Final Projct 1V Sem

8/2/2019 Final Projct 1V Sem

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1. EXECUTIVE SUMMARY

The world economy is engaged in a spiralled mortgage crisis, starting in theUnited States, which is carving the route to the largest financial shock since the

Great Depression. A loss of confidence by investors in the value of securitized

mortgages in the United States was the beginning of a financial crisis that swept

the global economy off its feet. The major financial crisis of the 21st century

involves esoteric instruments, unaware regulators, and nervous investors.

Starting in the summer of 2007, the United States experienced a startling

contraction in wealth, triggered by the subprime crisis, thereby leading to

increase in spreads, and decrease in credit market functioning. During boom

years, mortgage brokers, enticed by the lure of big commissions, talked

buyers with poor credit into accepting housing mortgages with little or no down

payment and without credit checks. Higher default levels, particularly among

less credit-worthy borrowers, magnified the impact of the crisis in the financial

sector.

The ability to raise cash, i.e. liquidity, is an essential component for the

markets and for the economy as a whole. The freezing liquidity has closedshops of a large number of credit markets. Interest rates had been rising across

the world, even rates at which banks lend to each other. The freezing up of the

financial markets eventually lead to a severe reduction in the rate of lending,

followed by slow and drastically reduced business investments, paving the

way for a nasty recession in the overall economic state of the globe.

A collapse of trust between market players has decreased the willingness of

lending institutions to risk money. The bursting of the housing bubble has

caused a lot of AAA labelled investments to turn out to be junk. Nervous

investors have been sending markets plunging down. Markets all over the

world including those of Britain, Germany, and Asia, had to confront all-

time low figures since the past couple of years or more.

Britain also witnessed the so-called bursting of the Brown Bubble, in the

form of the highest personal debt per capita in the G7, combined with an

unsustainable rise in housing prices. The longest period of expansion, which

Britain claimed to be undergoing, eventually revealed itself as an illusion. Theillusion of rising to prosperity had been maintained by borrowing to spend,


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often in the form of equity withdrawal from increasingly expensive

houses. The bubble ultimately burst, exposing Britain to the most serious

financial crisis since the 1920s. This brings a lot of misery to the home owners

who are set to see the cost of mortgages soar following the deepening of the

banking crisis and the Liborthe rate at which banks lend to each other.

The impact of the crisis is more vividly observable in the emerging markets

which are suffering from one of their biggest selloffs. Economies with

disproportionate offshore borrowings (like that of Australia) are adversely

affected by the western financial crunch. Globalization has ensured that none of

the economies of the world stay insulated from the financial crisis in the

developed economies.

Contrary to the decoupling theory, emerging economies too have been

hit by the crisis. According to the decoupling theory, even if advanced

economies went into a downturn, emerging economies would remain

unscathed because of their substantial foreign exchange reserves, improved

policy framework, robust corporate balance sheets, and a relatively healthy

banking sector. In a rapidly globalizing world, the decoupling theory

was never totally persuasive. The decoupling theory stands totally

invalidated today in the face of capital flow reversals, sharp widening of

spreads on sovereign and corporate debt and abrupt currency depreciations.

The Project:

In the subsequent parts of the project, several issues will be discussed

which will provide a detailed account of the origin of the crisis and the

ripple effect of economic downturn of the worlds largest economy which

engulfed even the fast growing emerging economies into the crisis. Theimpact of the crisis on the Indian economy will also be dealt with.

The main aim of the study is to find relevant answers to questions like why and

how India has been hit by the crisis and how the Indian economy and the

Reserve Bank of India have responded to the crisis. The recommendations

include the outlook for the Indian economy in the wake of the economic

turmoil. The project concludes with an analysis of Entrepreneurship in times of

the financial crisis and a swift overview of the various aspects of

entrepreneurship which can help in the revival of a plummeting economy.


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2. INTRODUCTION

The Indian economy is experiencing a downturn after a long spell of growth.

Industrial growth is faltering, the current account deficit is widening, foreign

exchange reserves are depleting, and the rupee is depreciating.

The crisis originated in the United States but the Indian government had

reasons to worry because there was a potential adverse impact of the crisis on

the Indian banks. Lehman Brothers and Merrill Lynch had invested a substantial

amount in Indian banks, who in turn had invested the money in derivatives,

leading to exposure of even the derivatives market to these investment bankers.

Public Sector Unit (PSU) banks of India like Bank of Baroda had significant

exposure towards derivatives. ICICI faced the worst hit. With Lehman Brothers

having filed for bankruptcy in the US, ICICI (Indias largest private bank),

survived a rumour during the crisis which argued that the giant bank was slated

to lose $80 million (Rs. 375 crores), invested in Lehmans bonds through the

banks UK subsidiary. Even Axis Bank was affected by the meltdown.

The real estate sector in India was also affected due to Lehman Brothersreal estate partner having given Rs 7.40 crores to Unitech Ltd., for its mixed

use development project in Santa Cruz. Lehman had also signed a MoU with

Peninsula Land Ltd, an Ashok Piramal real estate company, to fund the latters

project amounting to Rs. 576 crores. DLF Assets, which holds an investment

worth $200 million, is another major real estate organization whose valuations

are affected by the Lehman Brothers dissolution.

The impact of the crisis on the Indian economy has been studied here forth

and the study is chiefly focused on 4 major factors which affect the Indian

economy as a whole. These are:

(i) Availability of global liquidity

(ii) Decreased consumer demand affecting exports

(iii) The Financial Crisis and the Indian IT Industry

(iv) The Financial Crisis and Indias Financial Markets


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Availability of Global Liquidity for India in times of Financial Crisis:

The main source of Indian prosperity had been Foreign Direct Investment

(FDI). American and European companies were bringing in truck-loads of

dollars and Euros to get a piece of pie of Indian prosperity. Less inflow offoreign investment will lead to a dilution of the element of GDP driven growth.

India is in no position to ever return this money because it has used the same in

subsidizing the petroleum products and building low quality infrastructure.

Liquidity is the major driving force of the stock market performances

observed in emerging markets. Markets such as those of India are

especially dependent on global liquidity and international risk appetite. The

initial stage of the crisis witnessed rising interest rates across global economies.

Rising interest rates tend to have a negative impact on global liquidity, and

subsequently equity prices, as funds may move into bonds or other money

market instruments.

Even though there are threats for the Indian economy due to the global liquidity

crunch, they are all oriented for the long term. Any short term liquidity concern

will be taken care of by the high rate of household and corporate savings in the

country. The Indian economy can certainly rely on its piggy bank to address

its short-term liquidity demands as the government is taking measures tochannelize large sums of household savings lying unused in physical assets

into the more productive financial sector. Thus, the Indian economy will be

relatively unaffected by the global liquidity crunch.

