1. The world economy went into a steep recession in the last three months of 2008 with global real GDP dropping at a 6 percent annual rate. This was clearly the worst decline in world output and also in world industrial production and world trade of the post World War II era, with virtually all countries getting affected by the downturn and many registering record declines in GDP.
Don’t waste time! Our writers will create an original "World Economic Recession and its Impact on India" essay for youCreate order
Many economists and experts foresee a global recession lasting well into 2010. However almost all believe that whatever may be the duration of the recession, the recovery is going to be slow.
2. The global financial crisis is unique in its kind. What started off as a sub-prime crisis in the US housing mortgage sector had turned subsequently into a global banking crisis and then into a global economic crisis. Housing is commonly cited as a fixed asset. It is ironic that this ‘fixed asset’ is the one that has triggered the greatest economic crisis since the ‘Great Depression’ of 1930s.
3. The recession in the US financial markets and the global meltdown had affected complete world with a varying levels of recessional impact. World over the impact was diversified and its impact was observed from the very fact of falling Stock market, recession in jobs availability and companies following downsizing in the existing available staff and cutting down of the perks and salary corrections. In this globalised business scenario, the impact of recession at one country filters down to all the linked industries and this has been very aptly proven by the current market situation which is faced by the entire world.
4. According to the IMF’s World Economic Outlook, published on 08 Oct 08, the world economy was “entering a major downturn” in the face of “the most dangerous shock” to rich-country financial markets. The IMF expected global growth, measured on the basis of purchasing-power parity (PPP), to come down to 3% in 2009, the slowest pace since 2002 and on the verge of what it considered being a global recession. (The IMF’s definition of global recession takes many factors into account, including the rate of population growth.). The severity and suddenness of the crisis can be judged from the IMF’s forecast for the global economy. For the first time in 60 years, the IMF is now forecasting a global recession with negative growth for world GDP in 2009-10. The IMF has revised its forecasts downwards thrice since July 2008, and it is not yet certain that this will be the last revision.
5. 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. In fact the RBI was raising interest rates until July 2008 with the view to cooling the growth rate and to contain inflationary pressures. But as the financial meltdown turned into a global economic downturn with the collapse of Lehman Brothers on 23 Sep 08, the impact on the Indian economy was almost immediate. Credit flows suddenly dried-up and, overnight, money market interest rate rose and remained high for the next month. The impacts of the global economic downturn, the first in the center of global capitalism since the Great Depression, on the Indian economy was still unfolding. The WTO has predicted that world trade, which had virtually collapsed in the second half of 2008 is likely to decline by as much as nine percent in 2009-10. The world has already seen exports from world’s major exporters, like Germany, Japan and China, plummeting by more than 35 percent in the last quarter of 2008. The sharp decline in economic activity is despite the large stimulus, estimated at more than US $ 3 trillion that major economies have put in place. Yet the bad news does not stop. It is, therefore, prudent not to underestimate the severity of the present crisis.
6. Even the common man is discussing the US financial crisis and its impact on developing countries, like India. Economists, industrialists and even the common man have been shocked at the mere thought of recession in India at this time and, that too, one caused by the most powerful nation of the world. High inflation, reducing job opportunities and industrial production, ‘austerity measures’ and decreasing purchasing power parity, are a few of the topics being discussed even over cups of tea. There is a famous saying that, "When the U.S coughs, rest of the world gets bronchitis"! However in today’s world of globalisation, this may not at all be the case. Our Finance Minister’s statement that "India has strong fundamentals" is very much correct and not merely a political statement. The Reserve Bank of India has also expressed the same thing over and over again.
7. Many economics experts around the world feel that the impact of a possible slowdown in the US will not be much on countries like India and China. The experts also feel that, Indian economy is not following a sinosidical curve, but has become capable of sustaining high single-digit growth rates for times to come. India may not be impacted largely by the US recession, mainly because today’s India is very different and more robust than what it was three decades back.
8. While the prevalent global economic recession may not have huge impact on Indian economy, but it will affect our growth rate and it is visible in the first two quarters of 2009. Therefore it will be prudent to understand what happened, how it affects India and what the measures our government must take to keep this impact to the minimum.
1. In today’s world of globalisation, it will be foolish to expect that India will not be affect the US financial crisis. Some of the important affects the US financial markets have experienced in the recent past are depreciating dollar, sub-prime crisis, crisis in banking system, reduction in demand, low consumer confidence and so on. However, these happenings in the US are not the ones having direct impact on Indian economy. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States. However there are other factors related to this recession that are going to affect Indian economy.
2. For 2010, global growth is projected to strengthen to 3.7 percent. For the advanced economies, growth is expected to bounce back to 3%. For emerging-market and developing countries, growth in 2010 is expected to rise to 4.7 percent, on its way back up to a potential growth rate above 6%.
Statement Of Problem
3. Recession in the West, especially the United States, is not a good news for our country. Exports for Jun 09 had declined by 27.7 per cent. A lot of people are losing their jobs. Companies are reluctant to employ new personnel and this is a cause of worry. Many companies have reduced perks and incentives of their employees and even stalled the promotion policies. The new projects have no takers in either the government or the private sectors. Federation of Indian Export Organisations (FIEO) has claimed that up to one crore people could have lost their jobs. The most affected are the garment, handicraft and textile industries. The tourism industry has also felt the pinch as there has been a steady decline in the tourists. Due to reduced liquidity, even the real estate is facing a problem and it is difficult to find any financers. The GDP growth is likely to decline to between 6.5 to 7 percent in 2009-10. Agencies like the IMF, the World Bank and the ADB have also estimated Indian GDP growth at similar levels in their latest forecasts. Thus, Indian economy will come down from the 9% trend that it had achieved in the last four years.
