Consequences Of The Recent Meltdown

Ishita Desai MMS – A , Roll no: 52

RIMSR

Consequences of the recent melt- down on the Wall Street on the Indian Economy.

The spectacular collapse of Lehman Brothers, 150-year-old company, when it applied for bankruptcy surprised everyone. The crisis arose due to a host of small banks which had, for several years, been sanctioning housing loans without, or inadequate, securities. There is no doubt that the Wall Street crisis will only have a marginal effect on India, thanks largely to the cautious regulatory system in place. It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. India has sharply criticized the United Nations (UN) and its affiliated organizations for sitting on the sidelines as the current financial crisis unfolded, saying the International Monetary Fund remained helpless despite the economic meltdown impacting the developing nations. India called on the world body to use its universality to coordinate an international response, which is crucial to overcoming the crisis.

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Indian Software Industry: Turbulence in the global financial markets could translate into nasty surprises for the Indian Software Industry. The

Indian IT vendors have been facing challenging times as a result of uncertainty in the US and Europe for well over a year now. The crisis though is not going to be restricted to the vendors exposed to these companies alone. The heat will be felt across the industry as the crisis leads to an overall slowdown in IT spends. Overall, the market will don a more conservative approach toward any spending, including IT spending, as the companies want to wait and watch whats going to happen to the business. When the whole industry is in turmoil, companies become cautious and step back to think how and where to spend, explains Arvind Thakur, CEO, NIIT Technologies.

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Preliminary analysis of the current scenario indicates an impact on discretionary spend on IT due to the uncertainty and customer decisions being postponed .In the short-term the vendors will continue to get the same growth rate. While non-discretionary spend is not going to get much impacted, the discretionary spend (on new technologies and integration of new technologies) is going to be limited. Non-discretionary IT spend will typically include existing work, live projects and maintenance kind of work.

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Demand Slowdown: Six months after Bear Sterns went under and was acquired by JP Morgan, the latest series of events in the US financial sector would further slow down the demand for IT services. Most IT companies, however, did not offer any comment citing ‘silent period before quarterly results. In IT budgets, the non-discretionary spend, which is about 70 per cent, will continue. In a downturn, discretionary spend on new projects, innovation or up gradation gets affected. The impact, if any, will be on the latter. Unfortunately, the economic slowdown has been catching up with the other verticals as well, namely telecom, retail and manufacturing,

especially the automobile segment. Some of the damage control measures by the US may make matters worse for Indian IT companies.

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Disinvestment: The immediate effect has been the disinvestment in Indian Share Market by Foreign Institutional Investors. during the past few years, foreigners have pumped in about 60 odd billion dollars in order to buy shares in Indian companies. the resource crunch and liquidity problems in Wall Street forced them to liquidate their Indian share holdings. This led to the crash of the SENSEX and the artificial hue and cry over it. But as the foreign investors withdrew their investments, we had a net outflow of foreign funds, depressing the exchange value of the Rupee against the Dollar and other currencies.

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Banking System: We have a chain of banking system based still on concept of welfares rather than profits. The urban (52) and state cooperative banks (16) have been playing significant roles in making 'fundamental our economy' strong. We have had developed 'a scientific fiscal mechanism of consistent monitoring' system for our banking system which would keep our economy safe in extensor, when the world's economy is in extremis. Common men, pensioners and small domestic savings still prefer post offices for one simple reason, the high rates of interest rates in comparison with any other financial institutions.

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Export Businesses: Export Businesses will suffer because of fall in foreign demand, but the depressed Indian Rupee will set it off to some extent. The rest of us in rural India should not suffer much - but alas! our capitalist-oriented Government will make us suffer. Because their greatest blue eyed pets, the capitalists who suffer losses due to depression of the value of the shares of their companies, will raise pressure on the Ministers

of the Government. Even the prices of petrol and diesel will not be corrected down wards, because Government's pet boys may suffer loss of excess profits. So, the government will make us suffer.

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Rural Economy: Economic crisis that is now “crushing” the poor around the globe and for lacking any vision for the future or how the organization could help developing countries deal with the serious looming challenges. The upheavals in the financial markets have very little to do with rural economy. Indian financial market especially banks have always been under RBI scanner, even during normal times.

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Mass Layoffs: Indians are not used to mass layoffs. The recent economic boom has conditioned them to expect big companies to announce big profits, not wholesale sackings. India's rigid industrial relations system has also long discouraged corporations from making big retrenchments. India’s biggest private airline, Jet Airways, found out how deeply the community resents this industrial strategy when it "released" 1900 workers.A crowd of newly retrenched cabin crew, dressed in uniform, stormed the airline's headquarters in Mumbai to vent their anger.

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Handicraft Sector : The handicrafts sector will be the most severely hit, followed by gems and jewellery. There has been a massive decline of 40-50 percent in handicraft exports from last year.That’s because this market is almost completely US-driven. In gems and jewellery, growth was projected at 20 percent, but due to the dwindling value of the dollar and the slowdown in the US, the growth rate is down to 10 percent.

In light of the historical significance of the crisis it is too early to predict all its consequences. What we can be sure about, though, is that the world economy in

general and the developing countries in particular will suffer from it in the future. ______________________________________________________________________