Indian companies which had access to foreign funds for financing their trading

activities are the worst hit. Foreign funds will be available at huge premiums but

will be limited to the blue-chip companies, thus leading to

Reduced capacity of expansion leading to supply pressure Increased interest rates which will affect corporate profitability Increased demand for domestic liquidity which will put interest rates

under pressure


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Decreased consumer demand affecting exports:

Consumer demand has plummeted drastically in developed economies,

leading to a reduced demand for Indian goods and services, thus affecting

Indian exports.

Export oriented units are the worst hit; thus impacting employment Trade gap has been widening due to the reduced exports, leading to

pressure on the rupee exchange rate

The Financial Crisis and Indian I.T. Industry

In India, IT companies, with nearly half of their revenues coming from financial

and banking service segments, are close monitors of the financial crisis across

the world. The IT giants which had Lehman Brothers and Merrill Lynch (ML)

as their clients are Tata Consultancy Services (TCS), Wipro, Satyam, and

Infosys Technologies. HCL escaped the loss to a great extent because neither

Lehman Brothers nor ML was its client.

Impact on Financial Markets:

The outflow of foreign institutional investment from the equity market

has been the most immediate effect of the crisis on India. Foreign

Institutional Investors (FIIs) have been major sellers in Indian markets as

they need to retrench assets in order to cover losses in their home countries,

thus being forced to seek havens of safety in an uncertain environment.

Given the importance of FII investment in driving Indian stock markets

and the fact the cumulative investment by FIIs stood at $66.5 billion at the

beginning of 2008, the pullout of $11.1 billion during the first nine-and-a-half

months of 2008 triggered a collapse in stock prices. The Sensex fell from its

closing peak of 20,873 on January 8, 2008, to less than 10,000 by October

17, 2008.

The withdrawal by FIIs also led to a sharp depreciation of the rupee. While this

depreciation may be good for the Indian exports which have been adversely

affected by the slowdown in global markets, it is not so good for thosewho have accumulated foreign exchange payment commitments.


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The financial crisis has reinstated the notion that in the globalized world, no

country can exist as an island, insulated from the twists and turns of the

global economy; growth prospects of emerging economies have been

undermined by the cascading financial crisis, though there certainly exist

significant variations across the countries.


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4. BACKGROUND OF THE CRISIS

A disorderly contraction in wealth and money supply in the market is thebasic cause of a financial crisis, also known as a credit crunch. The

participants in an economy lose confidence in having loans repaid by debtors,

leading them to limit further loans as well as recall existing loans.

Credit creation is the lifeblood of the financial/banking system. Credit is

created when debtors spend the money and which in turn is banked and loan to

other debtors. Due to this, a small contraction in lending can lead to a dramatic

contraction in money supply.

The present global meltdown is a culmination of several factors, the most

important being irrational and unsustainable consumption in the West

particularly in United States disproportionate to its income by consistent

borrowings fuelled by savings and surpluses of the East particularly China and

Japan.

The second important factor is the greed of the investment bankers who induced

housing loans by uncontrolled leveraging on an optical illusion of increasing

prices in the housing sector.

The third important factor is the failure of the regulating agencies who

ignored the warning signals arising out of the ballooning debts, derivatives

and financial innovation on the assumption that the Collateral Debt

Obligation (CDO), the Credit Default Swapping (CDS) and Mortgaged Backed

Securities (MBS) would continue to remain safe with the mortgage

guarantees provided by Government Sponsored Enterprises (GSEs) namely

Fannie Mae and Freddie Mac which had enjoyed the political patronage sinceinception.

There are other several factors including shadow banking system, financial

leveraging by the investment bankers and lack of adequate disclosures in

the financial statements leading to fallacious ratings by the rating agencies.

The global financial crisis is the unwinding of the debt bubbles between 2007

and 2009. On December 1 2008, the National Bureau of Economic Research

(NBER) officially declared that the U.S. economy had entered recession inDecember, 2007. The financial crisis has moved into an Industrial crisis now


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as countries after countries are sharing negative results in their

manufacturing and services sectors.


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5. CAUSE OF THE CRISIS: The Financial Crisis:

How it happened

The current crisis has been linked to the sub-prime mortgage business, in

which US banks give high-risk loans to people with poor credit histories.

These and other loans, bonds, or assets are bundles into portfolios or

Collateralized Debt Obligations (CDOs) and sold to investors across the globe.

Falling housing prices and rising interest rates led to high numbers of people

who could not repay their mortgages. Investors suffered losses and hence

became reluctant to take on more CDOs. Credit markets froze and banks

became reluctant to lend to each other, not knowing how many bad loans and

non-performing assets could be on their rivals book.

The crisis began with the bursting of the United States housing bubble and

high default rates on sub-prime mortgages and adjustable rate mortgages

(ARM). The foreclosures exceeded 1.3 million during 2007 up 79% for

2006 which increased to 2.3 million in 2008, an 81% increase over 2007.

Financial product called mortgaged backed securities (MBS) which in turnderive their value from the mortgage instalment payments and housing prices

had enabled financial institutions and investors around the world to invest

in U.S. housing markets. Major banks and financial institutions which had

invested in such MBS incurred losses of approximately US $ 435 billion as of

July 2008 which has mounted further and is now near to the value of US $ 1

trillion. The value of all outstanding residential mortgage owed by US

households was US$ 10.6 trillion as of Mid 2008 of which $ 6.6 trillion were

held by mortgaged pools Consisting of Collectivized debtobligation (CDO)already mortgage backed securities (MBS) (CDO and MBS) and the remaining

US$ 3.4 trillion by traditional depository institutions.

The owners of stock in US corporation alone has suffered loss of about US$ 8

trillion between 1 January and 11 October 2008 as the value of their holding

declined from US $ 20 trillion to US $ 12 trillion.

The first catastrophe took place when Bear Stearns was sold to JP Morgan at a

throw away price in April 2008.


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The biggest adverse impact was on Fannie Mae (The Federal National

Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage

Corporation); the two Government Sponsored Enterprises (GSEs) were

granted a very quick bailout package by the US Treasury. A record breaking

level of mortgage foreclosures took place for the subprime mortgages. This led

to a sharp decline in the value of securities which were based on these

mortgages. Most of the investment bankers including Fannie Mae and Freddie

Mac reached to the brink of bankruptcy.

When homeowners default, the payments received by MBS and CDO investors

decline and the perceived credit risk rises. This has had a significant adverse

effect on investors and the entire mortgage industry. The effect is magnified

by the high debt levels (financial leverage) households and businesseshave incurred in recent years. Finally, the risks associated with American

mortgage lending have global impacts, because a major consequence of

MBS and CDOs is a closer integration of the USA housing and mortgage

markets with global financial market.


