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EXPOSUREOFGLOBALFINANCIALCRISISONDEVELOPINGWORLD; AN INDIANEXPERIENCE
Sunil Bhardwaj & Rohit Bhagat
The Business School
Bhaderwah Campus, University of Jammu
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CONTENTS
1. Introduction
2. Literature Review
3. Objectives of the Study
4.
Research Methodology5. Data Collection
6. Discussion and Observations
7. Conclusions
8. Suggestions and Recommendations9. References
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ECONOMIC SUSTAINABILITY
A sustainable economy ensures and encompasses variousaspects such as economically healthy businesses withminimum impact on environment, sustainable agriculture,growth management, appropriate development of rural
resources, improved trading and tourism and low impactregional planning and transportation systems.Technological advances in business, health, education andenvironment that provide new opportunities for
communities (Dr. Aditi Sawant and Dr. Sachin KumarSharma, 2012).
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RATIONALEOF ECONOMIC SUSTAINABILITY
Economic sustainability is becoming more and morecomplex due to increasing integration of domesticeconomy with the global economy as thesustainability is correlated with the country specific
as well as global variables. Economic sustainability becomes even more
necessary for the country like India which is thehome of 17.6 per cent of world population out of
which approximately 55 per cent are poor (UNDP andOxford University, 2010).
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LITERATURE REVIEW
There is a huge literature available on sustainabilityof economies in general and sustainability ofIndian economy in particular. Different researchershave adopted different approaches andperspectives to the economic sustainability.
1. Dr. Aditi Sawant and Dr. Sachin Kumar Sharma(2012) have given the impact of FDI on thesustainability of Indian economy in the post crisisperiod.
2. Dr. Vinay Sharma and Aditi Sengar (2012) in theirresearch work show that sustainability ischallenge for businesses in rural market andrecommend that building sustainable marketlinkage can combat this issue.
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LITERATURE REVIEW
3. Rajat Setia, Chandan Sharma (2012) shows arelationship between the exchange rate andmacroeconomic fundamentals which hold in thelong run but the composition of parameters andtheir effect varies considerably overtime.
4. Kalim Siddique (2009) says that decoupled Asiafrom the rest of the world is too ambitious andshows the effect of financial crisis on India andChina.
5. Raghbendra Jha (2009) identifies the channelsthrough which the global financial crisis hasimpacted the Indian economy and examinedshort-run prospects for the Indian economy inthe light of the global financial crisis andeconomys recent dynamism.
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OBJECTIVESOF STUDY
1. To examine the extent of decoupling of Indian economyfrom the world economy.
2. To analyse the effect of global slowdowns on Indianeconomy.
3. To recommend policy measures to make our growth storymore sustainable in nature.
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RESEARCH METHODOLOGY
1. The piece of research is descriptive and analyticalin nature.
2. The features of this type of research are to reportthings that have happened or happening withouthaving much control over these variables.
3. The research uses facts and figures alreadyavailable for analysis and inference by criticalevaluation of data.
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DATACOLLECTION
The paper uses secondary data for analysis anddiscussion. This includes:
1. Research Publications
2. Magazines3. Reports
4. Publications of Organisations
5. Data and Statistics compiled by institutions
6. Research Journals etc
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Analysis &Observations
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GLOBAL FINANCIAL CRISIS (SUBPRIMECRISIS2008)
Lehman Brothers Holdings Inc has gone bust
Merrill Lynch sold to Bank of America
Goldman Sachs & Morgan Stanley, two imp. Security firmdecided to convert themselves into retail banking
American International Group (AIG) was bailed out by USgovt. in exchange for 79.9% Equity.
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FACTORS BEHIND
US long continuous growth with low inflation whichmade mkt. & regulators complacent
During good time Financial institutions grew big,took big risks, made huge profits & innovated manycomplex financial product and derivatives
Banks took High riskswithout sufficient capital onthe balance sheet to support it
US risk management lagged behind innovation inthe financial system.
