NATIONAL LAW UNIVERSITY, ODISHA

MACRO-ECONOMICS
MACROECONOMIC CRISES

SUBMITTED BY: ASTHA AHUJA (15/BALLB/010)

SEMESTER: THIRD

FACULTY: PROF. MADHUBRATA

DATE OF SUBMISSION: 18/10/2016

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................4
REVIEW OF LITERATURE...........................................................................................................5
HYPOTHESIS.................................................................................................................................6
GREAT DEPRESSION-1930..........................................................................................................7
I. Causes:..............................................................................................................................7
i. Mainstream theoretical explanation:.............................................................................8
a. Keynesian:...........................................................................................................................8
b. Monetarist:...........................................................................................................................8
ii. Gold Standard:...........................................................................................................9
iii. Breakdown of International Trade:............................................................................9
II. Recovery:.......................................................................................................................9
III. Impact of the Great Depression on India:...................................................................10
INDIAN ECONOMIC CRISIS-1991............................................................................................11
I. Causes:............................................................................................................................11
II. Recovery:.....................................................................................................................12
FINANCIAL CRISIS 2007-08......................................................................................................13
I. Causes.............................................................................................................................14
i. Boom and bust in the housing market:........................................................................14
ii. Speculation:.............................................................................................................15
iii. High risk loans and lending practices:.....................................................................15
iv. Securitization:..........................................................................................................15
v. Government Policies:...............................................................................................15
vi. Central Bank policies:..............................................................................................16
II. Impacts of U.S. Financial Crisis on India:..................................................................16
i. Impact on stock market:..............................................................................................16
ii. Impact on Indias trade:...........................................................................................16
iii. Impact on Indias export:.........................................................................................17
iv. Impact on Indias handloom sector, jewelry export and tourism:............................17
v. Exchange rate depreciation:.....................................................................................17
vi. IT-BPO sector..........................................................................................................17

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 vii. FII and FDI..............................................................................................................17
CONCLUSION..............................................................................................................................19
LEGAL IMPLICATIONS OF MACR-ECONOMIC CRISES.....................................................20

INTRODUCTION

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 A MACRO-ECONOMIC CRISIS can be explained as a situation in which country's per
capita GDP or consumption fall is of at least 10% over a short duration of time. An illustration
for the same can be - in the United States from 1929-1933 there was a fall in per capita GDP by
almost 29%, with the fall in consumption per capita was by 21%. Also in France, the per capita
fall in GDP was by 41% between 1939 and 1944, with per capita consumer expense fell by
approximately 58% between 1938 and 1945. This is for the fact that large macro-economic
disasters are rare so, determination of their possibility and size of distribution of the same needs
quite a long period of time and series of national accounts of different countries.

The first macro-economic crisis occurred back in 1870 and still continues in todays
modern era as well. To study such crises a research usually focuses on significant cases with the
annual statistics. The study and researches done with the available data has helped in identifying
152 GDP crises in almost 36 countries with 95 consumption crises in about 24 countries.

The major disastrous events across the world were World War-I, World War-II, the Great
Depression of 1930s, Post-World War II crises which expanded to Latin America and also Asia.
The Great Influenza Epidemic of years 1918-20 adds to the list. The estimated probability of any
crisis is a fall in National Income or consumption of more than 10% in a year which is around
3.5% per year, with an average size of 22% and on an average duration of about 3 years.
Typically, Gross Domestic Product and consumption fall are concurrent in nature, though the
consumption tends to fall disproportionately in wartime. For example, during both the world
wars, there was a rise seen GDP in the United Kingdom with a sharp fall in consumer
expenditure- this difference is chiefly attributed to the raise in military spending. It is important
to measure the division of personal consumption expenditure between durables and non-durables
also possible government consumption.

In this project, the author has dealt with three major crises (i.e. the Great Depression of
1930, the Indian Economic Crisis of 1991 and also the Financial Crisis of 2007-2008) across the
world and their implication on Indian economy.

REVIEW OF LITERATURE

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This year marks the 50th anniversary of the end of Second World War and the world will reflect
on the human cost of this conflict and wasnt spared by the material destruction, but had to face
the economic consequences of war and also loss of life. This led to the macro-economic crisis in
1930 (Great Depression). Following the Great Depression, there were many more crises which
occurred and had adverse effects on almost every economy may be directly or indirectly. One
among these crises was the Indian Economic Crisis of 1991 which struck Indian economy to
worst of its conditions ever after the independence. In 21 st century the U.S. Financial Crisis
(2007-08) is considered to be the reason for Great Recession in the world.

