Economic Recession

Before, understanding “Recession”, we need to understand the market economy; A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

A1] Growing Market Economy

A2] Declining Market Economy

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

oducer wants his demand always to be high nsumer wants his buying cost always to be low Actually, Demand is the price at which consumer is ready to buy and producer is ready to sell;

Producer Price Consumer Price

Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand; In competitive Price = Less Demand;

C] What is Recession?

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

GDP = Value of all the reported goods and services produced by the people operating in the country GDP = MONEY VALUE OF {C + I + G + (X – M)}

Consumables, I = Gross Investments, G = Government Spendin 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; Note: If the recession continues for next quarter, (>6 months) then we go through “DEPRESSION” Economy;

There is a joke that economists quote to explain the Difference between “Recession & Depression” RECE SSION = WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRE SSION = WHEN YOU LOSE YOUR JOB

D] What is a Business Cycle?

What goes up; Has to come down;

Growing economy has to come down if the production rate of goods & services was more than the actual consumption;

E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

E] Why Recession happens?

E1] OVER PRODUCTION PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS COMPANIES PRODUCED MORE

A situation in which the supply exceeds the nation’s ability to consume what has been produced;

E] Why Recession happens? E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth

E2.2] Assignable Cause

E2.1] Word of mouth

Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies’ bankruptcy, etc

Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy;

E] Why Recession happens? E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth E2.2] Assignable Cause

E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies’

Producers do not stock materials, th reduce their productions, gets into th cost reduction activities, worried abo the profitability, etc…

E] Why Recession happens? E2.2] Assignable Cause

Bad Incidences Happening;

Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc… Series of such incidences leading into a kind of War

Please see next slides, for details on business impac

Terrorists’ Attack on 11th September in US Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit Airline & Hotel Industries offered discounts, gift coupons, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities

CONTINUED IN NEXT SLIDE

Terrorists’ Attack on 11th September in US Airline & Hotel Industries started “Cost Reduction” activities

i] Reduce No. of flights

In flight meals reduced

ii] Lay off people

iii] Salary reduction to “Not laid off people”

Low or No income to They became careful due spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money got the hit come down instead of spending Catering company now, lays off people

Demand for other goods come down

o, you can see how the hit on Airline and Hotel

dustries can affect the end;

“Un-related” industries

ne industry can hit many other industries when the onfidence level of millions of consumers & producers astically comes down;

F] How to know recession? 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

G] How to come out of recession?

unhealthy for any nation to be in Recession; Government will take certain countermeasures iminate or reduce the Effect of recession for turnaro Important Point: Today, it is a market Economy

Producers;

Consumers;

Can produce and sell at their prices

Can decide to buy or not;

Both Producers and Consumers are free to act; Not a forced action

G] How to come out of recession?

, Government does not have direct control on Producers mers’ behavior; But, they can influence millions of Producer mers with Government’s policies;

Government has 2 plans

Fiscal Policies (By Govt.) Government influences the economy by changing how it (Government) spends and collects money

Monetary Policies (By RBI)

RBI manipulates the available supply of money in the country

G] How to come out of recession?

Fiscal Policies

Government influences the economy by changing how it (Government) spends and collects money

1] Tax cuts for businesses or for individuals

More money available for spending

2] More Spending by Govt. to create jobs

Individuals get salary and spend money

3] Automatic fiscal policy; Unemployment Insurance

Some income to unemployed people to spend

Demand picks up; Market can recover;

G] How to come out of recession?

Monetary Policies

Government manipulates the available supply of money in the country

More money 1] Reduce reserve available for bank ratio to give loans What 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”

Demand picks up; Market can recover;

G] How to come out of recession? MonetaryGovernment manipulates the available supply of money in the country Policies More money 1] Reduce reserve available for bank ratio to give loans 2] Lower the interest rates

Individuals take more loan

Demand picks up; Market can recover;

G] How to come out of recession?

Government manipulates the available suppl Monetary Policiesof money in the country 1] Reduce reserve More money available for bank ratio to give loans 2] Lower the interest rates

Individuals take more loan

3] Use its own reserved money to buy Govt. bonds

It becomes an income to Govt. to inject money into the market

Demand picks up; Market can recover;

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

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

Nation’s recession is controlled by the actions of everybody living in that country;

I] WOW!!!!!!!! Most of the developing Economies like China, India; Most of the developed Economies like US, Japan, Germany, etc

Currently, Slow Down Stage; Not yet in Recession

GDP Growth Rate Down; But, Still expected to be Around 6% in India

Currently, in Recession

GDP Growth Rate Negative;

HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)

QUESTIONS ?

What is Recession ?  A Recession is a contraction phase of the business cycle.  National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession.  They define 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”.  For this reason, the official designation of 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.

US Crisis Hits India US faced major crisis because of • Subprime mortgage crisis (homeloan 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.

Crisis In The US  The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value  In February, 63,000 jobs were lost, a 5-year record.  In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.  On September 5, 2008, the United States Department of Labour issued

How India will ride this Recession? India will surely be affected by the crisis but at the same time, it will be the first country to emerge stronger with a solid foundation of sustained growth. There are few good reasons for riding this recession - -

1.-Foreign Direct Investment(FDI) Years

% of GDP

2000-01

0.60

2001-02

0.85

2002-03

0.61

2003-04

0.44

2004-05

0.54

2005-06

0.69

2006-07

0.84

2007-08

1.32

• Being 10th largest economy in the World and 3rd in term of PPP(Purchasing Power Parity), India has emerged as a potential player for FDI & NRI investment. • $16 billion total amount of FDI that came to India in 2006-2007 and $20 billion in 2007-08. • India provides highest returns on FDI than any other country

2.- Exports India Years

Export as % of GDP

2000-01

9.68

2001-02

9.17

2002-03

10.39

2003-04

10.65

2004-05

11.92

2005-06

12.75

2006-07

13.79

2007-08

13.92

 World bank Chief Economist said that more jobs will be lost in China than India because India is less dependent on exports and he said also emerging India is in much better shape in comparison to other emerging country.  Half a million jobs have

3.- Consumption • Consumption accounts for just about 35% of GDP in China while it constitutes about 65% of GDP in India. • India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal. • India has a vast domestic market of 300 million strong middle class population having a substantial purchasing power and another 700 million people whose capacity to purchase is gradually increasing. • Indian GDP growth rate will moderate from

4.- Sixth pay commission • Government has recently handed over a pay hike that ranges from 40% to 100%. • Employees will get hundreds of thousands of rupees as Arrears.

5.- Welfare Schemes • National Rural Employment Guarantee Program (NREGP) that provides 100 days of employment to the poor people in rural areas.

6.- Interest Rates  The PLR rate is still more than 12% and its was 16% in mid 1990s. 

7.- Healthy Banks • Europe and US banks have become habitual for once mighty and then report losses. • Analysts are deeply worried about Chinese banking system. • But no comments from western analysts and their ilk about Indian Banks.

8.- India Inc  Western scholars acknowledge that India holds the advantage compared to China because of 2 reasons – 2.Most successful India companies are private. 3.They have used capital for more productively and efficiently than Chinese counterparts.  Most Indian companies are sitting on billions of dollars of reserves.  AMI(Access Market Information) said SME channel partners expect 12-13% growth in 2009.  $6 millions for MSME programme to help Orissa

9.- Democracy • India is the largest democratic county in the world. That’s why the psychological impact on Indian consumers and investors has been for more sanguine than it has been in others countries. • Business pundits say that democratic govt. is better than an authoritarian or autocratic one when it comes to delivering high growth rates and economic prosperity.