-By Arpit Agrawal :
The Great Recession was a period of general economic decline observed in world markets beginning around the end of the first decade of the 21st century. The exact scale and timing of the recession, and whether it has ended, is debated and varied from country to country.[1][2] In terms of overall impact, the IMF concluded that it was the worst global recession since World War II.
There are two senses of the word “recession”: a less precise sense, referring broadly to “a period of reduced economic activity”; and the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth.
The Great Recession only met the IMF criteria for being a global recession, requiring a decline in annual real world GDP per capita (Purchasing Power weighted), in the single calendar year 2009.
The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand.
US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during 2006 and homeowners began to default on their mortgage payments in large numbers starting in 2007.
The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on 15 September 2008, a major panic broke out on the inter-bank loan market.
Governments and central banks responded with fiscal and monetary policies to stimulate national economies and reduce financial system risks. The recession has renewed interest in Keynesian economic ideas on how to combat recessionary conditions.
The majority report of the U.S. Financial Crisis Inquiry Commission, concluded that “the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.
Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.
Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless.
Real gross domestic product (GDP) began contracting in the third quarter of 2008.
The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009,
Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009.
Housing prices fell approximately 30% on average from their mid-2006.
Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007.
U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012.
For the majority, income levels dropped substantially.
Economic growth decelerated in 2008-09 to 6.7 percent. This represented a decline of 2.1 percent from the average growth rate of 8.8 percent in the previous five years (2003-04 to 2007-08). Per capita GDP growth grew by an estimated 4.6 percent in 2008-09.
The effect of the crisis on the Indian economy was not significant in the beginning. The initial effect of the subprime crisis was, in fact, positive, as the country received accelerated Foreign Institutional Investment (FII) flows during September 2007 to January 2008. There was a general belief at this time that the emerging economies could remain largely insulated from the crisis and provide an alternative engine of growth to the world economy. The argument soon proved unfounded as the global crisis intensified and spread to the emerging economies through capital and current account of the balance of payments. The net portfolio flows to India soon turned negative as Foreign Institutional Investors rushed to sell equity stakes in a bid to replenish overseas cash balances
The global financial crisis began to affect India from early 2008 through a withdrawal of capital from India’s financial markets. This is shown in India’s balance of payments as a substantial decline in net capital inflows in the first half of 2008-09 to US$ 19 billion from US$ 51.4 billion in the first half of 2007- 08, a 63 percent decline.
In the second half of 2008-09, net capital flows turned negative as there were huge outflows of portfolio investment, short-term trade finance and banking capital.
Merchandise exports declined by about 18 percent in the second half of 2008-09 over the same period of 2007-08, and imports declined by 11 percent.
Due to the global crisis the economy experienced extreme volatility in terms of fluctuations in stock market prices, exchange rates and inflation levels during a short duration necessitating reversal of policy to deal with the emergent situations.
To counter the negative fallout of the global slowdown on the Indian economy, the federal Government responded by providing three focused fiscal stimulus packages in the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. India’s central Bank – the Reserve Bank of India (RBI) took a number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial system to meet the needs of productive sectors.
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.