Recession
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RECESSIONIMPACT ON INDIAN ECONOMY
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INTRODUCTION
In simple words it is flying of money (huge to very huge) from market. When it begins? How it begins? Where it started? It started with a very small thing. At that time very few could have thought of this disaster. It is surprise to many but all begins with disbursement of loan (bad) to buy houses, to people who don¶t have credit worthiness. They called it NINJA loans (No Income No Job Approval). The providers of loans were US Bankers supported by policies of US Government and Federal Reserve (Central Bank of USA). Loans were given to those people who don¶t have job or any income source to repay the loan. Though stringent conditions were attached with such disbursement e.g. in the initial period of loan no interest or very small interest rate has been charged and in later period of loan (after 2-3 yrs) higher interest has been charged for the rest of loan period. That was the point (when higher interest started), when many started defaulting on repayment of these loans. But you must be thinking that how this small thing, a small sparkle can create this big fire? It was a ³Systematic Plan´. US government created two mortgage companies (Fannie Me and Freddie Mac) to disburse the loans. They created bonds of these loans (loans were assets of those companies, they converted loans into bonds) and sold them to investors. Investors included bankers, financial institutions, investment companies (like Lehaman Brothers), foreign banks, foreign governments and small investors (like you and me). Bad loans disbursed were to the tune of some Trillian US dollars. When default started in repayment of these loans the value of bonds started shrinking. That has impacted liquidity as well as profitability of many banks. Many banks shows losses or lesser profits compare to previous periods. Some banks closed down, some sacks employees for cost cutting. Financial impact of this was so huge that it spread across the globe. Overall demand comes down heavily which results in more loss to many companies. Right now nobody can predict how far this will go? Analysis by some economist predicts that this will last for next 1.5 to 2 yrs. So we should be well prepared for this, if it is true as, as of now India has not seen any major event of recession. But we may face trouble in 2009.
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Definition
A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration.
Meaning
A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. The given definition of recession should be a substantial decline in activity across the economy, lasting a longer period which is usually more than a few months. The activity across the economy is reflected by various economic data like, industrial production, employment, gross income and wholesale-retail trade. From a technical point of view, a recession happens when there are two consecutive quarters of negative economic growth as measure by a particular country's Gross Domestic Product (GDP). Usually recession last from 6 to 18 months. So stock markets falling relentlessly do not necessary means that the economy is undergoing a recession. But recession however is something that cannot be avoided as it is considered as a part of the business cycle. For obvious reason, it is also the most dreaded and hated part of a business cycle. Recession is not to be confused with depression. Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to severe depression. Depression is a dead end. It is time to close shop completely. It is a total state of irrevocable economic failure. When a country is doing well all round its
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Gross Domestic Product (GDP) is on the rise. Overall economy is bullish; it is not only the stock exchanges that tell riches to rags stories but even small businesses. It all adds to the national exchequer. An economist is likely to give a detailed, comprehensive definition of recession. But for the layman who has been affected knows it only one way-when he loses his job and has no money to pay his credit and loans. Recession is when the consumer faces foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many companies and whole countries go bankrupt for want of liquid funds and cash flow for even daily requirements. Are we facing a recession or not? Yes, for the simple reason that not only our neighbors but our friends are unemployed. There is less of business talk and more billing worries. Transitory recessions are good for the economy, as it tends to stabilize the prices. It allows run away bullish companies to slow down and take stock. There is a saying, µwhen it¶s tough the tough get going¶. The weaker companies will not survive the brief recession also. Stronger companies will pull through its resources. So when is it time to worry? When you are facing a foreclosure, when the chips are down and out and creditors file cases for recovery. Firms face closures when they go through recession and are not able to recover from losses. If, at this time, they are not able to sustain their prices and stocks then there is more trouble. Even when the recession period gets over, they will not be able to do well. If a business survives a recession period they should be able to survive a depression. But how many recession proof businesses are there? Who will eventually survive the recession? 1. Those that have been able to save their funds. 2. Those who have not invested in fly-by-night companies. 3. Those who remain clam till the storm passes. 4. Those that take stock immediately and decide to reinvest in a recession proof business.
