like wildfire throughout the world. There have been huge amounts of investments in the U.S financial sector from Europe and many developing countries. When U.S faced crisis, it was invariably reflected in the markets back in the investors’ home countries. Also, in countries like China, there are many industries which have been making huge profits by exporting their goods to the U.S and other developed countries. So, when the U.S economy was faced with crisis, the demand for these Chinese goods fell sharply and the manufacturing units in China were facing huge losses. Exports declined by a record 26 percent in February 2009 and 17.5 percent in January as global demand for Chinese-made toys, shoes, clothes and other goods collapsed.

  

The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, rapid declines in various stock markets, and large reductions in the market value of shares and commodities. According to Bloomberg, $14.5 trillion, or 33%, of the value of the world’s companies has been wiped out by this crisis at its peak.

Socio-Economic Effects: As the economic situation of the world collapsed, its effects were seen almost everywhere. Many industries, in order to reduce their expenditure, cut the number of employees drastically leading to huge rates of unemployment. Official figures reveal that only in China, more than 20 million people lost their jobs between 2008 and 2010. U.S and Europe saw unprecedented levels of unemployment at 12% and 9.5% simultaneously in 2008. In addition many employees had to suffer from pay cuts and lower pay scales imposed. Also the job insecurity of the employees has had a drastic effect on their productivity and efficiency.

Another major problem the economic depression presented is that of food crisis. Although food prices have been considerably increasing since 2003, the economic crisis greatly magnified this price rise and its effects which were largely unnoticed until then by the governments. The World Bank reports that global food prices rose 83% between 2005 and 2008. As of March 2008, average world wheat prices were 130% above their level a year earlier, soy prices were 87% higher, rice had climbed 74%, and maize was up 31%. Another concurrent issue is that of human rights. Amnesty International in its 2009 report states that “As millions more slide into poverty as a result of the current crisis, social unrest increases resulting in more protests. These protests are sometimes met with a lot of suppression. Other times, people are exploited further.”   As unemployment prevailed, the workers had to forgo their right to minimum wages and labor welfare measures took a plunge due to gross losses of the industries.

Thus the many various faces of economic crisis were revealed and governments had to take necessary steps. As soon as the news of the financial meltdown was confirmed, countries around the world started implementing countermeasures to minimalize the effects of the crisis. Financial rescue plans have been implemented and huge stimulus packages injected into the financial system. The U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009. Bailout packages for many bankrupt companies have been announced. By 2011 the total amount of bailout packages amounted to $ 9.7 trillion.  However there has been widespread criticism from various economists and public on the U.S policy of bailing out the investment banks (Goldman Sachs and Morgan Stanley) which are widely conceived to be the main culprits behind the economic crisis. It has to be noted that an initial bailout bill could not pass the US senate but only after some major changes and repeated appeals from the then President George. W. Bush and the IMF made up the minds of senators to pass the bill. However, as former Nobel prize winner for Economics, former Chief Economist of the World Bank, Joseph Stiglitz, argued,that the plan “still remains a very bad bill”

Around the world, many other countries have also devised stimulus packages and bailout packages for their economies. Germany announced that all the private bank accounts are guaranteed by the government. The U.K announced a bank rescue package and rescue of about $850 billion on 8^th October 2008. The plan aimed to restore market confidence and help stabilize the British banking system. China also announced a $586 billion stimulus package on 9^th November 2008 as an attempt to minimize the impact of economic crisis. Most of these stimulus packages have been aimed at improving liquidity in the economy and trying to get banks give out loans thereby stabilizing the industries and the economy. For example the British government, by its stimulus packages provides money to banks but only to be used for extending credit. On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure of their homes. Many economists argue that this step should have been the first to be taken since this directly addresses the cause due to which recession started.

