Abstract :

Economic growth changes with change in the situtations in an economy.Any economy is very senstive to alittle change in the regular movement of the economy. One country is effected by the other,question her arises how did the Subprime Crisis arise, a problem in a small corner of U.S. financial markets, affect the entire global banking system allover? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. It was found that fortunes of international banks rise and fall together even in normal times with short-term global economic prospects. But the important was the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.The subprime mortage crisis which developed during 2007 and 2008. It includes United states enactment of government laws and regulations, as well as public and private actions which affected the housing industry and related banking and investment activity. All this had effect on our economy and our economy also had to suffer from the down fall.

Its by September 2008, the biggest investment funds like Lehman Brothers and AIG declared bankruptcy. The sub-prime loanees, mostly blue collar workers with normal aspiration to own a house, had because of recession become unemployed and could not repay even a fraction of the loan instalments. Lehman had bought heavily the derivatives and thus became saddled with house properties on foreclosures of loan defaulters and these properties they could not auction off because of the recession and growing unemployment.

Lehman and other funds thus declared bankruptcy. Liquidity in funds was vastly reduced thereby causing a stock market collapse. US demand for goods from abroad, i e, imports got reduced, and this affected European economies which had imitated the US sub-prime boom thanks to US multinational investment banks and subsidiaries. China got affected because its economic boom was export-led, enabling that country its huge trade surplus with US and EU and consequently rising foreign exchange reserves.

But why did Indian economy get affected so. In the United States, sub-prime loans were possible because of weak oversight of banks. But the Reserve Bank of India strictly regulates the banks in India, and banks are forced to hold reserves in the name of SLR and CRR, and purchase of government treasury bonds. Unlike China, India's exports to US and EU as a ratio of GDP is still small. Indian economy had a setback not because of financial contagion spreading from US, or because of the interdependent global trade system, but because of our own perfidious financial derivative called Participatory Notes (PNs) compounded by an anti-national agreement with Mauritius to permit even $1 paid-up companies incorporated in that country to invest in Indian stock markets and not be subject to capital gains tax.

The subprime crisis:

The lesson in the United States is that the decline in output after a banking crisis is both large and protracted . The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases, the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. In August 2007 a mild recession hit the US economy. It was enough to trigger and cascade bankruptcies in Investment Funds which had bought heavily these financial derivatives and had recklessly assumed that the US economic boom would last forever. This phenomenon is now called ‘greed', and the culprits were in the ‘Wall Street' stock market.

Economic crises follow a similar pattern.An innovation emerges. Sometimes it is a new tool of science of industry, such as the diving bell, steam engine, or the radio. Sometime it is a tool of financial engineering, such as the joint-stock company, junk bonds, or collateralised debt obligations. Investors may be wary at first, but then they see that extraordinary returns appear available on these new instruments and they rush in. Financial intermediaries—banks and investment companies—stretch their balance sheets so as not to be left out. The upward surge in asset prices continues, and that generation of financial market participants concludes that rules have been rewritten. Risk has been tamed, and leverage is always rewarded. The US financial crisis, which triggered the global crisis, began in the US in August 2007. It was then known as the sub-prime crisis, because housing loans had been recklessly advanced by investment banks even to borrowers who on first glance of any banker would not in all probability be able to repay the loans. Such loans were called ‘sub-prime' because of the high risk of default. These loans however had caused a huge housing boom in the US and an asset bubble to form.

The asset price rise peters out, sometimes from exhaustion on its own or sometimes because of a real shock to the economy. This exposes the weaknesses of the balance sheets of those who justified high leverage by the expectation of outsized capital gains. Many financial firms admit losses, and some ultimately fail. All those financial firms hunker down, constricting credit availability in an effort to slim their balance sheets. With wealth lower and credit harder to get, economic activity typically contracts. Only after the losses are flushed out of the financial system and often with the encouragement of lagging monetary and fiscal ease does the economy recover. This has led to some conflict between the government and the banks, particularly with regard to the enforcement of cuts in interest rates. However, the cuts which have been achieved here have come at the expense of even larger cuts in rates paid to savers which have serious implications for both current and future pensioners. In addition, the bail-out as a whole has resulted in a considerable ideological cost both in terms of the reputation of the financial sector within society as a whole (which is probably now at an all time low) and in terms of the increased legitimacy of regulation and even state ownership.

