The global economy is reeling with the impact of the ongoing recession which started with the sub-prime crisis in the United States and found its way to other developed and emerging economies of the world.
This recession has its roots in the initial collapse of the financial sector. However, in a world that is more integrated within each country as well as across nations, the events in the financial sector have eventually trickled down to the real sector of the economies as well.
Finance and financial markets play a dominant role in growth and development of modern economies – hence, any recovery from the current recession must be couched in an overall recovery of the health and performance of the financial sector.
In the absence of mature financial markets in their own economies, several emerging economies (including
India) have heavily depended on credit and other financial services from the western financial markets.
Therefore, any form of failure in these markets has a direct effect on the markets in emerging economies.
The concerns relating to the US slowdown and its intensity have mounted in view of the potential spill over on to the global economy. With tightening in lending standards, deterioration in asset quality and deceleration in consumer loan demand, events in the financial markets are beginning to have a persisting impact on the real economy as well, with direct slowdown in employment and growth in several economies across the world. Terms-of-trade losses due to soaring commodity prices have not only reduced the capacity of a re-balancing of the world economy but have also adversely impacted several countries. Although the
Emerging Market Economies (EMEs) are exhibiting resilience until now, the eventual depth and width of the impact on these economies have kept many economists