Global Economic Recession & Resilience of India’s Economy111

8/8/2019 Global Economic Recession & Resilience of Indias Economy111

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Global EconomicGlobal Economic

Recession & Resilience ofRecession & Resilience ofIndias Economy:Indias Economy:

Monetary PolicyMonetary Policy

PerspectivesPerspectivesByBy

Dr. S.K SharmaDr. S.K SharmaReader In Economics, GGPG College, GhazipurReader In Economics, GGPG College, Ghazipur

&&Dr. Navnita SinghDr. Navnita SinghReader in Commerce, NSCB College, LucknowReader in Commerce, NSCB College, Lucknow


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Start Of Global RecessionStart Of Global Recession Date: 13Date: 13thth Sep, 2008Sep, 2008

158 Year old firm Lehman Brothers goes158 Year old firm Lehman Brothers goesbankrupt (Fourth largest investment bank filedbankrupt (Fourth largest investment bank filedfor bankruptcy)for bankruptcy)

Federal Reserve extended & 138 billion loan to LBFederal Reserve extended & 138 billion loan to LBfor bail outfor bail out

UBI shares tumbled due to closure of $300UBI shares tumbled due to closure of $300million exposure to LBmillion exposure to LB

AIG (American International Insurance Group)AIG (American International Insurance Group)decided to sell wholly owned HSB group for $742decided to sell wholly owned HSB group for $742millions.millions.

2626thth Sep 08 US bails out $700 billionSep 08 US bails out $700 billion


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Federal Reserve Bank gave AIG bail out packageFederal Reserve Bank gave AIG bail out packageof $85 billionof $85 billion -- $106billion.$106billion.

Led to fall in shares in Japan, India, America,Led to fall in shares in Japan, India, America,Paris, London and ChinaParis, London and China--major consumermajor consumercountries.countries.

Merrill Lynch also goes bankrupt.Merrill Lynch also goes bankrupt.

Indias share market fell from 20000 to 10000 ofIndias share market fell from 20000 to 10000 of

BSE.BSE.

ICICI case became critical due to exposure of LBICICI case became critical due to exposure of LB& AIG.& AIG.


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Financial ImplicationsFinancial Implications

Over 5000 employees in UK sackedOver 5000 employees in UK sacked

20000 to be laid off in the US20000 to be laid off in the US

25000 Lehman employees in India will soon get25000 Lehman employees in India will soon getthe pink slipthe pink slip

Wall Street has lost its glory in world business.Wall Street has lost its glory in world business.Three of five major independent brokers haveThree of five major independent brokers havedisappeared.disappeared.

Only Goldman Sachs and Morgan Stanley leftOnly Goldman Sachs and Morgan Stanley left

Bi loss to Indian software com aniesBi loss to Indian software com anies


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Higher credit rates and borrowing costsHigher credit rates and borrowing costs

LB, JP Morgan, Bar Clays are three of four pillarsLB, JP Morgan, Bar Clays are three of four pillarsof US economy, LB, JP Morgan Bar Clays andof US economy, LB, JP Morgan Bar Clays andGoldman SachsGoldman Sachs-- collapsed in the share marketcollapsed in the share market

Bank of America purchased Merrill Lynch (earlierBank of America purchased Merrill Lynch (earlier

planned to purchase LB but rejected)planned to purchase LB but rejected)

Suicide cases in the USSuicide cases in the US

The crisis is far from overThe crisis is far from over

The US housing market would not revive untilThe US housing market would not revive until20092009


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Genesis of the crisisGenesis of the crisis The US is the Worlds biggest consumer, so a slowThe US is the Worlds biggest consumer, so a slow

down means a slow down every where.down means a slow down every where.

The crisis is due to the mortgage crisis that startedThe crisis is due to the mortgage crisis that startedin Sep. 2007in Sep. 2007

Decline in process of real estatesDecline in process of real estates

Housing loans made by the bank with little supportHousing loans made by the bank with little supportmade the loans riskymade the loans risky

Interest rates were raised by these banksInterest rates were raised by these banks

Borrowers could no more repay LehmanBorrowers could no more repay Lehman-- led to hugeled to huge

losses to bankslosses to banks


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As US housing process fall and banks tightenAs US housing process fall and banks tightenlending standardslending standards-- further aggravating thefurther aggravating theeconomyeconomy

It has its effect as housing market andIt has its effect as housing market andweakening economy.weakening economy.