As we study different articles written by eminent social scientists and economists, especially,
analysis of causes and impacts of abovementioned crises on Indian economy as presented by
Robert J. Barro and Jose F. Ursuawe in their article Macroeconomic Crises since 1870 can
understand the origin of any macro-economic crises. I could gain deeper insight into it while I
looked at it with the eyes of different economy Intelligentia. Robert E. Halls Why do Economy
Fall to Pieces after Financial Crisis, Michel Woodfords Financial Intermediation and
Macroeconomic Analysis, Lee E. Ohanians The Economic Crisis from Neoclassical
Perspective, Andreas Fuster, David Laibson and Brock Mendels Natural Expectations and
Macroeconomic Fluctuation, Ricardo J. Caballeros Macroeconomics after the Crisis: Time to
Deal with the Pretense-of-Knowledge Syndrome

This project also comprises of studies of articles published in journals such as Economic and
Political Weekly, The Economic Times, Indian Economic Review and others for different views
on the subject. Submissions and reports developed after these crises and subsequently published
serve as source of authentic data and portray the status of the economy.

We will study the causes and the implication of all macro-economic crises on Indian economy
with reference to all the above mentioned sources and literatures.

HYPOTHESIS

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 This project investigates the impact of the history of macro-economic crises on different
nations and mainly on India. We first study the impact of past crises on the probability of a future
crisis. Applying data for all countries for which the required information is available, controlling
for conventional macro variables and the history of macro-economic crises occurring after
1930s. Countries that have already experienced one crisis generally have a higher likelihood of
experiencing another crisis; and the depth of the present crisis does not appear to be affected by
the previous historical experience with crisis events. Evidence also suggests that, in middle-
income countries, is associated with lower likelihood of a crisis, a lower ratio of nonperforming
loans during the crisis, and higher levels of forgone output in the crisis' aftermath.

In contrast, we find that past crisis experience has a significant impact on present
economies. When facing considerable political risk, the past does seem to matter - countries with
more people who were exposed, over their lifetime, to larger disasters will tend to take more
precautions. This association, however, does not hold for countries with more stable political
systems. We interpret these results as consistent with a differential economy adjustment to a
crisis hypothesis. The private sector, by virtue of its harder budget constraints, adjusts faster,
whereas the government adjusts at a slower pace following a crisis. The financial sector may find
itself in between the two.

This paper traces the genesis of India's 1991 economic crisis and analyzes the policy
response of the government in terms of macroeconomic stabilization and structural reforms. It is
suggested that the economic crisis was primarily due to the large and growing fiscal imbalances
over the 1980s. Large fiscal deficits, overtime, had a spillover effect on the trade deficit
culminating in an external payments crisis. A program of economic policy reform has since been
put in place which has yielded very satisfactory results so far. While a lot still remains on the
unfinished reform agenda, the prospects of macro stability and growth are indeed encouraging

In this piece of work we concentrate mainly on the "initial conditions" worst hit economy
and on the "crisis hypothesis" of the same.

GREAT DEPRESSION-1930

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 The Great Depression of 1930s is considered as the worst economic depression of the
world which has ever occurred. The time period of the Great Depression varies across different
nations. However, it can be said that this economic depression started in 1929 and lasted till
1930s.It is commonly known for its one year long time span and implications across the world.
As a result of this, during 1929 to 1932 the worldwide GDP fell by almost 15%.1

In modern era of 21st century, the Great Depression of 1930s is mocked as an example of
how far can the world's economy decline.2 The origin of this depression is rooted the United
States- the result of the fall in stock market that began somewhere around September 4, 1929 and
became turned out to be worldwide crash of the stock market on October 29, 1929-Black
Tuesday. The Depression had its devastating effects almost every country may it
be rich or poor. Peoples income, profits, tax revenue, and prices fell, whereas, the international
trade plunged by more than 50%. The rise in unemployment in U.S. by 25%, and even in some
other countries it raised as high as 33%.3

All mega cities across the world were hit hard, especially those which were dependent
on heavy industry. There came a halt in construction in many countries. Rural areas and farming
communities also suffered a lot with the fall in crop prices by approximately 60%. 4 There were
some economies which even started to recover by the mid-1930s whereas, many countries
continued to suffer with the negative effects of the Great Depression till the beginning of World
War II.

