DR.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY

SUBJECT: Economics III

TOPIC: Global Recession, Causes And Impact on Indian Economy
And Agriculture

SUBMITTED TO: SUBMITTED BY:

Dr. Mitali Tiwari Animesh Rajoriya
Associate Professor 3rd Semester
Economics -III Enrolment - 180101022
Table Of Contents:

 Introduction………………………………………… …4
 Causes Of Economic Crisis…………………………….5
 Impact On Indian Economy……………………………9
 Impact On Indian Agriculture………………………..10
 Impact On Indian Fisheries…………………………...12
 Conclusion……………………………………………...13
 Bibliography……………………………………………14
 Acknowledgement

I owe a great many thanks to a great many people who helped

and supported me during the writing of this case analysis.

Words are inadequate in offering my deep sense of gratitude to

my Professor for her precious guidance.

With her enthusiasm, her inspiration and her great efforts to

explain things clearly and simply, she helped throughout my
analysis of work with lots of encouragement, sound advice, and
good innovation.

I would also like to thank the librarians of Dr. Madhu Limaye

Library who extended their assistance to me by helping me out
consult the relevant books.

I know that despite my best efforts some discrepancies might have

crept in which I believe my humble Professor would forgive.

Thanking You All

ANIMESH RAJORIYA

INTRODUCTION:
Banking. and economic crises have been a common phenomenon throughout the modern
economic history of mankind. Since the great depression of 1929, the world has witnessed
hundreds of such crises and the frequency of the crises has increased over
time. According to a UNCTAD (2008), there were as many as 112 systemic banking crises
from the late 1970s until 2001. Most of them, including the current one, have shared some
common features: they each started with a hasty process of financial sector reforms, which
not only created a vacuum in terms of regulations but also deteriorated the basic economic
fundamentals though massive inflows of foreign capital and finally ended up with a change in
investor expectations and a consequent mess in the financial markets. Seshan (2009) reported
that the financial sector crisis that arose in the latter half of 2007 and was precipitated by the
collapse of Lehman Brothers on 23 September 2008 shared most of these features. However,
what makes the current crisis exceptional is that it broke out at the very epicentre of global
capitalism and its contagion spread very quickly to the entire globe. India, being an integrated
part of the global economic order, was also exposed to the adverse impact of the global
economic crisis. The Indian economy looked to be relatively insulated from the global
financial crisis that started in August 2007 when the ‘sub-prime mortgage’ crisis first
surfaced in the US. But as the financial meltdown, morphed in to a global economic
downturn with the collapse of Lehman Brothers on 23 September 2008, the impact on the
Indian economy was almost immediate. Credit flows sud-denly dried-up and, overnight,
money market interest rate spiked to above 20 percent and remained high for the next month.
It is, perhaps, judicious to assume that the impacts of the global economic downturn, the first in
the centre of global capitalism since the Great Depression, on the Indian economy are still
unfolding. For the first time in 60 years, the IMF (2011) is now reported a global recession
with negative growth for world GDP in 2009-10. The Horn (2010) has reported that GDP
virtually collapsed in the second half of 2008 and further it declined by as much as nine
percent in 2009-2010.

Causes Of Economic Crisis

 (i) Sub prime mortgage:

G-20 summit (2008) viewed that the current global economic crisis has originated due to sub-
prime mortgage in USA in 2007. With easy availability of credit at low interest rates, real
estate prices in US had been rising rapidly since the late 1990s and investment in housing had
assured financial return. Kunt et al., (2002) reported that US home-ownership rates rose over
the period 1997-2005 for all regions, all age groups, all racial groups, and all income groups.
Banks went out of their way to lend to sub-prime borrowers who had no collateral assets.
Low income individuals who took out risky sub-prime mortgages were often unaware of the
known risks inherent in such mortgages. While on the one hand, they were ever keen to
become house-owners, on the other, they were offered easy loans without having any regard
to the fact that they were not in a position to refinance their mortgages in the event of the
crisis. All this was fine as long as housing prices were rising. But the housing bubble burst in
2007. Home prices fell between 20 per cent and 35 per cent from their peak and in some
areas more than 40 per cent; mortgage rates also rose. Sub-prime borrowers started defaulting
in large numbers. The banks had to report huge losses. Acharya (2009), Green, King &
Dawkins (2010) also ex-plain the main reason of global economic crisis is excessive sub-
prime mortgages.