4. All these facts indicate that the Indian economy has not had total immunity from the global recession. However, the recuperation of Indian economy is relatively faster as compared to the developed nations. It is necessary that efforts are made to ensure that our economy is future proof in regards to recessions.
Justification Of Study
5. World economic crisis is one of the topics of concern in fast growing economy like India, as it is a topic that concerns all individuals across the spectrum. Bold steps need to be taken to come back to high single digit growth rate and also to assure a common Indian that there is nothing much to worry about.
6. Scope of this research is limited to looking into present status of the global recession. Scope also includes comparison of Indian and Chinese economies.
Methods of Data Collection
7. Following Methods were utilised for collection of research material.
(b) Articles and journals.
(c) Internet search.
(d) News paper articles.
(e) Text from research material, speeches and comments on the subject.
Organisation of Dissertation
8. The dissertation has been organized under following heads:
(a) Chapter I: Introduction
(b) Chapter II: Methodology
(c) Chapter III: Definition of Recession and historical perspective
(i) What is recession?
(ii) History of world recessions.
(iii) The great depression of 1930s.
(d) Chapter IV: Present Global Economic Crisis
(e) Chapter V: India and China – A comparison
(f) Chapter VI: Measures needed to reduce impact on India
(g) Chapter VI: Conclusion
DEFINITION OF RECESSION AND HISTORICAL PERSPECTIVE
What is a Recession?
1. Experts around the world believe that a true economic recession can only be confirmed if Gross Domestic Product (GDP) growth is negative for a period of two or more consecutive quarters. In other words, when the value of goods and services produced decreases for six months in a row. While the “two quarter” definition is accepted globally, many economists feel that definition does not factor in other important economic change variables. For instance, current national unemployment rates or consumer confidence and spending levels are all a part of the economic system and should be taken into account when defining a recession. The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. According to the NBER, a recession is a “significant decline in economic activity lasting more than a few months.” The Business Cycle Dating Committee of the NBER determined that a peak in economic activity occurred in the U.S. economy in December 2007. This peak marked the end of the expansion that began in November 2001 and the beginning of the present recession.
History of World Recessions
 2. One of the most talked about subjects in the news these days is the recession we’re currently experiencing. The reality is that this is not the first time the world has gone through a recession, and it probably won’t be the last. It is also true that this is one of the worst recessions that the U.S. economy has seen in the Post-World War II era. But the good news is that the world has gone through this before, and like before, it will come out. The following are the recessions that have occurred in the past:-
1907 – 1908
. The “Panic of 1907” was the first major financial crisis in the 1900s. The Panic of 1907 was actually a severe decrease in the money supply that manifested itself as a recession. (b)
1918 – 1921
. The Post-World War I recession was a recession characterized by severe hyperinflation in Europe. Much of it had to do with the lost production at the end of the war. This, coupled with the influx of labour that was caused by returning troops who needed jobs, drove unemployment to very high levels. (c)
August 1929 – June 1938
. The stock market crash that occurred on Black Tuesday, October 29, 1929 was one of the major causes that led to the Great Depression which, coupled with bank failures (throughout the 1930s over 9,000 banks failed), led to one of the worst economic depressions. This is further discussed in later paragraphs. (d)
July 1953 – May 1954
. The Early 50s recession was mainly brought about because of the kinds of financial challenges seen after the Korean War (challenges that often accompany the end of any war). False highs, this time in the form of a large inflationary period, came down quickly as the war came to a close. (e)
April 1960 – February 1961
. The Early 1960s recession, also called the Recession of 1960, was characterized by, high unemployment rates, high inflation, and a bad Gross National Product rating. These all worked together to cause consumer confidence in the system to deteriorate, and caused a downward spiral that negatively impacted many businesses. President Kennedy decided to increase government spending to improve the Gross National Product. This helped reduce unemployment, helped bring back confidence in the economy, and contributed to the end of the recession. (f)
November 1973 – March 1975
. The 1970s oil crisis really began in 1973. The 1970s oil crisis was brought on when oil prices were quadrupled by OPEC. This led to severe inflation. (g)
January 1980 – November 1982
. The 1980s recession can be mostly attributed to the Iranian Revolution which took place around 1979. This revolution caused a sharp increase in the price of oil all around the world, causing the 1979 energy crisis. (h)
ASEAN Crisis 1997-1999
The exchange rate system of ASEAN currencies was fixed and pegged to the USD. When the Dollar rose, consequently the ASEAN currencies grew too, resulting in lower exports and export competitiveness particularly in electrical goods. The decrease in exports resulted in increased trade deficit. The crisis first emerged in Thailand when as a crisis of loan repayment. This led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions. The withdrawal of short-term credit led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF. The contagion then spread to Philippines, Malaysia and Indonesia. The crisis led to weaker, unstable exchange rates and weakened financial institutions. To tackle this, the Government imposed higher domestic interest rates, which led to a slowdown in manufacturing and industrial activity. This brought about huge unemployment and an undesirable social impact – on food, healthcare and education. The financial crisis coincided with the worst drought conditions in the ASEAN region. Since ASEAN is the fourth largest trading block in the world, the spillover effect was also felt on the world trade (mainly ASEAN’s trading partners). (j)
December 2007 – Present Day
. The late 2000s recession, affecting the U.S. and almost the whole world, was triggered by the breakdown of the housing market. The banking industry is in crisis, as even the most credible banks face uncertainty about the values of their assets, particularly related to mortgages. The US stock market has lost significant value from the highest it reached in late 2007 and unemployment has increased. The Great Depression of 1930s9
3. Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.