Due to various stimulus packages and measures taken by the governments, the condition of financial and stock markets around the world showed signs of improvement from January of 2009. According to the U.S. National Bureau of Economic Research, the recession ended in June 2009. However, very large losses were incurred as a consequence of crisis and the loop holes in the economic policies of various governments were exposed. A need for fundamental rethinking of the basic ideas of financial policies and economics is being felt and reforms are to be devised so as to avert another great financial fiasco as some people would call it.  

In June 2009, the U.S.A introduced a series of financial regulatory reforms addressing consumer protection, leverage limits, capital requirements for banks etc. Reforms on International level which give a greater voice to the developing third-world countries are being asked for. French President and head of the EU presidency, Nicolas Sarkozy has called for major changes to the IMF and World Bank. China’s arguments for an alternative to dollar as international currency standard have gained popularity. However there is a certain amount of skepticism in various developing countries about the proposed reforms which tend to contain the influence of powerful nations on the international frontier.

References:

·         http://en.wikipedia.org

·         http://www.globalissues.org

·         http://www.worldbank.org/financialcrisis/

·         http://www.guardian.co.uk
   THE BIG SHORT-by MICHAEL LEWIS

      B.Pranay Reddy

      PH10B006

Aftermath of 2008 Recession

In this blog we are going to see the aftermath of 2008 recession. We are mainly concerned about the global situation in 2009 and early 2010. The recession of 2008 left approximately 1.5 million people unemployed directly and indirectly. After the recession of 2008, the global economy has been struggling to regain a sound footing to support vigorous growth. The recession lead to reduction of oil prices around the world. There were signs of recovery from various parts of the world but they were rather slow. There were no immediate signs of employment for all those who lost their job during the recession. In fact economists predicted that it will last another two years after the recession. GDP of most countries dropped a little and started increasing from mid2009.

The residential construction which bottomed out in 2008 recession did not show any major signs of growth in 2009.   In the meantime GDP increased slightly in America and other European countries. All parts of the GDP such as consumption, business investment, exports with the exception of building sector. The recession also had an impact on the lifestyle of citizens of developed nations also. People started spending less and saving more but the recession left them with no means of profitable investments. Governments of America and Europe tried to bail out big companies and banks at the cost of public sector money in the aftermath of recession. This lead to a huge opposition amongst the public.  Economists such as Paul Krugman felt that these countries instead of being rightist should be more labour friendly. He also felt that instead of slashing various welfare schemes, the government must increase the welfare schemes given to the people.

In America and several countries, the recession has forced the youngsters to take up jobs. They were not able to pursue higher educations as they did not have sound financial status and the cost of Higher Education also increased. These factors may affect the overall growth of these students in longer run. In the aftermath of recession Governments of America and European countries felt that bailing out the big fishes by implementing cuts on spending for public will strengthen the financial sector which would eventually create more jobs for the unemployed. But many economists were not convinced. They gave the example of Britain where such measures taken by the British Government was not fruitful and lead Britain into an economic slump. While most developed countries of the world tried to bail out their banks at the cost of public expenditure, there was an exception in the case of Iceland. It made the banks take the brunt of the recession and didn’t reduce the public expenditure. It also prevented foreign investments to protect the local interests. As a result, the percentage of unemployed people started decreasing and the country did not suffered from any major economic slump after that.

Aftermath of recession in Asia:

The outcome of Asia’s financial sector in 2009 was relatively better compared to other countries in West and also compared to its own experience in 1997-1998.  Even then there were GDP contractions as a result of volatile external environment and faltering domestic demand. Since most Asian countries had adequate exposure to exports and global liquidity, they were not the first of countries to recover from the recession. The recession also showed strong interconnections between the Western and Asian economies and how the impact on one affects the other.

The Asian countries that were exporting goods to West were mainly affected by the recession since the purchasing power of many people in West came down after the recession. One of the main reasons for such a decline in trade volumes is due to the uncertainty that prevailed during that time. Industries and households put off purchases of big-ticket items such as consumer durables and investment goods fearing another slump. Since durable goods figured predominately in trade and commerce, countries exporting these goods were much affected in the aftermath of the recession.