History
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The next recession confirmed occurred in the years between 1807 and 1814, and was called the Depression of 1807. This depression was primarily caused by the Embargo Act of 1807, signed into effect by then President Thomas Jefferson. This act destroyed a good part of the shipping related industries, and it was fought hard by the Federalists, who allowed smuggling to take effect in New England as a result of the Act. The Panic of 1819 soon followed. This was considered the first major financial crisis to unveil itself before the relatively new U.S. economy. This panic brought with it widespread foreclosures, failing banks, huge unemployment rates, and a gigantic slump in manufacturing and agriculture that caused havoc among Americans. This recession also marked the end of great economic expansion that had taken place following the War of 1812. Economic recessions in America continued with the Panic of 1837. This recession can really be attributed to failing banks, and to the lack of confidence people had in paper currency, which was becoming popular at the time. Banks stopped paying out in gold and silver, which really took its toll on American confidence. The Panic of 1857 followed not long after. With the failure of the Ohio Life Insurance and Trust Company (which at the time was one of the biggest in the United States) came the explosion of a European confidence bubble in the U.S. This greatly affected the railroads and U.S. banks, causing over 5,000 businesses in America to fail in the first year of the panic alone. Unemployment rose, and protest meetings became popular. Recessions continued to plague not only America, but the rest of the world as well. Considered part of the natural cycle of the modern economic system, no one can really escape recession in the long run. Countries like Germany, the U.K., China, and Japan have all had trouble with recessions. In fact, economists say that Germany is in for what might be the biggest recession in all of German history not too far down the road. Japanese economic recession has also played a huge part in their history. Japanese recession, just like economic recessions in America, can be linked to the dreadful cycle of imbalanced inflation, money supply, and interest rates that keep things in balance, rolling, and functioning properly. In the year 2001, the early 2000s recession hit America. The collapse of the dot.com bubble was truly the cause of these recessions, as well as the attacks that occurred on September 11th on the World Trade Center Towers in New York City. Accounting scandals also ran rampant, contributing to the overall downward financial spiral that America faced. Everyone remembers the attacks on America¶s soil, and nobody will forget how, despite economic trouble, the attacks brought Americans together, more united than ever. And with that kind of perseverance, America was led out of that struggle to a new future of prosperity. And lastly, America has been hit by what has been called the Late 2000s recession. The collapse of the housing market really set this one off on a bad note, and it, coupled with bank collapses in the U.S. and Europe, have caused consumer confidence and credit
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availability to plummet to new lows. Hopefully, things will turn around. But for now, the modern economic cycle again comes around to purge itself of the problems put on it by humanity, and unfortunately, that purge is known to us as recession. It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasn¶t a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didn¶t bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as ³sub-prime´ clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients weren¶t even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Mae¶s ³bad assets´ reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. The US governments realized the... Introduction: There has been constant fluctuation in the exchange rate of US Dollar (USD) versus the Indian Rupee (INR) in the last few months. From the year high of Rs. 51.88/$ in April µ09 it has declined to Rs. 46.99/$ in the first week of November ¶09. A lot is being debated about the impact this fluctuation on the Indian Economy. We shall take an overview of Forex - Inflow and Outflow, mainly in conjunction with the Dollar Trade and the effect of USD-INR Exchange rates. The Forex rates are determined by market forces and are based on demand & supply of these currencies. If supply exceeds the demand, the value of the currency depreciates, as is the case with US Dollar against the Indian Rupee (INR), since there is a huge inflow of foreign capital into India in USD.
