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Emerging economies like India, China are not directly affected by factors which were responsible for crisis in developed economies. No doubt the cascading effect of said crisis have made situation worst. East Asians like Japan have been hit hard due to collapse in demand for manufactured products. India would also see severe drop in export earnings on same footings but it would be able to maintain 1.5 to 2% growth in 2009 which would further rise to 4% due to its domestic demand. In India, crisis can be caught from short supply of agricultural products due to adverse climate condition in 2007-08 which was multiplied by rise in population and their use as input in industrial production. This had factors initiated inflationary phase at higher rate in the economy.



Government intervention and their effects:


“Proactive role played by Indian Government had leaded to stability in economy up-to certain extent”. In context of government intervention to curb inflation to acceptable level and maintain liquidity was a challenging job. Governments and central banks around the world have responded to the crisis in an unprecedented show of policy force. The shock and awe of fiscal stimulus and monetary easing is still with us. Importantly, given the nature of the crisis, purely national responses have been supplemented by global efforts.  The G-20 group of nations met twice in the last six months.   At their April 2009 meeting, the G-20 leaders collectively committed to take decisive, coordinated and comprehensive actions to revive growth, restore stability of the financial system, restart the impaired credit markets and rebuild confidence in financial markets and institutions.


The Government launched three fiscal stimulus packages between December 2008 and February 2009. These stimulus packages came on top of an already announced expanded safety-net programmed for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission report, all of which too added to stimulating demand. Rising prices of infrastructural material, higher rate of inflation, short supply of primary products were the major issues. While headline inflation in terms of wholesale price index has seen a significant easing over the past few months (from around 12 per cent in September 2008 to 0.3 per cent by end-March 2009), it is largely due to the substantial decline in international crude oil prices and some reduction in domestic prices of administered oil products. Food articles inflation in the WPI continues to remain at high levels (6 per cent). Reflecting high food inflation, various measures of consumer price inflation – which have a relatively higher weight for food items vis-a-vis WPI – also remain at elevated levels (around 10-11 per cent).  In June inflation showed negative rate i.e. -1.3%. 

Government had heavily increased its expenditure on agricultural by waiver of loan, increased fertilizers subsidies to revive this sector. Had these steps corrected the error? Answer to this question would be affirmative only in long run. Various measures terms of changes in monetary policy from time to time were taken by RBI to curb inflation. Rise in bank rate was preferred and only step taken primarily. It is a fact that Indian economy has not received any bailout during the period. The raise in interest rate no doubt was raised to cut demand and squeeze excess liquidity which would bring inflation down. But other way-round inflation was not due to demand of manufactured products rather it was through price rise in primary products.

The first order of economic business for the new government will be the full budget. Given the still soft economy, the pressure to provide more stimulus will persist. While this may help in the very near term, the sustainability of the recovery requires returning to responsible fiscal consolidation. The borrowing programme of the government has already expanded rapidly. The Reserve Bank has been able to manage the large borrowing programme in an orderly manner.  Large borrowings by the government run against the low interest rate environment that the Reserve Bank is trying to maintain to spur investment demand in keeping with the stance of monetary policy.


Various steps taken by RBI to curb the present recession in the economy and counter act the prevailing situation. The sudden drying-up of capital inflows from the FDI which were invested in Indian stock markets for greater returns visualizing the Potential Higher Returns flying back is continuing to challenge liquidity management. Accordingly, the Reserve Bank has been pro-actively managing liquidity since mid-September 2008 to assuage the liquidity pressures through a variety of measures. The cash reserve ratio (CRR) was reduced from 9 per cent (September 2008) to 5 per cent by early January 2009 injecting nearly Rs.1, 60, 000 crore of primary liquidity in the system. Simultaneously, in view of the adverse impact of the global slowdown on the domestic economy, policy rates were also cut - the reverse repo rate by 425 basis points from 9.00 per cent to 4.75 per cent and the reverse repo rate by 275 basis points from 6.00 per cent to 3.25 per cent. Other measures taken by the Reserve Bank in response to the global financial crisis include cut in the statutory liquidity ratio (SLR), opening of new refinancing windows, refinance to SIDBI and EXIM Banks, and clawing back of prudential norms in regard to provisioning and risk weights. The measures to improve for-ex liquidity included increase in interest rate ceilings on non-resident deposits, and easing of restrictions on external commercial borrowings and on short-term trade credit. Recently RBI has eased norms for realization of foreign earnings under FEMA from six month to one year. It is also expected that government will enhance tax holidays under various section related to exports. For the calculation of export turnover under said section shall also be revised to make it in line with FEMA.