Results in liquidity crunch turning into Insolvencythus drying up of demand
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EXPORT, IMPORT & FOREIGN TRADE- % YOYGROWTH (ASON APRIL,2012)
-60
-40
-20
0
20
40
60
80
100
Jan-09
F
eb-09
M
ar-09
A
pr-09
M
ay-09
J
un-09
Jul-09
A
ug-09
S
ep-09
O
ct-09
N
ov-09
D
ec-09
Jan-10
Feb-10
M
ar-10
Apr-10
M
ay-10
Jun-10
Jul-10
A
ug-10
Sep-10
Oct-10
N
ov-10
D
ec-10
Jan.'11
F
eb.'11
Mar.'11
Apr.'11
May'11
Jun'11
Jul'11
Aug'11
Sep'11
Oct'11
Nov'11
Dec'11
Jan'12
Feb'12
Exports
Imports
Economy
Slowdown
Recovery
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EURO ZONE CRISIS
Europe & Euro Zone account for significant market for India Euro zone account for 20.2% Indias exports 13.3% of Indias Imports FDI from Europe amounted to euro 3.0 billion & Indias
investment was euro 0.6 billion Bilateral trade has been growing at an average of 9.6% (2006-
10) EU imported goods of worth euro 33.1 billion form India EU exported goods of worth euro 34.8% billion to India
BESIDES THREE CHANNELS
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Indian economy is scrambling for 6% growthrate
7-7.5 % forecasted by World Bank
6.5% by RBI
5.5% by CRISIL (Latest)- July 2012 56% of the 1.154 Indian companies analysed, have reported a
decline in the net profit for the Quarter 1 of the FY 2012-13(CRISIL)
Inward FDI is estimated to decline by a substantial range of53% from $16.3 billion in Q1 of FY 2011-12 to $ 7.7 billion in theQ1 of FY 2012-13
The FDI in India in June 2012 to $1.24 billion from $5.66billion in the same period a year earlier
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BALANCEOF PAYMENT
-300000
-200000
-100000
0
100000
200000
300000
400000
500000
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Current Account
Capital Account
Overall BoP Balance
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BoP surplus for first three years 2004-05 onwards BoP deficit due to CAD i.e.
Rs 12174crores in 2004-05 to Rs 202532 Croresin 2010-11
Highest BoP surplus Rs 369689 Crores during2007-08
As reaction to US crisis BoP turn negative Rs97115 crores in 2008-09
Trade deficit was US$ 184921.69 mn for April-march 2011-12 higher than the deficit of US$118632.93 mn in April-march, 2010-11.
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CRUDE OIL
36.54
29.86
29.12
34.6
45.78
58.83
66.45
71.03
97.33
57.18
75.05
88.93
93.47
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Oil prices in $/bbl
Oil prices in $/bbl
India imports 70% crude oil consumption
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DEPRECIATIONOF CURRENCY
Euro-zone resulting in euro losing value against USDollar
Depreciate more than 20-25% against USD with RBIlosing $40-50 billion in reserves in the last fewmonths
RBIs intervention in the forex market has resulted inthe decline of $336.5 million in the forex reserve to$287.62 billion on week ending 6 July 2012
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DEPRECIATIONOF CURRENCY
44.368
44.904
44.851
44.415
45.278
47.638
49.256
50.843
52.667
51.346
49.163
50.145
51.541
54.638
56.181
55.464
55.614
54.973
0
10
20
30
40
50
60
Exchange rate per US dollar
Exchange rate per USdollar
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INFLATIONAND ECONOMIC GROWTH
13.33
9.41
8.43
8.99
10.06
9.39
9.34
6.49
5.32
7.57
8.65
10.2210.16
10.05
0
2
4
6
8
10
12
14
Apr/10
May/10
Jun/10
Jul/10
Aug/10
Sep/10
Oct/10
Nov/10
Dec/10
Jan/11
Feb/11
Mar/11
Apr/11
May/11
Jun/11
Jul/11
Aug/11
Sep/11
Oct/11
Nov/11
Dec/11
Jan/12
Feb/12
Mar/12
Apr/12
May/12
Jun/12
Inflation rate (%)
Inflation rate (%)
SELF DEFEAT FOR THE ECONOMY
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REPO & REVERSE REPO
7.5
6.5 5.5
54.75
5
5.25
5.75
6
6.25
6.5
6.75
7.25
7.58
8.25
8.5
8.5
8
6
5
4 3.5
3.253.5
3.754.5
5
5.25
5.5
5.75
6.256.5
7
7.25
7.5 7.5
7
0
2
4
6
8
10
12
14
16
18
Reverse Repo (%)
Repo (%)
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SLR & CRR
24
24
24
24 24
24 24 24
2524 24
24 24
25
7.75
8.25
8.75
9
6
5.5
5
5.75
6 6 6 5.5
4.75 4.75
0
5
10
15
20
25
30
Apr/08
Jun/08
Aug/08
Oct/08
Dec/08
Feb/09
Apr/09
Jun/09
Aug/09
Oct/09
Dec/09
Feb/10
Apr/10
Jun/10
Aug/10
Oct/10
Dec/10
Feb/11
Apr/11
Jun/11
Aug/11
Oct/11
Dec/11
Feb/12
Apr/12
Jun/12
SLR (%)
CRR (%)
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CONCLUSION
Economic sustainability is a complex challenge for the countries in
globalised world where the linkage between the countries is higher
and isolation is limited, means any economic disturbance in one
region affects the sustainability of other regions. In this study wehave highlighted the challenges that are coming in the way of
sustainability. There are various domestic and global factors like US
subprime crisis, Euro zone debt crisis, crude oil prices, inflation,
Balance of payment, Fiscal slippage and policy paralysis which are
important for the sustainability of the country that is evident from the
past experience of India. So proper manoeuvring of these factors is
the need of the hour.
