1 GLOBAL
ECONOMIC COLLAPSE IN 21ST CENTURY
L. Kavitha & R. Priya,III BBA
INTRODUCTION
A financial crisis is a sudden change in the
country’s economy causing the threat of collapse of large financial
institutions such as banks, stock markets and business houses, resulting in
foreclosures and prolonged unemployment. The Great Depression that occurred
during the early 1930’s left a huge dent in the country’s economy, giving rise
to a massive scale of unemployment and poverty. In the later years, a major
downturn of economic activity occurred during the period 2008-2012, causing the
failure of key businesses and an estimated loss of trillions of US Dollars.
This paper explains the latest economic crisis and how it has been overcome.
BACKGROUND & CAUSES
Most of the American economists believe that
economic crisis started in the United States from 1997 and extended till
2006.
The root cause of this problem is many American and
European companies, including banks, invested in subprime loans.
These investments gave more money to the loaning companies, who used it to give
out more subprime loans.
The housing companies built too many houses. This
caused the price of housing to decrease beginning in the summer of 2006. The
value of many homes dropped below the value of the remaining mortgage debt, so
the owners were unable to sell and move away. The homeowners with subprime loans left
their houses with less value than they had when they were bought, which meant
that the loans were worth more money than the house. The loaning companies were
not able to make money from these houses.
The collapse of the housing bubble caused the value
of investments to fall. The companies that had invested in subprime loans lost
a total of about $512 billion. Citigroup and Merrill Lynch were two of the
companies which lost the most money. More than half of the money lost, $260
billion, was lost by American firms.
IMPACT OF CRISIS ON
AMERICAN ECONOMY
Between June 2007 and November 2008, Americans lost
more than a quarter of their net worth. By early November 2008, a broad U.S.
stock index, the S&P 500, was down 45 percent from its 2007 high. Housing
prices had dropped 20% from their 2006 peak, with futures markets signalling a
30–35% potential drop. Total home equity in the United States, which was valued
at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008
and was still falling in late 2008. Total retirement assets, Americans'
second-largest household asset, dropped by 22 percent, from $10.3 trillion in
2006 to $8 trillion in mid-2008. During the same period, savings and investment
assets (apart from retirement savings) lost $1.2 trillion and pension assets
lost $1.3 trillion. Taken together, these losses total $8.3 trillion.
- Real gross domestic product (GDP)
began contracting in the third quarter of 2008 and did not return to
growth until Q1 2010. CBO estimated in February 2013 that real U.S.
GDP remained 5.5% below its potential level, or about $850 billion. CBO
projected that GDP would not return to its potential level until 2017.
- The unemployment rate rose from 5%
in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by
March 2013.The number of unemployed rose from approximately 7 million in
2008 pre-crisis to 15 million by 2009, then declined to 12 million by
early 2013.
- Residential private investment
(mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to
$400 billion by mid-2009 and has remained depressed at that level.
Non-residential investment (mainly business purchases of capital
equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300
billion in 2010, but by early 2013 had nearly recovered to this peak.
- Housing prices fell approximately
30% on average from their mid-2006 peak to mid-2009 and remained at
approximately that level as of March 2013.
- Stock market prices, as measured by
the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a
trough of 676 in March 2009. Stock prices began a steady climb thereafter
and returned to record levels by April 2013.
- The net worth of U.S. households
and non-profit organizations fell from a peak of approximately $67
trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15
trillion or 22%. It began to recover thereafter and was $66 trillion by Q3
2012.
- U.S. total national debt rose from
66% GDP in 2008 pre-crisis to over 103% by the end of 2012. Martin
Wolf and Paul Krugman argued that the rise in private savings
and decline in investment fuelled a large private sector surplus, which
drove sizable budget deficits.
ABOUT US STATUS
As 2014 winds down, many
investors are wondering what the economic outlook for 2015
will be. If you look at the U.S. economic data that’s been trickling in, 2015
looks like it could be a very strong year.
The U.S. announced strong
third-quarter gross domestic product (GDP) growth of 3.9%. This extends the
recent trend of strong quarter-over-quarter GDP growth; in the fourth quarter
of 2013, real GDP growth came in at 2.4%; GDP in the first quarter of 2014
contracted 2.9%—though this was primarily seen as a result of the brutal
winter; and in the second quarter, real GDP increased 4.6%.
