CHANAKYA NATIONAL LAW UNIVERSITY.

ECONOMICS II
LESSON FROM RECENT ECONOMIC FINANCIAL CRISIS.
BY:MD.SHAIQUE ROLL NO.559 4TH SEMESTER SUBMITTED TO:MRS SHIVANI MOHAN

[Pick the date]

CONTENT 1. INTRODUCTION. 2. RESEARCH METHODOLOGY. 3. REASON FOR FINANCIAL CRISIS. a). Reasons for Global Financial Crisis b). Reasons for Indian Financial Crisis 4. Global Financial Crisis and Its Impact on India. 5. WHAT CAUSE THE GLOBALFINACIAL CRISIS. 6. INDIAN ECONOMY DURING FINANCIAL CRISIS. 7.LESSON FRON RECNT FINANCIAL ECONOMIC CRISIS. 8.CONCLUSION 9.BIBLIOGRAPHY.

RESEARCH METHODOLOGY Project work is primarily based on doctrinal and analytical research keeping this in view the researcher utilized the resources like print and electronic media ,articles and reports of various authorities, books in the library, internet websites like Google search; discussed the project with teachers, classmates & friends. As the study is legal in nature, historical and doctrinal methods are adopted because it is not possible to study purely by experimental method. From the collected material and information, researcher proposes to critically analyze the topic of the study and try to reach the core aspect of study.

ACKNOWLEDGMENT

To complete this project was not easy, but due to kind help from many persons at last I was able to complete my project work easily without any difficulty. To many debt incurred in meeting the challenges of producing this research project are gratefully acknowledged by the researcher. First of all, I am thankful to my subject teacher Mrs SHIVANI MOHAN under whom able guidance about Lesson from the recent economical financial crisis. I was able to complete this project. Who despite having the very tight and busy schedule helped me to complete this project and devoted his energies to this task.. I cannot ignore the contributions made by my classmates, seniors and friends towards the completion of this project work .And I would also like to express my gratitude towards the library staff of my college which assisted me in acquiring the sources necessary for the compilation of my project. Last, but not the least, I would like to thank the Almighty for obvious reasons. Finally, I am thankful to all those individuals and institutions that directly and indirectly provided me the materials which helped me to complete this project.

MD.SHAIQUE ROLL NO-559 FOURTH SEMESTER

INTRODUCTION
The term financial crisis refers to the loss of confidence in a country's currency or other financial assets causing international investors to withdraw their funds from the country. The financial crisis and associated recession originated in the US in early 2008 and then spread to Europe has by now engulfed most of the economies in both developed and developing world. The crisis, of course, being an unavoidable phase in the path of market economy, injures almost all sectors of an affected economy. Various economic activities such as production, employment, saving, investment, consumption etc are being badly affected and thereby the economy of the country as well as an individual do undergo a downturn during the crisis. The speed and magnitude of the spread of the crisis from one corner of the world to the other is simply oiled by the globalisation process. . The beginning of the crisis The Global Financial Crisis, which started in 2008, is considered to be the latest in the series of economic crises to adversely affect 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. It is stated that 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 (Mohan, Rakesh, 2009) .

The economic world heard about the recent crisis with the striking news of the collapse of an American bank, Leman Brothers1, which was traditionally well experienced and financially very strong. The crisis in the financial sector had already started in the latter half of 2007 and finally burst out on 23rd September 2008 in the form of the collapse of the bank. As we learn, the current financial crisis in United States originated due to the indiscriminate lending of housing loans in the countrys sub-prime mortgage market. The investment in real estate and the housing sector had started in the U S from the early 2000s and by 2007 there was a kind of housing boom in the US economy which led to mismatch between supply and demand.

Lehman Brothers Holdings Inc. (former NYSE ticker symbol LEH) was a global financial services firm. Before declaring bankruptcy in 2008,

The clients were, of course, the investors with poor financial background and having insufficient financial resources. As there was inadequate demand for houses in the market, the investors in the housing sector could not sell them out profitably and failed to repay the bank loans. Thus, the sub- prime lending resulted in high level defaults.