1 By comparison, GDP fell less than 1% from 2008 to 2009 in the Great Recession. Roger
Lowenstein, "History Repeating," Wall Street Journal Jan 14, 2015

2 Barry Eichengreen, Hall of Mirrors: The Great Depression, The Great Recession, and the
Uses-and Misuses-of History (2014)

3 Frank, Robert H.;Bernanke, Ben S. (2007). Principles of Macroeconomics (3rd ed.). Boston:
McGraw-Hill/Irwin. p. 98. ISBN

4 "World Economic Survey 193233". League of Nations: 43.

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 I. CAUSES:
The two competing theories i.e. Keynesian and Monetarist gave their own line of theoretical
explanation for the causes of Great Depression. Economists and economic historians are almost
evenly split as to whether the traditional monetary explanation that monetary forces were the
primary cause of the Great Depression is right, or the traditional Keynesian explanation that a
fall in autonomous spending, particularly investment, is the primary explanation for the onset of
the Great Depression.5

i. Mainstream theoretical explanation:

a. Keynesian:

John Maynard Keynes, the British economist argued in his book General Theory of
Employment Interest and Money that, the lower aggregate expenditures of the economy
contributed to massive fall in the income and also employment fell below the average. In such
circumstances the economy reaches equilibrium at high unemployment and low level economic
activity. Keynesians basic idea was quite simple, according to this school of thought, to keep
everyone fully employed, government have to run deficits when the economy slows, because the
private sector will not invest enough so as to keep production at constant level and ultimately,
bring the economy out of recession. During the times of economic crisis there should be an
increasing government spending and cutting taxes.

As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies, and other
devices to restart the US economy, but never completely gave up trying to balance the budget.
According to the Keynesians, this improved the economy, but Roosevelt never spent enough to
bring the economy out of recession until the start of World War II.6

b. Monetarist:
5 Robert Whaples, Where Is There Consensus Among American Economic Historians? The
Results of a Survey on Forty Propositions., Journal of Economic History, Vol. 55, No. 1 (March
1995), p. 150 in JSTOR

6 "The Keynesian Revolution" New York: Macmillan. pp. 5658,169, 17779.; Rosenof,
Theodore (1997). Economics in the Long Run: New Deal Theorists and Their Legacies, 1933
1993. Chapel Hill: University of North Carolina Press.

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 Monetarist school of thought follows the explanation given by Friedman and Schwartz.
According to them the Great Depression was caused due to the banking crisis which caused one-
third of all banks to vanish even due to a reduction in the wealth of shareholder. Further, because
of monetary contraction by 35% that resulted in a price drop by 33% i.e. Deflation.

With significantly less money to go around, businessmen could not get new loans and could not
even get their old loans renewed, forcing many to stop investing. This interpretation blames the
Federal Reserve for inaction, especially the New York branch.7

ii. Gold Standard:

Various economic studies have shown that the downturn was spread across the world by the
rigidities of Gold Standard i.e. it was suspending gold convertibility in other words, it was
devaluing the currency in terms of gold which was done most to recover from the depression.
During the Great Depression almost every major currency left it. First one to do so was the Great
Britain. With the speculative attacks on pound and reduction in gold deserves, the Bank of
England ceased the exchange of currency notes for gold.

Great Britain, Japan, and the other nations left the gold standard in 1931. Other countries, such
as Italy and the United States, remained on the gold standard, whereas a few more countries
which were termed as the "gold bloc" including Belgium, Poland, and Switzerland, stayed on
this standard until 193536.

iii. Breakdown of International Trade:

According to many of the economists the fall in international trade after 1930 has helped in
contributing towards the depression, especially those countries which were completely
dependent on foreign trade. Most of the economists partially blame the American Smoot-Hawley
Tariff Act for the worsening of depression by significantly reducing international trade and thus,
causing retaliatory tariffs in other countries. While foreign trade was a small part of overall

7 Griffin, G. Edward (2002). The Creature from Jekyll Island: A Second Look at the Federal
Reserve.

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economic activity in the U.S. and was concentrated in a few businesses like farming, it was a
much larger factor in many other countries.8