The economist Minsky's recommends that financial crises can be resolved efficiently with lender-of-last-resort and big-government interventions. The crisis that began in 2007 and after it the period has been different: its more profound and resistant to policy interventions. Minsky missed the factor that the impact of racial exclusion and U.S. cross-border imbalances on U.S. financial dynamics. we also draw the analytical implications of the systematic differences between banks' and non-banks' balance-sheets. One key effect of so doing is to see that asset-liability balances as well as cash-flows are crucial in financial dynamics. This paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons: banks no longer bear as well as originate credit risk; banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose; and subprime homeowners and structured investment vehicles became more leveraged than banks. But risk-distributing new financial products invented by computer-savvy MBAs, such new derivatives, which created portfolios of loans extended by banks and of mortgages of different risks and maturities, enabled banks to sell off at a discount their loan mortgages to investment funds, and the funds did not need to worry about defaulting of sub-prime loans because these derivatives had spread the risk, and the funds were earning on the discounts. Banks loved it because they got fresh liquid funds in place of mortgages.

This was possible because the US economy then, due to a loose monetary policy and low interest rates (in 2003-'07), was booming. This boom also fuelled global international trade by rising imports of US and hence also global growth.

a. what is happening at the moment represents the break-up of the interlocking set of arrangements by which the world economy has been governed since the mid-1980s.

b. weak situation of British capital, at least that section of British capital territorially located in Britain, has left Britain especially vulnerable to the crisis.

Financial Turmoil

The key development of the second half of 2008 has been a dramatic worsening the financial crisis based on the accumulation of debt. Its because growing recognition that the quantity of bad debt in the system was much larger than was previously thought. the rising tide of bad debt threatened the solvency of the banks This led to confusion amongst the US ruling class about the way to respond to the rising number of loan defaults.. Since bank regulation is based on the idea that loans can only be a certain multiple of bank capital and since the decline in shares reduced capital significantly, this looked likely to lead to a massive decline in bank lending, which would have further threatened the stability of the system.

The result of this has been an abrupt change in policy towards bailing-out the banks. The form of this has varied across countries.The UK government plan, which has effectively been adopted by the EU, provides some potential leverage for political debate in that it involves buying shares in the banks.

Efforts to out the crisis:

The starting point for Marxists says there is the capital in other industries which has been invested in the expectation of demand originating from a booming housing market; in particular that which depends on high levels of demand resulting from homeowners borrowing against the equity in their houses - something now unlikely to happen in the foreseeable future. The apparent change in Federal Reserve policy from the earlier rescue of Bear Sterns created a panic in the inter-bank lending market. Uncertain of which banks would survive banks ceased to lend to anyone at all in this market causing the system as a whole to seize up. Unwillingly forced to nationalise the mortgage companies Fannie Mae and Freddie Mac (largely as a result of pressure from Chinese and Japanese investors in these companies) they then switched abruptly to allowing a leading investment bank, Lehman Brothers, to fold. stock market investors also panicked sending bank shares into freefall

The real cost of the UK bank bail-out at present appears to be around £37 billion; i.e. the actual financial assistance being given to the banks. Even this will not necessarily be a long-term cost if the stake taken in the banks can be resold at a higher price at a later date. Nonetheless, it is a significant amount of money and will lead to a record government budget deficit this year. The sums involved in other European countries appear rather similar for example the Financial Times of 5 November reports that Italy is planning to allocate £24 billion to recapitalise its banks.