4. More often than not, the start of the Great Depression is attributed to the sudden and total collapse of the US stock market on October 29th, 1929, known as Black Tuesday. The stock market showed a positive trend in early 1930s, indicating a return to earlier levels, though still almost 30% below the peak of Sep 29. The government and the private sectors actually spent more in the first half of 1930 but to little effect. The consumers, many of whom had suffered major losses in the stock market the previous year, cut back their expenditures by ten percent. To top it all, a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.
5. The crisis in the US economy was the reason that affect most countries, and the strengths or weaknesses of each country made conditions better or worse. By late 1930, a steady decline had started that hit rock bottom by March 1933.
6. There were many causes for the initial slide in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, many historians point out structural factors like bank failures and the stock market meltdown, while economists point to Britain’s decision to return to the Gold Standard at pre-World War I parities.
7. The recovery. Various countries around the world started to recover from the Great Depression at different times. In most countries of the world, including U.S., recovery from the Great Depression began in 1933. However, the U.S. did not return to 1929 GNP for over a decade and still had an unemployment rate of about 15% in 1940, albeit down from the high of 25% in 1933.
8. It is believed that the monitory growth that was triggered by substantial international gold inflows was one of the main reasons of the recovery of the United States’ economy. The gold inflows were partly due to devaluation of the U.S. dollar and partly due to deterioration of the political situation in Europe.
9. Gold standard. Economic studies have indicated that just as the crisis was spread all over the world by the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that helped in recovery of most economies. Japan, Great Britain, and the Scandinavian countries relinquished the gold standard in 1931. Great Britain was the one to take the initiative. In September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets. Other countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933, while a few countries in the so-called "gold bloc", led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935-1936.
10. Subsequent analysis indicated that the earlier a country relinquished the gold standard the sooner was its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. This partly explains why the experience and length of the depression differed between national economies.
11. WWII and recovery. The Great Depression ended with the beginning of World War II. The increased government spending on the war waging efforts, ironically, helped in faster recovery from the Great Depression. The massive rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937-39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 finally ended unemployment. The productivity soared as most people worked overtime and gave up leisure activities to make money after so many unproductive years. People accepted rationing and price controls for the first time as a way of expressing their support for the war effort. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs.
CURRENT GLOBAL ECONOMIC CRISIS
“Our crisis is not a crisis of information;it is a crisis of decision of policy and action”-George Walts
1. In 2007 and 2008, the worst crisis in decades ripped through the global financial system. A downturn in the U.S. housing market forced consumers and speculators, who had used risky "subprime" loans to purchase property, into default. The ensuing problems extended far beyond the mortgage market. In many cases, lenders had quickly sold mortgage debt to investment banks, which repackaged these loans and resold them to investors, including other banks, hedge funds, and individuals around the world. When the debt from subprime loans went bad, all these parties suffered major losses. Stock markets tumbled, and lenders–fearful about the viability of would-be borrowers–stopped lending, leading to a dramatic credit freeze.
Global Financial Turmoil
2. Subprime lending became popular in the US in the mid 1990s, with the outstanding debt increasing from $ 33 billion in 1993 to $ 332 billion in 2003. As of Dec 07, there was an estimated $ 1.3 trillion in subprime mortgages outstanding. 20 per cent of all mortgages originated in 2006 were considered to be subprime, a rate unthinkable just ten years ago. This substantial increase was attributable to industry enthusiasm: banks and other lenders discovered that they could make hefty profits from origination fees, bundling mortgages into securities and selling theses securities to investors.
3. The immediate cause or trigger of the present crisis was the colapse of United States housing bubble (Also known as Subprime lending crisis). In March 2007, the United States’ sub-prime mortgage industry collapsed to higher-than-expected home foreclosure rates, with more than 25 sub-prime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale. As a result, many large investment firms had seen their stock prices coming crashing down. The stock of the country’s largest sub-prime lender, New Century Financial plunged 84%. US Federal Reserve tried to salvage the liquidity crisis by pumping in a substantial amount of capital into the financial markets. In 2008 alone, the US government allocated over $700 billion to special loans and rescues related to the US housing bubble.
4. Many U.S. investment banks either went bankrupt (Lehman Brothers) or were sold to other banks (Bear Stearns and Merrill Lynch). These failures further added to the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulation.
