By :Vir Ramandeep Singh

Ph.D Student

U.S RECESSION AND ITS IMPACT ON

INDIAN ECONOMY

Contents

• Introduction.

• What is Recession and its causes.

• U.S Recession.

• Impact of Global Recession on India.

• Effect of Recession on Different Sector of the Country.

• Impact of a strong rupee on the Indian Economy.

• Corrective Steps taken to Check Recession.

• Current economic scenario - Impact of recession on India.

• Conclusion.

Introduction• The fear of a recession looms over the United

States. • And as the cliché goes, whenever the US

sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.

• Weakening of the American economy is bad news, not just for India, but for the rest of the world too.

A Recession is a contraction phase of the business cycle.

In Economics , the term recession generally describes the reduction of a country's Gross Domestic Product (GDP) for at least two quarters.

National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession.

They defines Recession as : “significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

What is Recession ?

What Causes Recession ? • An economy typically expands for 6-10 years and tends

to go into a recession for about six months to 2 years.

• A recession normally takes place when consumers loose confidence in the growth of the economy and spend less.

• This leads to a decreased demand for goods and

services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

• Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

CAUSES OF US CRISISCAUSES OF US CRISISCAUSES OF US CRISISCAUSES OF US CRISIS

• Sub prime mortgage crisis (home loan defaults)• Rising oil prices at $100 a barrel• Global Inflation• High unemployment rates • A declining dollar value

All this slowed down the growth of the economy and as the GDP growth rate fell to 2%, recession set in.

• The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value

• On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 10.9%, the highest in five years

• The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis in the US.

• Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes.

• Major banks have landed in trouble after people could not pay back loans.

Recession in United States• U.S.A – Consumption based Economy

• 2/3rd economic activity i.e. GDP – comes from consumers.

• Credit - free flowing for U.S consumers.

1. Credit card loans for personal consumption.

2. Auto loans for purchase of cars.

3. Home loans for purchase of houses.

• Result -Over consumption/ Extravagant spending by the consumer and thus for years the prices of homes in the U.S. kept rising.

• Ultimately results in housing bubble.

• After that a need felt to Preserve capital. Therefore 1.Started tightening credit 2.Started restricting lending to the U.S consumer and businesses.

• Since then 1. Loans became difficult to come by banks 2. Bank cut Credit card limits.

Thus, U.S. consumer significantly reduce spending.

• Reduced spending meant - reduced activity for most businesses and consumers.

• Businesses started to layoff workers (firing people as there was no work).

• Because of layoff, Unemployment started to rise which resulted in further reduction in spending by consumer.

• Dollar value Declined and Stock market crashed.

• All this slowed down the growth of economy.

• GDP growth rate fell to 2%.

• All this put together has driven the U.S. economy in recession.

• In Feb 2008 63,000 jobs were lost. In Sept, 2008 159,000 jobs were lost, the 5 yr U.S record and there was 10.9 % unemployment in U.S.

• In early July, depositors at Los Angeles offices of Indy Mac Bank lined up in the street to withdraw their money.

• On July 11,Indy Mac - the largest mortgage lender in the US - was seized by federal regulators.

• During the weekend of September 14-15, Lehman Brothers declared bankruptcy after failing to find buyers.

• Another bank failure occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.

• The year 2008 as of September 17 has seen 81 public corporations file for bankruptcy in the United States

IMPACT OF GLOBAL RECESSION ON INDIA

• Indian companies have major outsourcing deals from the US.

• India's exports to the US have also grown substantially over the years.

• For the first time in five years, India’s export growth has turned negative. Exports for October 2008 contracted by 15% on a year-on-year basis. This should not surprise as the Organization for Economic and Co-operation Development (OECD economies) accounted that over 40% of India’s export market have been slowing for months.

EFFECT OF RECESSION ON DIFFERENT SECTOR

OF THE COUNTRY

SHARE MARKET

• Most people have sold the shares.• Foreign investors have pulled out from stock

market.• The Indian stock markets also crashed due

to the slowdown in the U.S economy.• The Sensex crashed by nearly 13% in just

two trading sessions in January • Stock broking houses are laying-off people.• People have started saving money.