Most Asian countries enter the crisis with strong economic fundamentals, including low inflation and fiscal positions. These good fundamentals in turn provided scope for strong economic fightbacks in the aftermath of recession. China, Japan , Korea , and Singapore employed relatively aggressive policy strategies, in particular, China undertook a sizable fiscal program, which was supplemented by accommodative monetary and bank lending policies.

Not all Asian nations responded so aggressively to the crisis. Some countries with weaker fiscal positions were not able to respond like China. Countries with low inflation such as China, Japan, and Thailand were able to implement strong policies without concerns about increasing inflation. On the other hand inflation was a major concern for Indonesia, Philippines and Korea and hence they had to take policies keeping in mind that inflation should not increase. The policies taken by these countries also depended on the severity of crisis across these countries.  Generally speaking, the Asian response to the crisis appeared effective. It can also be said that the revival of Asian economy aided in global economic growth.

AFTERMATH OF RECESSION ON INDIA:

In the aftermath of the recession, there were sudden sales of stocks and the Stock markets crashed often.  There was also a decrease in exports by India. Though the recession did not result in that much unemployment as in US, there was a reduction in wages to the employees mainly in IT companies and BPOs. There has not been a significant increase in wages even now. The hiring of workers had decreased and the employees were forced to work for longer hours for lesser salary. There was also depreciation of Rupees versus dollars and banks were on severe cash crunch. The major challenge faced by the government to control the inflation since it had started increasing after the recession. Government was also entitled to spread the benefits of growth equitably. Unlike other Western countries, India did not try to take drastic steps and policy changes. Instead it continued to concentrate on investment projects which will lead to the development of the country. Since there was a global uncertainty Indian exports did not recover as it was expected. There were some plus points which came as a result of 2008 recession. The land prices came down after recession. Some export goods were sold in local market and it resulted in reduction of prices of these commodities. All these factors helped the common man. There were also some minus points. There was wide spread job scarcity after recession especially in IT sector. This situation has improved in recent times but the wages continue to remain low. There was low liquidity after recession and it also lead to reduction in exports. There was also significant reduction in production after the recession. The automobile sector was the most affected one. The sales of most automobile majors came down and many new models to be released were put on hold.

The official estimates of GDP growth for the first two quarters of 2008/9 stayed above 7.5percentage.  There was a decline in output of automobiles, commercial vehicles, steel, textiles, petrochemicals, construction, real estate, finance, retail activity and many other sectors also. The exports also fell by 12percent in term of dollars. The GDP of the second part of 2008/9 came down.

There were they mixed opinions on what policy reform should India undertake for recovery. There were also questions whether Indian should deploy monetary, fiscal and exchange rate policies to insulate our growth momentum from adverse conditions. The Monetary policy was aggressively loosened. On the fiscal front, the government pretty much exhausted the available fiscal space through its record Rs 237,000 crore (4.5 percent of GDP) supplementary demand in October 2008. Some economists expressed their concern that given it economic policies and status before recession, it should have recovered stronger than other Asian powers which did not happen. They blame the lack of strong policies taken by the government and the inefficiency in regulation of various sectors by the Government as main reasons for it

Conclusion:

The United States has benefited significantly from Asia’s rapid development and integration into the global economy, and the payoffs to the Asian economics from global economic integration have been substantial as well. Indeed, the financial crisis has widely demonstrated the extent to which the fortunes of the United States, Asia, and the rest of the global economy are intertwined. These powerful economic linkages, as well as the importance of both the United States and Asia in the global economy, underscore the need for consultation and cooperation in addressing common issues and concerns. Economists are optimistic that the United States and Asia will rise to the challenge and address in a mutually beneficial fashion the range of issues confronting the global economy.

KAVIN KARTHIK
CS10B013

Major Cause For the Great Recession in late 2000s..

