"GLOBAL FINANCIAL CRISIS AND IT'S IMPACT ON INDIAN ECONOMY"

A
Dissertation Report
On
“ GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INDIAN ECONOMY”
SUBMITTED TO:
SAVITRIBAI PHULE PUNE UNIVERSITY
TOWARDS PARTIAL FULFILLMENT OF
MASTER‟S DEGREE IN BUSINESS ADMINISTRATION
BY:
SOMNATH B. PAGAR
UNDER THE GUIDANCE OF
PROF.MRS. NAMRATA DESHMUKH
MBA-II
(2013-2015)
MET’S INSTITUTE OF MANAGEMENT
NASHIK, MAHARASHTRA, INDIA - 422003.

GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INDIAN ECONOMY
MET, IOM, NASHIK. Page 2
CERTIFICATE
This is to certify that Project Report titled is “GLOBAL FINANCIAL CRISIS
AND ITS IMPACT ON INDIAN ECONOMY” a bonafide work carried out by
Mr.Somnath Balu Pagar, of MBA-II of MET‟s Institute of Management, Nashik,
Maharashtra, India 422003, as a part fulfillment of MBA Degree of University of
Pune.
He has worked under our guidance and satisfactorily completed the Project
Work.
Place: Nashik Signature of Guide Signature of Director

ACKNOWLEDGEMENTS
In the preparation of this study, lots of people have helped me in some way or the other
and therefore acknowledgements are due to them without whose co-operation, support,
encouragement and guidance this research study could not have been completed.
This study was done under the guidance of Prof. Ms. Namrata Deshmukh. I would like
to acknowledge my deepest appreciation and undying gratitude for the scholarly guidance,
constant encouragement and confidence he has given to me. She has been my mentor not only
during the course of this work, but also in my entire PG study. I am truly indebted to her.
I am extremely thankful to all my teachers and Dr. Sonali Gadekar (HOD) MET
Institute Of Management, Nashik. I would also like to thanks to the Librarians and administrative
staffs of the MET IOM for their timely help and co-operation during the project work.

DECLARATION
I Mr. Somnath Pagar Undersigned hereby declare that project entitled “GLOBAL
FINANCIAL CRISIS AND ITS IMPACT ON INDIAN ECONOMY Written and submitted by me.
Original work is done under the guidance of Prof. Namrata Deshmukh ma‟am.
The imperials findings in this report are based on data collected by myself. While
preparing this I have not copied from any report. I understand that any such copying is entitled to
be punished in a way that university authority deems to be fit.
Signature of student
Somnath Pagar

CONTENTS
Sr. No Particulars Page No.
Cover Page -
Certificate 2
Acknowledgement 3
Declaration 4
1. Executive Summery 7
2. Introduction 10
3. Literature review 14
4. Research Methodology 16
4.1 Method of Data Collection 16
4.2 Limitation of the Study 16
5. Objectives of the Study 18
6. Concept of the Project Study 19
6.1 Background of the Crisis 19
6.2 CAUSE OF THE CRISIS: The Financial Crisis: How it happened 21
6.3 Indian Economy During the Crisis 26
7. Data analysis and interpretation 31
7.1
Analysis the Impact of Economic Crisis in India
(Major Sectors)
32
7.2 Analysis of FII Flows and Indian Economy 40
7.3 Reasons for financial Crisis (2008) 45
7.4 India‟s Policy responses to Crisis 48
7.5 Opportunities arisen from Global Crisis 53
7.6 Entrepreneurship in Times of Financial Crisis 56
Conclusion 60
References 61

TABLE OF CONTENTS FOR TABLES & CHARTS
Sr. no Particulars Page no.
Tables
1. Table1: Indicators of income flow and foreign investment 27
2. Table2: Merchandise export and import 27
3. Table 3: Balance of payment position-overall balance 28
4. Table 4: GDP growth rate of Indian economy 29
5.
Table 2.1: FII Flows in the Indian Financial Markets for the Years
2000–2009.
40
6.
Table 2.2: Trend of Returns of the Stock Exchange during the
Period 2000–2009.
41
7. Table2.3: Relation and Impact of FII on Stock Market Returns 44
Charts
1. Figure 1: Business Cycles 19
2. Figure 2: Merchandise export and import 28
3. Figure 3. Trends of FII Flows and Stock Market Returns 41
4. Figure 4: Key factors behind the global financial crisis 45

CHAPTER- I
Executive Summery
The world economy is engaged in a spiraled mortgage crisis, starting in the United States,
Which is carving the largest financial shock since the great depression.
A loss of confidence by investors in the value of securitized mortgages in the United
States was the beginning of the financial crisis that swept the global economy off its feet. The
major financial crisis of the 21st
century involves esoteric instruments, unaware regulators, and
nervous investors.
Starting in the Summer of 2007, the United states experienced a startling contraction in
wealth, triggered by the subprime crisis, thereby leading to increase in spreads, and decrease in
credit market functioning. During boom years, mortgages brokers, enticed by lure of big
commissions, talked buyers with poor credit checks. Higher default levels, particularly among
less creditworthy borrowers, magnified the impact of the crisis in the financial sector.
The ability to raise cash, i.e. liquidity, is an essential component for the markets and for
the economy as a whole. The freezing liquidity has closed shops of a large number of credit
markets. Interest rates had been rising across the world, even rates at which banks lend to each
other. The freezing up of the financial market eventually lead to severe reduction in the rate of
lending, followed by slow and drastically reduced business investments, paving the way for a
nasty recession in the overall economic state of the globe.
A collapse of trust between market players has decreased the willingness of lending
institutions to risk money. The bursting of the housing bubble has caused a lot of AAA labeled
investments to turn out to be junk. Nervous investors have been sending markets plunging down.
Market all over the world including those of Britain, Germany, and Asia, had to confront all-time
low figures since the past couple of years or more.
Britain also witnessed the so-called “bursting of the Brown Bubble”, in the form of the
highest personal debts per capita in the G7, combined with an unsustainable rise in housing
prices. The longest period of expansion, which Britain claimed to be undergoing, eventually
revealed itself as an illusion. The illusion of rising to prosperity had been maintained by

borrowing to spend. Often in the form of equity withdrawal form increasingly expensive houses.
The bubble ultimately burst, exposing Britain to the most serious financial crisis since the 1920s.
This brings a lot of misery to the home owners who are set to see the cost of mortgages soar
following the deepening of the banking crisis and the Libor- the rate at which banks lend to each
other.
The impact of the crisis is more vividly observable in the emerging markets which are
suffering from one of their biggest selloffs. Economies with disproportionate offshore
borrowings (like that of Australia) are adversely affected by the western financial crunch.
Globalization has ensured that none of the economies of the world stay insulated from the
financial crisis in the developed economies.
Contrary to the ‗decoupling theory„, emerging economies too have been hit by the crisis.
According to the decoupling theory, even if advanced economies went into a downturn,
emerging economies would remain unscathed because of their substantial foreign exchange
reserves, improved policy framework, robust corporate balance sheets, and a relatively healthy
banking sector. In a rapidly globalizing world, the „decoupling theory „was never totally
persuasive.
The „decoupling theory„ stands totally invalidated today in the face of capital flow reversals,
sharp widening of spreads on sovereign and corporate debt and abrupt currency depreciations.
The Project Study’s:
In the subsequent parts of the project, several issues will be discussed which will provide a
detailed account of the origin of the crisis and the ripple effect of economic downturn of the
world„s largest economy which engulfed even the fast growing emerging economies into the
crisis. The impact of the crisis on the Indian economy will also be dealt with. The main aim of
the study is to find relevant answers to questions like:
 Why and how India has been hit by the crisis?
 How the Indian economy and the Reserve Bank of India have responded to the crisis?
 Which are the opportunities arisen from the crises?

The recommendations include the outlook for the Indian economy in the wake of the
economic turmoil. The project concludes with an analysis of Entrepreneurship in times of the
financial crisis and a swift overview of the various aspects of entrepreneurship which can help in
the revival of a plummeting economy.

CHAPTER-II
INTRODUCTION
The world has witnessed several financial crises in the past few decades, such as the
OPEC oil crises of the 1970s, the United States Savings and Loan crisis of the 1980s, the
prolonged economic downturn in the Japanese economy in the 1990s, the Asian financial crisis
in the latter part of the 1990s, and the problems following the crash of the dot com bubble in the
early part of the last decade. Each of these events had been accompanied by shocks to the
economies of one or more markets or regions and it took several years of concerted economic
and regulatory policy adjustments for the affected markets to return to stability. While it is
normal for financial crises to occur frequently and the affected economies to recover
subsequently, it nevertheless results in economic losses for the countries involved and for the
people, businesses and institutions in those countries.
The Global Financial Crisis, which started in 2008, is the latest in the series of economic
crises to adversely impact world economies. Unlike the past few crises, the current crisis has not
spared any of the countries or market sectors, and has devastated economies that were
traditionally strong. While the world is slowly seeing an end to the crisis, it is widely
acknowledged that among the financial crisis of the past hundred years, only the Great
Depression of the 1930s had a more severe and protracted effect on the world economy
compared to the current economic upheaval. What started as an excessively loose monetary
policy in the 1990s in major developed economies transformed into global imbalances and a full-
blown financial and economic crisis for all the economies of the world.1 The problems that were
first noticed in the US subprime mortgage market quickly spilled over into the real estate and
banking The Indian economy is experiencing a downturn after a long spell of growth. Industrial
growth is faltering, the current account deficit is widening, foreign exchange reserves are
depleting, and the rupee is depreciating.
The crisis originated in the United States but the Indian government had reasons to worry
because there was a potential adverse impact of the crisis on the Indian banks. Lehman Brothers
and Merrill Lynch had invested a substantial amount in Indian banks, who in turn had invested