5. In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities into special purpose vehicles or other entities in the shadow banking system. This helped them in bypassing the regulations, thus gaining during the boom but incurring heavy losses during the crisis. The sub-prime crisis in the US, following the collapse of the housing sector bubble, had adversely shaken the economies of many countries. The crisis has brought about a slump in economic growth in most countries and has been called the most serious financial crisis since the Great Depression, with its global effects characterized by the failure of many businesses, decline in the consumer confidence, rapid decrease in international trade, slowdown in foreign investments, steep falls in industrial productions, substantial financial commitments incurred by the governments, and significant decline in the economic activity.
Effect on the World
6. When the situation first surfaced, many were of the view that the fallout of the crisis will remain confined to the financial sector. Most economists around the world thought that this would be a shallow recession and would hardly affect the advanced countries. However, the financial crisis transferred to the real sector and before the governments could realise, it had its influence in every field. The recession had affected the world economy with a varying degree of recessional impact. World over the impact has diversified and its impact could be observed from the very fact of crashing Stock market, drought in jobs availability and companies reducing the staff strength and downwards revision of the perks and salary corrections. That is when it was realised that the recession was much deeper and the recovery was going to be longer than expected.
. The British economy stalled in the second quarter of 2008 and was clearly going into recession. The IMF’s forecasts suggested that Britain would see the worst performance of any big economy in the fourth quarter of 2008. The economies of the euro area, too, were struggling badly. The output in the euro area fell at an annualised rate of 0.8% in the second quarter. GDP shrank in the three largest countries—Germany, France and Italy. The fourth largest, Spain, barely grew. Even the European economies that were less directly affected by housing busts, such as Germany, were hard hit as was visible from the fact that household spending in Germany was falling. 8.
. Japan economy shrank at an annualised rate of 3% in the second quarter of 200812 as exports fell, investment slowed and high food and fuel prices lowered consumer confidence. Japanese banks were less affected by the financial crisis than those in Europe and America, but with other economies falling into recession and the yen soaring, the prospects for Japan’s exports and economy fell. 9.
. China’s GDP growth slowed to an annual rate of a mere 10.1% in the second quarter of 2008, from 12.6% in 2007, and most economists expect it to drop to 8-9% in 2010. But this slowdown should partly be welcomed, because China’s growth next year will come entirely from domestic demand, as its trade surplus shrinks. If the global downturn forces China to switch the mix of growth from exports to consumption, it would also help to make its future growth more sustainable. Impact on India
10. India’s economy has been one of the frontrunners of global economies in recent years, growing 9.2% in 2007 and 9.6% in 2006 and has seen a decade of 7 plus percent growth. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market. But, in the middle of 2008, price increases of global commodity, especially those of oil, metal and food took a toll on India. Inflation reached at 12.91 per cent, the highest level seen for a decade. With this growth softened, budget deficits widened and trade balances worsened. Before India could recover from the adverse impact of high commodity prices, the global financial crisis occurred. Initially, it was argued that India would be relatively immune to this crisis, because of the ‘strong fundamentals’ of the economy and the supposedly well-regulated banking system. But, a crisis of this magnitude was bound to affect globalised economy like India and it did. Economy began to slow down from the middle of 2007-08. After a long spell of growth, the Indian economy was experiencing a downturn. IMF had also predicted that Indian economy could not remain immune from global financial crisis10. The impact on various sectors was as follows:-
. Ministry of Commerce report of 03 Aug 09 indicated that India registered a fall of 27.7 percent in exports for the ninth month in a row in Jun 09. The imports also dropped by 29.3 percent, reflecting a slowdown in domestic consumption. The oil imports in Jun 09 plunged by 50.6 percent as compared to same period in 2008. (b)
. Inflation in India turned negative 1.61 percent for the first time in 32 years. However the prices of various commodities like food and oil were still higher than last year. It started showing a positive trend in Sep 09 but so did the food inflation which crossed 20 percent in Dec 09. (c)
. According to a report released by the Union Government in Aug 09, 1.71 lakh had lost their jobs in various sectors. The textile industry was worst hit. (d) ‘
Pull Out’ by FII
. The most immediate effect of that crisis on India was an outflow of foreign institutional investment from the equity market. Foreign institutional investors (FII), became major sellers in Indian markets. (e)
Depreciation of Rupee
. The financial crisis also created a shortage of money supply and India was also facing a credit crunch especially in terms of foreign exchange and the Indian Banking sector and forex markets were facing tight liquidity situations. This liquidity crisis along with FII sell off forced the Indian Rupee to devaluate like never before and the Indian Rupee slipped from around Rs 40/US $ to Rs 50/ US $. (f)
Fall of Stock Market
. On 21 Jan 08, the Sensex saw its highest ever loss of 1,408 points at the end of the session on Monday. The Sensex recovered to close at 17,605.40 after it tumbled to the day’s low of 16,963.96, on high volatility as investors panicked following weak global cues amid fears of the US recession. On 22 Jan 08 the Sensex saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points. The Bombay Stock Exchange benchmark Sensex witnessed its second-largest fall ever losing 900 points to close at 16,677.88. On 18 May 06,The Sensex registered a fall of 826 points to close at 11,391, following heavy selling by FIIs, retail investors and a weakness in global markets. The markets crashed by 801 points to close at a low of 10,528. (g) Other sectors which have been worst hit were:-
(ii) Services sector (Air travel, Mutual funds and Insurance)
(iii) Outsourcing services
(iv) Steep rise in food prices. As luck would have it, India had a poor monsoon season in 2009.