Causes & Effects
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CAUSES:
The two main reasons that attracted the borrowers were low interests and huge funds that helped easy loans for people. With such attractive promises, people took more and more loans to build houses and invest money. Since there was surplus amount of money in the banks, all the terms were relaxed and the demarcation between the prime and sub prime loans came at par. Banks merely looked for borrowers irrespective of their background, returning capacity and poor credit history. Borrowers were lured with incentives and bonus offers. The interest rates were also kept low initially and were meant to increase after the initial period. Despite of these borrowers continued to buy even those with a poor credit history called NINJA (No Income No Job No Assets). The house prices started to soar due to huge investments. The splurge proved a good time for all. The lenders and borrowers believed that the interest rates that would increase gradually or the soaring house prices will help in recovering of the loans. In case the borrower is unable to pay the interest, the houses could be sold off until the prices are soaring. Now begun the complication when the overbuilding of houses caused a decline in the prices thereby grasping the returning capacity of the borrowers. The borrowers had no money to repay the loans and meanwhile the interest rates continued to soar. The situation became worst when the loan amounts exceeded the total cost of the house and gave way to the current recession. Recession in economics means a general slowdown in economic activity in a country over a sustained period of time, or a business cycle contraction. During recession sub prime loans came under immense limelight and turned out to be an excellent option for the banks. Many big investors bought such loans from the original lenders thus helping lenders with fresh funds to raise again. These investors were not only from America but also from the other parts and as a result the phenomenon remained no more confined to the U.S. The limelight of the loans remained until the prices soared. But as soon as there saw a decline, loans became unbeneficial and dicey. Investors from all over the world who took loans faced major losses. These losses trickled down to other banks that were in chain with the international banks of America who formed the backbone of many banks. As the banks were left with no money, the major industries and companies worldwide that depended on loans from these banks for their activities faced closure. The recession became hazardous for the world market soon. It¶s been a lot of time we hear of ³Recession´ going on in US market. Everyone is talking about recession. We cling to newspapers, television news channels, and financial reports only to discover ³what next´ in recession. Technically, recession means decline in GDP or Gross Domestic Product of a country for two consecutive quarters. Now, this explains recession only as a definition to remember. When we go more deep, we need to first understand the meaning of GDP. Gross Domestic Product is the value of all final goods and services produced in an economy in a given year. These final goods are those goods which are not transformed into other goods. These goods are evaluated as per their market value. It means when the value of all final goods and services produced in a given
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year declines for two consecutive quarters, the state is referred to as ³recession´. It is visible in real GDP, real income, employment, industrial production, and wholesale-retail sales in an economy. As per NBER (National Bureau of Economic Research), there have been ten recessions since 1945. From mid 1940s till 2007, the average recession lasted 10 months, while the average expansion lasted 57 months, giving us an average business cycle of 67 months or about 5 years and seven months. In this period, the shortest recession lasted only 6 months, from January to July 1980. The two longest recessions during this period lasted 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. There was a noticeable decline in real GDP in both of these periods. The shortest expansion period from the mid-1940s until 2007 lasted only 24 months, from April 1958 to April 1960. The longest expansion continued from March 1991 to March 2001, setting a record of 120 consecutive months of growth. As luck would have it, United States has experienced only two relatively mild recessions and extended periods of expansion over the past 25 years. There are various factors that flush an economy into the weird state of recession but Inflation is the main factor which contributes more towards the situation. Inflation is a condition of an economy when the prices of goods and services rise immensely over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. This may be because of increased production costs, higher energy costs and national debt. When the prices of goods reach their ever higher stage, people tend to cut on overall spending, luxurious spending, restrict them towards basic necessities and thus save more n more. As a result, GDP declines when people begin to cut expenditures in order to cut down costs. This makes the companies to cut their costs as well and they chuck out workers which brings unemployment. Thereby, following are some of the factors that push an economy into recession«..
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Credit crunch - shortage of finance Falling house prices - related to shortage of mortgages and credit crunch Cost push inflation squeezing incomes and reducing disposable income Collapse in confidence of finance sector causing lower confidence amongst 'real economy
EFFECTS:
1) Share markets were falling: If our share markets ever touched new heights, it was due to investments from international banks. Now that- due to recession banks- faced shortage of liquidity; they started to withdraw their investments from India.