the money in derivatives, leading to exposure of even the derivatives market to these investment
bankers. Public Sector Unit (PSU) banks of India like Bank of Baroda had significant exposure
towards derivatives. ICICI faced the worst hit. With Lehman Brothers having filed for
bankruptcy in the US, ICICI (India„s largest private bank), survived a rumor during the crisis
which argued that the giant bank was slated to lose $80 million (Rs. 375 crores), invested in
Lehman„s bonds through the bank„s UK subsidiary. Even Axis Bank was affected by the
meltdown. The real estate sector in India was also affected due to Lehman Brother„s real estate
partner having given Rs 7.40 crores to Unitech Ltd., for its mixed use development project in
Santa Cruz. Lehman had also signed a MoU with Peninsula Land Ltd, an Ashok Piramal real
estate company, to fund the latter„s project amounting to Rs. 576 crores. DLF Assets, which
holds an investment worth $200 million, is another major real estate organization whose
valuations are affected by the Lehman Brothers dissolution. The impact of the crisis on the
Indian economy has been studied here forth and the study is chiefly focused on 4 major factors
which affect the Indian economy as a whole. These are:
(i) Availability of global liquidity
(ii) Decreased consumer demand affecting exports
(iii) The Financial Crisis and the Indian IT Industry
(iv) The Financial Crisis and India„s Financial Markets
Availability of Global Liquidity for India in times of Financial Crisis:
The main source of Indian prosperity had been Foreign Direct Investment (FDI).
American and European companies were bringing in truck-loads of dollars and Euros to get a
piece of pie of Indian prosperity. Less inflow of foreign investment will lead to a dilution of the
element of GDP driven growth. India is in no position to ever return this money because it has
used the same in subsidizing the petroleum products and building low quality infrastructure.
Liquidity is the major driving force of the stock market performances observed in
emerging markets. Markets such as those of India are especially dependent on global liquidity
and international risk appetite. The initial stage of the crisis witnessed rising interest rates across
global economies. Rising interest rates tend to have a negative impact on global liquidity, and
subsequently equity prices, as funds may move into bonds or other money market instruments.

Even though there are threats for the Indian economy due to the global liquidity crunch,
they are all oriented for the long term. Any short term liquidity concern will be taken care of by
the high rate of household and corporate savings in the country. The Indian economy can
certainly rely on its ‗piggy bank„to address its short-term liquidity demands as the government is
taking measures to channelize large sums of household savings lying unused in physical assets
into the more productive financial sector. Thus, the Indian economy will be relatively unaffected
by the global liquidity crunch.
Indian companies which had access to foreign funds for financing their trading activities
are the worst hit. Foreign funds will be available at huge premiums but will be limited to the
blue-chip companies, thus leading to
 Reduced capacity of expansion leading to supply pressure
 Increased interest rates which will affect corporate profitability
 Increased demand for domestic liquidity which will put interest rates under
pressure
Decreased consumer demand affecting exports:
Consumer demand has plummeted drastically in developed economies, leading to a
reduced demand for Indian goods and services, thus affecting Indian exports.
 Export oriented units are the worst hit; thus impacting employment
 Trade gap has been widening due to the reduced exports, leading to pressure on
the rupee exchange rate
The Financial Crisis and Indian I.T. Industry
In India, IT companies, with nearly half of their revenues coming from financial and
banking service segments, are close monitors of the financial crisis across the world. The IT
giants which had Lehman Brothers and Merrill Lynch (ML) as their clients are Tata Consultancy
Services (TCS), Wipro, Satyam, and Infosys Technologies. HCL escaped the loss to a great
extent because neither Lehman Brothers nor ML was its client.

Impact on Financial Markets:
The outflow of foreign institutional investment from the equity market has been the most
immediate effect of the crisis on India. Foreign Institutional Investors (FIIs) have been major
sellers in Indian markets as they need to retrench assets in order to cover losses in their home
countries, thus being forced to seek havens of safety in an uncertain environment.
Given the importance of FII investment in driving Indian stock markets and the fact the
cumulative investment by FIIs stood at $66.5 billion at the beginning of 2008, the pullout of
$11.1 billion during the first nine-and-a-half months of 2008 triggered a collapse in stock prices.
The Sensex fell from its closing peak of 20,873 on January 8, 2008, to less than 10,000 by
October 17, 2008.
The withdrawal by FIIs also led to a sharp depreciation of the rupee. While this
depreciation may be good for the Indian exports which have been adversely affected by the
slowdown in global markets, it is not so good for those who have accumulated foreign exchange
payment commitments.
The financial crisis has reinstated the notion that in the globalized world, no country can
exist as an island, insulated from the twists and turns of the global economy; growth prospects of
emerging economies have been undermined by the cascading financial crisis, though there
certainly exist significant variations across the countries.

CHAPTER-III
Literature Review
Walia (2012) planned a study on impact of global economic crisis on Indian economy:
An analysis. This paper aimed to analyze the impact of the global economy on Indian economy
which is one of the fast growing economies of the world. To analyze the impact of global
slowdown for the Indian economy, a comparative analysis was made between the growth rates of
sectoral GDP during pre-meltdown and meltdown years. The paper confirmed that various
sectors of Indian economy are affected by global recession, to a certain extent.
Long, Li,et al (2012)conducted a study on impact of US financial crisis on different
countries: based on the method of functional analysis of variance. This paper made a
comparative analysis on the economic development process and the degrees crisis-affected in
financial crisis of five categories countries. In this paper, the method of Functional Analysis of
Variance (FANOVA) was applied to make a comparative study on the economic development
process of different types of countries, including the differences on the economic growth rate, the
time of the economic recession, the extent of the recession and the recovery situation of the
economy. Moreover, the paper performs a dynamic test on the significance of the difference on
the economic growth rate during the whole stage.
Dornean, et al (2012) undertook a study on the impact of the recent global crisis on
foreign direct investment. Evidence has been taken from central and eastern European countries.
This paper aimed to analyze the relationship between the financial crisis and FDI in CEE
Countries for Central and Eastern European countries (EU members). The crisis had a major
impact on capital flows to the region, although the magnitude of the impact differed notably,
depending on the type of capital inflows and the receiving country. In order to highlight this, the
paper used a regression model and panel data methodology, trying to find if there is some
difference between the analyzed countries. The results showed that the financial crisis affects
directly the level of FDI.

Article By-Areej Aftab Siddiqui and N.A. (2012) Azad Foreign Institutional Investment
Flows and Indian Financial Market: Relationship and Way Forward.
In the Indian scenario, Chakrabarti (2001) has observed that foreign institutional
investors and domestic investors are at par with each other as far as the access to knowledge is
concerned in the Indian markets. He has taken a monthly data set for the period May 1993 to
December 1999 and found that FII net inflows are the effect of the Indian stock market returns
rather than the cause of returns. On the contrary, Mukherjee, Bose and Coondoo (2002) suggest
that FII flows to and from the Indian market are caused by returns in the domestic equity market.
In a subsequent study, Bose and Coondoo (2004) have found evidence of bi-directional causality
between returns on the BSE stock index and FII net inflows. According to them, this causality is
due to increase in FII inflows caused by an upsurge in global equity markets.
Journal of International Business and Law- K. G.Viswanathan (2010) The global
financial crisis has had a more severe impact on the advanced economies compared to the rest of
the world. The economic indicators in the United States and the European Union countries point
to a severe contraction in these markets. At the same time, the slowdown in the emerging
markets has been smaller. Within the emerging markets, countries such as India, China and
Brazil have even managed to expand during the crisis, albeit at a lower rate compared to their
growth prior to the crisis.

CHAPTER-IV
Research Methodology
The study is both Exploratory and Empirical in nature. Descriptive research design
has been used to examine the objectives. The exploratory part of the study is based on the current
literature available in the market on this particular issue in the form of books, journal articles,
research studies and websites.
Data are obtained from the websites of the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE), SEBI Handbook of Statistics on Indian Securities Markets,
Reserve Bank of India (RBI) Handbook of Statistics on Indian Economy, Investment Company
Fact Book, various reports and articles published in financial dailies, finance-based magazines
and periodicals.
Methods of Data Collection
The data for the study has been collected from secondary sources. Secondary data had
been collected from various books and journals. The study covers the thoughts and writings of
various authors in the stream of industry, academician, and research. The journals and books
have been referred were described in the bibliography.
Limitations of the Study
The current project discusses key issues of the Indian economy that cropped up as the
global economy is swaying in its worst economic downturn. Though the major factors have been
discussed, yet there exist more issues which have not been detailed due to time constraints.
As the economies across the globe try to protect themselves from the hazards of the
crisis, they are trying to maintain domestic demand and protect their domestic industry from
foreign invasions, lest their own economy might destabilize. This has been giving rise to
„Protectionism„ and rising incidences of countries resorting to protectionist measures have been
recorded at the World Trade Organization.

