THE POSITIVE IMPACTS OF FINANCIAL CRISIS ON INDIAN ECONOMY
INTRODUCTION
It took some time for policymakers and analysts in India to recognize both the speed and the intensity of the effects of the global crisis on India. Indeed, there were arguments that India, along with China, is “decoupled” from the global system and capable of becoming an autonomous growth pole, based on its recent high growth from a low per capita income base, and a young population leading to falling dependency ratios. In addition, the “strong” domestic financial sector was also seen to be immune to shocks from the international financial system. However, it turns out that this presumption was wrong, and even involved a faulty assessment of the previous boom. Recent high economic growth in India was fundamentally dependent upon greater global integration and related to the deregulation of finance combined with fiscal concessions that spurred a consumption boom among the top two deciles of the population, especially in urban areas, even as deflationary fiscal policies, poor employment generation and agrarian crisis kept mass consumption demand low. The substantial rise in profit shares in the economy and the proliferation of financial activities combined with rising asset values to enable a credit-financed consumption splurge among the rich and the middle classes, which in-turn generated higher rates of investment and output over the upswing. This was, therefore, quite similar to speculative bubble-led expansion in several other countries in the same period. This also made the growth process more vulnerable to internally and externally generated crises.
By the middle of 2008, even before the global crisis really hit India, this process too was reaching its limits. The crisis made matters much worse by causing sharp declines in exports of manufactures and reversal of capital flows such that both current and capital accounts of the balance of payments have worsened. The macro issues have been much commented upon, but the specific impact upon certain groups has been much less widely noted. The crisis has been accompanied by changes in employment and relative prices that have adversely impacted especially upon three sections of the population that were already very vulnerable: cultivators, migrant workers and home based women workers. In addition, it has sharply affected food insecurity which was already a problem in the country
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises and sovereign defaults. The current financial crisis is the worst of its kind since the great depression of 1930s. It becomes prominently visible in September 2008 with the failure of several large us-based financial firms. The global financial meltdown has spelt disaster for the world economy in general and for the US and the European economies in particular. But surprisingly when world’s developed economies are suffering, there the developing countries like India and China are still spending money in many projects. Do we need to believe that Indian growth story is over? The answer is a big no. India is still to enter its golden phase of growth. This is the time for India to march on and look for opportunities to make its presence felt on the global economic map.
THE INDIAN APPROACH IN CURRENT SCENARIO
Today India stands erect to face this financial crunch with many advantages and strengths. One of the major strength is its nuclear technology which will aid India to battle out its biggest problem-power.
Cautioning against the use of word “recession” for Indian economy, Finance Minister P Chidambaram says India’s growth would moderate in this difficult year, but would still be second-fastest in the world at the rate of 7-8 per cent. According to him a recession is defined as two successive quarters of contraction of GDP. He wishes to emphasize that India is nowhere near a recession. We may expect a moderation in growth rate in the current year to a level between 7 and 8 per cent. India would still be the second-fastest growing large economy in the world Chidambaram says.
Giving a positive projection on the country’s economic scenario, P.M Manmohan Singh said India could regain its annual growth rate of 8% to 9% as the world’s economy could recover partially the present crisis by September this year.
According to the Planning Commission Deputy Chairman, Montek Singh Ahluwalia, The global financial turmoil will not have any significant impact on the country’s financial system as India is not exposed to the new and innovative financial instruments that triggered the meltdown. We have not been as exposed to these new and innovative instruments, which have been the source of financial distress internationally… So the direct impact on the Indian financial system is not going to be significant at all.
There will be indirect effect As regards to India, the country is fortunate to have large foreign exchange reserves and hence it would be able to tide over any short-term disruption in capital inflows. The strengths of the Indian economy are substantial and capital inflows would eventually resume the normal course. As far as economic growth is concerned, the downturn in the world economy is going to have an impact on India and unlike the last year, the country would not get 9 per cent growth rate during the current fiscal. Still, the growth rate could fall below 8 per cent at 7.7 per cent, as predicted by the Prime Minister’s Economic Advisory Council.
POSITIVE IMPACTS ON INDIAN ECONOMY
Emergence of a new economy
Perhaps this is the first time during such crisis period when world’s big economies like US is struggling to overcome this situation India was able to invest money for launching of chandrayaan-1.This is the time when world’s most powerful economies are suffering more than Indian economy. It affected developed country economies more than developing country’s economy. In USA Lehman Brothers has filed for bankruptcy, Merill Lynch has emerged with Bank of America, Washington Mutual Operations are being apprehended by FDIC and Wachovia is being auctioned by Citigroup .In comparison to such terrific conditions India is in a better place. It is worth underlining that we have a number of companies still reporting successes at this time. Some of the businesses bucking the trend at this stage have diversified into a number of areas and others have exposure to export markets. Whilst overseas markets are increasingly tough, but the businesses have been able to benefit from the weakness of the money value which has allowed exporters additional competitiveness with their international trade.
Expose of weaknesses in the economy
The major role of financial crunch is that it exposes the political, structural and financial weaknesses of an economy. It explores efficiency in the financial market, transparency and accountability of new or reformed organizations, opportunity for creating new jobs and technologies, sufficient fund for investment in R&D innovation and education.
During the financial crisis period, the extent of sufferance of an economy shows its weaknesses. Because if the rest of the world gets disturbed and capital flows and liquidity shrinks, there is bound to be spillovers not just on India but all over the world.. Regulators are trying to assess the situation and taking steps to insulate their economies from the unnecessary shock. The fact that we have not been affected reflects the merit of proceeding slowly. We have actually been reforming very slowly and gradual pace of reforms has some advantage and we should continue with that pace. India should endeavor to make the regulatory system more sophisticated to ensure that the country does not run into regulator gaps that precipitated the present global financial crisis. Our country pursued economic reforms in a calibrated manner and escaped the fallout of global financial crisis. So these expose of weaknesses will definitely help India’s fast growing economy in the long run.