The effects of the global financial crisis have been more severe than initially forecast. By virtue of globalization, the moment of financial crisis hit the real economy and became a global economic crisis; it was rapidly transmitted to many developing countries. India too is weathering the negative impact of the crisis. There is, however, an important difference between the crisis in the advanced countries and the developments in India. While in the advanced countries the contagion traversed from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector. The global financial crisis has started in August 2007 when the sub-prime mortgage crisis first surfaced in the US. In fact, the RBI was raising interest rates until July 2008 with the view to cooling the growth rate and control inflationary pressures. But as the financial meltdown, morphed in to a global economic downturn with the collapse of Lehman Brothers on 23 September 2008, the impact on the Indian economy was almost immediate. Credit flows2 suddenly dried-up and, overnight, money market interest rate spiked to above 20 percent and remained high for the next month. It is, perhaps judicious to assume that the impacts of the global economic downturn, the first in the center of global capitalism since the Great Depression, on the Indian economy are still unfolding. The crisis confronted India with discouraging macroeconomic challenges like a contraction in trade, a net outflow of foreign capital, fall in stock market, a large reduction in foreign reserves, slowdown in domestic demand, slowdown in exports, sudden fall in growth rate and rise in unemployment.

A credit linked note is a note whose cash flow depends upon an event, which may be a default, change in credit spread, or rating change

REASON FOR FINANCIAL CRISIS.

Reasons for Global Financial Crisis

The first hint of the trouble came from the collapse of two Bear Stearns hedge funds early2007. 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 Practices3: 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 so- called 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.

Once mortgage backed securities started flooding the markets, the banks and financial institutions also resorted to securitization of the pool of assets to shift the risk to investors in these securities as well as to obtain funds well ahead of the scheduled tenor of these assets.

REASON FOR INDIAN FINANCIAL CRISIS.

In the first place for economic crisis corruption in public life and in administration right from the political boss down to the lowest public servant has been largely responsible for failure of our planning. It is common knowledge that hardly twenty five per cent of the total funds allocated reach the beneficiaries. The major chunk is appropriated by the political bosses themselves for purposes of fighting elections and for filling in their own coffers. A good deal of it is eaten up in commissions clandestinely given to officials big and small. Thus full use r-, not made of the scarce resources of the country. Astronomical figures are sanctioned; bur a tiny percentage of them reaches the beneficiaries. Deficit budgets are prepared, government resorts to borrowing and in this way debt-, go on mounting without any corresponding benefits accruing. this obnoxious state of affairs has been going on right since the achievement of independence It has intensified even further during last few years resulting in huge deficits.

Role Of Political Leaders in Economic Crisis The unscrupulous politicians and officials and their corrupt and are biggest culprit for economic crisis, they have- looted the country beyond measure bringing it to the brink of disaster. Recently a number of mega scams involving thousands of corers of rupees have been discovered. The urea scam in which figures the name of a former PMs son along with others, the fodder scam in which the former CM of Bihar was found to be the main culprit along with an army of predators, the letter of credit (LOC) scam involving the Chief Minister of Assam, the securities scam involving the big shares bull Harshad Mehta the Fake stamp papers scam involving about Rs. 60 thousand crore besides a number of have exposed beyond an iota of doubt how the big politicians have defrauded our national exchequer. Similarly big deals are struck at the government level for the import of many ill-ills needed for the country, particularly defense equipment, fertilizers, petroleum products etc.

We have to spend our foreign exchange for that purpose. Here too a handsome percentage of foreign exchange goes into the coffers of the politicians as commission and it is deposited in foreign banks. The country pays through the nose but it fails to reap the corresponding benefits.

The Bofors deal, the HDW submarine deals are but the visible part of the iceberg thousands of corers of dollars of foreign exchange have thus not benefited India in any way. In order to meet our needs we had to make further borrowings and in this way our foreign debt went on mounting up. The unscrupulous tribe of politicians had no time or will to look about the morrow. Thus corruption has eaten into the vitals of Indias economic life and it has brought India to such a bad situation. We did not even care to see that our exports are matched with imports. If there was adverse balance of trade position, we borrowed. In the course of time the interest payable on the borrowings reached mountainous figures.

This along with foreign exchange spent on essential items created a wide trade deficit leading to the present intractable balance of payments position, so intractable that we had to sell or pledge a good quantity of our gold to salvage our honour. It is an irony indeed that the interest payment on our debts forms the largest item of expenditure in the Central Budget. It is true that by so doing we honour our international commitments and obligations, but no amount of pious words can camouflage the act that our economy as a whole is not in a very healthy position.