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6. IMPACT OF THE CRISIS

The global financial crisis is already causing a considerable slowdown in mostdeveloped countries. Governments around the world are trying to contain the

crisis, but many suggest the worst is not yet over. Stock markets are don more

than 40% from from their recent highs. Investment bank have collapsed, rescue

packages are drawn up involving more than a trillion US dollars, and interest

rates have been cut around the world in what looks like a coordinated response.

Leading indicators of global economic activity, such as shipping rates, are

declining at alarming rates.

The continuous development of the crisis had

prompted fears of a global economic collapse.

Retail sales in the US have plunged to historic lows

and business and consumer confidence are at their

lowest levels. Most of the companies have reported

steep decline in sales due to the slackened demand

in the market. The rate of unemployment in the

United States has skyrocketed to 8.9% with the

loss of a total of 539,000 jobs. US GDP shrunk

6.1% in the first quarter the fall in GDP is recorded

despite an increase in consumer spending in the

economy which is trying to recuperate from the

crisis. The fourth quarter of the previous year had

recorded the highest contracted by 6.3%.

In the classical economic scheme of things, the free

market economy is set to correct itself when it verges away from fullemployment. This was proven to be untrue in the 1930s Great Depression

when up to a fourth of the workers in the US were out of work.

Quoting US Economist Paul Krugman, as noted in New York Times column,

1. The bursting of the housing bubble has led to a surge in defaults and

foreclosures, which in turn has led to a plunge in mortgage-backed securities

assets whose value ultimately comes from mortgage payments.

Rate ofunemployment

hikes to 8.9% in the US:

539,000 jobs lost

US GDP shrinks by 8.1%

in the first Quarter

US Foreclosures spike

32% in April, 2009

US Home Prices fall

14% in first quarter


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2. These financial losses have left many financial institutions with too little

capital too few assets compared with their debt. This problem is especially

severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt,theyhavent been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by

selling their assets, including those mortgage-backed securities, but this drives

asset prices down and makes their financial condition even worse. This vicious

cycle is what some call the paradox of deleveraging.

On October 11, 2008, the head of the International Monetary Fund (IMF)

warned that the world financial system was teetering on the "brink of systemicmeltdown" The sequence of the event can be summarized as below for

understanding at a glance.

Bear Stearns was acquired by J.P. Morgan Chase in March 2008 for $1.2billion. The sale was conditional on the Fed's lending Bear Sterns US$29

billion on a nonrecourse basis.

The Government Sponsored Enterprises (GSEs) Fannie Mae and FreddieMac were both placed in conservatorship in September 2008. The

two GSEs have more than US$ 5 trillion in mortgage backed securities

(MBS) and other debt outstanding.

Merrill Lynch was acquired by Bank of America in September 2008 for$50 billion.

Scottish banking group HBOS agreed on 17 September 2008 to anemergency acquisition by its UK rival Lloyds TSB, after a major decline

in HBOS's share price stemming from growing fears about its exposure

to British and American MBSs. The UK government made this takeover

possible by agreeing to waive its competition rules.

Lehman Brothers declared bankruptcy on 15 September 2008, after theSecretary of the Treasury Henry Paulson, citing moral hazard, refused to

bail it out.


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AIG received an $85 billion emergency loan in September 2008from the Federal Reserve, which AIG is expected to repay by gradually

selling off its assets. In exchange, the Federal government acquired a79.9% equity stake in AIG.

Washington Mutual (WaMu) was seized in September 2008 by the USAOffice of Thrift supervision (OTS). Most of WaMus untroubled assets

were to be sold to J.P. Morgan Chase.

British bank Bradford & Bingley wasnationalised on 29 September 2008 by UK

government. The government assumed

control of the banks 50 billion mortgage

and loan portfolio, while its deposit and

branch network are to be sold to Spains

Grupo Santander.

In October 2008, the Australiangovernment announced that it wouldmake

AU$4 billion available to non bank lenders

unable to issue new loans. After discussion

with the industry, this amount was

increased to AU$8 billion.

In November 2008, the U.S. governmentannounced it was purchasing $27 billion of preferred stock in Citigroup,a USA bank with over $2 trillion in assets, and warrants on 4.5% of its

common stock. The preferred stock carries an 8% dividend. This

purchase follows an earlier of $25 billion of the same preferred stock

using Troubled Asset Relief Program (TARP) funds.

UK: 5000 businesses

registered forbankruptcy in Q1

IMF: Economic Crisis to

cost $ 4 trillion

Germany sees GDP

plunge3.8%, worst

drop in 40 years

GDP ofEuro Area falls

by 1.6%


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7. INDIA AND THE FINANCIAL CRISIS

The global financial crisis has not left India unscathed. Over the last seven

months, growth has slipped dramatically - to 5.3% in the last quarter ofcalendar year 2008 - from over 9% in the previous four years. The contagion

of the crisis has spread to India through all the channels the financial

channel, the real channel, and importantly, as happens in all financial

crises, the confidence channel.

The slowdown is likely to have a large and immediate impact on

employment and poverty. Informal surveys suggest significant job losses. Job

creation is likely to remain a key concern as new entrants to the labor force -relatively better educated and with higher aspirations - continue to put pressure

on the job market.

The country has the option of turning the crisis into an opportunity. The most

binding constraints to growth and inclusion will need to be addressed:

improving infrastructure, developing the small and medium enterprises

sector, building skills, and targeting social spending at the poor. Systemic

improvements in the design and governance of public programs arecrucial to get results from public spending. Improving the effectiveness of

these programs - that account for up to 8-10% of GDP - will therefore be an

important part of the challenge.

The impact of the crisis on the Indian economy has been studied here forth

and the study is chiefly focused on 4 major factors which affect the Indian

economy as a whole. These are:

(i) Availability of global liquidity

(ii) Decreased consumer demand affecting exports

(iii)The Financial Crisis and the Indian IT Industry

(iv) The Financial Crisis and Indias Financial Markets


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7.1. GLOBAL Liquidity Crunch and the Indian Economy

The Indian banking system was gauged as being relatively immune to the

factors that had lead to the turmoil in the global banking industry. The problems

of the global banks arose mainly due to the sub-prime mortgage lending and

investments in complex collateralized debt obligations (CDOs) whose values

were sharply eroded. Confidence-related issues had also affected banks across

the globe due to the freeze in the inter-bank lending market. Indian banks

had limited vulnerability on both counts.

The reasons for tight liquidity conditions in the Indian markets during the

earlier stages of the crisis were quite different from the factors driving the

global liquidity crisis. Large selling by foreign

institutional investors (FIIs) and the subsequent

interventions by the Reserve Bank of India (RBI) in

the foreign currency market, continuing growth in

advances, and earlier increase in the Cash Reserve

Ratio (CRR) to contain inflation are some of the

reasons that accelerated the Indian liquidity crunch.