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2) The Indian currency got weakened against dollar: Before recession, banks continued to buy stock from India but now they are selling. The same stock thus converting Rupee into Dollars and weakening our currency. 3) Banks faced huge shortage of funds and soon collapsed: As banks kept giving loans and funds at reasonable terms. At the end of the day, they were left with nothing. Comparatively, India faced much lesser effects of this hazard. On the other hand, Iceland has become completely bankrupt and a country such as America is under a dreadful shock. World¶s greatest banks suffered losses and thousands of people lost their jobs. Statistics say 4000 jobs cut at Motorola, 100 at Google, Louis Vuitton cancelled the idea of setting up a mega store in Tokyo, Chanel have put down 200 staff in Paris and many other huge companies have done the same. Banks are short of money and capacity to run huge stuff has become impossible. Nobel Prize winner Paul Krugman said up to $5 trillion money can expedite recovery from recession and projects such as Freight rail could bring fast money. Many more solutions have been talked about but things will not recover soon. In case all turns out to be in vain, time is the greatest healer. Recession brings with itself all major consequences which create mayhem within the economy. One of the major effects of recession is Inflation. Recession comes into effect with inflation while on the other hand; it is one of the after effects of recession. This means the commodities reach their ever highest prices and people generally cut down on costs. Hence, inflation becomes the major effect left out by recession. Lower income is another effect of recession in the economy. As people cut down on costs, they tend to buy less which reduces the income and thereby fewer profits or no profits. The next consequence is the increment in mortgage rates. Lenders increase the mortgage rates in a bid to cover the losses they bear during that time. Employment opportunities are also one of the main targets when the economy is burning under recession. In order to cut down on costs, companies cut down on employment opportunities thereby leading with unemployment in the economy. So when an economy enters into recession, firms experience a decline in profitability. This is because: 1. Tendency for price wars to develop in a recession. Low sales encourage firms to cut prices 2. Falling sales will lead to lower revenues.
Recession 2011 in india
India was one of the lucky few countries that staged a smart recovery after the global
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financial crisis. The turnaround impressed the entire world. Its higher economic growth rate made it one of the hottest investment destinations. Conservative growth backed by prudent economic policies was the hallmark of India's steady recovery. However, the continued global economic stress has not left India untouched. A trident of higher inflation, interest rates and slower growth is now plunging deep into India's heart. The country has been battling the inflationary pressures through stricter monetary policies. The Reserve Bank of India (RBI) has already raised interest rates eight times in one year. But inflation still continues to spiral upwards. And the higher cost of borrowing is forcing companies to delay their budget spends. This in turn is hurting GDP growth rates. Slower growth would put pressure on the country's burgeoning fiscal deficit in the form of higher subsidy payout. And if the spiral continues, then India would find itself sinking into the whirlpool of recession (lower consumption and growth rates). It is more important to deal with the reasons behind this inflation monster. For this, the government needs to remove the bottlenecks that are causing prices to go up and lead to inflationary pressures. A major overhaul of reform policies is thus in order. Agreed that debating on bills for ruling out corruption is necessary. However, it is pertinent that policymakers work on reforms to arrest the recessionary trend on a more urgent basis. Else there is little to suggest that India's short term problems cannot spill over to the long term. Having said that we believe that the very reasons that helped India emerge stronger after the crisis of 2008 will help it tide over problems this time as well. All we need is some more commitment and timely execution of the long term planning. Recession in India 2011 - Foreign institutional investors pulling out of India: NEW DELHI: During the global recession, India was "the" place to put one's money in. The Bombay Stock Exchange's benchmark Sensex breached 21,000 levels and was expected to climb even higher. The index has now tapered to around 18,000 levels. The reason - US equity markets recovered earlier than expected and Indian stocks are seen as over-valued. In three months, foreign institutional investors (FIIs) pulled out US$1.7 billion. Sunil Shah, Director of Khambatta Securities, said: "North America and Europe are reviving and are doing well. So definitely some capital will go these countries. Then the Asian economies, which are highly dependent on the European and the US economies, they would do well because of this economic revival. So some capital will go to these countries like Taiwan, Korea and Asia Pacific." India's investment climate seems to have become unfavorable, with no clear policy on