Gloss over the winter of 2014,
and the U.S. economy is showing signs of sustained growth. Not only is GDP
growth up, but the U.S. jobs market is also improving with unemployment at
5.8%, consumer confidence is up, and so, too, is retail spending.
The U.S. Census Bureau announced
recently that November retail sales increased 0.7% month-over-month to $449.3
billion—the largest monthly gain since March 2014. Economists were expecting
November sales to climb just 0.4%. On a year-over-year basis, November retail
sales were up a whopping 5.1%.
The momentum could continue well
into 2015. And it is excellent news for a country that gets 70% of its GDP from
consumer spending. This may be why the U.S. economy is forecast to grow by 3.1%
in 2015. That would represent the strongest annual GDP growth since 2005, when
the economy grew 3.3%.
In fact, thanks to an improving
job market and falling oil prices, the U.S. could enjoy the fastest economic
growth in a decade. The optimism and boost in consumer spending can be
attributed, in large part, to slumping oil prices.
Oil prices have been in retreat
since the summer due to an increased supply of North American shale oil and
weak global economic data. Oil prices faced additional pressure in
mid-November, when OPEC (the Organization of the Petroleum Exporting Countries)
announced it would not reduce its output.
IMPACT OF CRISIS ON THE
INDIAN ECONOMY
Impact of
Global Recession on Indian Economy:
Ø The FII based mostly in US
and Europe withdraws the investment to meet the financial crisis at home.
Ø The power of rupees decline
when the FII started selling the stocks.
Ø Lehman Brothers and Merill
Lynch which invested in Indian banks withdrew the investment during recession.
Ø The recession has made loans
more difficult to get.
Ø The Recession has reduced
Business Profits and affected Industry
Ø Real Estate decline when the
recession affected IT industry, off-shore business. Recession brought down
housing demand from IT and commercial spaces.
Ø A downturn in economic
activity records a direct dip in employment. When the demand for output fell
the demand for labour fell .In 2008more than 100,000 jobs were lost in
organized job market.
India did get affected due to Global recession but the
intensity of the impact was low as the Central Bank and Government made
necessary arrangement. The RBI lowered interest rates and expanded credit. The
Government cut excise duties to stoke demand.
Indian economy has faced slowdown and not recession.
It enjoys the highest consumer market and lowest debt ratio of 22 percent and
highest saving rate of 28 percent of the GDP.
ECONOMIC RECOVERY OF
INDIA:
From all accounts, except for the agricultural
sector initially as noted above, economic recovery seems to be well underway.
Economic growth stood at 8.6 percent during fiscal year 2010-11 per the advance
estimates of CSO released on February 7, 2011. GDP growth for 2009-10 per quick
estimates of January 31, 2011 was placed at 8 percent. The recovery in GDP
growth for 2009-10, as indicated in the estimates, was broad based. Seven out
of eight sectors/sub-sectors show a growth rate of 6.5 percent or higher. The
exception, as anticipated, is agriculture and allied sectors where the growth
rate needs to higher and sustainable over time. Sectors including mining and
quarrying; manufacturing; and electricity, gas and water supply have
significantly improved their growth rates at over 8 percent in comparison with
2008-09. When compared to countries across the world, India stands out as one
of the best performing economies. Although there was a clear moderation in
growth from 9 percent levels to 7+ percent soon after the crisis hit, in
2010-11, at 8.6 percent, GDP growth in nearing the pre-crisis levels and this
pace makes India the fastest growing major economy after China.
In order for India’s growth to be much more
inclusive than what it has been, much higher level of public spending is needed
in sectors, such as health and education along with the implementation of
sectoral reforms so as to ensure timely and efficient service delivery.
CURRENT ECONOMIC
SITUATION IN INDIA:
India has become one of the most attractive
destinations for investment owing to favourable government policies and reforms
in the past few months. The approval of foreign direct investment (FDI) in
several sectors has allowed investments to pour into the economy. According to
the data provided by Department of Industrial Policy and Promotion (DIPP), the
cumulative amount of FDI inflows in the country in the period April
2000-September 2014 was US$ 345,073 million.
