ASSIGNMENT

ON
ECONOMIC CRISIS























INTRODUCTION:

The mismatches between production and consumption and savings and
investments are the root causes of any nations economic crisis. Inadequate
growth of consuming powerin line with rapid growth of productive forcesis
the basis for the periodic recurrence of demand crisis resulting in economic
disorders. Banking and financial crisis has been a common phenomenon
throughout the modern economic history.
Since the Great Depression, the world has witnessed hundreds of such crisis.
According to World Bank, there were as many as 112 systemic financial crisis
from the late 1970s till 2001. Most, including the current one, have shared a
common featureeach started with a hasty process of economic reforms,
which not only created a vacuum in terms of regulations but also deteriorated
the basic economic fundamentals despite massive inflows of foreign capital
and ended up with a change in investor expectations and a consequent mess
in the financial markets.

The word ECONOMY

The English words "economy" and "economics" can be "one who manages a
household".
An economy consists of the economic system of a country, the labor, capital,
land resources and the manufacturing, production, trade, distribution and
consumption of goods and services of that area.
Practical fields directly related to the human activities involving production,
distribution, exchange and consumption of goods and services as a whole are
engineering, management, business administration, applied science and
finance.
All professions, occupations, economic agents or economic activities,
contribute to the economy. Consumption, saving and investment are variable
components in the economy that determine macroeconomic equilibrium.









ECONOMIC MEASURES:

There are a number of ways to measure economic activity of a nation. These
methods of measuring economic activity include:
Consumer Spending
Exchange Rate
Gross Domestic Product(GDP)
GDP per capita
Gross National Product(GNP)
Stock Market
Interest Rate
National Debt
Rate of Inflation
Unemployment
Balance of Trade




IMPACT OF ECONOMIC SLOWDOWN:

The recent (2007-09) global financial meltdown and the related economic
recession are seen as the worst since the Great Depression of 1930s.
Given the increased (as compared to pre liberalization period) integration of
Indian economy with the world economy, India in no way could remain
unaffected of the negative fallout of this recession.
Although the overall impact of the economic slowdown is not considered to be
acute on India, the same had moderate impact on the Indian labour market as
well.
The falling profitability of Indian industries led to job cuts in general and in
export oriented sectors.













EURO ZONE CRISIS:

The Euro zone crisis started in 2010 when doubts about its ability to service
its debt made investors reluctant to buy bonds issued by the Greek
government. That reluctance spread to affect the bond issues of several other
Euro zone members, and by late November 2011, it was affecting the bonds
of all of its members, including Germany. Measures agreed by Euro zone
leaders in a series of summits in the course of 2011 were judged by the
financial markets to have been insufficient to resolve the crisis






CAUSES:

Rising government debt levels
Trade imbalances
Monetary policy inflexibility
Loss of confidence
Impact on Foreign Institutional Investment (FII)



INDIAN ECONOMY:

Global recession also hit Indian economy during the last quarter of 2008.
However, It has started regaining its ground. India has successfully controlled
its inflation problem. Indian auto sales up by 10 percent during the first
quarter of 2009. It is continuing with its GDP growth.
BSE Sensex that has tasted below 8000 during recession has crossed 12000
marks on 7th May 2009.
The Sensex had crossed 18000 marks at the end of 2009 before coming
down to 16K at present. (Feb: 2010)





IMPACT ON INDIAN ECONOMY:

Adversely impact Indias export growth
Software services and other export oriented sectors would benefit from the
rupee depreciation
FDI has not been significantly affected by the crisis while the FIIs are showing
outflow
Exchange rate depreciation would worsen the inflationary conditions in the
economy. Therefore, the RBI would have to continue with its anti-inflationary
stance in the near term if domestic conditions do not improve
















Inflationary scenario:


Headline inflation in India (WPI) has been outside the comfort zone of the
Indian Central Bank since late 2010. Therefore, the RBI has been increasing
interest rates in order to curtain the rising inflation. RBI has increased interest
rates 5 times (175 bps) in the current financial year. The RBI has maintained
time and again that the high headline inflation would start to decline from Dec
2011 and would settle at 7% by the end of the fiscal.
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.
Since the global uncertainties aggravated, 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 particularly hit the
industrial sector and put higher pressure on their costs as 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











INDIAN STATUS:
It was not so long ago that economists believed that an eight percent growth
in India was sustainable. With bottlenecks as explained above, forget
productivity for the moment, physical production of goods and services has
dropped significantly.
These supply side shortages fuel inflationary pressures. That in turn
necessitates huge imports into India. That makes Rupee extremely
vulnerable. Equally that results in India being dependent on foreign money to
fund its imports.
With eighty per cent of our fuel requirements being imported, Rupee
depreciation in turns makes (imported) fuel costlier. Coupled with a weak
physical infrastructure, this means that we are actually becoming a high cost,
inefficient, vulnerable and import dependent economy - just as we were in the
late eighties.
Surely all this is bound to have a profound impact on the Indian economy,
notably its financial sector.


According to well-researched and documented reports of Credit Suisse:
Of a sample of over 3,500 companies (with aggregate USD 330 bn debt in
FY11-12), earnings of 28% of such loans were insufficient to meet interest
liabilities (much less principle) in the fourth quarter of FY12. Moreover, 50%
of these corporates had earning lesser than its interest cost for more than 4
quarters in the last 7 quarters.
Obviously high interest rates are not the sole cause of this stress. And as
press reports suggest, this has only worsened in FY 12-13.
Restructured loans in FY12 are estimated to be at a high of 7-11% of total
loans. With many of stressed corporates yet to be recognized as one, such
levels can rise to over 20% shortly.
This is frightening to say the least and can have profound impact on the
financial sector, rupee and the Indian economy.
Over last five years, Indian banks have witnessed strong (20% CAGR) loan
growth. However, this has increasingly been driven by select ten corporate
groups; (evidence of crony capitalism?). While the aggregate debt of these
ten groups has jumped 5 times in the past five years and now equates to 13%
of bank loans and 98% of the banking system's net worth.
Therefore, surprisingly now in terms of the concentration risk, Indian banks
rank higher than most of their global peers.
Economic slowdown has in turn resulted in significant stress to specific
sectors (power & metals).
Consequently, financials of these groups are also stretched with four of the
above-mentioned ten having earnings insufficient to payout interest for their
borrowings.
Over past three years, bank loans, the reports points out to power sector
having grown approximately three times and now aggregate in excess of
USD 60 bn. With our thrust on power sector, bank exposure to this sector is
now significantly high at 10% of total loans.
However with weak physical reforms carried out by the Government, stress
on these loans comes from poor off-take, erratic fuel supply and sundry
developer risk.
















CONCLUSION:
The United Nations has warned that the world is on the brink of another
recession, projecting that global economic growth will slow down further and
even emerging powerhouses like India and China, which led the recovery last
time, will get bogged down.
While India's recent slowdown is partly rooted in external causes, domestic causes
are also important. The strong post-financial-crisis stimulus led to stronger growth
in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply
side constraints, led to higher inflation. Monetary policy was tightened, even as
external headwinds to growth increased. The consequent slowdown, especially in
2012-13, has been across the board, with no sector of the economy unaffected.
Falling savings without a commensurate fall in aggregate investment have led to a
widening current account deficit (CAD). Wholesale price index (WPI) inflation has
been coming down in recent months. However, food inflation, after a brief
slowdown, continues to be higher than overall inflation. Given the higher weightage
to food in consumer price indices (CPI), CPI inflation has remained close to double
digits. Another consequence of the slowdown has been lower-than-targeted tax and
non-tax revenues. With the subsidies bill, particularly that of petroleum products,
increasing, the danger that fiscal targets would be breached substantially became
very real in the current year.













REFERENCES:
1. Topnews.in
2. Ministry of Finance, India
3. The times of India.
4. Indiabudget.nic.in