Great Recession or Great economic Bubble of late 2000s is considered as the biggest and the most brutal financial crisis after the Great depression of 1930s. The crisis had been developing for a while, but its adverse impact could not go unnoticed by the middle of 2007 and into 2008. Due to the fall of financial institutions in USA the whole world was affected. And as the cliche goes, whenever the US sneezes, the world catches a cold and clearly all over the world, stock markets have trembled, large financial institutions have collapsed and declared bankruptcy and few have been bought out, and governments everywhere have had to come up to rescue these institutions and bail out their financial systems.

       We shall try to understand the history of this cataclysm and technical terms shall be defined while we are on the go. 

Credit Crisis is a worldwide financial fiasco where in you would find terms like subprime mortgages, collateralized debt obligation, frozen credit markets and credit default swaps used quite invariably. Here everyone except may be ones involved in fraudulent activities is affected. Basically the credit crisis brings 2 groups of people together, the home owners, who represent their mortgages, which represent the houses, and investors, representing their money, which represents huge institutions like pension funds, insurance companies, sovereign funds, mutual funds, etc. These two groups are brought together by some financial institutions like banks and brokers like:” Bear Stearns Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers.” And some financial conglomerates like “Citigroup, JP Morgan” and insurance companies like”AIG, MBIA, AMBAC” and rating agencies “Moody’s, Standard & Poor’s, Fitch”, etc.

In the US, traditionally the investors would go to the US Federal Reserve to buy treasury bills, which are believed to be the safest investments (AAA rating). But in the wake of the dot-com bubble Federal Reserve chairman, Allen Greenspan lowered the interest rates down to 1% to keep the economy strong, which meant very less returns for the investors. But on the other hand this meant that the banks on the Wall Street could borrow from the federal bank for only 1%. Added to that, general surplus of money from other countries created abundance of cheap credit which made borrowing money easy for banks. This lead to something called the leverage.

       Leveraging is to borrow money to amplify the outcome of a deal. In simple terms say I am going to buy an article and sell it to another person at a higher price to gain profit, but the profit is limited by the number of articles that I can buy. Hence if I borrow huge amount of money and buy these articles in bulk and sold them, I would have created more profit, even after returning the money that was borrowed with the interest. Hence essentially I would have created something out nothing!! Or so it seems.  This is a major way how banks make money.

In November 1999, U.S. President Bill Clinton signed into law the Gramm–Leach–Bliley Act, which repealed part of the Glass–Steagall Act of 1933. This repeal basically reduced the separation between commercial banks (which traditionally had fiscally conservative policies) and investment banks (which had a more risk-taking culture). Hence now the deposit banks could collaborate with investment banks. Which meant the banks could take more risky choices with the deposited money of the people.

So Wall Street now has a lot of credit from the abundantly available credit and grows rich and then pays it back.

Fueling the bubble- Due to the 1% interest rule that was made by Allen Greenspan, huge amount of money gushed into the system, hence increasing the amount of money, with relatively lesser growth in supply of products, creating a case of higher supply than demand. Hence the prices of the houses and commodities started to rise and there was a huge need for money for people who wish buy new houses.