The second cause of our economic crisis is the wasteful expenditure incurred by our governments on items which are not at all essential. We frittered away scarce resources in organizing cultural festivals and India festivals in foreign countries. Our politicians have developed a penchant for organizing big and bigger and still bigger party rallies. Lakhs of gallons of petrol and diesel are wasted for transporting crowds to the venue of the rallies and back home. This precious liquid could be better utilized to irrigate our fields which could give better yields. We have frittered away our precious stocks of liquid gold for nothing despite our full knowledge of the fact that our country is paying through the nose for the import of this commodity and is incurring heavy debt for its import in required quantity. Some unscrupulous politicians thus have not only looted the country but have all along befooled the masses. If only we could economics on consumption of this essential item we could well meet our requirements with our domestic production. There would have been then no need of huge imports of petrol and petroleum products. In a way billions of dollars worth petroleum has been burnt away grossly wastefully. It has not at all generated additional revenue to Indias exchequer. The lure of handsome commission and not the public good largely determined our international deals. There has been a very-very wide unfavorable gap between the import expenditure incurred and the resources generated with that expenditure.

The third major cause of Indias economic crisis is the mismanagement of the economy. We failed to distinguish between the essentials and the non- essentials and our economic ship drifted away our less on uncharted waters. The fact is that our nasty Politics has overridden all other considerations. Little did our leaders realize that they were sure to sink if the nation was to sink. But the self prevailed upon the concern for the nation.

The fourth major cause of our economic crisis is the system of restrictions and controls in which our economy finds it enmeshed. Our tax structure is faulty. Our socialistic endeavors have gone awry. The freedom of initiative and enterprise has been sadly curbed in the name of socialism. It is indeed sad to note that our entrepreneurs have to face controls galore in

proceeding with their ventures In view of these difficulties people shun undertaking

projects on their own. The tax structure is so faulty that it leaves little scope for incentives to embark on ambitious projects, with the result that the full potential of our youth to grow and expand and thereby contribute to national development is not realized. Indias is the case of stunted individuals who cannot be expected to contribute their mite to the task of national reconstruction in the present climate. We often hear of complaints of trade handicaps. The introduction of reforms and induction of liberalism in the economy are belated measures, the outcome of which is still shrouded in uncertainty, owing to the unstable conditions prevailing yet on the economic front. The so called economic reforms have benefited only a very limited segment of our population. The common man still finds the going very tough. The fifth major cause of Indias economic crisis is our peoples inefficiency and their disinclination for work. The government functionaries do not acquit themselves well and there is always big backlog of work. Our output therefore is not in direct proportion to our inputs. The adverse balance accumulates impinging on the total amount of resources generated. We have failed to evolve a work culture and in idleness and gossip we perceive higher status. In fact our economic crisis is the crisis of character understood in comprehensive terms. Strikes and bundhs, agitations and movements on the slightest pretext have become the common feature of our national life.

Destruction of public property during these agitations has become a common sight. Our scarce resources are thus being put to flames. The lack of national spirit and weakness of national sentiment have put out of gear our chariot of national resurgence. The criminal lack of national spirit and national sentiment is perhaps the major cause of the ill-conceived economic reforms and liberalization. True, the loosening of controls and restrictions liberated to some extent our economic activity, but the major advantage was cornered by the big multinationals. On the liberalization front, we gave a good boost to the activities of the multinationals which have come to destroy our indigenous industry. Their technology being of much higher grade, our own entrepreneurs find it impossible to compete with them. We embarked on globalization under the pressure of the foreign capitalist countries criminally oblivious of the fact that the economic alliance between unequal partners was not going to benefit the weaker party. Foreign investment in India was allowed unfettered, even in the consumer sector, along with the infrastructure sector leading to the present unhappy scenario in which the native industry faces the threat of closure and extinction.

Global Financial Crisis and Its Impact on India Impact on India

Due to globalization, the Indian economy cannot be insulated from the present financial crisis in the developed economies. The development in the U.S financial sector has affected not only America but also European Union, U.K and Asia. The Indian economy too has felt the impact of the crisis though not to the same extent. It is premature to try to quantify the consequences of the crisis on the Indian economy. However the impact will be multi-fold.
1. 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 (Atreya2008). The software companies may face hard days ahead. 2. Exchange Rate: Exchange rate volatility in India has increased in the year 2008-09 compared to previous years. Massive selling by Foreign Institutional Investors and conversion of their holdings from rupees to dollars for repatriation has resulted in the rupee depreciating sharply against the dollar. Between January 1 and October 16, 2008, the Reserve Bank of India (RBI) reference rate for the rupee fell by nearly 25 per cent, from Rs.39.20 per dollar to Rs.48.86(Chandrasekhar and Gosh 2008). This depre- ciation may be good for Indias exports that are adversely affected by the slowdown in global markets but it is not so good for those who have accumulated payment commitments. foreign exchange