INDIA AND CHINA: A COMPARISON
1. China and India together account for about 37.5% of world population and 6.4% of the value of world output and income at current prices and exchange rates. As the two countries have been playing a significant role in the world economy, the growth in the world trade has seen a positive trend.
2. Although the two Asian ‘fastest emerging economies’ appear to have many things in common, the approach of these two countries has been quite different. China initiated its state-led modernisation reform in the late 1970s after many years of operating according to the Soviet model, whereas India has relied mainly on the private sector to drive its economy. While China built up its economic strength by concentrating more on the manufacturing industry and inviting foreign trade, the service sector has been the leader behind economic growth of India’s, contributing to more than half of its total economic growth since the 1990s. Despite their very different approaches, however, both countries have a lot to offer to each other to learn and develop further.
Chinese Success Story
3. China’s trade expansion started in late 70s, when it initiated economic reforms and opening-up policies. For the past decade, it has been a strong economic player in international trade and has faired exceptionally. India’s trade expansion, on the other hand, has generally been second to China. China’s share of manufacturing exports has always been more than that of India. This stands to logic as India’s economic reforms happened almost 15 years after those of China.
4. China’s manufacturing sector accounts for more than 41% of gross domestic product (GDP). In 2008 manufactured goods constituted more than 90% of exports or almost a quarter of the gross value of industrial output. China has very effectively used its vast resources of cheap labour and domestic savings to build an infrastructure in order to invite large amounts of FDI so as to encourage the development of the manufacturing industry in the coastal areas. This was one of the initial and leading accelerators for the country’s economic success. India’s strength, on the other hand, are the knowledge-based sectors such as IT and pharmaceuticals, its intelligently developed financial markets and more robust private sector. Besides being the world’s third-largest trader, China is steadily becoming a manufacturing giant in Asia. It is now deeply involved in regional production and distribution networks in East and Southeast Asia. The share of China’s exports and imports to East Asian countries in its total trade is more than twice that of India, showing China’s stronger influence in the region.
5. In the past twenty years, China’s has successfully transferred the labour surplus from agricultural industry to manufacturing industry, from low efficiency State sectors to high-efficiency commercial sectors. This strategy has paid rich dividends for the country. The workers have had hardly any professional training but they have immensely contributed to increase in output in the manufacturing sector. It is important to note that China thus has achieved a big increase of productivity in addition to the labour supply growth, particularly in recent years after the country’s accession into the WTO. China achieved productivity growth of 8.7 per cent per year on average between 2000 and 2005. The figure was 3.1 per cent per year on average between 1995 and 2000.
6. China’s growth story has many reasons. Its large population itself gives it a noteworthy advantage, and is one of the main reasons of such rapid growth. Government policies have certainly helped, with large amounts of cash flow put towards infrastructure and transport. These have also increased the investment opportunities for foreign investors. Another major reason is the cheap labour available for companies coming into the country. This has been utilised by a number of large clothing corporations, with a large proportion of the world’s clothes manufactured in the country. Manufacturing has been the most significant growth area. It means that foreign companies can manufacture their clothes significantly cheaper by going to China, rather than having them manufactured in their own country. Some companies have been criticised for providing poor working conditions for workers as there aren’t the same strict regulations as elsewhere. Living costs are lower in China, meaning its workers don’t demand the same wages, and therefore lower costs for the businesses.
China’s Answer to Current Recession
7. In Sep 08, the world entered into a massive financial crisis. Although the worldwide financial crisis originated from the United States, its effects were felt on a huge scale by economies around the world, including China. China has a huge trading surplus with foreign countries, especially the United States. The balance of trade between China and the United States was, by Feb 09, US$34.8 billion in favour of China. The President of the United States in 2009, Barack Obama, had accused China of fixing their exchange rates to take advantage of foreign trade and investment. It may be noted that the purchasing power parity in China is equal to about ten times as much as many Western countries. In fact, in 2008 China was ranked the second large economy in the world using the PPP as a measurement, second only to the US.
8. China’s phenomenal growth rate since the beginning of this century was mainly due to the manufacturing exports. Following the financial troubles experienced in the West and the bankruptcy of several banks, China’s exports had an adverse effect. Suddenly, due to poor liquidity and low consumptions, there were not very many takers for these products.
9. This was mainly due to the collapse of world trade, an event made official by the International Monetary Fund on 29 Jan 09. As a result, by Jan 09, China’s exports had dropped to their lowest level since Apr 99. JP Morgan’s chairwoman of China equities Jing Ulrich, stated in a report by the BBC: “Export growth is likely to be flat in 2009, with negative year-over-year growth in the near-term”. However, China still had a good Dec 08 despite the crisis. Many economists, on the other hand, argue that the China’s trade surplus figures doing the rounds in the world markets may not be true. There is belief amongst many that whatever is made visible by the Chinese government is not the complete truth.
10. The vice chairman of the State Development Planning Commission of China, Zhang Guobao, stated in the People’s Daily newspaper: "The international financial crisis is equally a challenge and an opportunity. The slowdown has reduced the price of international energy resources and assets and favours our search for overseas resources." The government of China began buying up bargain assets overseas by concentrating on energy and resources companies in need of bail-outs. The China Development Bank financed China’s biggest-ever foreign investment a US$19.5 billion dollar bid for 18 percent of Rio Tinto, an Australian mining company in desperate need for investment to finance its US$19 billion worth of debts.