The current economic crisis has adversely affected countries over the world—more or less. Without quantifying details India may be one of the countries less adversely affected because of the sound fundamentals of its economy that is the reason why, he argued, India has had (foreign direct investment) inflows, which is encouraging. In the month of May itself we had USD 2 billion of FII money into India; this is because of the stability and strength of the Indian economy, which is reassuring to the Indian investor. India has been adversely affected in certain sectors, mainly exports, which have dropped by 30 per cent.” This needs to be corrected, said Union Commerce and Industry Minister Anand Sharma


Crashed Financial Markets:-


Financial stock market in the world trembled due to Liquidity crisis. Indian stock market is stated as Sensitive Exchange which shortly known as SENSEX. It is volatile to such an extent that single and small good or adverse news can affect it well. Significant amount of foreign investment have been made in India through stock market. Various modes of investments in Indian companies are made through P-Notes, Global Depository Receipts, American Depository Receipt and direct investments. Needs of funds in domestic market and cheaper stocks of home companies lead foreign investors to make heavy sell in our market. Failure of Lehman brothers and other biggis were sufficient for domestic investors to perceive slowdown to the greater extent. The effect was that the market fall up-to 8000 app. from highest end i.e. 21000 points in January 2008. No doubt strong fundamentals and adequate influence of stable government and RBI have caught investment back to country. During the period RBI put ban on P-notes which also affected market on large extent. One of the arguments is also made by research people that ban on P-notes affected much because black money was routed through these P-notes. Heavy derivatives losses and permanent reduction in value of the investments on balance sheet of the companies have made them unattractive.


Not only the value of current investments slashed down but it had badly affected primary markets. This had restricted new flow in market. Since January 2008 after issue of Reliance power no company was able to successfully excess primary market. Well reputed companies like Tata Motors was also compelled to finance it deal through bank finance. Recently in July 09, Adani power, a company of Adani group had initiated action to access primary market by IPO.             


 Threat of corporate defaults:-



In addition to above, Indian economy is fairly dependent on external funding which impaired due to liquidity crisis in rest of the world. Indian companies which completely depend on US and European economy had suffered and they have to learn a lesson not to depend only on outside economy, no matter even if they look lucrative. To strengthen their position in market companies have leveraged themselves and took advantage of boost during 2003-07. The economic downturn and financial crisis have threatened to corporate distress and raised question against their solvency especially in US. As per Global Financial Stability Report April 2009, emerging economies would face rollover needs of more than $1.8 trillion in 2009. External funding will be curtailed more sharply that even prospected in the baseline projections in the context of deteriorating economic prospects and intense global deleveraging. This would also affect small and medium enterprises as those large borrowers who were dependent on foreign borrowing would turn to banks for their financial needs. It became double-sided sword for SMEs as they were huge cut in demand for their products and they were even unable to maintain their liquidity. It is to remind that growth of the SMEs is most important for overall growth and development of economy. Rapid deterioration in exchange rate would further make situation worst by making balance sheet burdened with heavy repayment liabilities. If we talk about revenue, many large corporate have sold their receivables to banks and factors with or without recourse.  Hence they would not able to earn premium on those buyers who are sound and pay in time and they would even spend more interest for liberal recovery of debts.



