INDIA AND GLOBAL FINANCIAL CRISIS

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ARNAB DAS ARUSHI JOSHI KUMAR ABHINAV CHETAN 1/27/13

NULA RASHID SHRIKANT

GENESIS

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Between 1970 & 1990s

Real Wages per Hour (in 1964 US$) 1/27/13

Decline in the Personal Savings Rate

There was a major decline on purchasing power of the majority

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Personal Savings Rate (in %)

To deal with the issue, the US government deregulated finance to maintain consumption Capital flows oriented towards US owing to the emerging market crisis (East Asian Nations) in 1990s Most liquid and sound financial assets offered by US financial markets

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Increased Household Indebtedness

Household Sector Debt/Personal Income 1/27/13

The government countered the tendency to stagnation through:

Financial De-regulation Low interest regime Promoting asset inflation

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MAIN CONTRIBUTORS FOR THE GLOBAL FINANCIAL CRISIS

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Factors responsible for the collapse of the housing boom:

Increased loan default by sub-prime borrowers Mortgage fraud

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In March 2007, subprime mortgage industry in US collapsed.

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IMPACT ON THE WORLD

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By 2009, global GDP contracted by 0.6%. In the US, September 2007, i = 5.25%. December 2008: i = 0% Developed countries suffered a major contraction of their economies, while the emerging countries coped up well

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Countries like Germany and Japan that were most oriented towards exports suffered the high falls in GDP to -4.7% and -5.2% respectively In developing countries primary commodity exporters faced sharp falls in prices As global FDI inflows declined by 37%, developing countries were hit by reductions in remittances
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MEASURES UNDERTAKEN ACROSS THE GLOBE

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Central Banks cut their policy interest rates dramatically to between 0 and 1% Substituted the interbank market as lenders of last resort. Increase bank reserve balances Reduce the term structure of interest rates and credit easing measures. Nonconventional policies pursued were namely,
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The United States Government responded with a number of spending initiatives worth 1.1% of GDP to stimulate aggregate demand Developing economies remained resilient to the financial woes However, it felt the impact in the real economy as a result of reduced demand for imports The US set aside $ 700 billion for bailout The British Government set aside 500 billion pound for huge injection of liquidity into the banking system
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IMPACT ON INDIA

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DECOUPLING THEORY

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WHY DECOUPLING THEORY FAILED

Premature theory -emerging economies were not yet completely ready to showcase this trend. EMEs still had US as their primary trading partner. Investment in the emerging nations started withdrawing causing shrinkage. underestimated the impact and extent of globalization.

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PRE-CRISIS DEVELOPMENTS IN INDIA

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AGRICULTURE GDP GROWTH GDP

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Decline in Indias GDP Growth

SECONDARY SECTORS TERTIARY SECTOR

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CAPITAL FORMATION
PRIVATE INVESTMENT PLUNGED EXPORT GROWTH PLUMMETED

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EFFECT OF DECLINING GDP AND PRIVATE INVESTMENT

Adverse effect was mitigated.

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IMPACT ON VARIOUS SECTORS

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BANKING

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Reason of global banking system failure

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PERFORMANCE OF INDIAN BANKS

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PERFORMANCE OF INDIAN BANKS

PROFIT: CAPITAL
12

10

CAPIT AL in Crs(As on 31st March, 2008)

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CAPITAL ADEQUACY RATIO

100 90 80 70 60 CAR % 50 40 30 20 10 0

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NON-PERFORMING ASSETS

Most of the Indian banks have NPA less than 1%. Average NPA of all banks including foreign banks operating in India is 1%. So the quality of asset in also unquestionable.

2007-08
Nationalized Banks -0.77

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RETURN ON ASSETS: 26 banks showed more than 1% ROA and most importantly some of the small players showed more than 1.5 ROA

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REASONS OF STABILITY IN INDIAN BANKING SYSTEM

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EFFECT ON EXPORTS

Trade to GDP ratio in India increased from 11% in 1995 to 21.3% in 2007 Developed nations accounted for nearly 22% exports Impact of crisis

decrease in demand substantial asset deflation in the US Miscellaneous Services account was deeply hit

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Comparison Of Exports

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IMPACT ON LABOR EMPLOYMENT

Decrease in export caused job losses for those in export manufacturing and related areas. Reverse migration increased Unorganised sector constituted for about 50% of the GDP Most affected segments:
Marginalized and vulnerable populations Migrants and migrant workers

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NATURE OF THE CRISIS KEY MACRO INDICATORS

Indicator Real GDP Growth Industrial production Services Exports Imports GFD/GDP Stock Market (BSE Sensex) Rs.per US$ Period April-December April-February April-December April-March April-March April-March April-March April-March 2007-08 9.0 8.8 10.5 28.4 40.2 2.7 16,569 40.24 2008-09 6.9 2.8 9.7 6.4 17.9 6.0 12,366 45.92

Growth, per cent

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INFLATION
Item Mar-08 Jun-08 Wholesale price inflation All commodities Primary articles Fuel Manufactured products Agricultural labourers Rural labourers Urban non-manual employees Industrial workers 7.8 9.7 6.8 7.3 12 11 16.3 10.9 Consumer price inflation 7.9 7.6 6 7.9 8.8 8.7 7.3 7.7 11 11 9.5 9.8 11.4 11.4 9.8 9.7 12.1 12 16.5 10.5 5.9 11.6 -0.7 6.2 Sep-08 Dec-08

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HOW INDIA TACKLED?

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MONETARY POLICY

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EFFECT OF MONETARY POLICY

Ms

Primary liquidity impact r over Rs. 4,90,000 crore (9 % of GDP) Gradual reduction in deposit and lending rates of banks
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MONEY MARKET TURNOVER

Turnover money markets
12

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Rupees crore, average daily

10 8 6 4 2 0

ALL MONEY MARKET INTEREST RATES

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BOND YIELDS

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FISCAL POLICY

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LESSONS LEARNT

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What we thought

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What happened.

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Global Financial Crises before Crisis

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LESSON 1: IN A GLOBALIZING WORLD DECOUPLING DOES NOT WORK

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LESSON2: GLOBAL IMBALANCE IS TO BE REDRESSED

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LESSON 3: GLOBAL PROBLEMS REQUIRE GLOBAL COORDINATION

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LESSON 4 : PRICE STABILITY AND MACROECONOMIC STABILITY DON'T GUARANTEE FINANCIAL STABILITY

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LESSON 5 :
CAPITAL CONTROLS ARE NOT ONLY AVOIDABLE BUT ADVISABLE IN CERTAIN CIRCUMSTANCES

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LESSON 6: ECONOMICS IS NOT PHYSICS..

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THANK YOU

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