Thousands of investors, big and small, have been

hurt by the downward plunge of the Indian stock

market. It will also have broader implications for

Indias financial system and the future savings and

investment patterns.

Cautious investors had to diversify away from bank deposits and cash over the

past few years, and had moved to equities, mutual funds and insurance products.

The current market turmoil is driving them back to the safety of bank-deposits,

reducing the amount of capital available to other instruments and possibly

retarding the growth of the financial services industry as a whole.

Indias high saving rate has been a crucial driver of its economic boom,

providing productive capital and helping to fuel a virtuous cycle of higher

growth, higher income and higher savings. Since the 1990s, the gross domestic

saings rate has risen steadily from an average of 23% to an estimated high of

35% in the 2006/07 fiscal year (April-March). The latter rate compares very

favorably not only with developed economies (the US and the UK have savings

Indias Household and

Corporate Savings will

fuel the domestic

economy at a time

when the global

liquidity crunch is

aggravating theeconomic downturn

in other parts of the

globe.


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rates of around 14%), but also with other emerging economieswith a few

exceptions such as Malaysia (38%) and Chile (35%).

Yet India's household sector (including some small businesses) continues to

account for the lion's sharesome 70%of savings. The last five years have

seen a surge in corporate savings as companies became more competitive

and increased their profitability. That has been accompanied by a rise in

public-sector savings on the back of increased fiscal prudence. However,

the current economic situation is putting pressure on both corporate profitability

and the public finances, ensuring that savings in these two sectors are unlikely

to grow as rapidly as in the past. Household savings will therefore remain

crucial to sustaining a strong savings rate.

India will be relatively unaffected by the global liquidity crisis because the large

fund of Indias household savings which stood at Rs9.85trn (US$192bn) in

2006/07, will remain available to fuel domestic growth. At an aggregate level,

households in India had net savings of Rs 9, 53,212 crore in financial and

physical assets in 2007-08 or 19.9% of the GDP, estimated at current

market prices.

In the preceding year, it was Rs 8, 24,493 crore, or 20.2% of the GDP. Thus, as

GDP rose 14.4% at current market prices, net savings of the households grew

15.6%.The Indian government is trying to hasten the shift of Indias

physical savings, still locked up in unproductive physical assets such as

houses, durables, and jewellery, into financial assets. The household savings can

be channelized into the countrys debt, equity, and infrastructure finance

markets. This would not only deepen and stabilize the financial markets but also

reduce the governments social-security burden.

It is evident from the graph shown alongside that the ratio of gross domesticsavings to the GDP of the country has been increasing over the years.

Influx of these household savings into the countrys debt, equity, and

infrastructure finance markets will certainly help in the deepening and

stabilization of financial markets.

Gross National Savings also include all foreign remittances into India which

add to the domestic savings. A positive trend in the ratio further strengthens


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the fact that India is self-sufficient in the short-term with regard to any

immediate liquidity demand.

India's savings rate and investment rate for FY08 shows that on both counts the

country is well placed not just relative to its own historical record, but also

relative to other economies. India's savings rate at present is higher than all

other regions of the world, except developing Asia and Middle East. The

country's investment rate showed sharp acceleration during the period FY02-07

to surpass the average of all major regions of the world in FY07.

However, according to a report5, factors which could weigh down the rate of

domestic savings to a moderate 33.0% and further to 32.8% during FY09 andFY10 respectively from around 37.7% in FY08 are:

Lower corporate profitability Significant widening of fiscal deficit Erosion in value of financial and physical assets

Most Asian economies have been models of prudence. While American

and European households were borrowing up to the hilt, Asian ones were

tucking away their savings. While rich-country banks were piling into ever-riskier assets, Asian banks kept their holdings of such assets small. And while

America and Britain were sucking up the worlds savings, Asian

governments piled up vast stocks of foreign reserves.

The long-term trends in the savings of the country are a clear indicator of

the fact that even if Indias savings and investment rates undergo a cyclical

reduction in FY09, by next fiscal (FY10) these rates should still be around 30%,

with 6% growth in the second half of FY10.


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7.2. Decreased Consumer demand affecting exports

Some of the sharpest declines in output during the global recession have beensuffered by the strongest economies of Asia. It is feared that due to their heavy

dependence on exports, some of these economies may not see the face of

recovery until demand rebounds in America and Europe.

In October 2008, India registered its first every year-over-year decline in

exports (of 15%), following growth of 35% in the previous five months.

Indian shipments declined 33.3% in March from a year earlier, the biggest

fall since the last 14 years.

Goods exports dropped 33% from a year earlier to $11.5 billion in April

2009. This was the biggest fall since April 1995. Exports slid 21.7% in

February. Indias exports, which account for 15% of the

economy, grew 3.4% to $168.7 billion in the fiscal year

ended March 31, missing a $200 billion target set by the

government, before the collapse of the Lehman Brothers

Holding Inc. accelerated the world financial and

economic slump. The government expects exports tototal to $170 billion in the year that started April 1.

According to estimates from the Federation of

Indian Export Organizations, falling overseas sales may cost India about 10

million jobs.

A high fiscal deficit and a high current account deficit are a threat to economic

stabilitywhich is the main reason why international credit rating agencies

have brought the countrys debt close to junkstatus.

Asias export driven economies had benefited more than any other region

from Americas consumer boom, so its manufacturers were bound to be hit

hard by the sudden downward lurch.

Asia is suffering from two recessions: a domestic one as well as an

external one. Domestic demand had been expected to cushion the blow of

weaker exports, but instead it was hit by two forces. First, the surge in food and

energy prices in the first half of 2008 squeezed companies profits andconsumers purchasing power. Food and energy account for a larger

Asia is suffering

from two

recessions: a

domestic one as

well as anexternal one.


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portion of household budgets in Asia than in most other regions. Second, in

several countries, including China, South Korea and Taiwan, tighter

monetary policy intended to curb inflation choked domestic spending

further. With hindsight, it appears that Chinas credit restrictions to cool its

property sector worked rather too well.

In the first quarter of 2009, trade between India and the United States

declined by 23.47% in value to $8.2 billion, as compared to $10.69 billion in

the comparable period last year.

Shipments of Indian natural pearls, precious and semi-precious stones,

and pharmaceutical products, all recorded a decline causing Indian exports to

the US to drop by 22.63% to $5.22 billion in Q1 of 2009. According to data

from the US International Trade Commission, Indian exports to the US were

$6.75 billion during Q1 of 2008.

US exports to India also declined by 24.9% in Q1 of

2009; it amounted to $2.69 billion as compared to $3.94

billion in Q1 of 2008.

Indias exports to the US were recorded to be $25.86 billion

in 2008 and imports from the US were $ 17.33 billion.