India has been recorded to initiate the maximum number of anti-dumping investigations
against goods exported into the country. America is propagating its Buy American campaign in
order to help itself become a more self-sufficient economy. The Chinese economy is reeling
from the global drop in exports; China„s economy is highly industrialized and a significant
fraction of its GDP is accounted for by its exports to the United States.
Therefore, apart from internal factors that have affected global economies, there are
critical external factors and trade behavior that dictate the nations across the globe to resort to
measures to help themselves. The discussion of such issues in detail has not been made a part of
the report at hand, though a significant amount of information has been analyzed and studied for
the same.
Apart from these, there may be some technical flaws like:
(i) The accuracy and reliability of the data collected – data across different sources may
vary slightly
(ii) The measurability of the factors relating to the crisis across a global scale may not be
thorough – considering all the factors would not be a feasible option.
(iii) Opinion biasness may also exist.
(iv) Financial data are taken for five years only i.e. pre crisis era– 2005-07, during crisis
era– 2007-08, and after crisis happened–2009-10. In some cases it‟s taken from 1998
to 2008.
The study of the global financial crisis is inexhaustible, and it will continue as long as the
world economy does not become self-sustainable again. The impacts of the crisis are a test of the
financial market stabilities and regulations across the global economy; the corrections that will
be made have been long overdue.

CHAPTER-V
Objectives of the study
The impact of global crisis on Indian economy is mainly through three distinct reasons
viz, the financial sector, exports and exchange rates. In this one main reason is through financial
sector. It includes banking sector, equity markets, external commercial borrowings and
remittances.
The selected Dissertation project examines or study‟s the following various objectives,
are as follow:
1. To examine the impact of the global financial crisis on the India‟s Major sectors.
2. To the study of Financial Crisis impact on FII flow and Indian economy.
3. To identify the different reasons for global financial crisis.
4. To examine the How India‟s policy responses to the Crisis?
5. To identify the various opportunities arises from the Financial Crisis.
6. To analyse the Entrepreneurship in Times of Financial Crisis.

CHAPTER-VI
Concept of the Project Study
Understanding Business Cycles
Business Cycle or Economic Cycle refers to economy-wide fluctuations in production or
economic activity over several months or years. These cycles are characteristic features of
market-oriented economies – whether in the form of the alternating expansions and contractions
which characterize a classic business cycle, or the alternating speedups and slowdowns that mark
cycles in growth.
A recession occurs when a decline – however initiated or instigated – occurs in some
measure of aggregate economic activity and causes cascading declines in the other key measures
of activity.1
Thus, when a dip in sales causes
a drop in production, triggering
declines in employment and income,
which in turn feeds back into a further
fall in sales, a vicious cycle results and
a recession ensues. This domino effect
of the transmission of the economic
weakness, from sales to output to
employment to income, feeding back
into further weakness in all of these
measures in turn, is what characterizes
a recessionary downturn. Figure 1: Business Cycles; Source: Seguin Financial Group
The phases of the business cycle are characterized by changing employment, industrial
productivity, and interest rates.

In the Keynesian view, business cycles reflect the possibility that the economy may reach
short- run equilibrium at levels below or above full employment. If the economy is operating
with less than full employment, i.e., with high unemployment, then in theory monetary policy
and fiscal policy can have a positive role to play rather than simply causing inflation or diverting
funds to inefficient uses.
1. Economic Cycle Research Institute, New York, Pami Dua (References)
2. En.wikipedia.org/wiki/Business_cycle
1. Background of the crisis
A disorderly contraction in wealth and money supply in the market is the basic cause of a
financial crisis, also known as a credit crunch. The participants in an economy lose confidence in
having loans repaid by debtors, leading them to limit further loans as well as recall existing
loans.
Credit creation is the lifeblood of the financial/banking system. Credit is created when
debtors spend the money and which in turn is banked and loan to other debtors. Due to this, a
small contraction in lending can lead to a dramatic contraction in money supply.
The present global meltdown is a culmination of several factors, the most important being
irrational and unsustainable consumption in the West particularly in United States
disproportionate to its income by consistent borrowings fueled by savings and surpluses of the
East particularly China and Japan.
The second important factor is the greed of the investment bankers who induced housing
loans by uncontrolled leveraging on an optical illusion of increasing prices in the housing sector.
The third important factor is the failure of the regulating agencies who ignored the
warning signals arising out of the ballooning debts, derivatives and financial innovation on the
assumption that the Collateral Debt Obligation (CDO), the Credit Default Swapping (CDS) and
Mortgaged Backed Securities (MBS) would continue to remain safe with the mortgage
guarantees provided by Government Sponsored Enterprises (GSEs) namely Fannie Mae and
Freddie Mac which had enjoyed the political patronage since inception.

There are other several factors including shadow banking system, financial leveraging by
the investment bankers and lack of adequate disclosures in the financial statements leading to
fallacious ratings by the rating agencies.
The global financial crisis is the unwinding of the debt bubbles between 2007 and 2009.
On December 1 2008, the National Bureau of Economic Research (NBER) officially declared
that the U.S. economy had entered recession in December, 2007. The financial crisis has moved
into an Industrial crisis now as countries after countries are sharing negative results in their
manufacturing and services sectors.
2. CAUSE OF THE CRISIS: The Financial Crisis: How it happened
The current crisis has been linked to
the subprime mortgage business, in which
US banks give high-risk loans to people
with poor credit histories.
These and other loans, bonds, or
assets are bundles into portfolios or
Collateralized Debt Obligations (CDOs) and
sold to investors across the globe.
Falling housing prices and rising interest
rates led to high numbers of people who could not repay their mortgages. Investors suffered
losses and hence became reluctant to take
on more CDOs. Credit markets froze and
banks became reluctant to lend to each
other, not knowing how many bad loans
and non-performing assets could be on
their rivals„ books.
The crisis began with the bursting
of the United States housing bubble and
high default rates on subprime mortgages

and adjustable rate mortgages (ARM). The foreclosures exceeded 1.3 million during 2007 up
79% for 2006 which increased to 2.3 million in 2008, an 81% increase over 2007.
Financial product called mortgaged backed securities (MBS) which in turn derive their
value from the mortgage installment payments and housing prices had enabled financial
institutions and investors around the world to invest in U.S. housing markets. Major banks and
financial institutions which had invested in such MBS incurred losses of approximately US $ 435
billion as of July 2008 which has mounted further and is now near to the value of US $ 1 trillion.
The value of all outstanding residential mortgage owed by US households was US$ 10.6 trillion
as of Mid-2008 of which $ 6.6 trillion were held by mortgaged pools Consisting of Collectivized
debt obligation (CDO) already mortgage backed securities (MBS) (CDO and MBS) and the
remaining US$ 3.4 trillion by traditional depository institutions.
The owners of stock in US corporation alone has suffered loss of about US$ 8 trillion
between 1 January and 11 October 2008 as the value of their holding declined from US $ 20
trillion to US $ 12 trillion.
The first catastrophe took place when Bear Stearns was sold to JP Morgan at a throw
away price in April 2008.
The biggest adverse impact was on Fannie Mae (The Federal National Mortgage
Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation); the two
Government Sponsored Enterprises (GSEs) were granted a very quick bailout package by the US
Treasury. A record breaking level of mortgage foreclosures took place for the subprime
mortgages. This led to a sharp decline in the value of securities which were based on these
mortgages. Most of the investment bankers including Fannie Mae and Freddie Mac reached to
the brink of bankruptcy.
When homeowners default, the payments received by MBS and CDO investors decline
and the perceived credit risk rises. This has had a significant adverse effect on investors and the
entire mortgage industry. The effect is magnified by the high debt levels (financial leverage)
households and businesses have incurred in recent years. Finally, the risks associated with
American mortgage lending have global impacts, because a major consequence of MBS and

CDOs is a closer integration of the USA housing and mortgage markets with global financial
markets.
Impact of the Crisis
The global financial crisis is already causing a considerable slowdown in most developed
countries. Governments around the world are trying to contain the crisis, but many suggest the
worst is not yet over. Stock markets are down more than 40% from their recent highs. Investment
banks have collapsed, rescue packages are drawn up involving more than a trillion US dollars,
and interest rates have been cut around the world in what looks like a coordinated response.
Leading indicators of global economic activity, such as shipping rates, are declining at alarming
rates.
The continuous development of the crisis had prompted fears of a global economic
collapse. Retail sales in the US have plunged to historic lows and business and consumer
confidence are at their lowest levels. Most of the companies have reported steep decline in sales
due to the slackened demand in the market. The rate of unemployment in the United States has
skyrocketed to 8.9% with the loss of a total of 539,000 jobs. US GDP shrunk 6.1% in the first
quarter; the fall in GDP is recorded despite an increase in consumer spending in the economy
which is trying to recuperate from the crisis. The fourth quarter of the previous year had recorded
the highest contraction in GDP since the past 25 years – the economy contracted by 6.3%.
In the classical economics scheme of things, the free market economy is set to correct
itself when it verges away from full employment. This was proven to be untrue in the 1930„s
Great Depression when up to a fourth of the workers in the US were out of work.
Quoting US Economist Paul Krugman, as noted in New York Times column,
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which
in turn has led to a plunge in mortgage-backed securities – assets whose value ultimately
comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital – too
few assets compared with their debt. This problem is especially severe because everyone
took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven„t
been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling their assets,
including those mortgage-backed securities, but this drives asset prices down and makes
their financial condition even worse. This vicious cycle is what some call the „paradox of
deleveraging.‟
On October 11, 2008, the head of the International Monetary Fund (IMF) warned that the
world financial system was teetering on the "brink of systemic meltdown" The sequence of the
event can be summarized as below for understanding at a glance.
 Bear Stearns was acquired by J.P. Morgan Chase in March 2008 for $1.2 billion. The sale
was conditional on the Fed's lending Bear Sterns US$29 billion on a nonrecourse basis.
 The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were both
placed in conservatorship in September 2008. The two GSEs have more than US$ 5
trillion in mortgage backed securities (MBS) and other debt outstanding.
 Merrill Lynch was acquired by Bank of America in September 2008 for $50 billion.
 Scottish banking group HBOS agreed on 17 September 2008 to an emergency acquisition
by its UK rival Lloyds TSB, after a major decline in HBOS's share price stemming from
growing fears about its exposure to British and American MBSs. The UK government
made this takeover possible by agreeing to waive its competition rules.
 Lehman Brothers declared bankruptcy on 15 September 2008, after the Secretary of the
Treasury Henry Paulson, citing moral hazard, refused to bail it out.
 AIG received an $85 billion emergency loan in September 2008 from the Federal
Reserve, which AIG is expected to repay by gradually selling off its assets. In exchange,
the Federal government acquired a 79.9% equity stake in AIG.