IT & real estate sector

• IT industries, financial sectors, real estate owners, car Industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy.

• Recruitment by IT companies at IIT Kanpur has gone down from 130 students in 2007 to 72 in 2008.

• IT companies are predicted a drop of 15% in growth from 30% in BPO sector.

• India's export growth is also slowering down.

• One of the casualties this time are real estate, where building projects are half done al over the country and in this tight liquidity situation developers find it difficult to raise finance.

• The demand for houses had reduced significantly and property prices across india has registered 15-20% fall.

• Lehman Brothers had signed a partnership with some of the real estate companies like Peninsula Land Ltd and DLF Assets. These have also suffered a heavy loss.

MAJOR PLAYER IN REAL ESTATE

• DLF

• UNITECH GROUP

• ANSALS

• PARSAVNATH DEVLOPERS

DLF• The company’s net profit for 2008-09 dipped over 41

percent to Rs.4,629 crore from Rs.6,176 crore earned the previous year

• It was way lower than its last year profit by more than 1000 crore.

UNITECH

• During the year 2008-09 price of share decrease to Rs.21.80 from Rs.338.00

• Unitech’s consolidated revenue decrease by 57.1% from Rs.11.4 bn in Q3’08 to Rs.4.9 bn in Q3’09, due to a sharp fall in revenue from the construction and real estate

ANSALS

• Their profit declined by 81.24% in the last financial year over the last year

PARASVANATH DEVLOPERS

• Company’s net profit decline to Rs.138.53 crore as compared to Rs.586.48 in 2007-08.

• In 2008-09 company’s share is Rs.151.35 highest and drops to Rs.30.55.

• Market capital of the company in the fiscal year is Rs.2725.25 crore

Industrial sector• Government and other private companies are reluctant

in starting new ventures and starting new projects.

• Projects that are halfway to completion, or companies that stuck with cash flow issues on business that are yet to reach break even, will run out of cash.

• Companies in the private sector and government sector are hesitant to take up new projects. And they are working on existing projects only.

• Projections indicate that up to one crore persons could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled by Federation of Indian Export Organisations (FIEO), which says that it has carried out an intensive survey.

• The textile, garment and handicraft industry are worse effected. Together, they have lost four million jobs by April 2009, according to the FIEO survey.

• A survey of 125 companies by the commerce department in New Delhi has revealed that Indian companies lost the export worth rupees 1792 crores during Adjustment 2008 and were forced to layoff 65000 workers.

• The data also raised fear of low GDP growth of India.

Banking sector • Indian banks are facing through a tough time of liquidity

crunch. Lehman Brothers had invested a great amount in the stocks of Indian banks that have invested in derivatives.

• Falling down of Lehman had a great impact on the leading international bank, ICICI Bank, a bank that had invested in Lehman’s bonds. This meltdown even have covered the Axis Bank but not to a great extent

• Central banks have worked to improve liquidity but are charging higher credits. The interest rates have drastically increased from 11.5% to nearly about 16%.

Agricultural Sector

• There has been sharp decline in the exports of agricultural and allied products specifically to countries including the US and Europe during last two years. During April 2008-February 2009, the value of export declined from $1,682 million to $735 million to the United States.

• There is a ban virtually on all foograins exports, rice and wheat are banned.

• As for India we come in the category of the G-20 and it is noted that for these countries, including India, the IMF notes the contraction of the world economy and output of Food stuffs is likely to be between 0.5% and 1%.For the USA and the rest of the G-7, the contraction of the economy would be between 3.0 to 3.5 %, the IMF says.

Impact of a strong rupee on the Indian Economy

• Appreciation of the rupees against the dollar would be giant sign towards its economic prosperity.