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taming inflation. The Reserve Bank of India raised its forecast on inflation for the third time, currently projected at 8 per cent. For Indian companies, the higher cost has put earnings under pressure, making them an unviable investment option. Corruption scandals have also put the government's reform agenda under a scanner. Ashok Ajmera, Chairman and Managing Director of Ajcon Global Services Pvt Ltd, said: "Lot of such things are going on, which we have not heard of in the last five to 10 years. The kind of corruption cases, with the 2G scam, Commonwealth Games. Everyday, we hear one or the other person being rounded up. So markets don't like these kinds of uncertainties and actions. So that is the reason FIIs are not coming in a big way to buy because they also want to local position to settle down." This year, FII inflows are expected to fall by a third as compared to last year. Bombay Stock Exchanges' Sensex fell below 18,000 levels after India's central bank raised interest rates for the eighth time in a year recently. That day's session saw FIIs logging a net outflow of about US$250 million. There is a possibility of more hikes as the bank fights inflation. With this, stocks of auto, real estate and consumer durables will be the hardest hit as they are most sensitive to interest rates
RECESSION : IMPACT ON INDIAN ECONOMY
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The main Inflow and Outflow can be categorized as follows: Main USD Inflow: 1. Export earnings: 2. IT Sector Earnings 3. NRI Remittances 4. Foreign Direct Investments (FDI) 5. Portfolio Investment 6. Loans from other governments, IMF, World Bank, etc 7. External Commercial Borrowings (ECB) India is facing the position of recession as globalization showing its negative scenario. As it was started in US and now it's touching the boundary of India also. Recession is a phase in which rupee depreciate, cash crunches, money market slowdown, inflation comes. All in all it's become difficult to bring money from the pocket of an individual. As we know price of the steel, iron goes up, we would like to postpone our purchasing but if we won't spend, how producer could makes his bread. If the producer starts reducing the price of the commodity with such belief that customer buy the product in all case. This will bring only when he starts cutting its cost of production. Cost cutting means reduction in variable cost. As price of steel, iron, equipments, machinery, are touching sky, only way to reduce the cost is the reduction in employees. Hence people fear of their job security. In fear of the job security, people are generally shifting their purchasing. All of them either producer, investor, customer, employee posing each other to create Recession Negative Aspect of Recession on Indian Economy As recession have various negative effects on Indian economy. The capital market wasfacing the downfall, liquidity is dropping down, an individual don't have money to spend,producers are increasing their price, but to cope with market they are creating deployment. Positive effect of recession on Indian economy The recession in US led to decrease in demand... Economic Slowdown/Recession of 2008the recent slowdown (2008) in the North American macroeconomic environment alsofollows the same trends as its predecessors. Typically an economic slowdown is definedas an economy which has Declining aggregate demand Contracting employment/rising unemployment Sharp fall in business confidence & profits including a reduction in investment spending Reduced inventory levels and heavy discounting,
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Falling demand for imports
IMPACT ON INDIAN««.
Stock market:
Most of us these days hear re-assuring words from some or the other economist or politicians in recent times: ³Don¶t Panic, India is not in recession as of now, we are far better than other countries´. This is not another Great Depression or recession, the heat of which most of the countries have and are facing. ´ What have we learned? In 1929 investors had a currency backed by gold; nowadays our rupee or for that matter any other currency are backed by an IOU from the world¶s biggest debtor. In the year 1929 the financial system was far less sophisticated: no global markets and ecommerce was there. There was not much interdependence of developing countries on developed countries. But, today we have complex and sophisticated financial models which we although trust implicitly until they fail to predict the impending collapse and major failure. In 1929, majorly communication was mostly by postal mail. Whereas, today we are all inter-liked, with communications around, the globe measured in fractions of seconds. Then the relatively new Federal Reserve was still cautiously finding their way and regularly making mistakes. But today we have a Fed confidently patrolling the financial markets with a huge can of crude. And assuring most of the world that, they will use it to control and improve the situation. But later they realize, Why they are not confident that we they are in good hands? These mistakes were being made to under rule the mistakes being made to dwarf those of the great depression time. Most economist and politicians seem to be ignorant that negative real interest rates and budgetary deficits are the reason which created the problem in first place. Further more we have noticed that these major problems have started with the housing sector and the major culprit has been the infrastructure sector. The reserve bank of India rapidly lowered real interest rates to stimulate borrowing / lending and further the expenditure, though a very less has been done in this regard and no results have been seen for the same. The financial sector is being highly leveraged, which debt-equity ratio going to (6:1): selling assets in order to reduce debt on their balance sheets. Also we have seen the Reserve Bank of India has been making efforts to bring down the interest rate to cushion money supply and boosting the economy. Also efforts have been make to bring down the PLR (Prime lending rate).Further the world economy is heading towards a liquidity trap with all money supply sources drying up, also investors are not getting good rate of return on saving
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which demotivates them to save. Major outflow of deposits from the commercial is forcing banks to liquidate their illiquid assets.