 Washington Mutual (WaMu) was seized in September 2008 by the USA Office of Thrift
Supervision (OTS). Most of WaMu's untroubled assets were to be sold to J.P. Morgan
Chase.
 British bank Bradford & Bingley was nationalized on 29 September 2008 by the UK
government. The government assumed control of the bank's £50 billion mortgage and
loan portfolio, while its deposit and branch network are to be sold to Spain's Grupo
Santander.
 In October 2008, the Australian government announced that it would make AU$4 billion
available to nonbank lenders unable to issue new loans. After discussion with the
industry, this amount was increased to AU$8 billion.
 In November 2008, the U.S. government announced it was purchasing $27 billion of
preferred stock in Citigroup, a USA bank with over $2 trillion in assets, and warrants on
4.5% of its common stock. The preferred stock carries an 8% dividend. This purchase
follows an earlier purchase of $25 billion of the same preferred stock using Troubled
Asset Relief Program (TARP) funds.

3..Indian Economy During the financial Crisis
The global financial crisis which originated in the advanced economies spread rapidly to
India and other Emerging Market Economies through various channels. Indian economy could
withstand the adverse effects of the financial crisis and thereby avoid the long term consequences
with the help of the strength it already achieved. However, it is wrong to say that it is free of
adverse impacts. India‟s increasing dependence on bilateral trade with other countries and its
financial relationship with the advanced economies somehow transferred the economic shocks to
the national economy. The impact of financial crisis is already felt in terms of reduced export
earning, drastic decline in industrial growth and employment, depreciation of rupee, reduction in
foreign exchange reserves, down turn in stock markets and many other indicators. The stock of
foreign exchange declined from $330 billion some six months before to 245 billion by the first
week of December 2008 and the BSE index declined from over 20000 during the early months of
2008 to 9000 during the last week of November 2008 .
In the present global scenario, India has been considered as the most promising and fast
growing economy in the world. Due to the liberalized rules for Foreign Direct Investment (FDI)
in India, the real estate, telecommunication, services, construction activities, power etc have
become very attractive investment avenues for both the domestic as well as foreign investors.
Similarly, due to the increased activities of Foreign Institutional Investors (FIIs) like mutual
funds, pension funds etc, the Foreign Portfolio Investment in the country has witnessed
tremendous upswing during 2000s. The overall foreign investment in India met serious setback
during the crisis. Table 3 shows that the foreign investment in India has been growing at a faster
rate since 2003-04. However, during 2008-09, the very year hit by the crisis, the foreign
investment declined significantly showing a negative growth rate of 31.82 per cent. It was seen
that the net portfolio flows to India soon turned negative during the financial crisis as Foreign
Institutional Investors rushed to sell equity stakes in a bid to replenish overseas cash balances. A
similar trend of negative growth is found in case of income flow to India - including investment
income and compensation of employees- during 2008-09 and 2009-10.

Table1: Indicators of income flow and foreign investment
The worldwide financial crisis has caused fall in India's merchandise exports and imports.
Handicrafts exports fell by 70 percent. Other sectors like tea and carpets were also down by 20
percent and 32 percent, respectively. Overall merchandise export and import have been
significantly improving since 2001-02. The growth momentum continued till 2008-09. But the
merchandise trade of India was severely attacked by the crisis as due to the fact that our major
trade partners, European Union and the US, were both in the throes of financial crisis. The
merchandise export which recorded a growth rate of 28.29 per cent during 2008-09, immediately
turned down with meagre growth of only 0.06 per cent. The very similar trend is found in case of
India‟s merchandise imports. It slid down from a growth rate of 35.75% during 2008-09 to 0.13
% during 2009-10.
Table2: Merchandise export and import

Figure 2: Merchandise export and import
An important sector severely affected during the financial crisis was India‟s business
services. The earning from business services was treated to be an important source of income
flow to the national economy during the globalisation era. The data shown in table 2 depicts
increased earnings of business services during 2000s especially up to 2008-09. The picture all on
a sudden changed because the earning from business services declined from 85544 crores during
2008-09 to 53749 during 2009-10 i.e., a decline of 37.17 per cent
Table 3: Balance of payment position-overall balance

As the RBI data indicates, the overall balance of BoP has been improving since 2005-06.
But it was shocking that during the year 2008-09, the overall BoP balance turned negative i.e., -
20080 US $ million showing that global financial crisis severely hit the flow of capital into the
country. It was noted that right from the beginning of 2008-09 and then subsequently the current
account transactions (both trade and invisibles) in the second half of the year. This has led to one
of the highest current account deficits and one of the lowest capital account surpluses for the
country. The impact of the crisis on both capital flows and current receipts has been much larger
than what economists initially thought. However, the economy could recover from the sudden
shock of the crisis thereby making positive balance in country‟s BoP account.
Table 4: GDP growth rate of Indian economy
The macroeconomic and financial indicators predominantly pointed to a strong and
vibrant Indian economy prior to the financial crisis. Above Table presents the Gross Domestic
Product (GDP- stands for the money value of all final goods and services produced within the
domestic territory of a country during a fiscal year) growth rate of Indian economy for the fiscal
years from 2003-04 to 2010-11. (The fiscal year for India starts in April and ends in the
following March). The GDP was growing at the rate of 8.5%, 7.5%, 9.5%, 9.6% and 9.3%,
respectively, for the five years leading up to the crisis. However, the crisis affected external as
well as internal sectors of the national economy led to a reduced growth of the domestic
economy. That is the GDP growth rate declined from 9.3 per cent to 6.8 per cent during 2008-09.
It can be noted from the recent GDP figures that the Indian economy has emerged with

remarkable rapidity from the slowdown caused by the financial crisis of 2007-09. During the last
two fiscal years, the economy registered a growth of 8% and 8.6% showing a quick recovery
from the symptoms of financial crisis

CHAPTER-VII
Data Analysis & Interpretation
India and the Financial Crisis
The global financial crisis has not left India unscathed. Over the last seven months,
growth has slipped dramatically - to 5.3% in the last quarter of calendar year 2008 - from over
9% in the previous four years. The contagion of the crisis has spread to India through all the
channels – the financial channel, the real channel, and importantly, as happens in all financial
crises, the confidence channel.
The slowdown is likely to have a large and immediate impact on employment and
poverty. Informal surveys suggest significant job losses. Job creation is likely to remain a key
concern as new entrants to the labor force - relatively better educated and with higher aspirations
- continue to put pressure on the job market.
The country has the option of turning the crisis into an opportunity. The most binding
constraints to growth and inclusion will need to be addressed: improving infrastructure,
developing the small and medium enterprises sector, building skills, and targeting social
spending at the poor. Systemic improvements in the design and governance of public programs
are crucial to get results from public spending. Improving the effectiveness of these programs -
that account for up to 8-10% of GDP - will therefore be an important part of the challenge.
The impact of the crisis on the Indian economy has been studied here forth and the study
is chiefly focused on 4 major factors which affect the Indian economy as a whole. These are:
I. Availability of global liquidity
II. Decreased consumer demand affecting exports
III. The Financial Crisis and the Indian IT Industry
IV. The Financial Crisis and India„s Financial Markets

1. Analysis the Impact of Economic Crisis in India
(Major Sectors)
(A) Information technology
With the global financial system getting trapped in the quicksand, there is uncertainty
across the Indian Software industry. The U.S. banks have huge running relations with Indian
Software Companies. A rough estimate suggests that at least a minimum of 30,000 Indian jobs
could be impacted immediately in the wake of happenings in the U.S. financial system.
Approximately 61 per cent of the Indian IT Sector revenues are from U.S financial corporations
like Goldman Sachs, Washington Mutual, Citigroup, Bank of America, Morgan Stanley and
Lehman Brothers. The top five Indian players account for 46 per cent of the IT industry
revenues. The revenue contribution from U.S clients is approximately 58 per cent. About 30 per
cent of the industry revenues are estimated to be from financial services (Atreya 2008). The
software companies may face hard days ahead.
India„s emergence as a globally competitive supplier of software and services has
attracted world-wide attention. The software and service sector not only contributed significantly
to export earnings and GDP but also emerges as a major source of employment generation in the
country. Besides, the information technology (IT) sector has served as a fertile ground for the
growth of new entrepreneurial ideas with innovative corporate practices and has been
instrumental in reversing the
brain drain, raising India„s
brand equity and attracting
foreign direct investment
(FDI) leading to other
associated benefits.
Economists have long
noted that services in general
are cheaper in developing
countries than in developed
countries. An abundant

supply of labor – the major input in the production of services – in developing countries, leading
to low wages is the chief factor that accounts for the low cost of producing services. India, with
its large pool of skilled manpower, has emerged as a major exporter of IT software and related
services,4: such as business process outsourcing (BPO). In fact, one of the notable achievements
in India during the last decade has been the emergence of an internationally competitive IT
software and service sector.
With the recent emergence of business process outsourcing delivered over the Internet,
the socalled IT enabled services (ITES-BPOs) as a major source of employment and foreign
exchange, The impact of the global financial crisis, rooted in the United States, on the Indian IT
sector can be easily gauged from the fact that approximately 61% of the Indian IT sector„s
revenue were from clients in the US. 58% of the revenue contribution of the top five players who
account for 46% of the IT industry„s revenues is from US clients. Approximately 30% of the
industry revenues are estimated from financial services.
The US financial services
and insurance sector (BFSI –
Banking, Financial Services, and
Insurance) was one of the
earliest adopters of the trend of
outsourcing along with India„s
biggest IT-outsourcing firms.
Large outsourcing chunks were
created by the US BFSI which
made the Indian IT players learn
from their experience. Price
negotiations and increased
commitments on the service level raised the share of US financial services revenue as a
percentage of total revenues for the Top 3 Indian players from 25% to 38% between 1999 and
2008.
Indian companies were appreciated by the US clients for their flexibility, good quality
delivery and giving a key lever in managing their selling, general, and administrative expenses