The tax receipts are now expected to fall by 3 percentage points of GDP in 2009-10 and observes that `these changes are overwhelmingly due to revisions in the fiscal capacity and level of GDP; a permanent reduction in taxes on financial sector profits and housing transactions; and, more strikingly, a lasting loss of GDP. In 2010, the economy is now expected to be some 5.5 percent smaller than forecast in the budget'. This raises serious questions about the ability of governments such as the British government to fund their increased deficits by issuing bonds without either a sharp fall in bond prices which will raise interest rates and worsen the crisis or an increase in public borrowing from abroad which will further weaken the value of the pound. Direct subsidies for the banks funded by the taxpayerAn attack on the job security, wages and conditions of bank staff in order to cut costs. Again, state-sponsored mergers may help this process by providing the means to close branches.Reduction of the interest rate paid out to savers and depositors

Different sectors performance pre and post crisis

Industry and services

Information technology in india, business process outsourcing in india and retailing in india

Infosys global headquaters in banglor. India has asia's largest outsourcing industry land is the worlds second largest most favourable outsourcing destination after the united states.

India has one of the world's fastest growing automobiles industries .Shown here is tata motors nano, world's cheapest car.Industry accounts for 54.6% of the GDP and employ 17% of the total workforce.However, about one-third of the industrial labour force is engaged in simple household manufacturing only. In absolute terms, india stands 16thin terms of nominal factory output. India's small industry makes up 5 % emission.

Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods .Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology.Textile manufacturing is the second largest source for employment after agriculture and accounts for 26% of manufacturing output. Tirupur has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear. Daravi slum in Mumbai has gained fame for leather products. Tata motors nano attempts to be the world's cheapest car.

India stands 15th in services output. It provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 1991-2000 up from 4.5% in 1951-80. It has the largest share in the GDP, accounting for 55% in 2007 up from 15% in 1950.Business services .information technology enabled services,business process outsourcing are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialization, and an availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers, on the supply side matched on the demand side by an increased demand from foreign consumers interested in India's service exports, or those looking to outsource their operations. The share of india it industry to the country's GDP increased from 4.8% in 2005-06 to 7% in 2008In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world. In March 2009, annual revenues from outsourcing operations in India amounted to US$60 billion and this is expected to increase to US$225 billion by 2020. Organized retail such supermarkets accounts for 24% of the market as of 2008. Regulations prevent most foreign investment in retailing. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods to states, from states, and even within states. Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo medical tourism.


Farmers work inside a rice field inandhra pradesh. India is the second largest producer of rice in the world after China and Andhra Pradesh is the 2nd largest rice producing state in India with west bengal  being the largest. Main articles: agriculture in industry , forestry in india,animal husbandry in india ,and fishing in india.

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry,logging,fishing accounted for 16.6% of the GDP in 2007, employed 60% of the total workforce] and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements inirrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since green revolution in india;.However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world.

India is the largest producer in the world ofmilk,cashew nuts,coconuts,tea,ginger,turmeric,and black pepper .It also has the world's largest Cattle population: 193 million. It is the second largest producer of wheat,rice,sugar,cotton,silk,peanuts and inland fish.It is the third largest producer of tobbaco. India is the largest fruit producer, accounting for 10% of the world fruit production. It is the leading producer of banana,sapotas and manogoes. India is the second largest producer and the largest consumer of silk in the world, with the majority of the 77 million kg (2005) production taking place in karnataka.State, particularly in mysore and the North Bangalore regions of muddenahalli, kanivenarayanpura and doddaballapurathe upcoming sites of a INR 700 million "Silk City"

Foreign direct investment in India

Share of top five investing countries in FDI inflows. (2000-2007)



(Million USD)

Inflows (%)






United states




United kingdom











As the fourth-largest economy in the world in PPP terms, India is a preferred destination for (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market. The inordinately high investment from Mauritius is due to routing of international funds through the country given significant capital gains tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauriitus is a capital gains tax haven, effectively creating a zero-taxation FDI channel.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record $19.5 billion in fiscal year 2006-07 (April-March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24 billion and for 2008-09, it is expected to be above $35 billion. A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going to depend on how the government can create incentives for FDI flow across a large number of sectors in India.