Meanwhile, the investors, who saw very less profits from the treasury bills (1% as described earlier) wished get a piece of this open goldmine. The banks made a proposition of connecting the home owners and the investors through mortgages- For a family that needs a house and would like to get a loan, with a down payment, would approach a lender, who in turn gives the family a mortgage. Now the family is happy for getting a house as the mortgage prices had always been raising. Before the bank came up their proposition the above was the scenario and the lenders were very careful in choosing the people to whom they lent their money to, that is, to those who met certain financial background standards. Such mortgages are called Prime Mortgages. The banks came up with the idea of securitization where in the money lender would be secured from the defaults of the house owners as the banks would buy these mortgages at a satisfactory price and take upon themselves the risks involved. Hence now the lender could give out loans without any risks and make profit. The investment banker on the other hand, borrowed a lot of money and bought thousands of these mortgages. Hence the banker gets his monthly income from all these home owners. Then these banks made a complicated financial innovations called CDOs – Collateral Debt Obligations these are basically complex derivatives in which the collateral (something pledged as a security for loan) included not just mortgages but other loans like auto loans, credit card Debt, commercial mortgages, corporate buy-out debt, student loans ,etc. to reduce the risk of defaulting involved in the mortgages. Hence all these Debt- obligations were turned into complicated financial articles and sold to the investors. This is where the rating companies came into the picture. They would have to rate these different CDOs into different categories based on the risks (like the defaulting by house owners) involved, with best rating being AAA. Hence depending on their ability to take risks, investors from all over the world put their money into these banks and bought these CDOs. Higher the risk involved, higher the rate of profit. This attracted more and more investors but the number of people who wanted such mortgage loans and met the standards of loan payment, started becoming scarce. To overcome this hurdle the banks introduced something called Sub-prime Mortgages in which there was no need of proof of income, no down payment what so ever. Their idea behind this was that if ever the house owners were to default and leave their house the banks or the people who owned the mortgages/CDOs would come into possession of the houses and due to the then inflating housing bubble the prices of the houses were ever rising, hence the returns from selling the house would compensate the loan anyway. Hence now these banks started collecting such sub-prime mortgages from the lenders and created their complex CDOs and sold them to their investors. Everyone is making money and everyone is happy.

In 2004, the U.S. Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. Which means the financial companies could borrow huge amounts of money leading to overleveraging. At some point it went to values as high as 33:1(meaning 33 parts of the money is borrowed while 1 part was invested by banks).

Another major thing to note: As early as 1997, Federal Reserve Chairman Alan Greenspan fought to keep the derivatives market unregulated. With the advice of the President's Working Group on Financial Markets, the U.S. Congress and President allowed the self-regulation of the over-the-counter derivatives market when they enacted the Commodity Futures Modernization Act of 2000. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against particular credit risks. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total over-the-counter (OTC) derivative notional value rose to $683 trillion by June 2008

Due to the zero security policy of the banks it was seen that the amount of money invested on a house by the owners was around just 0.7%, that is, 99.3% was from the sub-prime mortgages and quite obviously after a point such owners could not payback their loans and defaulted. This meant that now the banks started to own houses as a part of their monthly income, reducing their liquidity. After a point the large number of defaults in the scheme of sub-prime mortgages and due to the growing housing bubble there was more supply of houses than the demand, leading to plummeting of the prices of the houses. This caused an interesting problem to those owners who paid their mortgages in a timely manner: because of foreclosure of the houses in their neighborhood the price of their houses also reduced drastically, which meant that they were paying mortgages at a much higher price than the actual price of the house. Hence they too forfeited. At this point the banks owned a pile of worthless houses, and quite obviously no one wanted to buy those toxic CDOs. On the other side the investors and lenders all over the world also, owned such toxic CDOs. The Share prices started to crash, when there is no money in the system just illiquid worthless houses, leads to the freezing of the credit markets. As Warren Buffett famously referred to derivatives as "financial weapons of mass destruction" in early 2003 the whole system collapsed bringing down other economies with it.

There was another ticking bomb: the AIG, one of the biggest insurance companies started a policy called Credit Default Swaps.  Credit default swap (CDS) is an agreement that the seller of the CDS will compensate the buyer in the event of a loan default. The buyer of the CDS makes a series of payments (the CDS "fee") to the seller and, in exchange, receives a payoff if the loan defaults.

In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). This worked out fine for AIG in the initial stages as there were many CDOs moving around in the system. Hence many started buying CDSs on things that they did not own. Ethically it meant that everyone is waiting for the CDOs to collapse. There has also been an allegation on the investment banks that they not only sold toxic CDOs but also bought CDSs against those CDOs, which meant that they were betting their money on the CDOs to fail. When finally the CDOs started to fail innumerably, AIG went bankrupt. Fall of such huge financial institution means fall of an economy as a whole. Hence the US Government had to come to the rescue of such institutes to bail them out. 