(ii) Securitization And Repackaging Of Loans

The mortgage market crisis that originated in the US was a complex matter involving a whole
range of instruments of the financial market that transcended the boundaries of sub-prime
mortgage. An interesting aspect of the crisis emanated from the fact that the banks/ lenders or
the mortgage originators that sold sub-prime housing loans did not hold onto them. They sold
them to other
banks and investors through a process called securitization. Securitization, as a financial
process, has gained wide currency in the US in the last couple of decades. Indeed, as recently
as 1980 only 10 per cent of US mortgages were securitized compared to 56 per cent in 2006.
In the context of the boom in the housing sector, the lenders enticed the naive, with poor
credit histories, to borrow in the swelling sub-prime mortgage market. They originated and
sold poorly underwritten loans without demanding appropriate documentation or performing
adequate due diligence and passed the risks along to investors and securitizes without
accepting responsibility for subsequent defaults. These sub-prime mortgages were securitized
and re-packaged, sold and resold to investors around the world, as products that were rated as
profitable investments. They had a strong incentive to lend to risky borrowers as investors,
seeking high returns and were eager to purchase securities backed by sub-prime mortgages.
The booming housing sector brought to the fore a system of repackaging of loans. It thrived
on the back of flourishing mortgage credit market. The system was such that big investment
banks such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers or Bears
Stearns would encourage the mortgage banks countrywide to make home loans, often
providing the capital and then the Huge Investment Banks (HIBs), would purchase these
loans and package them into large securities called the Residential Mortgage Backed
Securities.

(iii) Excessive Leverage:

Global economic outlook (2008) reported that the final problem came from excessive
leverage. Investors bought mortgage backed securities by borrowing. Some Wall Street
Banks had borrowed 40 times more than they were worth. In 1975, the Securities Exchange
Commission (SEC) established a net capital rule that required the investment banks who
traded securities for customers as well as their own account, to limit their leverage to 12
times. However, in 2004 the Securities and Exchange Commission (SEC) allowed the five
largest investment banks – Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs
and Morgan Stanley – to more than double the leverage they were allowed to keep on their
balance sheets, i.e. to lower their capital adequacy requirements. The institutions that have
reported huge losses are those which are highly leveraged. Leveraged investors have had to
return the money they borrowed to buy everything from shares to complex derivatives. That
sends financial prices even lower. All this led to massive bailout packages in USA, as the
government stepped in to buy and lend in a financial market. The role of leverage and credit
is, therefore, central to growth. Yet, excessive leverage is fraught with dangerous
consequences.

(iv) Mismatch Between Financial Innovation And Regulation

It is not surprising that governments everywhere seek to regulate financial institutions to

avoid crisis and to make sure a country’s financial system efficiently promotes economic
growth and opportunity. Striking a balance between freedom and restraint is imperative.
Conway (2009) reported that the financial innovation inevitably exacerbates risks, while a
tightly regulated financial system hampers growth. When regulation is either too aggressive
or too lax, it damages the very institutions it is meant to protect.

(v) Fair Value Accounting Rules:

Fair value accounting rules require banks and others to value their assets at current market
prices. The broad aim of fair value accounting is to enable investors, financial system
participants, and regulators to better understand the risk profile of securities in order to better
assess their position. In order to achieve this, financial statements must, in the case of
instruments for which it is eco-nomically relevant, be sensitive to price signals from markets,
which reflect transaction values. Investors and regulators hold that the fair value accounting
standard should not be weakened because it is a key component of accurate and fully
transparent financial statements, which in turn are the bedrock of financial activity. But the
asset holders maintain that accounting standard should be reformed to fully reflect the reality
of financial activities. They have argued that in times of illiquid and falling markets, it has
been difficult or impossible to value assets accurately. Singh (2009) reported that the fair-
value accounting has resulted in as-sets being valued at distressed sale prices, rather than at
their fundamental value, creating a downward spiral. The requirements of fair value
accounting ensured that what began initially as a sub-prime crisis morphed into a general
credit deterioration touching prime mortgages and causing their credit downgrades and
system wide mark downs.