Economic trends

In the revised 2007 figures, based on increased and sustaining growth, more inflows into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020, India's GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the united states(in US$) by 2043. In spite of the high growth rate, the report stated that India would continue to remain a low-income country for decades to come but could be a "motor for the world economy" if it fulfills its growth potential. Goldman Sachs has outlined 10 things that it needs to do in order to achieve its potential and grow 40 times by 2050. These are

  1. improve governance
  2. raise educational achievement
  3. increase quality and quantity of universities
  4. control inflation
  5. introduce a credible fiscal policy
  6. liberalize financial markets
  7. increase trade with neighbours
  8. increase agricultural productivity
  9. improve infrastructure and
  10. improve environmental quality


An Indian farmer

India agriculture :Agriculture has become an mian concern becasuse more than 2-3rd population depends upon it.but the growth in agriculture sector is very slow as compared to is demands its because of leakages in the  factors to access,the lack of good extension services,access to market is hampered by poor roads,and the basic irrigation facilities.The low productivity in India is a result of the following factors:

  • According to "India: Priorities for Agriculture and Rural Development" by World Bank, India's large agriculture subsidies are hampering productivity-enhancing investment. Overregulation of agriculture has increased costs, price risks and uncertainty. Government interventions in labor, land, and credit markets are hurting the market. Infrastructure and services are inadequate.
  • Illiteracy, slow progress in implementing land reforms and inadequate or inefficient finance and marketing services for farm produce.
  • The average size of land holdings is very small (less than 20,000m²) and is subject to fragmentation, due to land ceiling acts and in some cases, family disputes. Such small holdings are often over-manned, resulting in disguised unemployment and low productivity of labour.
  • Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs and impracticality in the case of small land holdings.
  • World Bank says that the allocation of water is inefficient, unsustainable and inequitable. The irrigation infrastructure is deteriorating. Irrigation facilities are inadequate, as revealed by the fact that only 52.6% of the land was irrigated in 2003-04, which result in farmers still being dependent on rainfall, specifically the monsoon season. A good monsoon results in a robust growth for the economy as a whole, while a poor monsoon leads to a sluggish growth. Farm credit is regulated by NABARD, which is the statutory apex agent for rural development in the subcontinent.

India has many farm insurance companies that insure wheat, fruit, rice and rubber farmers in the event of natural disasters or catastrophic crop failure, under the supervision of the ministry of agriculture.One notable company that provides all of these insurance policies is agriculture insurance company of india,and it alone insures almost 20 million farmers.India's population is growing faster than its ability to produce rice and wheat.The most important structural reform for self-sufficiency is the itc limited plan to connect 20,000 villages to the Internet by 2013. This will provide farmers with up to date crop prices for the first time, which should minimise losses incurred from neighbouring producers selling early and in turn facilitate investment in rural areas.

Weak financial health

India witnessed financial crisis in 1990-'91 during which period, as Union commerce minister in the Chandrashekhar government, Manmohan Singh as finance minister was surprisingly given credit for the reforms by the media, but if he was so capable, how is it that during the last six years as prime minister he has failed to implement a single major economic or financial reform. How has he allowed PN to flourish when anyone can see it is a perfidious corrupting anti-national derivative that will ultimately ruin the Indian economy by a killer blow of fleeing the country at short notice after a budgetary crisis? The budgetary crisis looming in the horizon is that the allocations for major heads of expenditure, which cannot be reduced without creating a crisis such as government employees' salaries, pensions, police, defence, subsidies, interests to be paid for past loans taken by the government, etc, now cover 98 per cent of the current and capital account revenues accruing to government. These allocations are revenue expenditures, and hence not asset building or investments for development projects. Moreover, in the revenue budget, these expenditures far exceed the revenue. Thus the revenue budget is in a huge deficit which is covered by taking more loans from public sector banks, and regrettably for economic growth by creating a surplus in the capital account. In a financially healthy economy, it should be the other way around — surplus on the revenue account and a deficit in the capital account. This present situation however cannot continue for long because the loans from the public sector banks to government have to be paid back. But here the government faces a developing debt-trap, i e, a situation when the past loan repayments will exceed the new loans the government would take. At present government pays back 96 paisa for every rupee for new loans. Public debt is now over 90 per cent of GDP and on an exploding trajectory.