(SG&A) and time to market by freeing up more critical IT resources. Indian players were
essentially partners in taking some of the fixed costs out of their SG&A. Because there was no
partnering of Indian firms with the financial services entities at any closer level, like tying up of
their invoices with the client„s business outcomes, the Indian players were saved from a much
worse impact of the crisis.
The slowing US economy has seen 70% of firms negotiating lower rates with their
suppliers and nearly 60% are cutting back on contractors. Due to a squeezed budget, only about
40% of the companies plan to increase their use of offshore vendors.
The US financial crisis has put the growth of the Indian It industry in the short-to-
medium-term in an uncertain position. Growth numbers of IT companies were revised down by
2-3% after sentiment started building up against the US financial sector at the time of the Q1
results. A worse downward revision is expected this quarter as well, though some larger players
like TCS, and Satyam have denied any larger impact of the crisis.
Some factors offsetting the revenue slowdown are:
 Favorable Rupee-dollar exchange rate
 Growth de-risking through Europe
 Growth in non-financial verticals
 Growth through counter-cyclical new business (countercyclical to US slowdown)
New outsourcing opportunities will also be provided by merger activities as newly-
merged entities may have to look at additional or new providers to support the integration work
with a broader global presence – considering the large size of combined business operations.
In addition to Mergers and Acquisitions, financial institutions will also be on the look-out
for ways to reduce their SG&A costs quickly which will opt for outsourced solutions that affect
the cause efficiently and effectively.
Efficiencies – Indian IT companies continue to be made of the same DNA as during the
dotcom days, and measures to shore up efficiencies are already underway since we saw the
exchange rate hit 39 to the Dollar. Some of those gains are permanent since the processes have
not been rolled back after the Rupee started depreciating. Potential measures are voluntary salary

cuts, complete moratorium on salary raises, travel reduction, tightening of promotion spends,
just-in-time hiring, and hire-after-contract.
While we have looked mainly at IT, the ITES sector is joined at the hip with IT industry,
but with its own flavors. The impact in financial services operations will be much larger, but,
over the medium to long term, there will be a huge gain for them from the increase in
outsourcing and off-shoring in the financial sector. However, short-term pain alongside the US
slowdown is inevitable.
(B) Impact on the Indian banking system
One of the key features of the current financial turmoil has been the lack of perceived
contagion being felt by banking systems in emerging economies, particularly in Asia. The Indian
banking system also has not experienced any contagion, similar to its peers in the rest of Asia.
The Indian banking system is not directly exposed to the sub-prime mortgage assets. It has very
limited indirect exposure to the US mortgage market, or to the failed institutions or stressed
assets. Indian banks, both in the public sector and in the private sector, are financially sound,
well capitalized and well regulated. The average capital to risk-weighted assets ratio (CRAR) for
the Indian banking system, as at end-March 2008, was 12.6 per cent, as against the regulatory
minimum of nine per cent and the Basel norm of eight per cent. A detailed study undertaken by
the RBI in September 2007 on the impact of the sub-prime episode on the Indian banks had
revealed that none of the Indian banks or the foreign banks, with whom the discussions had been
held, had any direct exposure to the subprime markets in the USA or other markets. However, a
few Indian banks had invested in the collateralized debt obligations (CDOs)/ bonds which had a
few underlying entities with sub-prime exposures. Thus, no direct impact on account of direct
exposure to the sub-prime market was in evidence. Consequent upon filling of bankruptcy by
Lehman Brothers, all banks were advised to report the details of their exposures to Lehman
Brothers and related entities both in India and abroad. Out of 77 reporting banks, 14 reported
exposures to Lehman Brothers and its related entities either in India or abroad. An analysis of the
information reported by these banks revealed that majority of the exposures reported by the
banks pertained to subsidiaries of Lehman Brothers Holdings Inc., which are not covered by the
bankruptcy proceedings. Overall, these banks‟ exposure especially to Lehman Brothers Holdings
Inc. which has filed for bankruptcy is not significant and banks are reported to have made

adequate provisions. In the aftermath of the turmoil caused by bankruptcy, the Reserve Bank has
announced a series of measures to facilitate orderly operation of financial markets and to ensure
financial stability which predominantly includes extension of additional liquidity support to
banks.
(C) Impact on stock and forex market.
With the volatility in portfolio flows having been large during 2007 and 2008, the impact
of global financial turmoil has been felt particularly in the equity market. Indian stock prices
have been severely affected by foreign institutional investors' (FIIs') withdrawals. FIIs had
invested over Rs 10,00,000 crore between January 2006 and January 2008, driving the Sensex
20,000 over the period. But from January, 2008 to January, 2009 this year, FIIs pulled out from
the equity market partly as a flight to safety and partly to meet their redemption obligations at
home. These withdrawals drove the Sensex down from over 20,000 to less than 9,000 in a year.
It has seriously crippled the liquidity in the stock market. The stock prices have tanked to more
than 70 per cent from their peaks in January 2008 and some have even lost to around 90 per cent
of their value. This has left with no safe haven for the investors both retail and institutional. The
primary market got derailed and secondary market is in the deep abyss.
Equity values are now at very low levels and many established companies are unable to
complete their rights issues even after fixing offer prices below related market quotations at the
time of announcement. Subsequently, market rates went down below issue prices and
shareholders are considering purchases from the cheaper open market or deferring fresh
investments. This situation naturally has upset the plans of corporate to raise resources in various
forms for their ambitious projects involving heavy outlays In India, there is serious concern
about the likely impact on the economy of the heavy foreign exchange outflows in the wake of
sustained selling by FIIs on the bourses and withdrawal of funds will put additional pressure on
dollar demand. The availability of dollars is affected by the difficulties faced by Indian firms in
raising funds abroad. This, in turn, will put pressure on the domestic financial system for
additional credit.
Though the initial impact of the financial crisis has been limited to the stock market and
the foreign exchange market, it is spreading to the rest of the financial system, and all of these

are bound to affect the real sector. Some slowdown in real growth is inevitable. Dollar purchases
by FIIs and Indian corporations, to meet their obligations abroad, have also driven the rupee
down to its lowest value in many years. Within the country also there has been a flight to safety.
Investors have shifted from stocks and mutual funds to bank deposits and from private to public
sector banks. Highly leveraged mutual funds and non-banking finance companies (NBFCs) have
been the worst affected.
Despite the vanishing foreign institutional investors (FIIs), the Indian markets remained
resilient and stayed afloat. Investors„ sentiments have been significantly impacted by the US
financial crisis. The tendency of investors to withdraw from risky markets has resulted in
significant capital outflows that have led to a liquidity crunch putting pressure on the Indian
stock market.
The Indian economy continues to show good health because of the strength of its
domestic drivers, like infrastructure projects, SME (small and medium enterprises) sector exports
and good yielding from the agricultural sector.
The cause behind US economy debacle is that the US investment banks are extremely
over leveraged and solely dependent on whole sale finances. This led to their demise. But such is
not the case with Indian Banks. The common man„s deposits are more in India and they have the
trust on the Banks, because all most all the Banks are nationalized and the depositor„s interest is
highly protected by Government of India.
In the US, the investment banks are dependent on institutional investor„s funds. These
investments are highly volatile and always search for high returns on their deposits. They look
for Demand-based investments and not time-based investments. Therefore, whenever the returns
from one market start dipping, they move their investment to re-invest in those markets which
would offer a better return, or take a defensive stance until the market regains momentum.
Domestic banking in India is generally secure, especially because nationalized banking
remains at the core of the system. Even so, there exist signs of fragility and inadequacy within
the banking sector. The effects of the global crisis have directly impacted some important
macroeconomic variables. Three such indicators stand out in terms of their sudden deterioration
since the middle of last year:

(i) Decline in the foreign exchange reserves held by the Reserve Bank of India
(ii) Fall in the external value of the rupee, especially vis-à-vis the US dollar
(iii) Decline in the stock market indices
(D) Impact on industrial sector and export prospect.
The financial crisis has clearly spilled over to the real world. It has slowed down
industrial sector, with from 8.1 per cent from last year to 4.82 per cent this year. The service
sector, which contributes more than 50 per cent share in the GDP and is the prime growth
engine, is slowing down, besides the transport, communication, trade and hotels & restaurants
subsectors. In manufacturing sector, the growth has come down to 4.0 per cent in April-
November, 2008 as compared to 9.8 per cent in the corresponding period last year. Sluggish
export markets have also very adversely affected export-driven sectors like gems and jewellery,
fabrics and leather, to name a few. For the first time in seven years, exports have declined in
absolute terms for five months in a row during October 2008- February 2009.
In a globalised economy, recession in the developed countries would invariably impact
the export sector of the emerging economies. Export growth is critical to the growth of Indian
economy. Export as a percentage of GDP in India is closer to 20 per cent. Therefore, the adverse
impact of the global crisis on our export sector should have been marginal. But, the reality is that
export is being and will continue to be adversely affected by the recession in the developed
world. Indian merchandise exporters are under extraordinary pressure as global demand is set to
slump alarmingly.
Decreased Consumer demand affecting exports- Some of the sharpest declines in output
during the global recession have been suffered by the strongest economies of Asia. It is feared
that due to their heavy dependence on exports, some of these economies may not see the face of
recovery until demand rebounds in America and Europe.
In October 2008, India registered its first every year-over-year decline in exports (of
15%), following growth of 35% in the previous five months. Indian shipments declined 33.3% in
March from a year earlier, the biggest fall since the last 14 years.
Goods exports dropped 33% from a year earlier to $11.5 billion in April 2009. This was
the biggest fall since April 1995. Exports slid 21.7% in February.