Current account and Balance of Payment:-



All countries in the world with current account deficits and strong credit cycles are finding it difficult to bring cost of capital down in the current environment. India is no different. Increased government expenditure and packages declared had also lead to lower collection of revenue to create enough liquidity in the market. These leaded to more current account deficit and also destroyed our path-way to curb current account deficit expected by 2010. New measures do not change our view on the growth outlook. Indeed, we remain concerned about the banking sector and financial sector. The BOP- Balance of Payment deficit – at a time when domestic credit demand is very high – is resulting in a vicious loop of reduced access to liquidity, slowing growth, and increased risk-aversion in the financial system.



Sectoral Effects:-


In total the recession have turned down the growth process and have set the minds of economists and others for finding out the real solution to sustain the economic growth and stability of the market which is desired for the smooth running of the economy. Complete business/ industry is in dolled rum situation and this situation persist for a longer duration will create the small business to vanish as they have lower stability and to run smoothly require continuous flow of liquidity which is derived from the market.


Effect on various sector of Indian Economy can be summed up as it has mostly affected companies depending on foreign business i.e. ITies, BPOs, EOUs, and SMEs etc. and those which were dependent on primary products including infrastructural material as their raw material.   “The US slowdown will immensely hit the mid-sized IT companies and also the big players to some extent. On the higher end, you have scenarios where people are cutting back on contracts. They are reducing the fees per manpower in their contracts. But at the same time they are using IT as a tool to reduce their overall costs. Perhaps, it is balanced out. There are people who have gone up to that stage and used IT to reduce their costs because IT is the best way to be used as an eminent tool for cutting down monetary burden.”


The problems of US slowdown have not only impacted the IT sector on all edges, it has   made the Indian manufacturing and energy sector worrisome too. The challenges that Indian industry is encountering with is a universal problem of rising energy and fuel cost. It is always followed that as the energy prices go up there is a probability of recession. The second factor that we see today is the global developments in India. The textile, garment and handicraft industry are worse affected. Together, they are going to lose four million jobs by April 2009. According to the Federation of Indian Export Organization survey there has also been a decline in the tourist inflow lately. IT industries, financial sectors, real estate owners, car industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy. Federation of Indian chambers of Commerce and Industry (FICCI) found that faced with the global recession, inventories industries like garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

In this context Ajay Shankar, Secretary, Ministry of Industry and Commerce opined that, “We take pride in saying that Indian economy is insulated to some extent from the global environment, which is really not true, because we can very clearly see the impact of that for the past few months where there is definite indication of economic slowdown in the country. The slowdown is taking place as the result of rise in the costs of the materials all over the world, surging commodity prices, the impact of surging food grain prices. We have been fortunate in case of the food inflation which has been very high and in seeing that we are able to insulate our consumers from the kind of food inflation which the rest of the world has experienced until now. Therefore, the government tried to use all the means of espousal to reduce inflation as far as the items of consumption of the common man is concerned. On the flip side this is a global shock for the high commodity and fuel prices. Moreover, our feeling is that worst is probably behind us and in the coming months things will definitely work well.


Heavy Expenditure on Infrastructure by various developing countries like China, India, and Malaysia etc had created Inflationary condition related to infrastructural material. This has not only weakened Industrial expansion but also severely effected property market. In fact, the input prices have risen up mainly because of the steel prices that have surged up. The reason behind the sky-scrapping input costs is not only because of rising steel prices, but also due to hike in prices of aluminum and copper. Steel prices have gone up by 40 to 50 percent and aluminum has gone up by 50 percent accurately, says Dr. S.N. Dash, Secretary, Ministry of Heavy Industries & Public Enterprises.


Investment bankers have gone overboard by giving loans to people, which were more than their repaying capacity. This crisis could be worse than what has been imagined, as the banks have not come out with the truth. It’s better to go slow on growth and keep inflation under control rather than bearing inflation with 10 percent GDP (gross domestic product).” “India’s progress is remarkable, but it is disheartening to see that it has been done at the cost of neglecting more than 80 percent of the common people of India who do not share the success story.


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CA Raj Thakkar
Category Others   Report

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