II. RECOVERY:

In 1933 most of the countries began to recover from the effects the Great Depression.
But, in United States the recovery started in early 1933 and did not return to 1929 GNP for more
than a decade and continued to have an unemployment rate of about 15% in 1940. To measure
the unemployment rate during that period was complicated and unsophisticated due to the
presence of massive underemployment. The economists gave their own point of view for the US
recovery policies of which the most common view is that of Roosevelt's New Deal policies
which either caused or accelerated the recovery. Although, the New Deal policies were never
strong enough to bring out the economy completely from the recession. Some economists have
also called attention to the positive effects from expectations of reflation and rising nominal
interest rates that Roosevelt's words and actions portended. 9 According to Christina Romer, the
money supply growth caused by huge international gold inflows was a crucial source of the
recovery of the United States economy, and that the economy showed little sign of self-
correction. The gold inflows were partly due to devaluation of the U.S. dollar and partly due to
deterioration of the political situation in Europe.10

III. IMPACT OF THE GREAT DEPRESSION ON INDIA:

The Great Depression of 1930 had a worst impact on India, which was then, under
British Raj. The trade policies adopted by the Government of British India were very beneficial

8 "The World in Depression". Mount Holyoke College.

9 Gauti B. Eggertsson, "Great Expectations and the End of the Depression,"American Economic
Review 98, No. 4 (Sep 2008)

10 Romer, Christina D., "What Ended the Great Depression", Journal of Economic History,
December 1992, vol. 52, no. 4, pp. 757784 "monetary development were crucial to the
recovery implies that self-correction played little role in the growth of real output"

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to the United Kingdom, but resulted in great damages to the Indian economy. During that period
(19291937), the export and import fell drastically leading to crippling seaborne international
trade.

The agricultural sector and railways were the most affected. The further adopted policies
were combined with the international financial crisis resulted in the soaring prices of goods and
commodities. In addition to that, the high prices with the stringent taxes in British India
impacted the common man in worst of its form. Consequently, the farmers manifested
themselves in rebellions and added to more number riots. The nationalist movement of Salt
Satyagraha of 1930 was the step taken in response to heavy taxation that time.

INDIAN ECONOMIC CRISIS-1991

During 1980s, India started to have problems in balance of payments. Towards the end of
1990, it resulted in a serious economic crisis. The government was very close to default and
its central bank refused to credit and the foreign exchange reserves reduced to such a level that
India could hardly finance itself for three weeks worth of imports which further, led the Indian
government to take a biggest step to airlift its national gold reserves as a pledge to IMF i.e.
the International Monetary Fund in return of a loan to cover its balance of payment debts.11

I CAUSES:
The Indian Economic Crisis of 1991 was mainly caused due to Current Account Deficit
and Currency over-valuation.

This crisis was basically due to large growing fiscal imbalance over 1980s. In mid-
eighties, India started to have problems regarding Balance of Payments. The main reason being
the Gulf War, export slump, swelling of oil import bills, drying of credit and also the investors
withdrew their money.

11 Rediff News. Retrieved 2009-10-20.

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 By the end of 1990, large fiscal deficit affected the trade deficit which added in external
payments crisis. Thus, India was in great economic trouble. The Centres and states gross fiscal
deficit rose from 9% of Gross Domestic Product (1980-81) to 12.7% (1990-1991).

If we count only Centres gross fiscal deficit it rose somewhere from 6.1% (1980-1981)
to 8.3% (1985-86) and further to 8.4% in (1990-91). As these deficits were to be met either by
borrowing or by some other means, the governments internal debt rapidly increased. This
accumulation of debt was from 35% (1980-81) to 53% (1990-91). 12
Due to these fiscal deficits the foreign exchange dried up to the extent that India could
hardly bare finance 3 weeks worth of import. Due to two major wars fought by India i.e. Indi-
China War (1962) and Indo-Pak War (1965) led to the start of devaluation of Indias currency.
Subsequently, India was forced to initiate liberal policies so as to stabilize its economy, which
further resulted in huge devaluation of the Rupee.

IV. RECOVERY:

In 1991 Indias foreign exchange reserves got depleted to half in the span of six months,
thereby leaving nation to barely survive for roughly 3 weeks of its imports. 13 During the same
time India was only few weeks away from defaulting on its external BOP i.e. balance of payment
obligations.