Growth in India is expected to rise to 5.6 per cent
in 2014 and pick up further to 6.4 per cent in 2015 as both exports and
investment will increase, according to the World Economic Outlook (WEO) report
released by International Monetary Fund (IMF).
Sectors projected to do well in the coming years
include automotive, technology, life sciences and consumer products.
Engineering and research and development (ER&D) export revenue from India
is expected to reach US$ 37-45 billion by 2020, from an estimated US$ 12.4
billion in FY14, according to Nasscom.
Furthermore, the US$ 1.2 trillion investment that
the government has planned for the infrastructure sector in the 12th Five-Year
Plan is set to help in further improving the export performance of Indian
companies and the Indian growth story, which will consequently improve the
overall Indian economy.
KEY DEVELOPMENTS/INVESTMENTS
In the past few months, there have been quite a few
investments in several sectors of the Indian economy. This has led to some
major changes and developments in the country. Some of these major
developments/investments are as follows:
- Venture capital (VC) investments in the first
nine months of 2014 worth US$ 1.09 billion, according to Ernst & Young
(EY).
- India's drugs and pharmaceuticals industry is
expected to grow at a compound annual growth rate (CAGR) of 14 per cent to
reach a turnover of Rs 2.91 trillion (US$ 47.05 billion) by 2018. This
growth is aided by the rapidly growing domestic market and the newly
emerging export opportunities.
- The output of eight core sector industries in
India grew by 5.8 per cent in August 2014 as compared to 2.7 per cent in
July 2014, on the back of good expansion in steel, coal, cement and
electricity generation. The eight industries constitute 38 per cent of the
Index of Industrial Production (IIP).
- The total approximate earnings of Indian
Railways during the period April 1-September 30, 2014 were Rs 73,403.67
crore (US$ 11.87 billion) compared to Rs 65,525.85 crore (US$ 10.59
billion) during the same period last year, which is an increase of about
12.02 per cent.
- Private equity (PE) giant Surbana plans to
invest around Rs 300 crore (US$ 48.51 million) in the food park promoted
by Keventer Group in Bengal, making it the biggest FDI in the food
processing sector in India.
- Indian firms are expected to raise US$ 13-14
billion through global bonds in 2014 on the back of improved economic
outlook and reforms to ease the raising of funds aboard, according to
Moody's. The oil and gas, metals and mining, and telecommunications sector
issued 67 per cent and 76 per cent of the foreign currency bonds from
Indian non-financial companies in 2013 and 2014, respectively.
GOVERNMENT INITIATIVES
India has become a promising investment destination
for foreign companies looking to do business here. Mr Narendra Modi, Prime
Minister of India, has launched the 'Make in India' initiative with the aim to
give the Indian economy global recognition. This initiative is expected to
increase the purchasing power of the common man, which would further boost
demand, and hence spur development, in addition to benefiting investors.
The steps taken by the government in recent times
have shown positive results as India's gross domestic product (GDP) at factor
cost at constant (2004-05) prices for Q1 of 2014-15 is estimated at Rs 14.38
trillion (US$ 232.63 billion), as against Rs 13.61 trillion (US$ 220.12
billion) in Q1 of 2013-14, registering a growth rate of 5.7 per cent.
Based on the recommendations of the Foreign
Investment Promotion Board (FIPB), the Government of India has approved 14
proposals of FDI amounting to Rs 1,528.38 crore (US$ 247.19 million)
approximately. Out of the 14 approved proposals, six of them belonged to the
pharmaceutical sector which was the highest number of approvals for any sector.
On Thursday,
December 11, the price of West Texas Intermediate oil dipped below $60.00 per
barrel, the lowest price since July 2009. Some analysts predict oil could stay
around $60.00 per barrel for the next five years.
CONCLUTION
If India does
attain and sustain growth rates of 9+ percent that it had achieved prior to the
crisis, this itself is likely to push up its domestic savings in the next few
years. Besides, stronger growth should attract more foreign savings, especially
foreign direct investment, and thus raise the investment rate.
Economist have
to use forecasting tools effectively in order to make ready with precaution and
giving enough importance while they get the sign of crisis.
SOURCES
simple.wikipedia.org
www.businessinsider.com
en.wikipedia.org
Rbi.org.in
www.cmie.com
www.trivedieffect.com
