Impact of Credit Crunch on Indian Economy

A credit crunch is an economic condition in which investment capital is difficult to obtain. During credit crunch, banks and investors become wary of lending funds to corporations, which results in the mounting prices of debt products for borrowers.The global financial crisis of fall 2008 was unexpected. A few people had been predicting that serious problems were looming, and even fewer had placed bets accordingly, but even they were astounded by what happened in mid-September. Today the banks in Europe, America, Dubai and the rest of the world are in crises. As each day passes another report falls across our screens telling us of yet another financial disaster. These aren't small institutions but some of the biggest names in finance in the world. It’s making everyone scared. There is a confusion between the two terms recession and credit crunch but they are not the same. What are the possible reasons for a credit crunch. Some examples of financial crises have explained thereafter from some countries. It impacts banking system as well as share market also. Although India has not been directly impacted by the global financial Crisis, we should be cautious about the indirect knock-on effect of the global crisis. According to the GET report, over 50 million could lose their jobs by 2009 worldwide. Keywords : Credit crunch, Global crisis, Banking system

INTRODUCTION
 
The global meltdown is not only affecting the services, even the industrial Sector has been affected adversely. Lastly conclusion is drawn by giving suggestions that major projects and expansion plans are being reviewed by the corporate sector and they have started focusing costs and borrowings.
Economic Recession
What is a recession? Economic Recession is a financial meltdown, which can last for a period of few months to couple of years and can affect regional or world economy, leading to financial crisis, market crash, unemployment and economic depression. A long lasting impact of economic recession can lead to economic depression.
•    Credit Crunch
A credit crunch is an economic condition in which investment capital is difficult to obtain. During a credit crunch, banks and investors become wary of lending funds to corporations, which results in the mounting prices of debt products for borrowers. Currently, the sub prime mortgage crisis is an ongoing financial crisis characterized by constricted liquidity in global credit markets and banking systems triggered by the failure of mortgage companies, investment firms and government-sponsored enterprises.
 

Is Recession And Credit Crunch Are Not The Same
There is often confusion between the two terms recession and credit crunch but they are not the same. A recession usually refers to two successive quarters of negative economic growth while a credit crunch is a different term which can be a part of a recession.

Possible Reasons for a Credit Crunch?
According to many economics experts, one of the reasons which leads to a credit crunch is a sustained period of careless and inappropriate lending which results in losses for lending institutions as well as investors in debt. A reduction in the market prices of previously ‘over inflated’ assets also result in a credit crunch.

Financial Market Meltdown
One of the reasons which leads to a credit crunch is the financial market meltdown. It has grown to the point where it has profound ramifications for everyone. The common wisdom for financial market variation, for most of us, is just to focus on the long term and don’t worry about short term fluctuations. That is good advice. This panic is threatening to override that wisdom however. There are at least 2 areas to consider: personal finance and business prospects (how managers need to take this crisis into account). On personal finance it is believe that the same smart personal financial decisions last year, or five years ago are wise today: avoid credit card debt, have an emergency fund of 6 months of expenses, save for retirement, have proper health insurance, don’t buy what we don’t need and can’t afford… The biggest change is that the risks of failing to do these things (and the risks of failing to have done them in the past) are increasing greatly.  One of the challenges with personal financial matters is they are by nature long term issues. What we did over the last 5 years cannot be fixed in a few weeks, most likely it takes years.
On the impact to management area, this crisis has reached the point at many companies that managers not involved in finance have already been dealing much more with the importance of cash flow. And all indications indicate the risks related to manage cash flow are increasing dramatically. The expected sources of cash to provide for long term investments, for medium term investments and even short term cash flow needs are disappearing in a way I don’t think anyone predicted was possible.
What will happen in the next 1-6 months is very hard to predict. Most likely the credit markets will recover some (it is hard to imagine they could stay this broken). But to what extent is hard to say. And the real business risks of almost unimaginable (anytime the last 70 years anyway) problems raising cash, require managers to evaluate how to react today based on these risks. Even a month ago, for most businesses (outside of the financial industry or those with extremely heavy financing needs) this was not likely a consideration.
 