       Major reason to be unable to interpret the dangers of the CDOs then, was the complexity involved in understanding the CDOs. The investors could not evaluate the risks involved in such investments hence couldn’t warn themselves and others from the impending danger. The inaccurate ratings of the rating companies like Fitch, S&P’s, Moody’s had a major role to play in misleading the investors of the world.

 Declaration of bankruptcy by Lehman Brothers is marked as the beginning of the peak of the Great Recession of late 2000s. The immediate effects of the crisis shall be addressed in the corresponding blog entry……

References:

http://www.youtube.com/watch?v=m3im-iJdhv4

http://en.wikipedia.org/wiki/Late-2000s_financial_crisis

http://www.globalissues.org/article/768/global-financial-crisis

Movie: Inside Job, Zeitgeist-2
other lectures on www.youtube.com

-Prateek S Kolhar

 EE10b109

Impact On India

         The economic crisis of 2007-2008, which is considered to be the second largest crisis after the Great Depression in 1929, in USA, swept off many of the world's largest economies and even had it's impact on economy of developing countries. India is one such economy which survived this massive crisis resiliently. Though the growth rate of India was hampered it soon rebounded with an impressive GDP growth of 6.7% in 2008-2009 while rest of the world economies were facing a negative growth.

Why should global crisis affect India? Our search begins by analyzing various reforms and regulations undertaken by the Indian government, which date back to 1991. During this year, having survived a crisis already in 1990-1991, the Indian Government started to open the Indian economy to the world. This included various reforms like reduction in import duty, increasing the restriction levels of export, and allowing foreign direct investments. The effect of these steps under taken by the government can been realized by consistent growth of the country from 2003-04 to 2007-08. Clearly the amount of openness created by these new reforms integrated Indian economy to some extent with global economy and any changes in the global economy is sure to have an impact on it.

What was the result of crisis on India? In the recent years, India registered a high growth even with a low per capita income and this growth was consistent even when the global economies were dwindling this led the economists into thinking that India has decoupled from the global economy, that is to say it is no longer affected by global economy, and capable of self sustenance. Also the strong domestic financial sectors of the nation seemed to show no signs of impact by rapidly varying global financial sectors. But little did economists realize that the high growth rate of India in 21^st century has been achieved by significantly integrating its economy with the global economy, hence a downturn of global markets leaves its impression on Indian markets too.

When the US economy was hit by crisis in August 2007, Indian economy apparently seemed to have been insulated from this effect. It was actually in September 2008 when Lehman Brothers collapsed the impact on Indian Economy was unavoidable and clearly visible. This resulted in high interest rates overnight and drying up of credit flows into the economy. The crisis was a contagion, it plummeted most of the largest economies. The countries with high export rates were greatly affected which resulted in declining of GDP growth, unemployment, reversal of capital inflow(investors took back their money from Indian market) into the economy and inflation. Global crisis effect on India can be seen at two major levels, they are:

Financial Sector: It includes banks, equity(stock markets) markets and other financial institutions. When crisis hit global economy many of the foreign investors withdrew a huge amount of 12 billion USD from Indian market in order to save their parent companies. The resulting scarcity of funds had to be replaced by capital from domestic banks. Due to the fact that there was no money for banks to lend even to other banks it resulted in higher interest rates which eventually led to depreciation of Indian Rupee(the value of a currency is determined by many factors and interest rates increment combined with reduction in capital account lead to decline in currency value). This led to increase in foreign debt of the country. Hadn't Reserve Bank Of India tightened the laws on use of securitization, sub-prime lending and derivatives all banks in India would have fallen to worst situations.

Export Sector: Export occupies a share of 22% in India GDP growth as on 2008. Exports increased by about 30% over a span of five years from 2003. But most of the export sector is rather clustered in nature. Only few states registered high growth due to exports, like Tamil Nadu, Karnataka, Rajasthan, Andra Pradesh etc. Even though export sector percentile is low compared to capital formation in financial sector, it's multiplying effect has drastic consequences on economy. About 21% decline in export was seen during 2008-09 and this resulted in job losses of approximately 1 million people in this sector. The industries that were badly affected were textile, gems, jewelry, leather and handicrafts. Clearly these states which had high growth rate due to exports had a major downturn in their income and increment in unemployment. Many of the workers in this sector are migrants from villages to cities because of which all those who had lost their jobs during the crisis had to return back to their rural areas. This questioned the apparent stability that rural area provided during crisis since the returning number of migrants was in thousands.