11. The Rio Tinto partnership is just one example of many Chinese government bailouts of foreign companies. The Chinese government had also invested $39 billion in three separate deals to secure future oil supplies from Russia, Brazil, and Venezuela. China is more interested in natural resources than investing in banks.
12. The managing director of the IMF, Dominique Strauss-Kahn, in a press conference on 23 Apr 09, said that the slowdown in China’s growth, as in other countries, has in effect a very deep slowdown in the imports, and the effect on the world economy is important. He also noted that he won’t draw any kind of consequences about the role of China in Asia and the way China will help, or not, the Asian part of the world to get out of the crisis. It is a global crisis. There is no way for Asia to get out of the crisis without the rest of the world getting out of the crisis. That is why a global view was needed, and in this global view, certainly, the Chinese economy plays a big role.
13. China still remains in a strong economical position even in these times of world recession, and it is believed to have been a sanctuary of relative economic stability. Though its growth rate has been affected by the crisis but recent trends suggest that it is well on the road of recovery. The comments made by Chinese President Hu Jintao suggested that China has a clearly made plan to recover:
(a) More money will be lent to the International Monetary Fund
(b) US$95 billion in currency swap deals with six countries (trading in CNY instead of USD)
(c) US$52 billion in foreign acquisitions, two thirds of which are focused on natural resources
(d) Multi-billion dollar credit to countries rich in oil resources.
14. What is going to be the future of Chinese economy is anybody’s guess. The international economic crisis could be a significant opportunity for net surplus countries such as China to have their voices heard on the international stage and may also dictate terms. China will certainly be playing a very prominent role in international affairs in the times to come.
15. The Indian economy is also expanding, but so far the process of transferring cheap labour from low value agriculture to higher value manufacturing industry has been slow. This is mainly due to relatively weak industrial growth and unfavourable labour laws that have created a strong incentive for firms to use more machinery and hire fewer workers. India may choose to follow the East Asia model to attract foreign investment and beef up its manufacturing industry. At the same time, India will continue expanding its strong service sector in business and engineering services that has drawn major global firms to outsource their operations to India and has the potential to continually drive India’s foreign trade.
16. India’s strength is based on its knowledge-based sectors such as IT and pharmaceuticals, intelligently developed financial markets and a more robust private sector.
17. In comparison to China, although India’s ‘look east’ policy has helped in increasing trade relations with East and South Asia, its exports and imports to East and South Asia are not as good as those of China. Also, India is yet to prove its potential in the manufacturing sector. Like China, India also enjoys the advantage of cheap labour. This indicates that India can grow further in this sector provided the policies are put in the right place.
18. In order to take advantage of its large base of human capital and domestic market potential, India needs to proceed along the path opened by the East Asian economies. This model revolves around boosting the manufacturing industry. India could also decide to further expand the IT-enabled services for global companies, such as call centre services, professional services and software maintenance activities – its fast growing sector in terms of exports. In overall commercial services, China’s share of global exports (2.9 per cent) and imports (3.4 per cent) still lead those of India (1.9 per cent, 2.0 per cent respectively). However, IT-related services and now pharmaceutical industries can be the key drivers of Indian trade growth in the future.
19. India’s National Association of Software and Service Companies (NASSCOM) estimates that by 2020 India’s share of the offshore market for engineering services – of a projected value of more than US$ 1 trillion – could be 25-30 per cent – up from the current 12 per cent – provided that the capacities, capabilities, infrastructure and the international reputation are in place. Business services and software have boosted Indian trade since 1990s and now a few of Indian firms in those areas are among the largest in the world. Abundance of well trained, English-speaking cheap labour is a big asset for India and can be better employed. Services are by far the largest part of the Indian economy (50 per cent) with some sub-sectors performing better than others. There is still much scope for improved productivity and increased investment.
20. China has always attracted more FDI than India. This is because China’s policies for foreign investors are more liberalized than India. Moreover, the Chinese economy is growing faster and infrastructure is better. Although strict protection policies remain in place in China in selected sectors such as automobiles, India’s restrictive labour laws and limits affecting foreign shares in ownership restrain foreign investment in general. And in particular, India’s inadequate infrastructure development makes it very difficult for multinational companies to ship products in and out of the country, and even within the country.
21. China and India have achieved relatively successful outcomes, following their own growth tracks. However, one of the current distinction between China as the “factory of the world” and India as the “world’s back office” in international trade may be changing in the coming decade, since China is aiming to develop its service sectors whereas India hopes to strengthen its manufacturing industry.
IMPACT ON INDIA AND GOVERNMENT INITIATIVE
Impact of Economic Crisis on India
1. The global economic crisis and consequent recession in developed economies have clearly been major factor in India’s economic slowdown. Though the origin of this crisis was in the USA, which some have called the worst since the Great Depression, every developing country has suffered to a varying degree. In this era globalisation, no country, including India, remained immune to the global economic shock.
2. Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08). The five years of high growth had raised the expectations of the people. Few remember that during the preceding five-year period from 1998-99 to 2002-03 average growth was only 5.4 per cent, while the highest growth rate achieved during the period was 6.7 per cent (in 1998-99).