(vi) Failure Of Global Corporate Governance:

The financial system of USA has changed dramatically since the 1930s. Many of America's
big banks moved out of the "lending" business and into the "moving business". They focused
on buying assets, repackaging them, and selling them, while establishing a record of
incompetence in assessing risk and screening for credit-worthiness. Hundreds of billions have
been spent to preserve these dysfunctional institutions. Singh (2008) told that nothing has
been done even to address their perverse incentive structures, which encourage short-sighted
behaviour and excessive risk taking. Prudential oversight was lax, allowing poor lending
standards, the proliferation of non-transparent securitization structures, poor risk management
throughout the securitization chain, and the build-up of excessive leverage by financial
institutions. The weaknesses in prudential oversight were partly due to particular
characteristics of the US financial system, such as the existence of different regulatory
regimes for investment banks, commercial banks and government-sponsored enterprises
(Fannie Mae and Freddie Mac), as well as the complex and fragmented supervisory
architecture, comprising several federal and state agencies with competing and overlapping
mandates.

(vii) Typical Characteristic Of US Financial System:

One of the reasons for current crisis in the advanced industrial countries related to the failures
in corporate governance that led to non-transparent incentive schemes that encouraged bad
accounting practices. Rajadhyaksha (2008) studied that there is inadequate representation and
in some cases no representation of emerging markets and less developed countries in the
governance of the international economic institutions and standard set-ting bodies, like the
Basle Committee on Banking Regulation. The IMF has observed and stated in The Hindu,
(March 11, 2009) that market discipline still works and that the focus of new regulations
should not be on eliminating risk but on improving market discipline and addressing the
tendency of market participants to underestimate the systemic effects of their collective
actions. On the contrary, it has often put pressure on the developing countries to pursue such
macro-economic policies that are not only disadvantageous to the developing countries, but
also contribute to greater global financial stability.

(viii) Complex Interplay Of Multiple Factors:

It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a host
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a hos
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a hos
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a hos
It may be said with a measure of
certainty that the global econom-
ic crisis is not alone due to subprime
mortgage. There are a hos
It may be said with a measure of certainty that global economic crisis is not alone due to sub
prime mortgage. There are a host of factors that led to a crisis of such an enormous
magnitude. The declaration made by the G-20 member states at a special summit on the
global economic crisis held on 15th November 2008 in Washington, D.C. identified the root
causes of the current crisis and put these in a perspective. During a period of strong global
growth, growing capital flows, and prolonged stability earlier this decade, market participants
sought higher yields without an adequate appreciation of the risks and failed to exercise
proper due diligence. At the same time, weak underwriting standards, un-sound risk
management practices, increasingly complex and opaque financial products, and consequent
excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators
and supervisors, in some advanced countries, did not adequately appreciate and address the
risks building up in financial markets, keep pace with financial innovation, or take into
account the systemic ramifications of domestic regulatory actions. Major underlying factors
to the current situation were, among others, inconsistent and insufficiently coordinated
macroeconomic policies, inadequate structural reforms, which led to unsustainable global
macroeconomic outcomes. Pan (2009) reported these developments, together, contributed to
excesses and ultimately resulted in severe market disruption.
 Impacts

(i) Impact On Indian Economy:

Until the emergence of global crisis, the Indian economy was going through a phase of high
growth driven by domestic demand growing domestic investment financed mostly by
domestic savings and sustained consumption demand. In fact, consumption and saving were
well-balanced. Services sector, led by domestic demand, contributed to the stability in
growth. Concomitantly, inflation was also generally low and stable. This overall
improvement in macroeconomic performance in India was attributed to calibrated financial
sector reforms that resulted in an efficient system of financial intermediation, albeit bank-
based; the rule based fiscal policy that reduced the drag on private savings; and forward
looking monetary policy that balanced the short term trade-off between growth and inflation
on a continuous basis. Additionally, the phased liberalisation of the economy to trade and
capital flows along with a broadly market-driven exchange rate regime enhanced the role of
external demand in supporting the growth process, simultaneously exposing the economy to
the forces of globalisation. India, though initially somewhat insulated to the global
developments, eventually was impacted significantly by the global shocks through all the
channels – trade, finance and expectations channels. This raised the issue that whether India
is more globalised than what is perceived in terms of conventional trade openness indicators.
At the same time, India was also among the first to exhibit strong rebound from the global
downturn as compared to many advanced economies.
 (ii) Impact On Indian GDP Growth Rate:

Economic growth is the increase in value of the goods and services produced by an economy.
It is conventionally measured as the percent rate of increase in real gross domestic product or
GDP. Growth is usually calculated in real terms, i.e. inflation adjusted terms, in order to net
out the effect of inflation on the price of the goods and services produced. Indian GDP
growth rate for last five years and for each year quarter growth rate of GDP are compared. It
shows that global economic crisis of 2007 had impact on Indian GDP growth rate in the
financial year of 2009, where GDP growth rate were lowest in first three quarter of the
financial year.