Export sector mainly consists of unorganized labor but the case is true not only for unorganized sector it is even true for organized sector where informal workers are employed and they too suffer form this. Only about 8% of total working class in India are covered by social securities like old age pension, unemployment insurance etc where as, among the rest of the community who have lost their jobs, have no means to afford these privileges that come from social securities. Migration of Indian workers in other countries back to India was also seen. The main reason for the fall of export sector can be attributed to the fact that exports from both organized and unorganized sector are consumed mainly by USA and Europe, as their economies were also undergoing recession it led to the decline in their import, owing to declined consumer consumption.

Agriculture which has lesser share in GDP growth had only marginal effects of crisis in terms of job losses. But it's effect on economy was seen at different levels. The reforms of 1990's were not in favor of farmers. Trade liberalization led to severe and frequent changes in crop prices. This volatility of crop prices had a increased burden on farmers other than unpredictable monsoons. During 2007 and mid 2008 globally primary commodities prices took a steep inclination which led to farmers shifting to cultivate high cash yielding crops, for more profit. As the crisis struck, these prices suddenly came down, especially oil seeds, leaving farmers empty handed and full of debt. The effect of which was reflected by about 10% increase in prices of food products. The rise in food prices was more pronounced for food grains rather than fruits, eggs, meat and vegetable which added additional woes to the public, mainly the poor.

Why did India take lesser hit during the crisis compared to other nations? Compared to any other developed country India did not sustain severe damages. Various domestic trade, public consumption and fiscal stimulus by government kept the economy growing, but with a slower pace. The growth of Indian economy depends majorly on its financial sector and export. The lessons that were learnt during the crisis of 1997-1998 paved way for creation of policies which led to slower pace of opening up of capital account(which basically reflects net change in nation's ownership of assets) of the country. Hence stringent policies by RBI made sure that Indian banks do not purchase mortgage - based securities and derivatives, which were the main reasons for crisis in US economy. Though many argued that additional tightening of interest rate by RBI curbed the growth even before crisis. But these were also the policies which prevented banks from going into bankruptcy. Government released three fiscal stimulus packages(part of budget used for public purposes during such times) which totally amounted for 2.7% of GDP in 2009. These packages included reduction in in-direct taxes(from public) and specific measures for sectors which got affected during this period of crisis. Although these policies have been implemented, because of decentralized system of governance and various other delays it takes time for them to reach their targets. But nonetheless growth in recent years is turning out to be positive. The timely action by Indian Government and RBI has prevented India from having the fate of USA and other developed economies. These policies by Government and RBI eventually increase consumer spending by providing employment, loans at lower interest and cutting down inflation, which will ultimately curb the slowdown of market.

The Global Financial Crisis surely showed us the flaws in our system, even if the policies of this system reduced the effect, and a need for more dependable policies which adapt to ever changing markets and investment sector, a more diversity of exports so that the impact of any such crisis would be distributed rather than clustering and affecting adversely on smaller groups. Ultimately it was Indian poor who was greatly affected hence there is a need for systems which monitor the financial activities efficiently so that the government is well prepared with the measures and strategies to tackle such situations in future or change the oncoming economic adversity into advantage.



References:
1. Bibek Debroy, India Country Report. In: Bertelsmann Stiftung (ed.), Managing the Crisis. A
Comparative Assessment of Economic Governance in 14 Economies. Gütersloh: Bertelsmann Stiftung, 2010.
2. An article by Shashi Tharoor, Former Indian Minister, How India Survived The Financial Crisis
3. Wikipedia: Economics Portal