An Analysis of the Economic Indicators

7/31/2019 An Analysis of the Economic Indicators

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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


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EFFECT OF GLOBAL ECONOMIC SLOWDOWN ON THE INDIAN ECONOMY

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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. Thoughthe 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 non-

banking 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 ContentsINTRODUCTION ............................................................................................................................................. 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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INTRODUCTIONAt 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 acceptgreater 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 usedderivatives, 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 theyears 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 mortgage-

backed 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 DECLINEUnfortunately, 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 well-

intentioned 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 saving-

investment 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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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

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. Rising government debt levels

b. Trade imbalances

c. Monetary policy inflexibility

d. Loss of confidence

CONCERNS IN DEVELOPING COUNTRIES REMAIN

The rather unsatisfactory outlook of the advanced economies on account of:

1. Maintenance of interest rates at near-zero levels

2. Uncertainties over the euro region sovereign debt crisis

3. Rising US fiscal deficit problems and slowing economic growth

has had an impact on the developing countries.

(Source: Wikipedia)

Table 1: Credit Default Swap Rate for a select few countries

CREDIT DEFAULT SWAP RATES

% 1st August 2011 30th November

Greece 18.56 77.2

Portugal 9.06 10.86Ireland 7.75 7.47

Hungary 3.06 6.18

Italy 3.03 5.34

Spain 3.56 4.66

Belgium 1.95 3.78

France 1.20 2.36

Austria 0.92 2.22

Germany 0.62 1.1

UK 0.72 0.99

US 0.75 0.54
http://en.wikipedia.org/wiki/Greek_government_debt_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932012_Irish_financial_crisishttp://en.wikipedia.org/wiki/Economic_history_of_Portugal#Economic_crisis:_the_2010shttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Economic_history_of_Portugal#Economic_crisis:_the_2010shttp://en.wikipedia.org/wiki/2008%E2%80%932012_Irish_financial_crisishttp://en.wikipedia.org/wiki/Greek_government_debt_crisis


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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 2008-

09 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, transportand 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) from5.8% 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 China Brazil USA UK Germany

2000 4.4 8.4 4.3 4.1 3.9 3.22001 3.9 8.3 1.3 1.1 2.5 1.2

2002 4.6 9.1 2.7 1.8 2.1 0

2003 6.9 10.1 1.1 2.5 2.8 -0.2

2004 8.1 10.1 5.7 3.6 3 1.2

2005 9.2 11.3 3.2 3.1 2.2 0.8

2006 9.7 12.7 4 2.7 2.8 3.4

2007 9.9 14.2 6.1 1.9 2.7 2.7

2008 6.4 9.6 5.1 0 -0.1 1

2009 6.8 9.2 -0.6 -2.5 -4.9 -4.7


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2010 10.4 10.3 7.5 2.8 1.3 3.5

2011 8.2 9.6 4.5 2.8 1.7 2.5

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%

-10

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

India

China

Brazil

USA

UK

Germany


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Source: Central Statistical Organization (CSO)

OUTFLOW OF FII AND THE SENSEX

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 investm ent even

though India was more or less insulated from the crisis. But as of 2010, Indias FII were greater as

0%

5%

10%

15%

2005-06 2006-07 2007-08 2008-09 2009-10

Index Of Industrial Production (Growth)

Index Of Industrial Production

(Growth)

-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

300,000,000,000

Brazil

China

Germany

India

United Kingdom

United States


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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.

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.

Stocks traded, total value (current US$)

-15000

-10000

-5000

0

5000

10000

1500020000

Amount

0

10,000,000,000,000

20,000,000,000,000

30,000,000,000,000

40,000,000,000,000

50,000,000,000,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Brazil

China

Germany

India

United Kingdom

United States


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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 theirincome 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.

CurrencyCurrent Price

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

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

0

500,000,000,000

1,000,000,000,000

1,500,000,000,000

1997 1998 1999 20002001 200220032004 200520062007 200820092010

Brazil

India

0

10

20

30

40

50

60

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

India

Brazil

China

Germany

United Kingdom

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 2008from 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.

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.

-20

2

4

6

8

10

12

14

16

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil

China

Germany

India

United Kingdom

United States

0

50

100

150

200

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

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.

0

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

2,500,000,000,000

3,000,000,000,000

3,500,000,000,000

19971998199920002001200220032004200520062007200820092010

Brazil

China

Germany

India

United Kingdom

United States

FOREIGN

EXCHANGE

RESERVES


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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 andimport 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.

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.

0

100,000,000,000

200,000,000,000

300,000,000,000

400,000,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

India's Foreign Exchange Reserves

India

0

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

Brazil

China

Germany

India

United Kingdom

United States

EXPORTS


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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.

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.

-1,000,000,000,000

-800,000,000,000

-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

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil

China

Germany

India

United Kingdom

United States

BALANCE OF

PAYMENTS


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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 increasinglinearly. 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.

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 so-

called BRIC counterparts, which include China, Russia and Brazil. Both Moodys and Fitch have a

stable outlook on Indias debt rating.

-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

150,000,000,000

200,000,000,000

Brazil

China

Germany

India

United Kingdom

United States

0

20,000,000,000,000

40,000,000,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

PUBLIC DEBT

Germany India United Kingdom United States


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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 foreign -

exchange reserves, which stand at four-times the countrys short-term external debt, also boostconfidence 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 thecash reserve ratio to 5.75 percent from 5 percent.

MANUFACTURING SECTORThe 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)

% PMI

Apr May Jun Jul Aug Sept Oct

Brazil 50.7 50.8 49.0 47.8 46.0 45.5 46.5

China 51.8 51.6 50.1 49.3 49.9 49.9 51.0

India 58.0 57.5 55.3 53.6 52.6 50.4 52.0

Russia 52.1 50.7 50.6 49.8 49.9 50.0 50.4

HK 55.3 53.2 52.6 51.4 47.8 NA NA

South Korea 51.7 51.2 51.1 51.3 49.7 47.5 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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Manufacturing, value added (% of GDP)( Worldbank)

In the above graph we see how Indias and Chinas manufa cturing 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 SECTORThe 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% in2008-09 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 SECTORThe 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.

0

5

10

15

20

25

30

35

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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China

Germany

India

United Kingdom

United States


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CONCLUSIONIndias 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 tothe 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 Ind ias 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
http://www.investopedia.com/features/crashes/crashes9.asp#axzz1ttA0zLz2http://www.investopedia.com/features/crashes/crashes9.asp#axzz1ttA0zLz2http://en.wikipedia.org/wiki/Sovereign_defaulthttp://en.wikipedia.org/wiki/Sovereign_defaulthttp://en.wikipedia.org/wiki/Sovereign_defaulthttp://www.worldbank.org/http://www.worldbank.org/http://www.worldbank.org/http://www.imf.org/http://www.imf.org/http://www.imf.org/http://planningcommission.gov.in/http://planningcommission.gov.in/http://planningcommission.gov.in/http://planningcommission.gov.in/http://www.imf.org/http://www.worldbank.org/http://en.wikipedia.org/wiki/Sovereign_defaulthttp://www.investopedia.com/features/crashes/crashes9.asp#axzz1ttA0zLz2


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APPENDIX- II

An Analysis of the Economic Indicators

Documents

Transcript of An Analysis of the Economic Indicators