3. Foreign Exchange Outflow: After the macro-economic reforms in 1991, the Indian economy has been increasingly integrated with the global economy. The financial institutions in India are exposed to the world financial market. Foreign institutional investment (FII) is largely open to Indias equity, debt markets and market for mutual funds. The most immediate effect of the crisis has been an outflow of foreign institutional investment from the equity market. There is a serious concern about the likely impact on the economy because of the heavy foreign exchange outflows in the wake of sustained selling by Foreign Institutional Investors in the stock markets and withdrawal of funds by others. The crisis resulted in net outflow of $ 10.1billion from the equity and debt markets in India till 22nd Oct, 2008 (Kundu 2008). There is even the prospect of emergence of deficit in the balance of payments in the near future.

4. Investment: The tumbling economy in the U.S is going to dampen the investment flow. It is expected that the capital inflows into the country will dry up. Investments in mega projects, which are under implementation and in the pipeline, are bound to buy more time before injecting funds into infrastructure and other ventures. The buoyancy in the economy is absent in all the sectors. Investment in tourism, hospitality and healthcare has slowed down. Fresh investment flows into India is in doubt.
5. Real Estate: One of the casualties of the crisis is the real estate. The crisis will hit the Indian real estate sector hard (Sinha 2008). The realty sector is witnessing a sudden slump in demand because of the global economic slowdown. The recession has forced the real estate players to curtail their expansion plans. Many on-going real estate projects are suffering due to lack of capital, both from buyers and bankers. Some realtors have already defaulted on delivery dates and commitments. The steel producers have decided to resort to production cuts following a decline in demand for the commodity.

6. Stock Market: The financial turmoil affected the stock markets even in India. The combination of a rapid sell off by financial institutions and the prospect of economic slowdown have pulled down the stocks and commodities market. Foreign institutional investors pulled out close to $ 11 billion from India, dragging the capital market down with it(Lakshman 2008). Stock prices have fallen by 60 per cent. Indias stock market indexSensex touched above 21,000 mark in the month of January,2008 and has plunged below 10,000 during October 2008 ( Kundu 2008).The movement of Sensex shows a positive and significant relation. with Foreign Institutional Investment flows into the market. This also has an effect on the Primary Market. In 2007-08, the net Foreign Institutional Investment inflows into India amounted to $20.3 billion. As compared to this, they pulled out $11.1 billion during the first nine-and-a-half months of the calendar year 2008, of which $8.3 billion occurred over the first six-and-a-half months of the financial year 2008-09 (April 1 to October 16).

7. Exports: The crisis will sharply contract the demand for exports adversely affecting the countrys growth prospects. It will have an impact on merchandise exports and service exports. The decline in export growth may sharply affect some segments of the Indian Economy that are export- oriented. The slowdown in the world economy has affected the garment industry. The orders for factories which are dependent on exports, mainly to the U.S have come down following deferred buying by big apparel brands. Rising unemployment and reduced

spending by the Americans have forced some of the leading brands in the U.S to close down their outlets, which in turn has affected the apparel industry here in India. The U.S accounts for 55 per cent of all global apparel imports (Bageshree and Srivatsa2008). The global recession will undermine other major export sectors of the Indian economy like sea foods, gems and jewellery.

8. Increase in Unemployment: One danger is of a dip in the employment market. The global financial crisis could increase unemployment. Layoffs and wage cuts are certain to take place in many companies where young employees are working in Business Process Outsourcing and Information Technology sectors (Ratnayake 2008). With job losses, the gap between the rich and the poor will be widened. It is estimated that there would be downsizing in many other fields as companies cut costs. The International Labor Organization predicted that millions of jobs will be lost by the end of 2009 due to the crisis - mostly in construction, real estate, financial services, and the auto sector. The Global Wage Report2008-09 of International Labour Organization warns that tensions are likely to intensify over the issue of wages. There would also be a significant drop in new hiring (The Hindu 2008) All these will change the complexion of the job market.