(iii) Impact On Inflation Rate:

By January 2010, the domestic growth signals were pointing towards a consolidation of the
recovery process. However, sustained increase in food prices was beginning to spill over to
manufactured products. Inflation in primary commodities moved up 8.2 in August 2009 to
22.2 per cent by March 2010. An important concern from the point of view of inflation
management is the downward rigidity in the primary food articles prices even after a good
monsoon. Moreover, the consumption basket is getting diversified more in favour of non-
cereals items such as milk, meat, poultry, fish, vegetables and fruits, which are important
from the nutritional angle. The decomposition of food inflation indicates that during the
recent period the key drivers of food inflation are non-cereals. All together Inflation rate is
increasing at higher rate.

(iv) Impact On Indian FDI Inflows:

Foreign Direct Investment (FDI) inflow into the core sectors plays a significant role as a
source of capital, management, and technology in transitional economies. It implies that FDI
can have positive effects on the host economy’s developmental efforts. As mentioned earlier,
India has opened its economy and has allowed the entry of multinational corporations
(MNCs) as a part of the reform process started in the beginning of 1990s. Like many other
countries, India has offered greater incentives to encourage FDI inflows into its economy.
The presence of FDI inflow in India was negligible till 1991, but there has been a steady
build-up in the actual FDI inflows in the post-liberalisation period. The share of FDI in GDP
was merely 0.03 per cent in 1991, which rose to about 3 per cent in 2009-10. Its annual
growth during this period was phenomenal. The FDI inflow has been growing rapidly since
then with a quantum jump after 2004-05. From US $3250 million in 2004-05, the FDI has
leaped to over US $247329 million in 2008-09. However, since February 2008, a reversal in
the trend has been observed. A perusal of the monthly inflow of FDI between January 2008
and January 2010 suggests a clear decline over a period of 24 months. The share of
agriculture in the total FDI in India is negligible. The recent data show that agriculture
accounted for only about 1 .5 per cent of the total FDI inflows into India. In the agriculture
sector, die entry of FDI was confined to plantation crops, food processing industries,
agricultural services and agricultural machinery. FDI has been allowed in fertiliser
manufacturing also, which have a direct bearing on agriculture but was not allowed in the
cultivation of crops or rearing of livestock. However, its entry into the food processing sector
can have ramifications on the agriculture sector (though it may be limited). Therefore, though
the FDI inflow has slowed down over the past one year, its impact would not be visible on
agriculture, as the dependence of agriculture on FDI is minimal.

(v) Impact On Indian Agriculture:

India has opened its market since the beginning of the past decade (more precisely since July
1991) by lowering tariff and non- tariff barriers, as well as liberalising investment policies.
Still Indi-an agriculture is far less vulnerable to the external economic shocks than agriculture
in many developing countries. Agricultural trade still accounts for less than 10 per cent of
agricultural gross domestic product (Ag. GDP). However, Indian agriculture cannot be
completely insulated from the global and domestic economic recessions. The impact of
economic crisis is transmitted through three distinct channels, viz., financial sector, exports
and exchange rates, and the impact manifests itself in several direct and indirect ways. Some
of the implications of the economic crisis are discernible in the short-run, while others may
be visible only in the long run. It is difficult to gauge the impact of economic crisis on Indian
agriculture in the short run. However, the trends in some broad parameters may indicate its
implications and the possible options can be worked out to mitigate its adverse impact.
Chandrasekhar (2009) identified the broad indicators for assessing the impact of economic
recession on Indian agriculture could be the trends agricultural exports, Ag. GDP, agriculture
export & Foreign Direct Investment (FDI) etc. The trends in these indicators have been
assessed and briefly discussed in the following sections.

(vi) Agricultural Exports:

Two remarkable developments have taken place in India’s agricultural exports during the
post-liberalisation period. one, the agricultural exports have grown at a much faster rate since
the initiation of liberal economic policies where agricultural exports in value terms have
grown annually from 18.9 per cent during 1990s to 15.2 per cent during 2000s but after 2000
it reduced gradually it would be interesting to see whether mere has been any divergence
from the long-term trend in the export of important agricultural commodities due to economic
recession. For this, share of export of agricultural products (including livestock products) in
total national export during 2007-08 and 2009-10 can be compared. However, the decline or
slowdown in exports cannot be entirely attributed to economic recession.