India„s exports, which account for 15% of the economy, grew 3.4% to $168.7 billion in
the fiscal year ended March 31, missing a $200 billion target set by the government, before the
collapse of the Lehman Brothers Holding Inc. accelerated the world financial and economic
slump. The government expects exports to total to $170 billion in the year that started April 1.
According to estimates from the Federation of Indian Export Organizations, falling
overseas sales may cost India about 10 million jobs.
(E) Impact on employment
Industry is a large employment intensive sector. Once, industrial sector is adversely
affected, it has cascading effect on employment scenario. The services sector has been affected
because hotel and tourism have significant dependency on high-value foreign tourists. Real
estate, construction and transport are also adversely affected. Apart from GDP, the bigger
concern is the employment implications A survey conducted by the Ministry of Labour and
Employment states that in the last quarter of 2008, five lakh workers lost jobs. The survey was
based on a fairly large sample size across sectors such as Textiles, Automobiles, Gems &
Jewelers, Metals, Mining, Construction, Transport and BPO/ IT sectors. Employment in these
sectors went down from 16.2 million during September 2008 to 15.7 million during December
2008 Further, in the manual contract category of workers, the employment has declined in all the
sectors/ industries covered in the survey. The most prominent decrease in the manual contract
category has been in the Automobiles and Transport sectors where employment has declined by
12.45 per cent and 10.18 per cent respectively. The overall decline in the manual contract
category works out to be 5.83 per cent. In the direct category of manual workers, the major
employment loss, i.e, 9.97 per cent is reported in the Gems & Jewellery, followed by 1.33 per
cent in Metals Continuing job losses in exports and manufacturing, particularly the engineering
sector and even the services sector are increasingly worrying. Protecting jobs and ensuring
minimum addition to the employment backlog is central for social cohesiveness.

2. Analysis of FII Flows and Indian Economy
The influence of foreign institutional investors has seen a rising trend in the Indian equity
market. Table 1 presents the trend of FII flows in the Indian financial markets for the years
2000–2009.
Table 2.1: FII Flows in the Indian Financial Markets for the Years 2000–2009.
Source: www. indiainfoline.com
Table 2.1: clearly reveals that the net FII flows have been positive except for the year
2008. FII continued to be negative in the year 2009 but then gained momentum towards the end
of 2009. The financial crisis of 2008 faced by USA led the major companies to suffer heavy
losses, bankruptcy and even collapse of certain gigantic investment banks of US and Europe,
thus leading to massive losses to shareholders, investors, lenders, borrowers and common people.
This resulted in a huge spillover across the world and a severe liquidity crunch and fall in the
output and employment levels. Thus, the impact is highly visible in the falling interests of the
foreign institutional

Table 2.2: Trend of Returns of the Stock Exchange during the Period 2000–2009.
Source: http://www.bseindia.com
Investors and their level of confidence in the economy. Table 2.2 clearly shows that the
gross sales exceeded the gross purchases of FII in the Indian equity market during the year 2008.
This had a direct impact on the Sensex and it went down to 9,647 during 2008. Table 2 gives the
trend of returns of the stock exchange during the period 2000–2009.
It can also be inferred from Figure 1 that the major fluctuations in the stock market is
accompanied by the trends of FII flows in the Indian equity market.
Let us now examine the relationship of FII with the Sensex, BSE-500, BSE-100 and the
major sectoral indices of the Indian equity market with the help of simple correlation, as it is the
main objective of the present study.
Figure 3. Trends of FII Flows and Stock Market Returns

Inference:
1. Sensex, BSE-500 and BSE-100
From the analysis carried out, it is visible that Sensex, BSE-500 and BSE-100 and FII
inflows share a positive relationship. Hence, it can be easily said that if Sensex, BSE-500 and
BSE-100 increases then FII net flows will also rise. Whereas, on examining the significance of
this result, it is inferred that FIIs do not have a significant impact on the Sensex, BSE-500 and
BSE-100. Therefore, it would be right to say that, although there exists a positive relationship
between Sensex, BSE-500 and BSE-100 and FII Inflows in India, the role of Sensex, BSE-500
and BSE-100 in attracting FIIs is not so significant. The main reason being that as FIIs flows into
the stock market the returns rise, but again this rise cannot be attributed to the flow of FIIs alone.
The rise in these indices can also be attributed to the rise in the level of domestic investments.
2. BANKEX
The flow of FII in the Indian equity market with respect to the banking sector has been
seen since 2002. Hence, the variables are compared from the year 2002. The relationship
between FII flows and BANKEX is positive. Hence, the variables will move in the same
direction. In spite of a positive relationship, the impact of FIIs on BANKEX is highly
insignificant. It can be rightly inferred from the analysis that the flow of FIIs to the banking
sector plays an inconsequential role in determining the returns.
3. Auto Index and Metal Index
The high level of correlation between FII flows and Auto Index and Metal Index clearly
indicates that major FII flows are directed towards the auto and metal sectors. Any rise in the FII
flows to the auto and metal sectors will yield higher stock returns of the companies in the auto
and metal sectors of the Indian markets. The FII net flows have a major impact on the auto and
metal sector returns, as per the results. This is also visible in the ever-increasing flows of foreign

investment into these sectors and the high rate of returns achieved. With FIIs rising in companies
like Hero Moto Corp, Bajaj Auto and Tata Steel, the relationship derived is practically
significant and positive.
4. Realty Index
FII flows in the realty sector have been significant since the year 2006. The level of
correlation between FII flows and Realty Index is positive. Thus, it can be easily concluded that
FII net flows have a positive and direct impact on the Realty Index. The impact is not so
significantly visible as initially the investors feared a three year lock-in period when investing in
realty companies in India like DLF and Unitech. Also the financial crisis of 2009 has led to the
rise of the level of insignificance with respect to the returns of this sector.
5. IT Index
The relationship between FII net flows and IT Index is highly significant and positive.
The results also portray a highly significant relationship between the two. FII stakes dramatically
rose in companies like Polaris Software, Subex, Glodyne Technoserve and KPIT Cummins.
Significant rise in stake was also seen in Persistent Systems, e-Clerx, Redington India and NIIT
Technologies.
6. Capital Index, Consumer Durables Index and PSU Index
FII net flows have a positive and direct impact on the Capital Index, Consumer Durables
Index and PSU Index. The inflow of FII but does not directly correspond to the returns of the
respective indices. The impact is mild and the significance of the rise in returns of the stock
market cannot be attributed to the rise in FIIs alone. A rise has been seen in the inflow of FIIs
into the PSU sector with investor confidence growing in government held companies like Power
Grid Corporation of India Ltd., NTPC and REC.

7. FMCG Index, Oil & Gas Index and Power Index
The flow of foreign investment in the power sector has been noteworthy since the year
2005. The level of correlation between FII flows and FMCG Index, Oil & Gas Index and Power
Index can be said to have a direct relationship. In spite of a positive relationship, the impact of
FIIs on these indices is highly insignificant.
Table2.3: Relation and Impact of FII on Stock Market Returns
Source: http://www.bseindia.com

3. Reasons for financial Crisis (2008)
Figure: Explaining the key factors behind the global financial crisis
The first hint of the trouble came from the collapse of two Bear Stearns hedge funds early
2007. Subsequently a number of other banks and financial institutions also began to show signs
of distress. Matters really came to the fore with the bankruptcy of Lehman Brothers, a big
investment bank, in September 2008. The reasons for the crisis are varied and complex. Some of
them include boom in the housing market, speculation, high-risk mortgage loans and lending
practices, securitization practices, inaccurate credit ratings and poor regulation.
1. Boom in the Housing Market:
Subprime borrowing was a major contributor to an increase in house ownership rates and
the demand for housing. This demand helped fuel housing price increase and consumer
spending. Some house owners used the increased property value experienced in housing bubble
to re-finance their homes with lower interest rates and take second mortgages against the added