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SUGGESTIONSAND RECOMMENDATIONS
1. To achieve sustainability good quality infrastructure is the most critical physicalrequirement for retaining faster growth and also stimulating foreigninvestments into Indian economy.
2. Economic reforms related to macro policies (Fiscal, trade, financial, monetaryand judiciary) keeping in view all the sectors and sections of the society canhelp the country to achieve sustainability.
3. Foreign Investments in the form of FDI, FII, and FPI are very necessary for thecountry like India as it acts as an important source of long term as well as shortterm funds dismantling of barriers and induction policies in respect to theseinvestments must be adopted so as to lure the foreigners towards large Indianmarket.
4. Technological innovations and modernization is very necessary in order toincrease the quality production so that exports can be enhanced and imports can
be substituted.5. From the experience of global financial crisis, it is clear that neo-liberal
economic policy of India has failed. So, there is a need for the restructuring andremodelling of Indias economic policy keeping in mind the complexities ofglobalisation.
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SUGGESTIONSAND RECOMMENDATIONS
1. The root cause of Indian economy is the lack of political will inimplementing reforms but the recent step of allowing 51 per centof FDI in multiple brand retail seems to be in the right direction.So the policy paralysis must not be there.
2. It is evident from the current scenario that Indian economy isaffected to a large extent by the slowdown in Euro zone countries.
So, India must encourage trade with more and more countries sothat one countrys slowdown can be overcome by the trade withthe other ones.
3. Fiscal slippage is an important issue in Indian economy as it isadding to the countrys inflation and also negatively affecting thecountrys GDP growth rate which necessitates the fiscal discipline
in our fiscal policy.4. As India imports 70 per cent of the crude oil which is a huge fiscal
burden on the country. It necessitates the shift from non-renewable resources to the renewable sources of energy like windenergy, solar energy, water energy, hydrogen energy etc.
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WEBLIOGRAPHY/ BIBLIOGRAPHY/ REFERENCES
1. IMF (2011) Euro area policies: Spill over report 2011, WashingtonDC. http://www.imf.org/external/pubs/ft/scr/2011/cr11185.pdf
2. Government of India (2011): Ministry of Commerce, New Delhi.http://commerce.nic.in/tradestats/filedisplay.aspx?id=1
3. Basant K Sahu (2011): Growth experience during post reformperiod in India economics and trade policy.
4. Indian Institute of Foreign trade New Delhi.
5. Government of India (2012): Economic Survey 2012. Ministry ofStatistics and Programme Implementation, Central StatisticalOffice: Government of India. http://indiabudget.nic.in
6. Rupee Depreciation: Probable causes and outlook by AmolAgrwal.
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LIMITATIONS/SCOPE
It is a macro-analysis analyzing the effect of global
slowdowns on macro-variables of the country.
Study do not shows the extent to which different
sectors are effected by global slowdown.
Tax regulation, News of corruption and scandals, redtape delays, absence of reforms, political andregulatory uncertainty and policy paralysis
THAT WILL CONSTITUTE THE FUTURE SCOPE OFOUR STUDIES
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Queries Please