12% of Indias total exports of $168.7 billion in FY2008-

09 went to the US.

The Indian Gems and Jewellery sector was significantly affected by the

reduced demand in the United States and Europe. Overseas sales of Indias gem

and jewellery items expanded at a seven-year low rate of 1.45% and stood at

$21 billion in 2008-09, as exports contracted sharply in the last six months of

the year. This lead to about 200,000 job losses in the sector, especially of

artisans engaged in polishing diamonds.

The fall in exports was caused by lowering of demand in overseas markets for

luxury items in the backdrop of the ongoing global recession.

Exports of cut and polished diamonds dipped 8.24% to $13.02 billion. This

pulled down the overall growth trade of the sector as diamonds accounts for 62

per cent of the overseas sales. The drop in expansion of gems and jewellery

exports in 2008-09 was cushioned by a 23.6% growth in gold jewellery, which

stood at $6.85 billion as against $5.54 billion in the year-ago period.

12% of Indias

total exports

of $168.7

billion in

FY2008-09went to the


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Dun & Bradstreet (D&B) expects exports to be around US$ 178 billion in

FY09, which is approximately US$ 22 billion lower than the Government's

target, owing to economic downturn witnessed in India's key export markets.

D&B, however, expects exports to witness some revival during the second

half of FY10, when the world economy begins to stabilize. D&B expects

exports to grow around 14% to US$ 203 billion during FY10.

India and the other Asian economies will have to brace themselves up for the

sharply reduced consumption in the United States over an extended period,

following the global financial crisis, and change the export-dependent structure

of its economies and create more regional demand to drive their growth.


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7.3. The Financial Crisis and the Indian IT Industry

Indias emergence as a globally competitive supplier of software andservices has attracted world-wide attention. The software and service sector

not only contributed significantly to export earnings and GDP but also emerges

as a major source of employment generation in the country. Besides, the

information technology (IT) sector has served as a fertile ground for the growth

of new entrepreneurial ideas with innovative corporate practices and has

been instrumental in reversing the brain drain, raising Indias brand equity

and attracting foreign direct investment (FDI) leading to other associated

benefits.

Economists have long noted that services in general are cheaper in

developing countries than in developed countries. An abundant supply of

labor the major input in the production of services in developing

countries, leading to low wages is the chief factor that accounts for the

low cost of producing services. India, with its large pool of skilled

manpower, has emerged as a major exporter of IT software and related

services, such as business process outsourcing (BPO). In fact, one of the

notable achievements in India during the last decade has been the

emergence of an internationally competitive IT software and service sector .

With the recent emergence of business process outsourcing delivered over the

Internet, the so-called IT enabled services (ITES-BPOs) as a major source of

employment and foreign exchange, The impact of the global financial crisis,

rooted in the United States, on the Indian IT sector can be easily gauged from

the fact that approximately 61% of the Indian IT sectors revenue were from

clients in the US. 58% of the revenue contribution of the top five players whoaccount for 46% of the IT industrys revenues is from US clients.

Approximately 30% of the industry revenues are estimated from financial

services .

The US financial services and insurance sector (BFSI- Banking, Financial

Services, and Insurance) was one of the earliest adopters of the trend of

outsourcing along with Indias biggest IT- outsourcing firms. Large outsourcing

chunks were created by the US BFSI which made the Indian IT players learn

from their experience. Price negotiations and increased commitments on the


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service level raised the share of US financial services revenue as a percentage of

total revenues for the Top 3 Indian players from 25% to 38% between 1999 and

2008.

Indian companies were appreciated by the Us clients for their flexibility, goodquality delivery and giving a key lever in managing their selling, general, and

administrative expenses (SG&A) and time to market by freeing up more

critical IT resources. Indian players were essentially partners in taking some

of the fixed costs out of their SG&A. Because there was no partnering of Indian

firms with the financial services entities at any closer level, like tying up of their

invoices with the clients business outcomes, the Indian players were saved

from a much worse impact of the crisis.

The slowing US economy has seen 70% of firms negotiating lower rates with

their suppliers and nearly 60% are cutting back on contractors. Due to a

squeezed budget, only about 40% of the companies plan to increase their use of

offshore vendors.

The US financial crisis has put the growth of the Indian It industry in the short-

to-medium-term in an uncertain position. Growth numbers of IT companies

were revised down by 2-3% after sentiment started building up against the US

financial sector at the time of the Q1 results. A worse downward revision isexpected this quarter as well, though some larger players like TCS, and Satyam

have denied any larger impact of the crisis.

Some factors offsetting the revenue slowdown are:

Favorable Rupee-dollar exchange rate Growth de-risking through Europe Growth in non-financial verticals Growth through counter-cyclical new business (countercyclical to US

slowdown)

New outsourcing opportunities will also be provided by merger activities

as newly-merged entities may have to look at additional or new providers to

support the integration work with a broader global presence considering the

large size of combined business operations.


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In addition to Mergers and Acquisitions, financial institutions will also be on

the look-out for ways to reduce their SG&A costs quickly which will opt for

outsourced solutions that affect the cause efficiently and effectively.

Efficiencies Indian IT companies continue to be made of the same DNA asduring the dotcom days, and measures to shore up efficiencies are already

underway since we saw the exchange rate hit 39 to the Dollar. Some of those

gains are permanent since the processes have not been rolled back after the

Rupee started depreciating. Potential measures are voluntary salary cuts,

complete moratorium on salary raises, travel reduction, tightening of

promotion spends, just-in-time hiring, and hire-after-contract.

While we have looked mainly at IT, the ITES sector is joined at the hip

with IT industry, but with its own flavors. The impact in financial services

operations will be much larger, but, over the medium to long term, there will be

a huge gain for them from the increase in outsourcing and off-shoring in the

financial sector. However, short-term pain alongside the US slowdown is

inevitable.

Financial Crisis and the Satyam Saga:

In the light of the debacle of the Satyam Computer Services, the current

financial crisis has brought the issue of audit committee effectiveness to the

fore in India. Satyam, Indias fourth largest computer software exporter,

after years of vastly inflated profits, was shattered and exhausted when the

shocking reality of Satyams operating margin of 24% being false was

brought to the forefrontits operating margins were a meager 3%.

Satyam worked with more than a third of the Fortune 500, and claimed goodfinancial health. Satyam has a remarkably small promoter shareholding of 8.6%.

They had 61.57% shareholding by institutions of which 46.86% is made up of

foreign institutional investors (FIIs).

The financial crisis also struck the company at a time when there were

growing suspicions related to the Maytas issue. Satyam was not able to

maintain its inflated figures in the wake of the crisis and hence, its majestic

accounting fraud was brought to the forefront.


