The Global Financial Crisis and the Indian Economy (eBook)

B L Pandit has served as a professor and head, Department of Economics, Delhi School of Economics. He got his PhD in Economics from Delhi School of Economics, University of Delhi. He has taught courses in macroeconomic theory, monetary theory and policy and financial markets at the Delhi School of Economics besides supervising M Phil and PhD students. He has published books with international publishers and has also published  extensively in peer reviewed national and international journals. His research project studies have been sponsored by Canadian International Development Agency, FICCI and Reserve Bank of India. He has presented papers and attended conferences in Toronto, Moscow and UNCTAD Geneva.

Preface 5
Contents 7
About the Author 11
1 Introduction 12
Abstract 12
Part I The Systemic Issues of the Global Crisis 16
2 Genesis of the Global Financial Crisis 17
Abstract 17
2.1 Introduction 18
2.2 Origin and Manifestation of the Crisis 18
2.2.1 Easy Money Policy and Increase in Risk Appetite 18
2.2.2 International Macroeconomic Imbalances 19
2.2.3 Housing Finance for the Low-Income Households 20
2.2.4 Securitisation—originate-to-distribute Model 21
2.2.5 Role of Financial Engineering 24
2.2.6 Problems in Assessment and Pricing of Risk 24
2.2.7 Governance Failure andor Market Failure 25
2.2.8 Laxity in Supervision and Regulation of Financial Institutions 25
2.2.9 Regulatory Capture 26
2.2.10 Financial Instability Hypothesis 26
2.2.11 The Financial Cycle Hypothesis—A BIS Perspective 27
2.3 Global Impact of the Financial Crisis—A Synoptic View 28
2.4 Concluding Remarks 29
References 30
3 Financial Liberalization, Economic Development and Regulation 32
Abstract 32
3.1 Introduction 33
3.2 Micro-economic Issues in Regulating a Financial Firm 33
3.3 Indian Experience in Public Ownership of Financial Institutions—A Digression 34
3.4 Financial Development, Liberalization and Economic Growth 36
3.4.1 Financial Liberalization, Rate of Interest and Savings 39
3.4.2 Financial Growth and Economic Development—The Causality 40
3.5 Regulation of Financial Markets 41
3.5.1 How Financial Markets Differ from Commodity Markets 42
3.5.2 Negative Externalities and Financial Regulation 43
3.6 Concluding Remarks 44
References 44
4 Towards a New International Monetary System 46
Abstract 46
4.1 Introduction 47
4.2 Some Developments in International Finance 47
4.3 US Dollar as De Facto International Currency 48
4.4 SDR as International Reserve Currency 49
4.4.1 SDR in the Post-Crisis Period 50
4.5 Post-Crisis Scenario in International Finance 51
4.5.1 A Multi-Currency System in a Multi-Polar World 51
4.5.2 Need for Reforms 52
4.5.3 Benefits of Multipolarity 53
4.6 Concluding Remarks 56
References 56
Part II Global Crisis and Indian Economy 57
5 Monetary Policy Transmission: Cointegration and Vector Error Correction Analysis 58
Abstract 58
5.1 Introduction 58
5.2 Transmission of Monetary Policy 59
5.3 Estimation Framework 61
5.3.1 DF-GLS Test for the Presence of a Unit Root 61
5.3.2 KPSS Unit Root Test 61
5.3.3 Cointegration and VECM Framework 62
5.3.3.1 Johansen Procedure for Testing of Cointegration 62
5.3.3.2 Generalized Impulse Responses and Generalized Variance Decompositions 64
5.4 Data and Empirical Model 65
5.5 Empirical Results for the Crisis Period 65
5.5.1 Model A 67
5.5.2 Model B 69
5.5.3 Model C 72
5.6 Empirical Results for the Entire Period 75
5.6.1 Model D 75
5.7 Concluding Observations 79
References 80
6 Monetary Policy and Credit Demand During the Crisis 81
Abstract 81
6.1 Introduction 82
6.2 Research Questions 83
6.3 Role of Monetary Policy: Open Cum Developing Market Economies 88
6.4 Impact of Changes in Policy Rate on Lending and Deposit Rates 89
6.5 Model Specification, Data and Estimation Methodology 90
6.6 Empirical Results 92
6.7 Conclusions 95
References 95
7 Global Financial Crisis and the Indian Stock Market 97
Abstract 97
7.1 Introduction 98
7.2 Objective of the Study 98
7.3 Recent Studies: A Review 100
7.4 World Markets in Crisis 101
7.5 Global Integration of Indian Economy 103
7.6 Indian Stocks During the Crisis 103
7.7 Analytics of Stock Pricing in a Financial Crisis—Our Model 108
7.8 Empirical Model 109
7.9 Empirical Results 110
7.10 Summing Up 111
References 112
8 Indian Economy Through the Global Crisis 113
Abstract 113
8.1 Introduction 113
8.2 Transmission Channels 114
8.3 Immediate Impact of the Crisis on Indian Economy 115
8.4 Monetary Policy Response to the Global Crisis in India 120
8.4.1 Monetary Policy Measures 120
8.4.1.1 Changes in Policy Rates 120
8.4.1.2 Liquidity Injection Measures 121
8.4.1.3 Exit Policy Measures 121
8.5 Fiscal Policy Response to the Global Crisis in India 122
8.5.1 Union Budget 2008–09—Major Counter Cyclical Fiscal Policy Measures 122
8.5.2 Union Budget 2009–10—Major Counter Cyclical Fiscal Policy Measures 123
8.6 RBI Policy Interventions and Financial Stability 124
8.7 Post-crisis Inflation in India 125
8.7.1 Opening of the Economy and Imported Inflation 125
8.7.2 Policy Perspectives in an Open Economy 127
8.7.3 Is the Recent Inflation Rooted in High Rate of Growth of M1 or M3? 127
8.7.4 Structural Aspects of Current Inflation 129
8.7.5 Inflation, Per Capita Expenditures, Wage Rates and Corporate Wage Bill 130
8.7.6 Trading of Agricultural Commodity Futures 131
8.7.7 Recent Inflation in India—A Summing Up 132
8.8 Globalization, Economic Growth and Employment 132
8.8.1 Survey Data on Unemployment in India 133
8.8.2 Recent Scenario of Employment 134
8.9 Post-Crisis Post-Script 137
8.10 Concluding Remarks 140
References 142
9 Conclusions 143
Abstract 143
9.1 Part I 144
9.2 Part II 144
Index 146