Auditors way have understated losses as complexAuditors way have understated losses as complexfinancial installments linked to mortgages andfinancial installments linked to mortgages andcorporate loanscorporate loans

Seventies Flash BackSeventies Flash Back --Duly 1970s the US wasDuly 1970s the US wasaffected with stagflation crippling inflationaffected with stagflation crippling inflationcoupled with stagnant economic growth and highcoupled with stagnant economic growth and highunemployment.unemployment.


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Futuristic OutlookFuturistic Outlook

The US economy is expected to shrinkThe US economy is expected to shrink0.4% in 2009 compared with 20080.4% in 2009 compared with 2008( survey by 49 economists)( survey by 49 economists)

The economists expect contractions in theThe economists expect contractions in theJapanese, British and Euro zoneJapanese, British and Euro zoneeconomies in 2009economies in 2009

US GDP will fall by 2.8% in first quarter ofUS GDP will fall by 2.8% in first quarter of

20092009

Consensus suggests that the currentConsensus suggests that the currentrecession will be deeper and last longerrecession will be deeper and last longer

than those of 2001 and 1990than those of 2001 and 1990--9191


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Projected unemployment rate 7.4% inProjected unemployment rate 7.4% in2009 as it was 6.5% in October.2009 as it was 6.5% in October.

$700 billion bail out will fail$700 billion bail out will fail

There are more than $ 1trillion worth ofThere are more than $ 1trillion worth of

subsub--prime collaterized mortgageprime collaterized mortgage--backedbackedsecuritiessecurities

The purchase plan is not limited to justThe purchase plan is not limited to just

residential mortgageresidential mortgage-- backed securitiesbacked securities

The govt. plan is even more under fundedThe govt. plan is even more under fundedthan the people realizethan the people realize


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Status Of IndiaStatus Of India

Indias rupees slid 19.2% in 2008Indias rupees slid 19.2% in 2008

22ndnd worst among 10 most active Asian Currenciesworst among 10 most active Asian Currencies

excluding Japan.excluding Japan.

Inflation was more than 11% nearing 12%.Inflation was more than 11% nearing 12%.

Growth rate is real sectors came downGrowth rate is real sectors came down Automobile, software and realty sectors haveAutomobile, software and realty sectors have

sufferedsuffered


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Strength of Our EconomyStrength of Our Economy Inflation rate has come down to 5.2% to 3.92 on 17Inflation rate has come down to 5.2% to 3.92 on 17thth Feb. 2009.Feb. 2009.

Growth rate is still high of 7.1% in 2008Growth rate is still high of 7.1% in 2008--09.. It is still the second09.. It is still the secondhighest in the world, the first being China having growth rate ofhighest in the world, the first being China having growth rate of8.5 % in 20088.5 % in 2008--09.09.

Monetary policy and fiscal policy are working in tandem.Monetary policy and fiscal policy are working in tandem.

It has many other strengths as well.It has many other strengths as well.

Foreign Exchange reserve as on 16Foreign Exchange reserve as on 16thth Feb. 2009 is $242.85 billionFeb. 2009 is $242.85 billion

Our economy achieved a sustained growth of 9.1% during the lastOur economy achieved a sustained growth of 9.1% during the last

three years 2004three years 2004--05 to 200705 to 2007--08.08.

PCI has grown at 7.4 per annum during the last four years.PCI has grown at 7.4 per annum during the last four years.


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Fiscal deficit came down from 4.5% in 2003Fiscal deficit came down from 4.5% in 2003--04 to 2.7% in 200704 to 2.7% in 2007--08. Revenue deficit08. Revenue deficitdeclined from 3.6% to 1.17%.declined from 3.6% to 1.17%.

Domestic Investment Rate as a proportion of GDP increased fromDomestic Investment Rate as a proportion of GDP increased from27.6% in 200327.6% in 2003--04 to over 39.7% in 200704 to over 39.7% in 2007--08.08.

Domestic Saving Rate as a proportion of GDP increased from 29.8% to 37.7% duringDomestic Saving Rate as a proportion of GDP increased from 29.8% to 37.7% during

this period.this period.

Agriculture as proportion of GDP improved from 11.1% in 2003Agriculture as proportion of GDP improved from 11.1% in 2003--04 to 14.2% in 20704 to 14.2% in 207--8.8.

Growth in agriculture has reached to nearly 4% and food grain reserve has reachedGrowth in agriculture has reached to nearly 4% and food grain reserve has reached230 million tons.230 million tons.

Social sector reforms have been introduced heralding NAREGA , Sarva ShikshaSocial sector reforms have been introduced heralding NAREGA , Sarva ShikshaAbhiyan, Rajiv Gandhi Potable water Provision Scheme etc.Abhiyan, Rajiv Gandhi Potable water Provision Scheme etc.