. In the first two quarters of 2008- 09, the growth in GDP was 7.8 and 7.7 per cent respectively. This was when the global recession was growing. The real effect was visible in the third quarter. The growth fell to 5.8 per cent in the third and in the fourth quarters of 2008-09 (compared to 9.3 and 8.6 per cent in Q3 and Q4 of 2007-08). The last quarter saw an added deterioration in manufacturing due to the deepening impact of the global crisis and a slowdown in domestic demand1. 4. According to Economic Survey of India report, following was the impact on Indian economy:-
(a) The growth in agriculture and allied activities decelerated from 4.9 per cent in 2007-08 to 1.6 per cent in 2008- 09, due to a fall in the production of non-food crops including oilseeds, cotton, sugarcane and jute.
(b) The manufacturing, electricity and construction sectors decelerated to 2.4, 3.4 and 7.2 per cent respectively during 2008-09. The slowdown in manufacturing could be attributed to the combined impact of a fall in exports followed by a decline in domestic demand, especially in the second half of the year.
(c) The index of industrial production for the year 2008-09 pointed towards a sharp slowdown with growth being placed at 2.4 per cent. The performance of six core industries comprising crude oil, petroleum refinery products, coal, electricity, cement and finished steel (carbon) grew at 2.7 per cent as compared to 5.9 per cent in 2007-08.
(d) Agriculture sector suffered a further setback with poor monsoon season.
(e) The contribution of private consumption to aggregate growth declined dramatically from 53.8 per cent in 2007-08 to 27 per cent in 2008-09. This decrease was cushioned by an increase in the contribution to growth by government consumption expenditure from a level of 8 per cent in 2007-08 to a level of 32.5 per cent in 2008-09. Consequently the overall contribution of consumption demand to growth was only marginally lower than that in 2007-08.
(f) The growth in per capita GDP decelerated from 8.1 per cent in 2006- 07 to 4.6 per cent in 2008-09, while the per capita consumption growth declined from 6.9 per cent in 2007-08 to 1.4 per cent in 2008-09.
(g) The rising oil and commodity prices, contributed to a significant rise in prices, with annual WPI peaking at 12.8 per cent in August 2008.
(h) . The rupee gradually appreciated from Rs. 46.54 per US dollar in August 2006 to Rs. 39.37 in January 2008, a movement that had begun to affect profitability and competitiveness of the export sector. The global financial crisis however reversed the rupee appreciation. The exchange rate was Rs. 51.20 per US dollar in March 2009.
(j) A positive development was higher private transfers and software earnings and increase in non-resident deposit flows and foreign direct investment vis-à-vis the corresponding period last year. Higher FDI flows in 2008-09 were also a reflection of the confidence of foreign investors in the growth prospects of the Indian economy.
Indian Government Response
5. The Economic Survey of 2007-08 had pointed out that “There is now no doubt that the economy has moved to a higher growth plane, with growth in GDP exceeding 8 per cent in every year since 2003-04.” It had however warned that “The new challenge is to maintain growth at these levels, not to speak of raising it further to double digit levels.” Further, “The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic.” Ten months later, the Mid-Year Review (December 2008), noted that “We should be prepared for growth in 2008-09 as a whole to be around 7 per cent.” The experience of economic growth in a wide range of countries across the world and over different periods of history bears testimony to the fact that such setbacks are common. The experience of high growth economies (HGEs) suggests that these can be overcome by appropriate, pragmatic and expeditious action to address the problems that the shocks expose and by seizing the opportunities that they open up. This is what distinguishes the few economies that sustain growth over decades from the many that fall by the wayside.The following steps were taken by the Indian Government in order to restrict the impact of global recession20:-
(a) In consonance with the commitment to ensure faster social development and achieving an inclusive pattern of growth, the government continued its focus on several initiatives and programmes towards that end. Some of the major social sector initiatives for achieving inclusive growth and faster social sector development and to remove economic and social disparities in the Eleventh Five Year Plan, include the Bharat Nirman programme, Mid-day Meal Scheme, National Rural Health Mission Jawaharlal Nehru National Urban Renewal Mission and the National Rural Employment Guarantee Scheme (NREGS).
(b) Under NREGS, over four crore households were provided employment in 2008-09. This was a significant jump over the 3.39 crore households covered under the scheme during 2007-08.
(c) The situation necessitated a fiscal response beyond the measures enunciated in the 2008-09 budget. These included the payout of a part of the arrears to government employees, following the Sixth Pay Commission Report and the debt relief (farm loan waiver) package to alleviate the debt burden of the distressed farmers. By increasing the fiscal deficit, this expenditure, inter alia, helped to sustain domestic demand.
(d) Further measures during December 2008 to February 2009 included increased plan expenditure, reduction in indirect taxes, sector specific measures for textiles, housing, infrastructure, automobiles, micro and small sectors and exports and authorization to specified financial to raise tax free bonds to fund infrastructure projects.
