Impact of Global Financial Crisis in India

AbstractFinancial crisis in the market economies of democratic countries are not unusual. It is also not unusual for such economies to make policy correction and come out of the crisis. During this first decade of the 21st century itself we have seen economies in the west go through two crises: the first was in 2000, the dotcom bust and the second was after the 9/11 terror attacks. But the market economies came out of it: in feet we saw a boom between 2003 and 2008.Keywords: Financial crisis, market, policy, India, global crisis.IntroductionThe term Financial Crisis is applied broadly to a variety of situation in which some financial institutions or assets suddenly lose a large part of their value. 19th and 20th centuries witnessed many kinds of financial crisis such as banking panics, recessions, stock market crashes, currency crisis, sovereign defaults and so on. Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however and financial crises are still a regular occurrence around the world.Background of Financial CrisisThe Subprime mortgage crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in United States had a major adverse effect on financial markets and banks. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. The main reasons for the present financial crisis are as follows:* Boom and burst in the housing market* Speculation* High risk mortgage loans lending / borrowing practices* Securitization practices* Inaccurate credit ratings* Government policies* Policies of central bank* Financial institutions debt level and incentives* Credit default swaps.In its Declaration of the Summit on Financial Market and the World Economy, dated 15 November 2008, leaders of the Group 20 cited the following causes.a Inadequate appreciation of the risks and failure to exercise proper due diligence.b. Weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products and consequent excessive leverage combined to create vulnerabilities in the system.c. Policy-makers, regulator and supervisors of some advance countries did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation or consider the systematic ramifications of domestic regulatory action.Impact of Financial Crisis on Indian EconomyWhat will be the impact of the crisis on the Indian economy? In the subprime instance, two negatives had cancelled each other in India: the crisis virus from abroad versus the local financing of the housing boom in India by black money - which is immune to interest rates and grows like a financial amoeba. In the present larger crisis, we would have been largely unaffected if Mauritius - routed black money washing machine called participatory notes (PNs) had not been permitted. PNs need not conform to the regulations of the securities and exchange board of India (SEBI) or comply with international standards of disclosure as to who owns them and how they were paid for. More than 55 percent of the foreign fund inflow comes today from these PNs which even the terrorists, not to mention financial buccaneers and corrupt politicians, have used to earn money on the Bombay Stock Exchange and make the sensex go up or down at the will of a small cartel.Impact on Capital FlowsThe most immediate effect of this crisis on India has been an outflow of Foreign Institutional Investment from the equity market. Foreign institutional Investment pulled out $ 11.1 billion during the first nine and half months of calendar year 2008. A sharp decline in pressure with the rupee was depreciated by almost 25%. …