9. Banks: The ongoing crisis will have an adverse impact on some of the Indian banks. Some of the Indian banks have invested in derivatives which might have exposure to investment bankers in U.S.A. However, Indian banks in general, have very little exposure to the asset markets of the developed world. Effectively speaking, the Indian banks and financial institutions have not experienced the kind of losses and writedowns that banks and financial institutions in the Western world have faced (Venkitaramanan 2008). Indian banks have very few branches abroad. Our Indian banks are slightly better protected from the financial meltdown, largely because of the greater role of the nationalized banks even today and other controls on domestic finance. Strict regulation and conservative policies adopted by the Reserve Bank of India have ensured that banks in India are relatively insulated from the travails of their western counterparts (Kundu 2008).

WHAT CAUSE THE GLOBAL FINACIAL CRISIS

Trying to identify the factors that caused the global financial crisis is a debate which has been raging over the last few years, with some people pointing to one area, and others looking at other culprits for what has been one of the most devastating and groundbreaking events of the economy in recent memory. The global financial crisis might make it sound like something that hasn't affected regular people, but this certainly isn't the case, as regular workers in some of the massive companies that have been bankrupted have become unemployed, and cities and towns across the United States have been decimated if a major employer in the area has gone out of business. There are a number of factors which are generally pointed to when looking at the reasons that triggered the global financial crisis, and this is documented extremely well in the financialcrisis.biz website, which is a very good resource for those looking for information on all aspects of the crisis. One of the main culprits that is often pointed to as one of the main triggers of the global financial crisis are the mortgage derivative products, where risky mortgages were packaged with more traditionally secure mortgages and sold to corporate investors and other banks as secure investment products. This packaging of mortgages is generally accepted to have masked the real risks that were linked with such a product, which gradually grew as lending criteria were loosened in the first five or six years of the twenty first century. These products were created by one group of people who have been vilified more than any other industry over recent years, which are the bankers. The investigations that have been carried out by politicians and government in the aftermath are still proceeding, but there is no doubt that some of the blame for the crisis has to lie with them, and the way in which they packaged and sold the mortgage derivative products.

Another area which has been blamed for the crisis is widespread selling of mortgages across the United States and the world to people who weren't really able to afford the repayments for the borrowing. As more people started to default on their mortgages, property prices slumped, causing even bigger problems as more people found the level of borrowing was above the value of their home, and more people started to default on their mortgages. There have also been many people who have blamed government regulation of the financial industry as one of the main reasons for the global financial crisis, and it is certainly the case that if there was a more proactive regulation of the financial industry, and especially how the mortgages were verified, then it may have prevented the crisis from becoming as wide ranging as it was. Countries and governments are still trying to recover from the repercussions of the crisis, and the levels of national debt has been increasing both in the US and worldwide, but by dealing with this debt, and with better regulation, then industries will start to recover from the devastating effects of the defining event of this century so far touched above 21,000 mark in the month of January,2008 and has plunged below 10,000 during October 2008.

How Can We Get Out Of Recent Financial Crisis.

The global financial crisis of the early twenty first century has been one of the most critical and destructive events to the economy of the United States and worldwide economies. With many massive companies having gone out of business as a result of the crisis, with hundreds of thousands, if not millions of people have been made redundant or fired because of the effects of this crisis, but finding a solution that will help us to get out of the crisis is vital. With levels of national debt at levels not seen since the Second World War, and more people than ever worried about their own and their family's future, recovery from the crisis on a national and international level is something that does rely a lot on how people react. For those people who are fortunate enough to still be employed, trends have shown that they are struggling to try and repay their existing lending, and have significantly cut down on the amount they are spending, largely because of the increased costs that have come with borrowing on credit cards and loans over recent years. It is this trend which is particularly worrying for those who are trying to guide the nation's economy out of the financial crisis because a reduction in spending by people mean that there is significantly less income coming into the coffers of the government, who are having to reduce the amount that is being spent, which has subsequently led to massive cuts in almost every government department. For some of the more conservatively minded, then this might well be a step in the right direction, but adding to the number of unemployed people in the country comes with more problems of its own, as they have to fight to survive and to look for work in a very competitive market which allows employers to push down labor costs.