India will be lest affected by the global recession and our government will prove toIndia will be lest affected by the global recession and our government will prove tobe victorious on all fronts.be victorious on all fronts.


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RBIs Major Changes sinceRBIs Major Changes since

15/09/200815/09/2008(To check recession and promote liquidity(To check recession and promote liquidityin the market for employment generationin the market for employment generationand long term investment for developmentand long term investment for development

activities)activities)Particulars 15/09/08 27/01/09Particulars 15/09/08 27/01/09

SLR 25.00% 24.00%SLR 25.00% 24.00%

CRR 9.00% 5.00%CRR 9.00% 5.00%

Bank Rate 6.00% 6.00%Bank Rate 6.00% 6.00%Repo 9.00% 5.5%Repo 9.00% 5.5%

Reverse Repo 6.00% 4.00%Reverse Repo 6.00% 4.00%


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Basel II Recommendations aboutBasel II Recommendations about

banking laws and regulationsbanking laws and regulations In order to check recession, Basel IIIn order to check recession, Basel II

recommendations have become very relevant.recommendations have become very relevant. RBI has required all banks to graduate from theRBI has required all banks to graduate from the

simpler approaches of Basel II framework tosimpler approaches of Basel II framework to

more advanced ones.more advanced ones. It sets up rigorous task and capital managementIt sets up rigorous task and capital management

aimed to ensure that a bank holds reservesaimed to ensure that a bank holds reservesappropriate to the risk it exposes it self throughappropriate to the risk it exposes it self throughlending and investment practices.lending and investment practices.

Since March 2008, foreign banks working in IndiaSince March 2008, foreign banks working in Indiaand Indian banks working abroad have alreadyand Indian banks working abroad have alreadymigrated to simpler approaches under Basel IImigrated to simpler approaches under Basel IIframework. Other commercial banks are requiredframework. Other commercial banks are requiredto migrate to these norms by March 31, 2009.to migrate to these norms by March 31, 2009.


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Under the standardized approaches banks activities areUnder the standardized approaches banks activities aredivided into eight businesses:divided into eight businesses:

Corporate finance,Corporate finance, Trading and sales,Trading and sales, Retail banking,Retail banking, Commercial banking,Commercial banking, Payment and settlement,Payment and settlement, Agency services,Agency services, Asset management, andAsset management, and Retail brokerageRetail brokerage

Within each business line, gross income is a broad indicatorWithin each business line, gross income is a broad indicatorfor the scale of business operation. The capital chrge forfor the scale of business operation. The capital chrge foreach business is calculated by multiplying gross income byeach business is calculated by multiplying gross income bya factor.a factor.


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Select ReferencesSelect References

The Times of India, Friday, 6 February, 2009The Times of India, Friday, 6 February, 2009 The New York Times, 13 February, 2009The New York Times, 13 February, 2009 The Business Standard, 10 February, 2009The Business Standard, 10 February, 2009 http://www.moneymorning.comhttp://www.moneymorning.com Don Miller, Money Morning Outlook 2009, 15 January, 2009Don Miller, Money Morning Outlook 2009, 15 January, 2009 Interim Budget, 2009Interim Budget, 2009--10, Govt. of India, 16 February,10, Govt. of India, 16 February,

20092009 MacroMacro--economic Data, Economic & Political weekly, Mumbaieconomic Data, Economic & Political weekly, Mumbai A. Vaidyanathan, Reviving the Economy: Problems andA. Vaidyanathan, Reviving the Economy: Problems and

Prospects, Economic & Political Weekly, 7 February, 2009Prospects, Economic & Political Weekly, 7 February, 2009

Economic Survey, 2007Economic Survey, 2007--08, Govt. of India,O

xford08, Govt. of India,O

xfordUniversity PressUniversity Press


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ConclusionConclusion

Although the coming years would beAlthough the coming years would bemore challenging than 2008more challenging than 2008--09, but09, butIndias economy is resilient enoughIndias economy is resilient enough

to cope up with the global recession.to cope up with the global recession.As a custodian of monetary policy,As a custodian of monetary policy,the RBI should constantly watch thethe RBI should constantly watch theeconomy to provide enough liquidityeconomy to provide enough liquidityand yet maintaining a balanceand yet maintaining a balancebetween price rise and employmentbetween price rise and employmentgeneration.generation.


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THANKSTHANKSTHANKS

Global Economic Recession & Resilience of India’s Economy111

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