Government of India took an instant step of securing emergency loan of about $2.2
billion from IMF by pledging almost 67 tons of Indias gold. 14 As are result of this, RBI had to
airlift 47 tons of gold reserve to Bank of England and also 20 tons of the same to the Union Bank
of Switzerland so as to accumulate $600 million. 15 During this period there was outrage of
12See: http://www.scribd.com/doc/52152513/1991-India-economic-crisis#scribd

13 Rajghatta, Chidanand; Sinha, Prabhakar. "Full circle: India buys 200 tons gold from IMF"

14 Meredith, Robyn (2007). The Elephant and the Dragon. W. W. Norton & Company.

15 "India shining, India scraping". The Telegraph. Archived from the original on 6 November
2009. Retrieved 2009-10-20

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national and public outcry when, people came to know that the government has pledged the
country's entire gold reserves to secure the loan. The government of Chandra Shekhar collapsed
after few months of the airlift. This move in a way helped tying over the balance of payment and
was also a start-off for P.V.Narasimha Raos governance and economic reform process.

He took over as the Prime Minister in June, and appointed Manmohan Singh as the Finance
Minister. The Raos government brought about changes in several reforms which are collectively
termed as liberalization. However, most of these reforms could come because it was IMF who
required those reforms for loaning money to India to overcome the crisis. 16 There was a
significant opposition to this reform because this appeared to be an interference with nation's
autonomy. The foreign exchange started picking up with the start-off liberalization policies and
gradually peaked its monetary funds.

FINANCIAL CRISIS 2007-08

The year of 2008 is known as a year of global Financial Crisis which had the most severe
effects on different parts of the world. Many economists world-wide, also consider it to be the
worst crisis ever faced since, the Great Depression of 1930s. 17 This Financial Crisis of 2008
is commonly known as the US Meltdown which has its origin in the countrys housing sector of
2001and 2002, but eventually it extended over half a decade of time and gradually brought
almost every big economy of the world under its grip.

16

17 Two top economists agree 2009 worst financial crisis since great depression; risks increase if
right steps are not taken. (February 29, 2009). Reuters. Retrieved September 30, 2009,
from Business Wire News database.

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 This crisis is even characterized by a contracted liquidity in the housing market and
global credit, mainly triggered by the failure of investment banks, mortgage companies and
governmental institutions and departments which already had heavily invested in subprime
loans. Though, the start of this financial crisis is noted to be in 2005-06, but it became more
visible and reached peak during 2007-08. In this period only many of the well-known Wall Street
firms were collapsed.

According to International Monetary Fund officials, the losses amounting to $945 billion
in USA alone were due to real estate crisis alone, but this may run into trillions of currency notes
when the losses of each and every country are taken into consideration. Initially, the crisis lead to
default in subprime loans and mass foreclosure but, later it got accelerated, and hence, took a
form of global financial crisis. The impacts of this crisis were so severe that, it led to the
destruction of varied number of top investment firms like Bears Sterns, Lehman Brothers, Merill
Lynch and apart from these there were few more such as JP Morgan and Citi Group which were
rescued by the American Investment Group (AIG) and the government.

The impact of it was so bad that, the US Government had to intervene into free market
economy and had to come up with the $700 billion bailout package so as to revive the
investment banks and firms and also to reinstate the peoples i.e. the investors faith back in the
stock market. Since then, the owners of stocks in United States stock market have suffered losses
of almost $12 trillion dollar, as the fall in value of it was somewhere from $20 to $12 trillion.

The Subprime Lending (also known as Ninja or Liar loans) is the well-known practice of
providing loans to the borrowers who does not qualify at the markets rate of interest owing to
several risk factors like size of down payments made, low-income level, employment status and
credit history, etc. The value of the U.S. subprime mortgages was about $1.3 trillion before this
crisis.

I CAUSES
It is very difficult to pin down the accurate and all the causes of the financial crisis, but,
many of the economists are of same view that subprime loans was one of the major cause of US
financial crisis of 2008. The several causes of this crisis are mentioned below:

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 i Boom and bust in the housing market:

The financial crisis of 2008, started with the burst of housing bubble which began in years
2001 and started to grow at a high rate until, it attained its peak in 2005. The reason for occurring
of the housing bubble was the speedy rate of the valuation of real property till which, the prices
of those properties reached the unsustainable level. This was because of the rapid increase in
demand of huge inflow of foreign exchange from nations such as Japan, China, U.K. and that to
at low interest rate. Further, subprime loans (second-chance lending) worked as fuel to the fire,
by more increase in the demand for houses.
Additionally, the Federal Reserve Board reduced the short-term rate of interest from
6.5% in 2000-01 to 1% in 2003-04. As a result of this, the home ownership rate hiked from 64 %
in 1994 to 69% in 2004. This raise in demand leads to push in the price of house by the leaps and
bounds. During the period of 1997 and 2006, increase in American home price was almost by
124%. Furthermore, the consumers of U.S. started to borrow money for their consumption by
mortgaging their property.