One of the best sites looking at solutions to this financial crisis is financialcrisis.biz, which looks in-depth at many of the issues and solutions, but at the heart of any recovery from this financial crisis has to be a balance of well managed government budgets which will be operating on a tight leash, along with a recovery in consumer confidence and spending. Once the economy stabilizes and these factors start to return to the market, then more people will start to have the confidence to spend money on the big ticket items again, and companies across the country will start to see the benefit and be able to look at hiring staff again instead of laying people off. There is no doubt that we still have some hard times ahead of us as we try to fight our way back from this financial crisis, and there will likely be more bumps in the road, before a confident and positive economy is back in place. However, by taking the right steps to deal with government debt and get this back on an even keel, and to start pushing the economy back into growth, then we will be able to get the United States and the world economy out of this crisis

Lessons from the Crisis

The crisis has shown that irrespective of the degree of globalisation of a country and the soundness of domestic policies, it can be impacted by a crisis in any other economy due to the inter linkages in the global economy. With the benefit of hindsight, a number of important issues have emerged which allows us to draw lessons. I will highlight four key lessons. First, the policy objectives of central banks would have to be broader than price stability as conventionally defined. The lesson for central banks that emerged from the crisis is that financial stability can be jeopardised even if there is price stability and macroeconomic stability (Subbarao, 2009). Moreover, the success in stabilising goods and services prices may not preclude inflation in asset prices, causing unsustainable speculation leading to asset booms. Thus, apart from price stability, the central banks would have to take into account asset prices and focus on financial stability as an explicit objective of policy. While there is more of an agreement to recognise financial stability as an objective, there is less of an agreement about the instrumentalities for achieving this objective. There is a broader acceptance of macro prudential tools for asset prices. It is, however, not apparent at this stage as to what extent policy interest rates could be used to address asset price inflation. Second, there is a need for fiscal consolidation to generate the fiscal space for macro management. During the crisis, fiscal policy responses have been unprecedented, although they were conditioned by country-specific factors. But the massive fiscal support, though appropriate as a crisis response, has raised questions about debt sustainability. This is reflected in increase in

sovereign CDS spreads even for advanced countries which has implications for macro-financial stability going forward. It is, therefore, important that fiscal buffers are established in good times to provide the necessary fiscal space for counter-cyclical fiscal measures in bad times. Third, financial institutions would have to be less leveraged and better regulated. This financial crisis brought into sharp focus the interlinkages among the financial institutions, markets and the payment and settlement systems. It has shown that market self regulation has limits. Hence, all systemically important financial institutions, markets and instruments should be subject to an appropriate degree of regulation and oversight depending on their relative importance for overall financial stability. At the same time, it needs to be recognised that regulation in itself can act to magnify cycles. In order to address the issue of pro-cyclicality, regulators need to focus on: identifying factors that amplify cycles; improving and diversifying market risk management models; undertaking more rigorous stress testing; and adopt forward-looking procedures to capital calculations. Fourth, the international financial architecture needs to be strengthened to address the challenges of the global economy of the 21st century. The crisis has exposed fundamental problems, not only in national regulatory systems affecting finance, competition and corporate governance, but also in the international institutions and arrangements created to ensure financial and economic stability. The IMF, the Financial Stability Board (FSB) and the G-20 should provide the effective platform for addressing global issues in a more credible manner. The IMF would have to play a more active role in crisis prevention, management and resolution. It needs to strengthen its multilateral surveillance with a greater macro-financial focus. In this context, the G-20 emphasis on modernizing the IMFs governance process is a welcome step which should improve its credibility, legitimacy and effectiveness. The G-20

can provide the necessary political support for implementation of policies which need a coordinated effort at the global level.

CONCLUSION
The Global Financial Crisis, which started in 2008, is considered to be the latest in the series of economic crises to adversely affect 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. India was relatively less impacted by the crisis despite increased global integration of the Indian economy in recent years. This could be attributed mainly to the structure of the economy, cautious policies, prudent regulation and effective supervision. The crisis has shown that irrespective of the degree of globalisation of a country and the soundness of domestic policies, it can be impacted by a crisis in any other economy due to the inter linkages in the global economy. With the benefit of hindsight, a number of important issues have emerged which allows us to draw lessons.

BIBLIOGRAPHY BOOKS
1. Shankar Acharya, India After the Global Crisis Orient Blackswan (2012) 2. S. Irudaya Rajan, India Migration Report 2012: Global Financial Crisis, Migration and Remittances, Routledge 3. ADARSH KISHORE, The Global Economic Crisis through an Indian Looking Glass

INTERNET RESOURCES

1. http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/WRPI090210.pdf 2. http://www.mainstreamweekly.net/article1418.html 3. www.kulkarnibooks.com/.../lessons_for_india_from_southeast 4. www.bis.org/fc.htm.