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Opportunities for Indias IT sector:

1. Make the growth vs. profitability tradeoff early on during the

slowdown: profitability levers are still available if growth is sacrificed when

required, and managed well

2. Utilize some of the unavoidable fixed costs for implementing investment

ideas that have been on the backburner and could not be done away with due to

high utilization

3. M&A opportunities exist in the US, both in financial sector and non-

financial sector

4. Intellectual Property (IP) and product related investments in the US should

be assessed and made

5. Operational efficiencies can be adhered to especially in an attractive labor

market and an environment of budget spend/uncertainty


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7.4. The Financial Crisis and Indias Financial Markets:

Despite the vanishing foreign institutional investors (FIIs), the Indian marketsremained resilient and stayed afloat. Investors sentiments have been

significantly impacted by the US financial crisis. The tendency of investors

to withdraw from risky markets has resulted in significant capital outflows

that have led to a liquidity crunch putting pressure on the Indian stock market.

The Indian economy continues to show good health because of the strength of

its domestic drivers, like infrastructure projects, SME (small and medium

enterprises) sector exports and good yielding from the agricultural sector.

The cause behind US economy debacle is that the US investment banks are

extremely over leveraged and solely dependent on whole

sale finances. This led to their demise. But such is not the

case with Indian Banks. The common mans deposits are

more in India and they have the trust on the Banks,

because all most all the Banks are nationalized and the

depositors interest is highly protected by Government

of India.

In the US, the investment banks are dependent on

institutional investors funds. These investments are

highly volatile and always search for high returns on their

deposits. They look for Demand-based investments and not

time-based investments. Therefore, whenever the returns

from one market start dipping, they move their investment to re-invest in

those markets which would offer a better return, or take a defensive stance until

the market regains momentum.

Domestic banking in India is generally secure, especially because nationalized

banking remains at the core of the system. Even so, there exist signs of

fragility and inadequacy within the banking sector. The effects of the

global crisis have directly impacted some important macroeconomic

variables. Three such indicators stand out in terms of their sudden deterioration

since the middle of last year:

(i) Decline in the foreign exchange reserves held by the Reserve Bank of India

Declinein RBIs

Forex Reserves

Depreciation of

the Rupee

Decline in

Stock Market

Indices


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(ii) Fall in the external value of the rupee, especially vis--vis the US dollar

(iii) Decline in the stock market indices

Measures taken by the RBI to stop depreciation of the Rupee led to a steep

decline in its foreign exchange reserves. Factors which also contributed to the

decline were the revaluation in foreign currencies and large scale pullout by

foreign institutional investors.

Figure 6 shows how the foreign exchange reserves, which had been

increasing steadily over the past few years, started declining after June

2008. Not that the earlier build-up of reserves reflected any great

macroeconomic strength, since unlike China it was not based on current

account surpluses. Instead, the Indian economy experienced an inflow ofhot money, especially in the form of portfolio capital investment of FII.

But that movement of FIIs was in turn related to the sudden collapse of the

rupee, shown in Figure 7. Early in March 2009 the rupee even breached the

line of Rs 51 per dollar. There are those who argue that this depreciation is

positive since it will help exports, but conditions prevailing in the world

trade market, with falling export volumes and values, does not give rise to

much optimism in that context.

India currently has a current account deficit, including a large trade

deficit and also quite significant factor payments abroad. The falling rupee

implies rising factor payments (such as debt repayment and profit

repatriation) in rupee terms, which is not good news for many companies

for the balance of payments.

Associated with all this is the evidence of falling business confidence

expressed in the stock market indicators. The Sensex (Figure 8) had

reached historically high levels in the early part of 2008, capping an almost

hysterical rise over the previous three years in which it more than tripled in

value. But it has been plummeting since then, with high volatility around an

overall declining trend such that its levels in early March were below the

levels attained in December 2005.


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Role of Foreign Investors:

Figure 9 tracks the changes in total foreign investment, split up into direct

investment and portfolio investment, over a period since April 2007. It is

evident that both have shown a trend of increase followed by decline. FDIhas been more stable with relatively moderate fluctuations (even though it

does include some portfolio-type investments that get categorized as FDI). It

peaked in February 2008 and thereafter it has been coming down but is still

positive.

Portfolio investment has been extremely volatile and largely negative

(indicating net outflows)since the beginning of 2008, and this has dominated the

overall foreign investment trend.

As a result, as in evident from Figure 10, the cumulative value of stock of

Indian equity held by FIIs fell quite sharply, by 24% between May 2008 and

February 2009. This is not likely to be due to any dramatically changed investor

perceptions of the Indian economy, since if anything GDP growth prospects in

India remain somewhat higher than in most other developed or emerging

markets. Rather , it is because portfolio investors have been repatriating capital

back to the US and other Northern markets.

This reflects not so much as a flight to safety (for clearly US securities are not

safe anymore either) as the need to cover losses that have been incurred in sub-

prime mortgages and other asset markets in the North, and to ensure liquidity

for transactions as the credit crunch began to bite.

Whatever the causes, the impact on the domestic stock market has been sharp

and direct. Since the Indian stock market is still relatively shallow, and FII

activities play a disproportionately sharp role in determining the movement of

the indices, it is not surprising that this flow has been associated with the overalldecline in stock market valuations.

As Figure 11 shows, the Sensex has moved generally in the same direction as

net FII inflows. In fact, movements in the latter have been much sharper and

more volatile, suggesting that domestic investors have played a more stabilizing

role over this period.

Overall foreign investment flows (including both FII and direct investment)

have also played a role in determining the level of external reserves. Figure 12


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shows the pattern in aggregate net foreign investment and change in reserves

since April 2007.

Once again, the two move together. However, in this case, foreign investment

has been less volatile than the change in reserves, suggesting that other

components of the balance of payments have been important as well. The

change in external commercial borrowing are likely to be significant.

In addition, the possibilities of domestic investors moving their funds out should

not be underestimated. The recently liberalized rules for capital outflow by

domestic residents have led to outflows that are not insignificant, even if still

relatively small.


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8. BAIL-OUT PACKAGES AND RBI INITIATIVES

Financial markets in the United States and around the world are in a state of direemergency and they require urgent and decisive action. Some key parts of the

credit market were on the verge of a deadlock, resulting not just in the

collapse of major financial institutions but also in credit disruption that has

been severely weakening the long-term prospects of non-financial companies.

There was a need for swift action to deal with the toxic mortgage-backed

securities that had been causing credit markets to seize up. The Federal

governments effort to support the global financial system have resulted in

significant new financial commitments, with the U.S. government havingpledged more than $11.6 trillion on behalf of American taxpayers over the past

20 month, far in excess of the aggregate of the several bailout packages

announced or dolled out in the past, as may be evident from the following

figures:

Past Event US$ billion

Invasion of Iraq 597

Life Time Budget of NASA 851

S & L Bailouts of 1980s 256

Louisiance Purchase 217

Korean War 454

The U.S. Treasury also added $200 billion to its support commitment for

Fannie Mae and Freddie Mac, the countrys two largest mortgage-finance

companies.