• Dollar in comparison to the rupee has fallen from a rate of 48 Re. for 1$ to a rate which is expected by the RBI to range from 39.15 Re - 39.50 Re

• There has been almost a 20% increase in the Indian rupee

• There are 3 major and significant variables which will suffer the impact of a stronger rupee first. They are-

1.Export 2.Import 3.Foreign Direct Investment (FDI)

EXPORT• The exporters in India, in a case of depreciating dollar will have a

lesser income than before.

• The exporters increase their prices so as to receive the same income in rupees as they did before, the demand of their commodities will fall and lead to greater losses.

• As such in the case of a depreciating dollar, exporters will have to bear the loss as a cut in margins which in some cases will also lead to loss.

• This will lead to an adverse effect on India’s economy and lead to a long term loss to India’s growth

IMPORT

• India imports generally Petroleum products, capital goods, fertilizers, chemicals, pulp and uncut stones.

• The importers in the case of a stronger rupee will now have to pay less for the same commodity.

• As such the imports to India will increase in quantity and importers will gain increased profits which will lead to economic growth in the country.

FDI

• Foreign Direct Investment, is the investment by foreign nationals in a country’s industries.

• In case of weakening of US$, there will be lesser funds in terms of rupees, invested by the US citizens and thus the FDI from US as such will be effected adversely.

Corrective Steps taken to Check Recession

• RBI needs to neutralize the outflow of FII money by unwinding the market

• This will mean drawing down the dollar reserves which is important at this hour.

• In the IT sector, there should be correction in salary offerings rather than job cutting.

• Public should spend wisely and save more.

• Taxes including excise duty and custom duty should be reduced to lighten the adverse effect of economic crunch on various industries.

• In real estate the builders should drop prices, so as to bring buyers back into the market.

• Also, the government should try and improve liquidity , while CRR and SLR must be cut further

• Indian Companies have to adopt a multi-pronged strategy, which includes diversification of the export markets, improving internal efficiencies to maintain cost competitiveness in a tight export market situation .

Policy rate (02-jan-2009) • The Repo Rate has been cut by 50 bps to 5.5 % w.e.f.

November 03, 2008.

• The Statutory liquidity ratio (SLR) has been cut by 100 bps to 24.0 % w.e.f. November 08, 2008.

• The CRR has been cut by 100 bps in two stages. First 50 bps cut w.e.f. October 25, 2008 and another 50 bps cut from November 08, 2008. The current CRR is thus 5.5. The Cash Reserve Ratio (CRR) has been further cut by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.

Current economic scenario - Impact of recession on India

• Recession has grabbed almost all the organizations of the world.

• Several people have lost jobs - facing the financial problems.

• Government - doing best to come out of the problem.

• Banks are providing business loans at low rate.

• Government - providing money packages to organizations.

• If I talk about India, here the situation is still satisfactory if compare it with other countries of the world.

• Reserve bank of India (RBI) has decreased the rate of interest.

• SBI and ICICI are also providing different types of loans at a low rate of interest.

• Organizations are cutting cost to stand in the market.

• Export businesses of India is going up.

• The real state was doing good business.

• But now a days the condition of real state is still worse because of recession.

Conclusion

• Due to major crisis faced by US (sub prime mortgages prices, high unemployment rates and decline in dollar value, etc) low down the growth of the economy and GDP and as GDP growth rate fell to 2% and as recession set in.

• In Sept 159000 jobs lost and there was 10.9% unemployment in US.

• Lehman brothers being the largest bankcruky in US history makes 2008 a record year in terms of assets.

• As a result India's export growth as turned negative and fall sharply.

• The sensex crashed by nearly 13% in the two trading seasons of January.

• The central bank rate of interest drastically increase 11.5% to 16%.

• The net profit of major player real estate decline as compare to pervious financial year.

• The textile, garment, and handicraft industry loose 4 million jobs by April 2009.

• The recession had no much impact on the Agricultural sector.

• The rupees has positive impact on import but have negative impact on export and FDIs.

• So the need arises to take corrective steps to check recession.

• Public should spend wisely and save money.

• Thus recession has grabbed almost all the organizations of the world.

THANKS