Three years before doom

My projection is that by 2013 more than a rupee has to be paid back against a rupee of new loan. Then we are in the debt trap. If the government tries to get out of it by printing new notes in the mint, it will generate unbearable inflation. Already the stimulus has accelerated money-supply growth, and pumped money into the economy excessively. Unscrupulous persons with political clout have got hold of most of the stimulus funds and are using them to engage in forward trading and plain hoarding to cause a galloping inflation today.

Fiscal deficit, which measures this excess money in the system, is already at a dangerous level of 13 per cent of GDP when according to the Fiscal Management Act it should be statutorily near zero. Thus the government is violating a law which it ought to be complying with. Such is the irresponsibility, or desperate situation, the government is in today. India is of course resurgent today in vitality and spirit of our people, but no thanks to current government policy; instead, it is in spite of it. India is resurgent because of the economic reforms set into motion in 1991-'95. No government has dared to reverse it, but no government since has dared to take it structurally forward. We still have three years to rectify matters with new financial reforms but with the present corrupt dispensation, it is not possible. As in the past, a crisis, this time a budgetary bankruptcy, will turn out to be a blessing in disguise for the country and enable the necessary reforms.

Suggestions :

Improving the Quantity and Quality of Land Resources

Increases in the quantity of land available for agriculture will increase economic growth. However, the extent to which this happens is limited to the extent to which bush land can be converted to agricultural land. All economic resources are scarce and have an opportunity cost. As bush land is increasingly used for agricultural purposes it is no longer a habitat for wildlife. The relative scarcity of land in the face of a growing population means that the law of diminishing returns might also become relevant. The law predicts that an increasing amount of labour applied to a fixed quantity of land the marginal productivity of the labour will fall.

Improving the Quantity and Quality of Capital Resources

One can distinguish between:

  1. Directly productive capital - plant and equipment e.g. factories
  2. Indirectly productive capital - infrastructure or facilitating capital e.g. roads and railways.

The process of acquiring capital is called investment. The opportunity cost of capital investment is the current consumption foregone. The level of investment and the quality of investment will directly affect the level of economic growth. The efficiency of the labour force and the other factors of production will depend upon the amount and quality of capital they have. In LDCs some investment comes from abroad in the form of foreign direct investment. This is usually through multinational enterprises locating in a country. There has been criticism of some investment in LDCs as to whether it is appropriate. If production moves from being labour intensive to capital intensive, unemployment and poverty increases.

The Quantity and Quality of Enterprise resources

The level of economic growth may be slowed down if there is a lack of entrepreneurial and risk taking managers. For growth to take place inventions and innovations must be encouraged. Again the role of education is seen as being essential here. Multinational enterprises also can provide training in management skills.

In countries like Zambia where for many years the government has taken a considerable role in production through prostates there might be a lack of enterprise culture. In addition, where traditional agriculture has been communally organised then the move towards a private sector profit making culture is likely to be slow.Thus there are many potential economic, cultural and social barriers to economic growth.

Improving the Quantity and Quality of Human Resources

Increases in the supply of labour can increase economic growth. Increases in the population can increase the number of young people entering the labour force. Increases in the population can also lead to an increase in market demand thus stimulating production. However, if the population grows at a faster rate than the level of GDP the GDP per capita will fall.It is not simply the amount of labour that will lead to economic growth. It is often the quality of that labour. This will depend on the educational provision in countries. Improving the skills of the work force is seen as being an important key to economic growth. Many LDCs have made enormous efforts to provide universal primary education. As more and more capital is used, labour has to be better trained in the skills to use them, such as servicing tractors and water pumps, running hotels and installing electricity. It should always be remembered that education spending involves an opportunity cost in terms of current consumption and thus it is often referred to as investment spending on human capital.

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