The Government of China had also announced a financial package of US$ 585

billion to pump prime the economy by making huge public investment and

by providing subsidies to protect domestic economy which is otherwise

exposed to external market and is likely to be severely affected because of the

cuts in imports by all the major importing countries.


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8.1. Indias response to the Crisis

As the contagion of the financial system collapse across the world spread

towards India, and into it, the government and the Reserve Bank of India

(RBI) responded to the challenge in close coordination and consultation.The main plank of the governments response was fiscal stimulus while the

RBIs action comprised monetary accommodation and counter cyclical

regulatory forbearance.

The RBIs policy response was to keep the domestic money and credit

markets functioning normally and see that the liquidity stress did not trigger

solvency cascades. RBIs targets can be classified into 3 prime directions:

(Duvvuri Subbarao, Governor)(i) To maintain a comfortable rupee liquidity position

(ii) To augment foreign exchange liquidity

(iii) To maintain a policy framework that would keep credit delivery on track

so as to arrest the moderation in growth

The previous period has forced RBI to adopt tightened monetary policies

in response to heightened inflationary pressures. However, the RBI changed itsapproach to handle the current scenario and eased monetary constraints in

response to easing inflationary pressures and moderation in growth in the

current cycle.

The following were the conventional measures of the RBI:

(i) Reduced the policy interest rates aggressively and rapidly

(ii) Reduced the quantum of bank reserves impounded by the central bank

(iii) Expanded and liberalized the refinance facilities for export credit

To manage Foreign Exchange, the RBI

(i) Made an upward adjustment on interest rate ceiling on the foreign currency

deposits by non-resident Indians


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(ii) Substantially relaxed the External Commercial Borrowings (ECB)

regime for corporates

(iii) Allowed access to foreign borrowing to non-banking financial

companies and housing finance companies

RBI also took unconventional measures as a response to the liquidity scenario:

(i) Indian banks were given the rupee-dollar swap facility to give them

comfort in managing their short-term funding requirements

(ii) An exclusive refinance window, as also a special purpose vehicle, was

made available for supporting non-banking financial companies

(iii) The lendable resources available to apex finance institutions for

refinancing credit extended to small industries, housing and exports, was

expanded

The Central Governments Fiscal Responsibility and Budget Management

(FRBM) Act, enacted to bring in fiscal discipline by imposing limits on

fiscal and revenue deficit, proved to be the road map to fiscal sustainability at

the time of the crisis. The emergency provisions of the FRBM Act wereinvokes by the central government to seek relaxation from the fiscal targets

and two fiscal stimulus packages were launched in December 2008 and January

2009.

These fiscal stimulus packages, together amounting to about 3% of GDP,

included:

Additional public spending, particularly capital expenditure,government guaranteed funds for infrastructure spending

Cuts in indirect taxes, Expanded guarantee cover for credit to micro and small enterprises, and Additional support to exporter

These stimulus packages came on top of an already announced expanded

safety-net for rural poor, a farm loan waiver package and salary increases

for government staff, all of which too should stimulate demand.


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The cumulative amount of primary liquidity potentially available to the

financial system through these measures is over US$ 75 billion or 7% of GDP.

Taking the signal from the policy rate cut, many of the big banks have reduced

their benchmark prime lending rates. Bank credit has expanded too, faster thanit did last year.


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9. OUTLOOK FOR THE INDIAN ECONOMY

India is witnessing a mixed result with respect to its growth prospects in the

wake of the global economic downturn. Real GDP growth has moderated to

6.6% and is projected to grow at the same rate in 2009-10.

The Services sector too, which accounts for 57% of Indias GDP, and has

been the countrys prime growth engine for the last five years, is slowing,

mainly in construction, transport and communication, trade, hotels and

restaurants sub-sectors.

According to recent data, demand for bank credit has been slackening despite

sufficient liquidity in the system.

Indias exports, which account for 15% of the economy, grew 3.4% to $168.7

billion in the fiscal year ended March 31, missing a $200 billion target set by

the government.

Corporate margins have been dented due to higher input costs and dampened

demand; business confidence has been affected by the uncertainty around the

economic condition. The Index of Industrial production has been showing a

negative growth and the demand for investment is decelerating.

India, though, certainly has some advantages in addressing the fallout of the

crisis:

(i) Headline inflation, as measured by the wholesale price index, has fallen

sharply; inflation has declined faster than expected. Key factors behind the

disinflations have been commodity prices and a part of it is contributed by

slowing domestic demand.

(ii) Decline in inflation should prove to be positive for reviving consumer

demand and reducing input costs for corporates

(iii) Fiscal space will open up for infrastructure spending as the decline in

global crude prices and naphtha prices will reduce the amount of subsidy

given to the oil and fertilizer companies

(iv) Imports are expected to shrink more than exports; this will keep the currentaccount deficit at modest levels


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(v) Indias sound banking system has helped to sustain the financial market

stability to a large extent -well capitalized and prudently regulated

(vi) Overseas investors are confident about the Indian economy due to

comfortable levels of foreign reserves

(vii) The negative impact of the wealth loss effect in the capital markets that

have plagued the advanced countries will not affect India because majority of

Indians stay away fro asset and equity markets

(viii) Institutional credit for agriculture will also remain unaffected

because of Indias mandated priority sector lending

(ix) Agriculture sector of India will be further insulated from the crisis

due to the governments farm waiver package

(x) Indias development of social safety programs over the years (e.g. the

rural employment guarantee program), will protect the poor and migrant classes

from the ill effects of the global crisis

Therefore, once the global economy begins to recover, Indias turn around

will be sharper and swifter, backed by its strong financial system and regulatorynorms.

The present global crisis has taken the shape of the Great depression of 1929 at

least in US and Japan. The biggest losers will be US, Japan and China. The

biggest gainers may be India, Brazil and few other developing countries with

their own domestic savings and domestic market. The world will have to

undergo the impact in different forms, somewhere it will be economic

slowdown, somewhere recession and somewhere depression.


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10. LIMITATIONS OF THE STUDY

The current project discusses key issues of the Indian economy that cropped

up as the global economy is swaying in its worst economic downturn.

Though the major factors have been discussed, yet there exist more issues

which have not been detailed due to time constraints.

As the economies across the globe try to protect themselves from the hazards of

the crisis, they are trying to maintain domestic demand and protect their

domestic industry from foreign invasions, lest their own economy might

destabilize. This has been giving rise to Protectionism and rising incidences of

countries resorting to protectionist measures have been recorded at the WorldTrade Organization.

