Recession & India

Recession and India Presented By Ajay Kumar Gupta Roll No. 06, Sec. – (A) ICBM - SBE

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 may not come until after we are in a recession for six months or longer.

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.

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 a report that its unemployment rate rose to 6.1%, the highest in

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 in the World. • India has a strong English language base for business purposes .

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 been lost in India and 20 million jobs have been lost in China in last

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 about 9% to about 6% in 2008-09 while it is poised to crash from 13% to 6% in China. That’s why slow and steady is often better.

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.  More than 7% of average GDP growth rates of the last decade come after high interest rates in India.

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 unit by UNIDO(United Industrial Development Organization)

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. • India 75th in Forbe’s best nations for business.

References: o Google search engine. o McKinsey reports. o World economic forum o World social forum o Harvard business review o Accountancy magazine o The Economists 04/04/09

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Ajay Kumar Gupta Give [email protected] or 9291592309