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There is, at least in some quarters, dismay that India has been hit by the crisis. This dismay stems from two arguments. The first argument goes as follows. The Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitised assets. In fact, our banks continue to remain safe and healthy. So, the enigma is how can India be caught up in a crisis when it has nothing much to do with any of the maladies that are at the core of the crisis. The second reason for dismay is that India's recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandise exports, accounts for less than 15 per cent of our GDP. The question then is, even if there is a global downturn, why should India be affected when its dependence on external demand is so limited?

The answer to both the above frequently-asked questions lies in globalisation. First, India's integration into the world economy over the last decade has been remarkably rapid. Integration into the world implies more than just exports. Going by the common measure of globalisation, India's two-way trade (merchandise exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 40.6 per cent in 2008-09. Second, India's financial integration with the world has been as deep as India's trade globalisation, if not deeper. If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 112.4 per cent in 2008-09.

The present financial crises are more widespread than previous ones, as countries financial systems are deeper connected into each other now than before. The current crisis began in United States when the subprime mortgages defaulted. Financial institutions, which are the key intermediaries in the financial system, faced a systematic risk that froze and decreased the capital in the real economy. The subprime mortgages were designed with an interest payment, whereby the mortgagees were planning to refinance to avoid increased mortgages rates (Acharya and Philippo, 2009).

The lending and mortgage system in the U.S. and rest of the world has gone through significant changes during previous decades - the old system where banks used balance-sheet money to lend has been replaced with a system where mortgages are securitized, i.e. transformed into financial instruments, and sold to investors. The process of securitizing mortgages includes a long chain of intermediaries and the risk of the mortgages thus becomes transferred far away from the actual source. To provide safety, the mortgage instruments were hedged with either credit derivatives or by companies specialized in insuring financial instruments, e.g. monoline insurers, further increasing the distance between the asset (e.g. mortgage) and the investor. Investment banks and other institutions used short-term funding to finance long-t本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。