On the other hand major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

Examples of Financial Crises
Someone has buying stocks: Google (GOOG), Templeton Dragon Fund (TDF), Toyota (TM) and ATP Oil (ATPG). The first three he was happy to buy and hold for 10 years. And plan to buy more over time (he is far from certain prices will not go lower from this point). Another piece of conventional wisdom is we don’t buy when stock prices are collapsing (try to “catch a falling knife”). Time will see. Buy when there “is blood in the street” “buy when everyone else is selling”) but timing frenzy driven markets is basically impossible. A year after a market recovery has started it is easy to see how wise it would have been to buy a year ago. Some other examples are :
•    On the weekend of September 13–14, 2008, the US government declined to bail out Lehman Brothers. The firm subsequently failed, i.e., it did not open for business on Monday, September 15. Creditors suffered major losses, and these had a particularly negative effect on the markets given that through the end of the previous week the Federal Reserve had been encouraging people to continue to do business with Lehman.
•    On Tuesday, September 16, the government agreed to provide an emergency loan to the major insurance company, AIG. This loan was structured so as to become the company's most senior debt and, in this fashion, implied losses for AIG's previously senior creditors; the value of their investments in this AAA bastion of capitalism dropped 40 percent overnight.
•    By Wednesday, September 17, it was clear that the world's financial markets—not just the US markets, and particularly US money market funds—were in cardiac arrest. The secretary of the Treasury immediately approached Congress for an emergency budgetary appropriation of $700 billion (about 5 percent of GDP) to be used to buy up distressed assets and thus relieve pressure on the financial system. A rancorous political debate ensued, culminating in the passing of the so-called Troubled Asset Relief Program (TARP), but the financial and economic situation continued to deteriorate both in the United States and around the world.
Thus began a financial and economic crisis of the first order, on a magnitude not seen at least since the 1930s and—arguably—with the potential to become bigger than anything seen in the 200 years of modern capitalism. We do not yet know if the economic consequences are "merely" a severe recession or if there will be a prolonged global slump or worse.  In India also our financial system is not insulated, Global financial meltdown does impact us. All these factors are affecting the growth rate of our economy which was growing at a rate of 9%.
 
We saw huge surge in stock markets mainly due Foreign Institutional Investors (FII) inflow. Post credit crisis, FIIs are pulling the money out from emerging markets, including India. Our stock markets have already declined over 70% from its peak in last one year. Our banking system is affected by the liquidity crisis, businesses are facing extreme problem in financing their projects, or even, raising funds for working capital requirements. With revenues drying up, cost cutting is the need of the hour. Abandoning new projects, putting existing projects on back burner. Employee are being laid-off. The global financial meltdown is percolating downwards and affecting individuals like us. The impact on each one of us is clear and present.

CONCLUSION
If economics is in so much trouble, what does this imply for thinking about economic policy, both in terms of sensible crisis management and more medium-term attempts to rebuild a reasonable global system?
In order to create the conditions for long-term economic health, we need to identify the real structural problem that created the current situation and that has likely pushed the global economy into a new phase of instability. It wasn't a particular set of payments imbalances (read: US-China), as these can and will change (which does not excuse policymakers who refused to address this issue). It wasn't the failure of a particular set of domestic regulators, as regulatory challenges and responses change over time (which doesn't excuse the specific regulators). The global meltdown is not only affecting the services, even the industrial Sector has been affected adversely. On the other hand major projects and expansion plans are being reviewed by the corporate sector and they have started focusing costs and borrowings.
REFERENCES
•    Bergsten, C. Fred. Globalizing the Crisis Response. Peterson Institute for International Economics. Washington,  2008.
•    Emirate rebrands itself as a global melting pot’, Financial Times, 12 July 2005.
•    Mann, Catherine L. Market Oriented Solutions to Financial Crises. Peterson      Institute for International Economics, 1998.
•    William McSheehy, ‘Financial centre: A three-way race for supremacy’, Financial Times, 12 July 2005.
•    William Wallis, ‘Demographics: Locals swamped by a new breed of resident’, Financial Times, 12 July 2005.