(e) The outflow of foreign exchange, as fallout of crisis, also meant tightening of liquidity situation in the economy. To deal with this, the monetary stance underwent an abrupt change in the second half of 2008-09. The RBI responded to the emergent situation by facilitating monetary expansion through decreases in the CRR, repo and reverse repo rates, and the statutory liquidity ratio (SLR). The repo rate was reduced by 400 basis points in five tranches from 9.0 in Aug 08 to 5.0 per cent beginning Mar 09. The reverse-repo rate was lowered by 250 basis points in three tranches from 6.0 to 3.5 per cent. The reverse-repo and repo rates were again reduced by 25 basis points each. The CRR was lowered by 400 basis points in four tranches from 9.0 to 5.0 per cent with effect from January 17, 2009. The credit policy measures by the RBI broadly aimed at providing adequate liquidity to compensate for the squeeze emanating from foreign financial markets and improving foreign exchange liquidity. The monetary measures had a salutatory effect on the liquidity situation. Taking the year as a whole, broad money recorded an increase of 18.4 per cent during 2008-09, as against 21.2 per cent in 2007-08.
(f) The Government increased its spending by nearly 1 per cent of the GDP. There was an increase of nearly 2.5 per cent of GDP on non-plan expenditure that included increased spending on fertilizers and food subsidies, agriculture debt waiver, defence, salaries and pensions. The Government renewed its efforts to increase infrastructure investments in telecommunications, power generation, airports, ports, roads and railways.
(g) The Government also announced specific measures to address the impact of global slowdown on India’s exports. These included extension of export credit for labour-intensive exports, improving the pre- and post-shipment credit availability, additional allocations for refund of terminal excise duty/CST and export-incentive schemes, and removal of export duty and export ban on certain items.
6. The measures taken by government have had a positive impact. The economic growth rate of 7.9 percent in the last quarter of 2009 holds testimony of this. There are speculations doing rounds that the government may withdraw some of the unconventional measures taken. However the RBI governor has recently stated that the time “may not be right to withdraw the stimulants” and the government could wait till the end of the financial year.
7. To further India’s claim that the economy is back on track, the Asian Development Bank has seconded it. In its report ‘Impact and policy responses – India’ the bank said that the stimulation package of Indian government has paid dividends and the Indian economy is poised for a strong recovery.
1. The recent global economic recession has taught the whole world a major lesson that in this era of ‘globalisation’, no country is economically isolated. Even if a crisis occurs in one country, some effect or the other would be felt in another. Though the major crisis had its genesis in the USA, its effect was seen throughout the world. The strongest of the economies like Germany declared that it was going to have a negative growth in 2009.
2. Another mystery that needs to be answered is that why did the US government not try to bail out their biggest bank – The Lehman Brothers. Though economists may argue that probably the US government had enough confidence that things would get under control or they wanted to ascertain the extent of the damage but it may not be anything more than ‘history repeating itself’. A similar thing happened during the Great Depression of 1930s and at that time also the US government did not bail out the first bank that filed for bankruptcy.
3. Two of the fastest growing economies of the world – India and China – have given enough indications that they have come out of this crisis with flying colours, although the end is still a fair bit of distance. Our Finance Minister’s words that “India has strong Fundamentals” are proving out to be true. Indian recovery has a lot to owe to the stimulus package that the government put into force. However, the regulatory bodies like the RBI, typical foreign investment rules, banking regulations and even India’s foreign policy had their role to play. Indian government needs to look into future and carve out comprehensive policy to make our economy as recession proof as possible.
4. The government’s policies towards providing adequate liquidity have worked but now it has to decide as to when to remove these and let the economy take its natural course. This is important because if the liquidity is further increased, there are chances that the government will be fighting another evil which is already showing its fangs – inflation. However, RBI’s governor, Mr D Subbarao’s statement that now is not the right time to remove the stimulants has some weightage.
5. There are a few recommendations that could further make our economy recession resistant. These are as follows:-
(a) The economic growth needs to be inclusive. Though the government always states this, it is important that some more steps are taken to increase the percentage of people above poverty line.
(b) The labour laws and laws for foreign investments need to be modified so as to ensure that, like China, we also enjoy the benefits of cheap labour to the fullest.
(c) India needs to improve the infrastructure and improve it fast. Many foreign companies, it is known, choose China over India mainly due to better infrastructure like transportation, work space and so on.
(d) India is strong in IT, services sector and agriculture. It needs to expand it arena by giving tough competition to China in manufacturing sector as well. Having better infrastructure and labour laws will certainly help.
(e) Schemes like NREGS are really good. However the central government needs to have better regulatory rule mainly because the success of this scheme vary from state to state. There has to some authority at central level which can ensure uniformity.
(f) RBI’s control over Indian banking system should remain.
(g) Stimulants have proved that there is enough potential in our economy. Even if the FIIs and FDIs dry out, the domestic consumption can still make it grow.
(h) Import of sub standard goods, especially Chinese, should be banned and the government should encourage domestic industries to come out with the solutions.
(j) A good thing in the Indian Armed Forces’ procurement procedure is the introduction of the ‘Offset Clause’. However our industries need to gear up for utilising the complete benefits of this. Our government needs to take some firm steps to enable the ‘Navratnas’ and other private companies to be up for the challange.
6. The Indian economy has taken a turn and has stood up to the test that the recent global recession had to offer. Our country has shown the world that ours is not a fairytale success story but one with hard work and intelligent thinking. The world, in turn, has acknowledged it and this is clearly visible from the fact that the foreign investments were back in India with the same speed they exited when the recession first surfaced. It will not be wrong to say that India has earned its pride of place in the eyes of the entire world.
We will send an essay sample to you in 2 Hours. If you need help faster you can always use our custom writing service.Get help with my paper