Cost stabilization in real estate market.
Confederation of Real Estate Developers Association of India ( CREDAI) and National Real Estate Development Council (NREDC), both builders association with around 3500members each across the country, have appealed the members to slash prices of their proporties.Builders feel that cutting down prices will spur buyers and restore confidence. This development will enable middle-class families to think of having their own homes as owning a house had become a distant dream because of unrealistic rise in real estate properties. By developing middle-class families it is for sure that Indian economy will be affected positively in long run. Because in comparison to any other country Indian middle-class families are significantly improving in monetary measures.
Rationalization of Salary Structure in IT Industry
This financial crisis will have a positive impact on the IT industry. This sector has seen an unprecedented rise in salaries and increments. But with this financial crisis this cannot go further. No economy can afford 25% to 30% salary hike per industry per annum. So now IT industry slowdown will ensure better quality of work and also prevent attrition. Today the IT professional will think twice before changing their jobs. Along with it funds spent on recruitment, training and development and retention of man power will come down considerably. Earlier the scene was quite different. With that lucrative growth rate of salary structure, IT professionals were changing jobs frequently. It had a bad impact on the job culture of the industry in particular. Frequent change of jobs also affected the overall productivity of the industry. But now the scene is totally reverse in nature. As a result of this financial crisis professionals are not only in favor of changing the job but also ready to work more with the same salary with the objective to keep his job secure. Definitely it would help in the improvement of this sector as well as the productivity of the IT industry.
Performance Appraisal is gaining ground
Today’s businesses are under a great deal of pressure to perform. With increasing customer expectations, global competition, costs of goods and services and above all because of financial crisis, many companies struggle to meet profit forecasts. As a result, companies are beginning to discover the powerful link that exists between employee performance and financial success. Many companies are relying more heavily on human capital to address consumer demands while lowering operating costs, and improving financial position. Deploying employee performance appraisal programs that lead to measurable improvements in employee performance can provide the human capital leverage companies need to overcome many of today’s business obstacles.
Earlier as the job opportunity was more for the people; the role of performance appraisal was less. To understanding how efficient your employees perform was critical to your business. Every year, thousands of businesses were losing millions of dollars in revenue due to inefficient employees. Now as this financial crisis arises everyone is trying to save one’s job. Watching the changed job environment use of Performance Appraisal is gaining its ground day by day. As a result, everyone is ready to give his 100% to his job. Fear of losing the job improves the performance of the employees as a whole.
Austerity is the targeted path
Today Warren Buffet advice of austerity is practically followed by many countries. Cost cutting seems to be the sole solution to this contemporary problem. Starting from Govt. sectors to big private corporate sectors, cost cutting is there everywhere. Earlier when big MNCs were spending recklessly for promoting their business where staff luxury was of major portion, today they are taking a second thought before spending a single penny.
Splurge will no more be the watchword and greed will no more be good in corporate parlance. Financial crunch will force the companies to eliminate all forms of wastage and follow an austerity regime. India’s greatest ability and strength is its tolerance and ability to adapt to difficult situations. It is now trying to tackle the issue of panic resulted out of depression and then pump massive amount of liquidity and confidence into the system. India’s population plays the most crucial role here
Best place for outsourcing
“It is time to open up banking and insurance sectors for further foreign direct investments as multinational insurers and bankers are willing to invest more in India. There is a talk that FDI limit in insurance might be hiked to49%. And this time is the best time to do it”, Prabhu Guptara, Executive Director, Think-Tank of United Bank of Switzerland (UBS).
According to Obama Govt. US’s priority would be given to curtail costs, which would include cutting wage expenditure and there by outsource work to countries like India.
In view of high credibility, Indian banks should also expand retail and other businesses abroad. There is also a need for more innovative products and global competitiveness.
India continues to be the best place or top destination for outsourcing. Two factors are responsible for it. First when it comes to salary costs India is extremely competitive, second Indian outsourcing firms have now matured into true global companies that can offer best services at competitive prices. India is coming under the list of top outsourcing destinations with China, Brazil, Mexico, Malaysia and Chile. India has the second lowest Its-BPO salary base of ,500-00 followed by China. Another advantage of India in this section is that India is having one of the largest producers of English-speaking graduates including management and engineering graduates. Such a huge number of graduates will definitely result in offering higher value-added services to the customers. Which is very weak in china as the number of youth is less here. . Today having the maximum no of youth our country is ready to adapt to this situation. Efficient young personnel are India’s greatest asset here.
Opportunities for International trade.
When looking in particular at International Trade, there are huge opportunities for when the world economy begins to grow again and demand returns to foreign markets. The competitive position of Rupees only adds weight to the potential that can be realised.
Today countries all over the world are interested for trading with India. It will have a great impact on our foreign fund reserve and forex market.
Conclusion
While it is uncertain how prolonged and deep the recession will be, it can be said with certainty that demand, and subsequently growth, will return. It is therefore imperative that, when this happens, policymakers have a recovery plan in place. This plan should act to foster growth in the short-term and lay the foundations for economic stability in the long-term. There is currently a high level of activity amongst the business support community with a key focus on ensuring businesses survive the downturn. A challenging and critical focus on the basics, or fundamentals of businesses, is likely to give local companies the best chance of survival over the next year.
The growth of the public sector and the narrow reliance on financial services for growth needs to change, with manufacturers and exporters having particular attention paid to them. After watching so many positive points we Indians can ourselves that we are quite in a safer place in comparison to many developed countries economy. To conclude lets hope for a stronger India by rectifying all its economic weaknesses after this so called financial crunch.
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