Also, people spent as much as $800 billion per year, which was more than what they
earned. Further, debt grew from $680 billion in 1974 to $14 trillion in 2008. But, the
overbuilding during this period and rise in rate of interest led to the burst of the bubble. During
2004 and 2006, the Federal Reserve Board raised the rate of interest by almost 17 times from 1
% to 5.25 %.

iv. Speculation:

Second important cause of housing crisis was the speculation in real estate. Moreover, it was
analyzed that, investment in housing sector yielded high return as compared to other traditional
investment sectors. As a result of this, investment in housing sector further increased. In 2006,
22% of homes purchased were for the purpose of investment, with 14% of purchase as vacation
homes. Approximately, 40% of home purchases werent for primary residences.
v. High risk loans and lending practices:

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 The subprime lending was highly risky, as this kind loan was offered to borrowers with high
risk. This includes illegal immigrants, people without a job, an asset and an income. The
expectation of repayment from such borrowers was real hard.
Another example for such high risk loans is ARMs i.e. the Adjustable Rate Mortgages. In ARMs
borrowers, only had to pay the interest and not the principal amount during the initial period.
vi. Securitization:

Securitization can be understood as a structured financial process under which assets and
financial instruments are undertaken and pooled together as the collateral for third party
investments. Because of which securitization, MBS i.e. Mortgage Backed Securities are created
and distributed by the third party i.e. investment banks. During the period of 2003 to 2006, the
share of MBS fell from 76% to 43% then only, Wall Streets share raised from 24% to 57%. The
increase in securitized share of subprime mortgages was from 54% in 2001 to 75 % in 2006.
vii. Government Policies:

The priority of both the Bush and Clinton administration was to provide house at the affordable
price. In the year of 1974, the President passed the Community Reinvestment Act under which it
was made mandatory for each and every bank and saving institution to provide loans for home to
low income people.
The United States Department of Housing and also the Urban Developments Mortgage
policies added to the trend to issue risky loans. Housing and Urban Development directed
Freddie and Fannie to give at least 42% of their mortgage to its borrowers.
viii. Central Bank policies:

The Federal Reserves primary concern was to manage their monetary policies and was least
bothered of the housing bubble

V. IMPACTS OF U.S. FINANCIAL CRISIS ON INDIA:

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 The impact of US meltdown on the Indian economy was quite less, because of India had
very strong fundamental and also less exposure to the global financial market. Perhaps, this
saved the Indian economy from getting carried away instantly. Unlike in United States where
capitalism rules, in country like India, the market is regulated by its government.

i Impact on stock market:

The immediate impact of the current financial crisis was felt when the stock market started to
fall. About Rs. 250,000 crores was wiped out on 10th of October (in a single day) from its share
market. Also, the Sensex lost almost 1000 points on that particular day. This kind of huge
withdrawal from Indian stock market was significantly by FIIs i.e. Foreign Institutional Investors
and participatory-notes.

ix. Impact on Indias trade:

The trade deficit also reached at alarming proportions. The reason being was of workers
remittances, FII investment, NRI deposits, etc. The current deficit is somewhere at around $10
billion. But, if in near future the remittances dries up and FIIs take flight, then very soon we
might head towards another 1991 economic crisis like situation and also if our reserves from
foreign exchange depletes and the trade deficit keeps on increasing at the same rate.
Furthermore, these reserves has depleted by almost $57 billion-$253 billion by the week end.

x. Impact on Indias export:

With the United States and several other European countries slipped under the full blow of
recession. Since, then Indian exports have run into difficulty. Different manufacturing sectors
such as leather, gems, textile, and jewellery were hit hard due to the slump in the demand these
countries. According to statistics Indias export fell by 9.9% in November 2008, when declining
consumer demand in the United States and several other major global markets impacted with the
negative growth widen to monthly trade deficit of over $10 billion.

