Recession

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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.

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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”.

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What Causes Recession ?

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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

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 U.S.A – Consumption based

Economy.  2/3rd economic activity i.e. GDP – comes from consumers.  Credit - free flowing for U.S consumers

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for years the prices of homes in the U.S. kept rising.

Result Overconsumpti on/ Extravagant spending by the consumer Thus

For years prices of homes in US 8

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 Felt a need to Preserve capital.

Therefore Started tightening credit , Started restricting lending to the U.S consumer and businesses.

 Since then

Loans became difficult to come by banks, Bank cut Credit card limits. 10

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Dollar value Declined

Stock market crashed

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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.

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

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Bank of America agreed to purchase Merrill Lynch, & consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure.

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Another bank failure occurred on September 25 when JP Morgan Cha agreed to purchase the banking assets of Washington M 16

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A slowdown in the us economy is bad news for India because:Indian companies have major outsourcing deals from the us.  India’s export to the us also grown substantially over the years.  Indian companies with big tickets deals in the us are seeing their profit margin shrinking. 

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Share market!

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IT & real estate sector 21

 Outsourcing industry worst hit  Fortune 500 companies to slash budgets

by 5% in 2009  building projects are half done allover the

country and in this tight liquidity situation developers find it difficult to raise finance.

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Federation of Indian chambers of Commerce and Industry (FICCI) found that faced with the global recession, inventories industries like garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

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Industrial sector!

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 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.

 Car, bike & truck sales down.  Steel plants also cutting production.  Hospitality and airlines are hit by poor

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 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 are

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Banking sector!

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 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.  A sudden fall in the economy directly

affected Lehman and Merill, eventually forcing them to file a bankruptcy.  Falling down of Lehman had a great impact

on the leading international bank, ICICI Bank, a bank that had invested in Lehman’s 28

 Real Estate companies like DLF had to shut

down their projects due to inability to raise funds as a result of liquidity crunch.  With all this, the Indian Sensex swung

violently downward, mainly because of the foreign companies pulling out credits to meet high inflations.  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%. 29

POSITIVES…  SBI posted a net profit of 40% in

last quarter of fiscal year 2008-09.  No mergers seen among financial

houses.  Growth in financial services was

9.5% in the first quarter of F.Y 2009-10.  Govt. slashed interest rates and

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AGRICULTURE! SHOWING..NO EFFECT…

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AGRICULTURE  No major on impact on Indian agri.

commodity business  Exports of Agri. Products reduced due to decrease in global demand. In US exports of agri. Products decreased from $1285 million to $785 million from Apr-08 to Feb-09.  Agri. Sector not affected due to slow down in FDI because of negligible foreign investment.

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AGRICULTURE waiver of 70,000 crore ensured steady growth of agri. Sector  Price of food articles did not increase due to normal and distributed rainfall in 2008.  Total foodgrain production increased from 231 million tonnes in 2007-08 to a record 234 million tonnes despite recession. 33

TELECOM SECTOR!

RESILIENCE…AGAINST RECESSION…

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PROBLEMS FACED BY TELECOM SECTOR…..  Lack of foreign investment .

 Fall in consumption as people focus

on their needs.  Lower penetration in the rural areas.  Process of completing auction for 3G

spectrum and roll out services been delayed. 35

TELECOM SECTOR HAS SILVER LINE…  Despite recession INDIA added 8-10

mn subscribers every month.  F.Y 2008-09 saw highest FDI ever. For April-June 09 quarter FDI inflow was $2bn every month.  Airtel’s rural penetration increased from 6% in 2007-08 to 12.5% in 2008-09.  Registered revenue of $63 mn (Aprjune 09) an increase of 53% from $44 mn in II quarter of 2008. 36

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 RBI needs to neutralise the

outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened.

 This will mean drawing down the

dollar reserves which is important at this hour.



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 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 39

 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 .

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 Government - providing money

packages to organisations.  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 41

 Organisations are cutting cost

to stand in the market.  The real state was doing good business.  But nowadays the condition of real state is still worse because of recession.

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Positive effects

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