Before, understanding Recession, we need to understand the marketeconomy;

A] TWO STAGES OF MARKET ECONOMY B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A1] Growing Market EconomyA2] Declining Market EconomyA] TWO STAGES OF MARKET ECONOMY

A1] Growing Market EconomyStarting Point = Willingness to buy

A2] Declining Market EconomyStarting Point = Unwillingness to buy

Producer wants his demand always to be high Consumer wants his buying cost always to be lowActually, Demand is the price at which consumer is ready to buy andproducer is ready to sell;B] TWO FACTORS OF MARKET; - DEMAND & SUPPLYProducer Price Consumer PriceUsually, we think; Demand = QuantityBut, here Demand = Price; This is because, Price decides the Quantity of Sales;Competitive Price = More Demand;In competitive Price = Less Demand;

Recession is the economy shrinking for two consecutive quarters (=6 months) with adecrease in the GDP (=Gross Domestic Product)

GDP = Value of all the reported goods and services produced by the people operating in the country

C] What is Recession?GDP = MONEY VALUE OF {C + I + G + (X M)}

C = Consumables, I = Gross Investments, G = Government Spending, X = Exports, M = Imports

GDP is a good indicator of economy; Other indicators could be;-Unemployment Rate-Consumption Rate-Actual Personal Income-Etc..

If GDP is growing, then market is growing due to increased demand;

GDP is a good indicator of economy; Other indicators could be;-Unemployment Rate-Consumption Rate-Actual Personal Income-Etc..

If GDP is growing, then market is growing due to increased demand;

Note: If the recession continues for next quarter, (>6 months) then we go through DEPRESSION Economy;

RECESSION

= WHEN YOUR NEIGHBOR LOSES HIS JOBThere is a joke that economists quote to explain theDifference between Recession & DepressionDEPRESSION

= WHEN YOU LOSE YOUR JOB

Growing economy has tocome down if the productionrate of goods & services was more than the actual consumption;D] What is a Business Cycle?What goes up; Has to comedown;

E] Why Recession happens?E1] OVER PRODUCTIONE2] LOW CONFIDENCE LEVEL

A situation in which the supply exceeds the nations ability to consume what has been produced;

Supply > Demand

E] Why Recession happens?PSEUDO DEMAND

ACTUAL NEED WASNOT THERE;WRONG PROJECTIONS

COMPANIES PRODUCEDMOREE1] OVER PRODUCTION

Low Confidence Level of Millions of consumers and producers after theyhear many job cuts, Demand coming down,Companies bankruptcy,etcE] Why Recession happens?Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reductionin demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;

E2.1] Word of mouthE2.2] Assignable CauseE2.1] Word of mouthE2] LOW CONFIDENCE LEVEL

Low Confidence Level of Millions of consumers and producers after theyhear many job cuts, Demand coming down,Companies bankruptcy,etcE] Why Recession happens?Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reductionin demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;

E2.1] Word of mouthE2.2] Assignable CauseE2.1] Word of mouthE2] LOW CONFIDENCE LEVELProducers do not stock materials, theyreduce their productions, gets into thecost reduction activities, worried aboutthe profitability, etc

Bad Incidences Happening;

Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc

Series of such incidencesleading into a kind of War

Please see next slides, for details on business impact;E] Why Recession happens?E2.2] Assignable Cause

Terrorists Attack on 11th September in USCreated fear in peoplePeople cancelled their travel plansAirlines & Hotel Industries badly hitResulted in low occupancy ratesAirline & Hotel Industries offered discounts, gift coupons, to attract peopleBut, still, no improvement in occupancy rateAirline & Hotel Industries started Cost Reduction activitiesCONTINUED IN NEXT SLIDE

Terrorists Attack on 11th September in USi] Reduce No. of flightsii] Lay off peopleiii] Salary reduction toNot laid off peopleIn flight meals reducedLow or No income to spend and buy goodsThey became careful dueto the fear of loss of jobMeals supplying companygot the hitCatering company now,lays off peopleDemand for other goodscome downStarted saving moneyinstead of spendingDemand for other goodscome downAirline & Hotel Industries started Cost Reduction activities

So, you can see how the hit on Airline and Hotel industries can affect Un-related industries in the end;

One industry can hit many other industries when the confidence level of millions of consumers & producersdrastically comes down;

Indicators to say a nation is in recession;

- People buying less stuff Decrease in factory production - Growing unemployment - Slump in personal income - An unhealthy stock market

F] How to know recession?

It is unhealthy for any nation to be in Recession;So, Government will take certain countermeasures to eliminate or reduce the Effect of recession for turnaround;Important Point: Today, it is a market EconomyProducers;Can produce and sell at their pricesConsumers;Can decide to buy or not;Both Producers and Consumers are free to act; Not a forced actionG] How to come out of recession?

Government has 2 plansFiscal Policies(By Govt.)Monetary Policies(By RBI)Hence, Government does not have direct control on Producers & theConsumers behavior; But, they can influence millions of Producers &Consumers with Governments policies;Government influences the economy by changing howit (Government) spends and collects money RBI manipulates the available supply of money in the countryG] How to come out of recession?

G] How to come out of recession?Government influences the economy by changing how it (Government) spends and collects money 1] Tax cuts for businesses or for individualsMore moneyavailable forspendingDemand picksup; Market can recover;2] More Spending by Govt. to create jobs Individuals getsalary and spendmoney3] Automatic fiscal policy; Unemployment InsuranceSome income tounemployed people to spendFiscal Policies

G] How to come out of recession?1] Reduce reserve ratio More moneyavailable for bankto give loansDemand picksup; Market can recover;Government manipulates the available supply of money in the country MonetaryPoliciesWhat is Reserve Ratio?

Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called Reserves; RBI sets certain ratio of this reserves and it is called Reserve Ratio

G] How to come out of recession?1] Reduce reserve ratio More moneyavailable for bankto give loansDemand picksup; Market can recover;2] Lower the interest ratesIndividuals takemore loanGovernment manipulates the available supply of money in the country MonetaryPolicies

G] How to come out of recession?1] Reduce reserve ratio More moneyavailable for bankto give loansDemand picksup; Market can recover;3] Use its own reserved money to buy Govt. bondsIt becomes anincome to Govt.to inject moneyinto the marketGovernment manipulates the available supply of money in the country MonetaryPolicies2] Lower the interest ratesIndividuals takemore loan

I] WOW!!!!!!!!RBIs Power or Governments Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation;

Nations recession is controlled by the actions of everybody living in that country;If we advise our people to save money, then, the multiplication effect is thatthe demand will not pickup and recession will continue; Very peculiar!!!!! But, I am not misguiding you; Just think from a macro level, if everybody in thecountry stops spending, what will happen?

Most of the developingEconomies like China,India;Currently, Slow DownStage; Not yet in RecessionCurrently, in RecessionMost of the developedEconomies like US,Japan, Germany, etcGDP GrowthRate Down; But,Still expected to beAround 6% in IndiaGDP GrowthRate Negative;I] WOW!!!!!!!!

HOPING THIS TIMERECESSION VANISHESSOON SO THATINDIA GETS BACKTO ITS STRONGERGDP GROWTH RATEOF 8% TO 10%(THOUGH THE EXPERSTSSAY IT WILL LAST TILLQ3 OF 2009)