India has been recorded to initiate the maximum number of anti-dumping

investigations against goods exported into the country. America is propagating

its Buy American campaign in order to help itself become a more self-

sufficient economy. The Chinese economy is reeling from the global drop in

exports; Chinas economy is highly industrialized and a significant fraction of

its GDP is accounted for by its exports to the United States.

Therefore, apart from internal factors that have affected global economies,

there are critical external factors and trade behavior that dictate the nations

across the globe to resort to measures to help themselves. The discussion of

such issues in detail has not been made a part of the report at hand, though a

significant amount of information has been analyzed and studied for the same.

Apart from these, there may be some technical flaws like:

(i) The accuracy and reliability of the data collected data across differentsources may vary slightly

(ii) The measurability of the factors relating to the crisis across a global scale

may not be thorough considering all the factors would not be a feasible

option.

(iii) Opinion biasness may also exist.


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The study of the global financial crisis is inexhaustible, and it will continue as

long as the world economy does not become self-sustainable again. The

impacts of the crisis are a test of the financial market stabilities and

regulations across the global economy; the corrections that will be made have

been long overdue.


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11. ENTREPRENEURSHIP IN TIMES OF

FINANCIAL CRISIS

Entrepreneurship can be technically defined as a process of starting new

organizations or revitalizing mature organizations, particularly new businesses,

generally in response to identified opportunities. Jean-Baptiste Say, a French

economist who first coined the word entrepreneur in about 1800, said: The

entrepreneur shifts economic resources out of an area of lower and into an area

of higher productivity and greater yield.

The dictionary definition of entrepreneur reads as a person who organizesand manages any enterprise, esp. a business, usually with considerable

initiative and risk; and also an employer of productive labor; contractor. The

propensity to take risks and the desire to create wealth are some qualities

possessed by entrepreneurs that define their entrepreneurship. Entrepreneurs

are ruthlessly opportunistic; they would persevere with a business plan at a

time when others are chasing full-time employment opportunities. The act of

innovation holds prime importance; the size of the company is a secondary

aspect to that.

Entrepreneurs have traditionally faced the shortage of finance, not of ideas.

Moreover, the human capital is also a critical aspect of an organization. The

growing industry of venture capitalists has greatly fostered entrepreneurship

across the globe. Talented people in an organization make the core machinery

of ideas and execution. To establish themselves, businesses need to put forward

substantial value propositions and a clear path to achieving their set goals and

objectives. Above all, intellectual capital is the chief component of

entrepreneurship; human capital and monetary capital fall after that. The

information age makes it even easier for ordinary people to start business

now.

Entrepreneurship is a stimulator of economic growth and social cohesiveness.

The globalization of entrepreneurship is raising the bar of competitiveness

for all the players. Once-closed economies like India and China have opened

up to enterprisers and entrepreneurs from all over the globe. Innovative

entrepreneurs carry more weight because of their ability to create more jobs.


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The economic downturn has put the global economy in an awkward situation.

The motives of established entrepreneurs are being questioned and their

disastrous results are being scorned off at. In the wake of scandals overestablished figures like Enron, and Satyam, things have become more difficult

for start-ups. Potential entrepreneurs are lured towards a safe and secure

government job and are becoming increasingly apprehensive of taking the risk

of venturing into an unknown territory. Risk, the lifeblood of the entrepreneurial

economy, is becoming something to be avoided.

However, the current financial crisis also brings with itself some

unprecedented opportunities that can prove to be a resource haven for the

upcoming and new entrepreneurs. Those who are planning to start and manage a

new business will now encounter a fresh set of values and a need to go back to

the basics of managing a business. Though the crisis does not put forth

an appealing landscape for entrepreneurs, yet those with rational expectations

will face no dearth of opportunities or ideas or innovations. The average life

cycle of a start-up from inception to exit will be much longer over 5 years

chiefly due to reduced mergers and acquisitions and late initial public offerings.

Persistence and commitment are the need of the hour and the willingness to wait

with patience before reaping the harvests of an endeavor is indispensable. Those

who are driven by the desire for a windfall should prepare themselves for

disappointment.

Aspiring entrepreneurs should realize that the receding economy offers

them the best time to start a company. The market is full of talented

people looking for new opportunities. The opportunity cost of letting go

of an attractive and high-paying job is very low as there is a general

decline in employment opportunities across the globe.

Moreover, the ordinary costs of doing a business are depressed. Space,

equipment, and any other resourceful asset were never available at such low

investments. Raising finance in times of the credit crunch is a tough task, but

what should be kept in mind is that competitive pressures are much lower

during downturns and it becomes relatively easier to establish ones company as

the leader. Advertising and other marketing expenditures are very low and its

easy to make a mark when relatively few in the market are trying to do so.

Being the holder of a private company, the entrepreneur would not have to


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worry about quarter-to-quarter performance and the investors would also

have a long term perspective.

Time is another critical aspect. A business, at its inception, needs to do a lot

of market research, research of potential customers, product designing andbuilding, and also look for investors and financing opportunities. What is not

expected from a start-up is the potential to start selling as soon as it is

conceived. Therefore, the current slump in demand across global economies is

a non-entity with respect to a start-up. Moreover, any new business initially

sells to the early adopters whose buying patterns are independent of the

economic state of the environment.

Therefore, the initial customer base is not susceptible to economic cycle

changes and the business can head off for a great start.

Poorly capitalized start-ups can cope with the grinding recession by

reallocating their existing financials and keeping non-essential activities out of

operations. Focus should be on the more important features and marketing

costs should be cut down to a minimum unless it is proven to give a positive

return on investment. Money from all payments which can be deferred should

be put into more productive areas of the business. Even well capitalized

start-ups need to keep themselves buckled up and cut costs wherever possible.However, it should be borne in mind that ruthless slashing of marketing costs

does a lot of harm in the future when companies have to spend a lot more

than they saved in order to recover. Therefore, a balanced and judiciously

thought out approach should be followed.

Entrepreneurship has the potential to drive an economy out of the economic

turmoil. It creates new jobs, generates revenue, advances innovation, enhances

productivity, and improves business models and processes. Entrepreneurship

has never been as vital for an economy as it is today. The risks and rewards

go hand-in-hand. A company should keep its strategic thinking flexible

enough to manage uncertain times and should have the aptitude to look beyond

the crisis.

History has demonstrated time and again that entrepreneurship and new

companies is the way to bolster a flagging economy. Giants like Microsoft,

Genentech, Gap, and The Limited were all founded during recessions.

Companies which started off in the Depression include Hewlett-Packard,Geophysical Service (now Texas Instruments), United Technologies,


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Polaroid, and Revlon. A plummeting economy helps initiators to develop a

business which has the tenacity to survive though difficult times and which is

relatively unaffected by a cycle of bankruptcies.

Documents

Final Projct 1V Sem