value to use the funds for consumer spending. Increase in house purchases during the boom
period eventually led to surplus inventory of houses, causing house prices to decline, beginning
in the summer of 2006. Easy credit, combined with the assumption that housing prices would
continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate
mortgages which they could not afford after the initial incentive period. Once housing prices
started depreciating moderately in many parts of the U.S, re-financing became more difficult.
Some house owners were unable to re-finance their loans reset to higher interest rates and
payment amounts. Excess supply of houses placed significant downward pressure on prices. As
prices declined, more house owners were at risk of default and foreclosure.
2. Speculation:
Speculation in real estate was a contributing factor. During 2006, 22 per cent of houses
purchased (1.65 million units) were for investment purposes with an additional 14 per cent (1.07
million units) purchased as vacation
homes. In other words, nearly 40 per cent of house purchases were not primary residences.
Speculators left the market in 2006, which caused investment sales to fall much faster than the
primary market.
3. High- Risk Mortgage Loans and Lending Practices:
A variety of factors caused lenders to offer higher-risk loans to higher-risk borrowers.
The risk premium required by lenders to offer a subprime loan declined. In addition to
considering high-risk borrowers, lenders have offered increasingly high-risk loan options and
incentives. These high-risk loans included “No Income, No Job and No Assets loans.” It is
criticized that mortgage underwriting practices including automated loan approvals were not
subjected to appropriate review and documentation.
4. Securitization Practices:
Securitization of housing loans for people with poor credit- not the loans themselves-is
also a reason behind the current global credit crisis. Securitization is a structured finance process
in which assets, receivables or financial instruments are acquired, pooled together as collateral
for the third party investments (Investment Banks). Due to securitization, investor appetite for

mortgage backed securities (MBS), and the tendency of rating agencies to assign investment-
grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk
readily transferred to others.
5. Inaccurate Credit Ratings:
Credit rating process was faulty. High ratings given by credit rating agencies encouraged
the flow of investor funds into mortgage-backed securities helping finance the housing boom.
Risk rating agencies were unable to give proper ratings to complex instruments (Gregorio 2008).
Several products and financial institutions, including hedge funds, and rating agencies are largely
if not completely unregulated.
6. Poor Regulation:
The problem has occurred during an extremely accelerated process of financial
innovation in market segments that were poorly or ambiguously regulated – mainly in the U.S.
The fall of the financial institutions is
a reflection of the lax internal controls and the ineffectiveness of regulatory oversight in the
context of a large volume of non-transparent assets. It is indeed amazing that there were simply
no checks and balances in the financial system to prevent such a crisis and “not one of the
socalled pundits” in the field has sounded a word of caution. There are doubts whether the
operations of derivatives markets have been as transparent as they should have been or if they
have been manipulated.

4. India’s Policy responses to Crisis
Due to the global crisis the economy experienced extreme volatility in terms of
fluctuations in stock market prices, exchange rates and inflation levels during a short duration
necessitating reversal of policy to deal with the emergent situations. Before the onset of the
financial crisis, the main concern of the policymakers was excessive capital inflows, which
increased from 3.1 percent of GDP in 2005-06 to 9.3 percent in 2007-08. While this led to
increase in foreign exchange reserves from US$ 151.6 billion at end-March 2006 to US$ 309.7
billion at end-March 2008, it also contributed to monetary expansion, which fuelled liquidity
growth. WPI inflation reached a trough of 3.1 percent in October 2007, a month before global
commodity price inflation zoomed to double digits from low single digits. The rising oil and
commodity prices, contributed to a significant rise in prices, with annual WPI peaking at 12.8
percent in August 2008. The monetary policy stance during the first half of 2008-09 was
therefore directed at containing the price rise.
To counter the negative fallout of the global slowdown on the Indian economy, the
federal Government responded by providing three focused fiscal stimulus packages in the form
of tax relief to boost demand and increased expenditure on public projects to create employment
and public assets. India‟s central Bank – the Reserve Bank of India (RBI) took a number of
monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial
system to meet the needs of productive sectors.
This fiscal accommodation led to an increase in fiscal deficit from 2.7 percent in 2007-08
to 6.2 percent of GDP in 2008-09. The difference between the actual figures of 2007-08 and
2008-09 constituted the total fiscal stimulus. This stimulus at current market prices amounted to
3.5 percent of GDP for 2008-09. These measures were effective in arresting the fall in the growth
rate of GDP in 2008-09 and India achieved a growth rate of 6.7 percent.
Developments in the exchange rate arena:
The exchange rate policy in recent years has been guided by the broad principles of
monitoring and management of exchange rates with flexibility, without a fixed or a

preannounced target or a band, while allowing the underlying demand and supply conditions to
determine the exchange rate movements of the Indian rupee over a period in an orderly manner.
Subject to this predominant objective, the RBI‟s intervention in the foreign exchange market has
been driven by the objectives of reducing excess volatility, maintaining adequate level of
reserves, and developing an orderly foreign exchange market.
The surge in the supply of foreign currency in the domestic market led inevitably to a rise
in the price of the rupee. 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 and after the end of positive shock around January 2008, rupee began a slow
decline.
A major factor, which affected the emerging economies almost simultaneously, was the
unwinding of stock positions by the FIIs to replenish cash balances abroad. The decline in rupee
became more pronounced after the fall of Lehman Brothers in September 2008, requiring RBI
intervention to reduce volatility. It is pertinent to note that a substantial part of the movement in
the rupee-US dollar rate during this period has been a reflection of the movement of the dollar
against a basket of currencies. The rupee stabilized after October 2008, with some volatility.
With signs of recovery and return of foreign institutional investment (FII) flows after March
2009, the rupee has again been strengthening against the US dollar. For the year as a whole, the
nominal value of the rupee declined from Rs. 40.36 per US dollar in March 2008 to Rs. 51.23 per
US dollar in March 2009, reflecting 21 percent depreciation during the fiscal 2008/09. In fiscal
2009/10, however, with the signs of recovery and return of FII flows after March 2009, the rupee
has been strengthening against the US dollar. The movement of the exchange rate in the year
2009/10 indicated that the average monthly exchange rate of the rupee against the US dollar
appreciated by 9.9 percent from Rs 51.23 per US dollar in March 2009 to Rs 46.63 per US dollar
in December 2009, mainly on account of weakening of the US dollar in the international market.

Developments in the monetary policy arena:
The outflow of foreign exchange, as a fall out of the crisis, also meant tightening of
liquidity situation in the economy. To deal with the liquidity crunch and the virtual freezing of
international credit, 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, RR and R-RR rates, and the statutory liquidity ratio (SLR).
The RR was reduced by 400 basis points in five tranches from 9.0 in August 2008 to 5.0
percent beginning March 5, 2009. The R-RR was lowered by 250 basis points in three tranches
from 6.0 (as was prevalent in November 2008) to 3.5 percent from March 5, 2009. The R-RR
and RRs were again reduced by 25 basis points each with effect from April, 2009. SLR was
lowered by 100 basis points from 25 percent of net demand and time liabilities (NDTL) to 24
percent with effect from the fortnight beginning November 2008.
The policy stance of the RBI in the first half of the year was oriented towards controlling
monetary expansion, in view of the apparent link between monetary expansion and inflationary
expectations partly due to the perceived liquidity overhang. In the first six months of 2008-09,
year-on-year growth of broad money was lower than the growth of reserve money. The
Government also took various fiscal and administrative measures during the first half of 2008-09
to rein in inflation. The key policy rates of RBI thus moved to signal a contractionary monetary
stance. The repo rate (RR) was increased by 125 basis points in three tranches from 7.75 percent
at the beginning of April 2008 to 9.0 percent with effect from August 30, 2008. The reverse-repo
rate (R-RR) was however left unchanged at 6.0 percent. The cash reserve ratio (CRR) was
increased by 150 basis points in six tranches from 7.50 percent at the beginning of April 2008 to
9.0 percent with effect from August 30, 2008.
The CRR was lowered by 400 basis points in four tranches from 9.0 to 5.0 percent with
effect from January 2009.

The WPI inflation which is the headline inflation for India has plummeted to the negative
territory on the basis of year-on-year (y-o-y) growth as of July 2009 (-1.6%). However, this
negative rate is a high base effect phenomenon mainly concentrated in items like iron & steel and
fuel group which due to the upward commodity price shock last year have been registering
negative double digit growth this year. In the WPI basket during April-July 2009, iron & steel
prices contracted by 20 percent whereas the fuel group shrank by 10 percent thus pushing the
aggregate WPI inflation in the negative territory.
However, prices have been rising for items like fruits & vegetables (15.2%, July 2009)
with prices of primary articles in general growing around 5 percent (July 2009). The inflationary
scenario becomes much clearer once we take seasonally adjusted month on month WPI inflation
rates. The seasonally adjusted month on month WPI inflation had seen a sudden spurt in the
month of July 2009 to 8.3 percent. This compares with the CPI (IW) situation where m-o-m
seasonally adjusted rate was around 11.4 percent (June 2009) and the y-o-y rate is also hovering
around 9.3 percent.
High food inflation has been the main factor driving the overall inflation rate. Food
constraint has not only driven up prices, but also threatens to limit India‟s overall growth
potential. In the 2010/11 budget presented to the parliament on February 26, the finance minister
acknowledged this challenge and outlined a four-pronged strategy to boost agricultural growth.
However, most of the measures announced in the budget are likely to help only in the medium to
long run. Here are some of the measures announced:
 Credit support to farmers: Banks have been consistently meeting the targets set for
agriculture credit flow in the past few years. For the year 2010-11, the target has been set
at Rs.375, 000 crore (US$ 81 billion).
 Rs. 200 crore (US$ 43 million) provided for sustaining the gains already made in the
green revolution areas through conservation farming, which involves concurrent attention
to soil health, water conservation and preservation of biodiversity.