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 xi. Impact on Indias handloom sector, jewelry export and tourism:

Further, this crisis also affected almost Rs. 3000 crores handloom industry, adding to the exports
dropped by 4.6% in 2007-08, leading to widespread unemployment in sector of handloom. Still
the global economy is experiencing the meltdown and also the Indian tourism sector being badly
affected due to sharp decrease in the number of tourists from United States and European
countries.

xii. Exchange rate depreciation:

Due to the outflow of FIIs, Indias currency i.e. rupee depreciated almost by 20 % against US
dollar thereby, standing at Rs. 49 per dollar. Hence, creating panic among the importers.

xiii. IT-BPO sector

The Indias IT-BPO revenue is aggregated and expected to grow by 33% and reach to $64 billion
by the ending of current fiscal year. Nearly the same time period, direct employment reaches to 2
million in a year. This sector derives about 75% of its revenues from the US and IT-ITES i.e.
Information Technology Enabled Services contributing almost 5.5% towards its total export. So,
it became very obvious that the financial crisis of US will impact IT sector of India.

xiv. FII and FDI

This contagious financial meltdown was successful in eroding a large chunk of cash from India
which also impacted Indias corporate sector. However, this money erosion will hardly affect the
performance of real sector in India. Due to the global recession, FIIs withdrew $5.5 billion,
whereas, inflow of FDI doubled from $7.5biilion (2007-08) -$19.3 billion (2008 April-
September).

Hence, now it is very clear that the Financial or Subprime Crisis was a consequence of greed
and too much profit making on the part of Wall Street and Investment Firms/Banks. It also
shows the biggest failure of capitalist market economy ever.

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 CONCLUSION

India cannot itself stay free from the adverse developments which take place in the global
financial markets. To encounter the negative fall of the worlds market slowdown on the Indian
economy, the Government has been trying to respond by providing focus on fiscal stimulus
packages in different ways like that of tax relief to boost the demand and increase the
expenditure on various public projects so as to create employment and public assets.

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 The Central Bank i.e. RBI (the Reserve Bank of India) has taken several steps to ease its
monetary policies and enhance liquidity measures to form different means for the flow of funds
from the financial system so as to meet the needs of all the sectors. The forward step taken
towards the growth rate of India over last two decades was basically, due to the changes in the
structure of industries, trade and financial areas. During 1990s the reforms in these sectors were
very wide and deep and as a result of this, have contributed significantly to further, productivity
of the economy. Indeed, it can be speculated that there more and more potential for higher
growth rate in upcoming years, but in other things, following would be required:

1) Revival and a better pursuit of economic reforms in center as well as in states.

2) Major efforts have to be made to raise the rate of domestic savings, by means of reducing
governmental dissaving at centre and state through cuts in explicit and also in implicit subsidies,
better control over non-developmental expenditures, further improvements in the tax ratio, and
even by strengthening incentives for savings.

3) Large investments and better performance of infrastructural services- both in the public as
well as private sectors.

4) Greater attention and larger resources for agriculture and also social sectors and rural
development programs so that there is an increase in employment, reduction in poverty and to
create a mass base in the support of economic reforms.

LEGAL IMPLICATIONS OF MACRO-ECONOMIC CRISES

The coordination of macroeconomic and trade reform policies becomes crucial at the
time of such crises. The political effect of these early reforms, particularly the support they will
elicit from the population, will depend on a number of factors, including:

(i) Whether the government is able to put in place an effective public relations effort;

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(ii) The performance of the economy;
(iii) The government's capacity to put in place compensation schemes and policies; and
(iv) The government's ability to forge broad political coalitions and Legislature.

To overcome such major and hard hit crises it becomes the priority of any nation to form
best of its economic policies and also the role of legislature comes in forefront to come up with
legal plans and agendas. The reason being for the same is that it is the responsibility of the
Legislative Assembly and the Judiciary to find out the loopholes in the functioning of
government made plans, related to economy.

For example the relation of law and economics can be understood better in the context of
Indian Economic Crisis 1991. The Indian economy suffered a balance of payment crisis, which
provided the context for the rolling out of neoliberal policies, also referred to as the New
Economic Policy in India.

It is important for government to understand the economic regime and analyze how the
earlier-established relationship between revenue generation and expenditure ran into trouble;
what changes occurred in the organization and management of revenues and capital; nature of
interventions of the state in the circulation of capital; changes in the physical aspects of
circulation of commodities, together with foreign trade and the formation of the world market;
and the rise of the United States as the only global superpower. It can be concluded that India's
economic crisis of 199091, and the neoliberal policies that followed, are products of contingent
legal policies and conditions.

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