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
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
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
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.
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.
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
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
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
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).” “