 Concessional customs duty of 5 percent to specified agricultural machinery not
manufactured in India.
 Government to address the issue of opening up of retail trade. It will help in bringing
down the considerable difference between farm gate, wholesale and retail prices.
 In addition to the ten mega food park projects already being set up, the Government has
decided to set up five more such parks.
Besides, the measures announced do not make for an agricultural reforms agenda that
tackle the problems caused by government control over inputs, production and marketing – an
agenda that is critical to ease the food constraint. There is also little in the budget to indicate an
effective short-term food inflation management strategy. Reforms are needed in the agriculture
sector to address structural constraints inhibiting productivity and income gains. However, in the
immediate future food prices can be controlled only through large imports, especially in the case
of rice where stocks are inadequate.
As the contagion of the financial system collapse across the world spread towards India, and into
it, the government and the Reserve Bank of India (RBI) responded to the challenge in close coordination
and consultation. The main plank of the government„s response was fiscal stimulus while the RBI„s
action comprised monetary accommodation and counter cyclical regulatory forbearance.
The RBI„s policy response was to keep the domestic money and credit markets functioning normally and
see that the liquidity stress did not trigger solvency cascades. RBI„s targets can be classified into 3 prime
directions: (Duvvuri Subbarao, Governor).
(i) To maintain a comfortable rupee liquidity position
(ii) To augment foreign exchange liquidity
(iii) To maintain a policy framework that would keep credit delivery on track so as to arrest the
moderation in growth
The previous period has forced RBI to adopt tightened monetary policies in response to heightened
inflationary pressures. However, the RBI changed its approach to handle the current scenario and eased
monetary constraints in response to easing inflationary pressures and moderation in growth in the current
cycle.

5. Opportunities arisen from Global Crisis
The unfolding global economic crisis came in various forms and presented many
challenges but these also brought opportunities. The extent to which the challenges engendered
by the crisis can be converted into opportunities by the country so this has given chance to
developing countries to mature in various dimensions. The international system and concept of
power also undergone a shift and had serious repercussion on developing countries and develop
more responsibilities for global economic and financial stability.
Competitive global markets
Against the impact on international business and declining in the exports has demanded a
change from the Indian policymakers to maintain the domestic demand work towards gaining
investor's confidence. The Indian government has option to explore other ASEAN countries
rather solely depending on the developed countries Europe and US with keeping incentive for
exporters to be competitive globally. For this strong governance reforms are required from
government to
improve overall competitiveness of the Indian economy.
Food grain led growth
The government put more emphasis on enlarging government expenditure for the
developments and growth rather on new speculative bubbles that caused global financial crisis.
This put focus on agricultural sector and production of food that directly improves the
livelihoods of the people engaged in particular sector. The new paradigm requires food grain-led
growth strategy on the basis of peasant agriculture sustained through larger government spending
towards the agriculture and rural sector, which can simultaneously remove both recession and
food crisis in India.

Stand in global economic agenda
With the global financial turmoil the emerging markets have got the prominent stand in
global economic agenda.
The policy choices made by the emerging countries India and China has made their role active
internationally on key policy issues and strengthening global economic governance for their
long-term interest to take the lead on global challenges.
Strategic Industrial advantage
At the time of crisis when the automobile companies in US were facing recession and received
public funds from government to overcome their shortcomings. In the same phase emerging
country like India has got the competitive advantage over the industries' of developed country in
terms of operating condition, novel market segments, dynamic market shifts, valuable learning
opportunities and enhanced indigenous competition. In structural terms the growth of business
capabilities available through market transactions provides international businesses with an
increasing range of options in terms of where value is added and whether this is managed under
common ownership or contracted externally. These increased strategic and structural options are
likely to play an increasingly important role in future competitive adaptation.
Retail sector development
Countries throughout Asia and specially India were well positioned for an early recovery
from the economic crisis as domestic demand is holding up well, GDP growth continued and
trillions of dollars of sovereign reserves were providing governments and state banks with tools
for action. The global recession has made prime real estate locations increasingly available and
affordable in many developing markets. It also has made acquisition valuations of many local-
market retailers very attractive. Unlike most developed markets, GDP in emerging markets is
expected to continue to grow, albeit at a slower rate, and populations in many countries are
younger, increasingly urban and showing a growing interest in modern retail formats. Asian

countries continued to transform their economies with domestic consumption as a primary focus
– a trend that should favor continued growth in retail business also over the long term.
Opportunities for India’s IT sector:
1. Make the growth vs. profitability tradeoff early on during the slowdown: profitability
levers are still available if growth is sacrificed when required, and managed well.
2. Utilize some of the unavoidable fixed costs for implementing investment ideas that have
been on the backburner and could not be done away with due to high utilization.
3. M&A opportunities exist in the US, both in financial sector and non-financial sector.
4. Intellectual Property (IP) and product related investments in the US should be assessed
and made.
5. Operational efficiencies can be adhered to especially in an attractive labor market and an
environment of budget spend/uncertainty.

6. Entrepreneurship in Times of Financial Crisis
Entrepreneurship can be technically defined as a process of starting new organizations or
revitalizing mature organizations, particularly new businesses, generally in response to identified
opportunities. Jean-Baptiste Say, a French economist who first coined the word entrepreneur in
about 1800, said: “The entrepreneur shifts economic resources out of an area of lower and into
an area of higher productivity and greater yield.”
Entrepreneurs have traditionally faced the shortage of finance, not of ideas. Moreover,
the human capital is also a critical aspect of an organization. The growing industry of venture
capitalists has greatly fostered entrepreneurship across the globe. Talented people in an
organization make the core machinery of ideas and execution. To establish themselves,
businesses need to put forward substantial value propositions and a clear path to achieving their
set goals and objectives. Above all, intellectual capital is the chief component of
entrepreneurship; human capital and monetary capital fall after that. The information age makes
it even easier for ordinary people to start business now.
Entrepreneurship is a stimulator of economic growth and social cohesiveness. The
globalization of entrepreneurship is raising the bar of competitiveness for all the players. Once-
closed economies like India and China have opened up to enterprisers and entrepreneurs from all
over the globe. Innovative entrepreneurs carry more weight because of their ability to create
more jobs.
The economic downturn has put the global economy in an awkward situation. The
motives of established entrepreneurs are being questioned and their disastrous results are being
scorned off at. In the wake of scandals over established figures like Enron, and Satyam, things
have become more difficult for start-ups. Potential entrepreneurs are lured towards a safe and
secure government job and are becoming increasingly apprehensive of taking the risk of
venturing into an unknown territory. Risk, the lifeblood of the entrepreneurial economy, is
becoming something to be avoided.
However, the current financial crisis also brings with itself some unprecedented
opportunities that can prove to be a resource haven for the upcoming and new entrepreneurs.
Those who are planning to start and manage a new business will now encounter a fresh set of

values and a need to go back to the basics of managing a business. Though the crisis does not put
forth an appealing landscape for entrepreneurs, yet those with rational expectations will face no
dearth of opportunities or ideas or innovations. The average life cycle of a start-up from
inception to exit will be much longer – over 5 years – chiefly due to reduced mergers and
acquisitions and late initial public offerings. Persistence and commitment are the need of the
hour and the willingness to wait with patience before reaping the harvests of an endeavor is
indispensable. Those who are driven by the desire for a windfall should prepare themselves for
disappointment.
Aspiring entrepreneurs should realize that the receding economy offers them the best
time to start a company. The market is full of talented people looking for new opportunities. The
opportunity cost of letting go of an attractive and high-paying job is very low as there is a
general decline in employment opportunities across the globe.
Moreover, the ordinary costs of doing a business are depressed. Space, equipment, and
any other resourceful asset were never available at such low investments. Raising finance in
times of the credit crunch is a tough task, but what should be kept in mind is that competitive
pressures are much lower during downturns and it becomes relatively easier to establish one„s
company as the leader. Advertising and other marketing expenditures are very low and it„s easy
to make a mark when relatively few in the market are trying to do so. Being the holder of a
private company, the entrepreneur would not have to worry about quarter-to-quarter performance
and the investors would also have a long term perspective.
A business, at its inception, needs to do a lot of market research, research of potential
customers, product designing and building, and also look for investors and financing
opportunities. What is not expected from a start-up is the potential to start selling as soon as it is
conceived. Therefore, the current slump in demand across global economies is a non-entity with
respect to a start-up. Moreover, any new business initially sells to the ‗early adopters„ whose
buying patterns are independent of the economic state of the environment.
Therefore, the initial customer base is not susceptible to economic cycle changes and the
business can head off for a great start.

Poorly capitalized start-ups can cope with the grinding recession by reallocating their
existing financials and keeping non-essential activities out of operations. Focus should be on the
more important features and marketing costs should be cut down to a minimum unless it is
proven to give a positive return on investment. Money from all payments which can be deferred
should be put into more productive areas of the business. Even well capitalized start-ups need to
keep themselves buckled up and cut costs wherever possible. However, it should be borne in
mind that ruthless slashing of marketing costs does a lot of harm in the future when companies
have to spend a lot more than they saved in order to recover.
Therefore, a balanced and judiciously thought out approach should be followed.
Entrepreneurship has the potential to drive an economy out of the economic turmoil. It
creates new jobs, generates revenue, advances innovation, enhances productivity, and improves
business models and processes. Entrepreneurship has never been as vital for an economy as it is
today. The risks and rewards go hand-in-hand. A company should keep its strategic thinking
flexible enough to manage uncertain times and should have the aptitude to look beyond the
crisis.
History has demonstrated time and again that entrepreneurship and new companies is the
way to bolster a flagging economy. Giants like Microsoft, Genentech, Gap, and The Limited
were all founded during recessions. Companies which started off in the Depression include
Hewlett- Packard, Geophysical Service (now Texas Instruments), United Technologies, Polaroid,
and Revlon. A plummeting economy helps initiators to develop a business which has the tenacity
to survive through difficult times and which is relatively unaffected by a cycle of bankruptcies.

"GLOBAL FINANCIAL CRISIS AND IT'S IMPACT ON INDIAN ECONOMY"

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