(vii) Agricultural GDP:

The trend in agricultural GDP during the past two decades suggests that the sector has been
growing slowly and steadily, but with occasional slumps. The reasons for slow growth during
the 1990s and early 2000s are many, ranging from poor monsoons to depressed agricultural
commodity prices in the world market. The current crisis is expected to have a modest effect
on the GDP of agricultural and allied products. Recent trends indicate that the sector is not
witnessing similar growth achieved during the previous year. Agricultural GDP is declined
by -0.1 per cent in 2008-09 as compared to 5.8 per cent in 2007-08. In 2009-10 and 2010-11
GDP growth rate for agriculture sector was 0.4 percent and 6.6 percent respectively,
Economic survey of India (2011). The trends in Ag.GDP seem to have weak links with the
present recession. Agricultural growth has been accorded priority to improve the
distributional aspect by which several schemes like National Food Security Mission,
Rashtriya Krishi Vikas Yojana (RKVY), substantial increase in the flow of agricultural
credit, waiving off agricultural loans, etc. have been launched to foster growth in this sector.
These schemes are likely to taper off the adverse impact of the economic recession on
agriculture to a large extent. However, the economic crisis may put downward pressure on
farm production in the short-run. Even though the government provides a shield to the
farmers by intervening in the agricultural markets to realise stabilised income, its intervention
is limited to a few commodities in some states. Therefore, in spite of government’s efforts,
farm income is expected to have slightly adverse impact due to economic recession. It is
important to note that rainfall and other weather parameters influence agricultural growth
significantly.

(viii) Impact On Fisheries:

Roughly speaking, the Asian Economic Crisis gives negative impacts to fisheries and any
fisheries-related business. In domestic fish markets, demand for fisheries products is on sharp
decline. Wholesale and retail prices sharply fall down. Export of Indian fisheries products
mainly for Asian markets is in a severe slump. Exporters, processing companies, and any
type of fish dealers suffer from extreme market slump. Their financial positions get worse,
which causes a sharp decline in fish prices in production sites. Moreover, fishers and fish
farmers find it very hard to raise capital for investment and operation, by depending on fish
traders. Since prices of productive materials rise, the rate of profit decreases. Before the
Crisis, exporters were prevented from further expansion of trading products with lower
additional value. In a much contrast, domestic-oriented production remained in depression

(ix) Impact On Fisheries Export:

However, the decline or slowdown in exports cannot be entirely attributed to the economic
recession. Quantity exported in the year of 2006-07 was 612 thousand tonnes and it has been
reduced in the year 2007-08 to 541 thousand tonnes, it shows the negative impact of
economic crisis on fisheries export. However, after the outbreak of global Economic Crisis,
demand for Indian fisheries has suddenly declined in foreign markets. It is reported that, in
European Union, wholesale prices of Indian fishes imported sharply fall down. Collectors
have to reduce their scale of transaction and reduce purchase prices of Indian fishes/shrimp.
Farm gate price is almost half of the highest at peak. This causes damage to small-scale
fishers who are engaged in catching young fish.

Conclusion

While the developed world including the U.S and the Euro zone and Japan, has plunged into
recession, the Indian Economy is being affected by the spill-over effects of the global financial crisis,
Chidambaram (2008) & Seshan (2008). Great savings habit among people, strong fundamentals,
strong conservative and regulatory regime have saved Indian economy from going out of gear,
though significant parts of the economy have slowed down and there is a wide variance of opinion
about how long it will continue. It is expected that growth will be moderate in India. The most
important lesson that we must learn from the crisis is that we must be self-reliant. Though World
Trade Organization (WTO) propagates free trade, we must adopt protectionist measures in certain
sectors of the economy so that recession in any part of the globe does not affect our country.
 Bibliography

 www.macroscan.org
 Economic Survey Of India , 2011
 Chidambram P. (2008) Spill – Over effects of global crisis will
be tackled. The Hindu, Daily,15.
 Global Economic Outlook , 2008
 Rajadhyaksha N.(2008) , The Hindustan Times
 UNCTAD(2008) World Investment Prospects Survey.