Banking Sector:
In India, it is the real economy that got impacted first ² on account of exports and the drying up of overseas finance for many firms. Banks are affected indirectly by the slowing down of the economy. The direct impact of the crisis on the Indian banking system has been small because Indian banks do not have big exposures to the subprime market. Indian banks are well placed to weather this impact. This is not a contrarian view. The RBI itself exudes optimism about the outlook for Indian banking in its latest Report on Trend and Progress in Banking. The banking sector in India is largely (70%) dominated by the public sector. Partly as a result, India has not been witness to the kind of crisis of confidence seen in advanced countries. Additionally, strict regulation and conservative policies adopted by the Reserve Bank of India have ensured that banks in India are relatively insulated from the travails of their Western counterparts. However, this cannot be advanced as a reason either for continuance of public sector dominance or for resistance to further financial sector reform.. It has cut the cash reserve ratio to 5.5% and the repo rate at which the central bank pumps liquidity into the system to 7.5%. It has also reduced the SLR or statutory liquidity ratio to 24%, down from 25% earlier. The reasons for tight liquidity conditions in the Indian market in recent times are quite different from the factors driving the global liquidity crisis. Some reasons include large selling by Foreign Institutional Investors (FIIs) and subsequent Reserve Bank of India (RBI) interventions in the foreign currency market, continuing growth in advances, and earlier increases in cash reserve ratio (CRR) to contain inflation. RBI¶s recent initiatives, including the reduction in CRR by 150 basis points from October 11, 2008, cancellation of two auctions of government securities, and confidence-building communication, have already begun easing liquidity pressures.
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The strong capitalization of Indian banks, with an average Tier I capital adequacy ratio of above 8 per cent, is a positive feature in their credit risk profile. Nevertheless, Indian banks do face challenges in the current Indian economic environment, marked by a slower gross domestic product growth, depressed capital market conditions, and relatively high interest rate regime. The profitability of Indian banks is expected to remain under pressure due to increased cost of borrowing, declining interest spreads, and lower fee income due to slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-market provisions on investment portfolios and considerably lower
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profit on sale of investments, as compared with previous years. Moreover, those Indian banks considering accessing the capital markets for shoring up capital adequacy may be forced to curtail growth plans, if capital markets remain depressed.
Market:
y Recession Infects the Indian Textile Industry Indian textile industry is integrated with the US economy to the extent, that the effects of recession is visible in the downstream of fabric exports due to the decreasing demand from US and European markets. With a decrease in demand for retail garments, Indian fabric manufacturers are restricting their production volume. Simultaneously, this also affects the yarn production, making it to decline. Financial turmoil in the US is likely to have a grave influence on Indian textile manufacturers as almost 50% of the total textile production is being exported to US and EU. Weakening of the US dollar also foretells issues for the Indian exporters. Indian export sector, which is already suffering from the depreciating value of dollar, will feel the recession much more intensely. y Financial Crunch Influences Credit Market: Until a few months before RBI was taking initiative to restrict the flow of money. Now with the recession, the condition turned topsy-turvy. An unprecedented financial crisis is seen in the domestic as well as the global markets. There is always a potential risk in the Indian credit market due to the changes in the global market conditions. Despite the fact that Indian markets offer high returns, still industry analysts predict that there would be pressure on the capital inflows. Liquidity is getting tight affecting the money markets since they, being interlinked with each other, the infection spreads among them quickly. Blocked credit markets may freeze the economic growth of the country. Financial crisis in US is freezing the credit markets all across the globe; gradually. The bank is now liberalizing its bans on capital inflows and is turning on the money tap. Credit crunch in US not only affects the Indian exports, but also the money that is being invested in India from abroad. American companies will have less money to invest in other countries including India. Now, the concern of every country is to ride out of the storm without much damage. When the financial condition on a country goes down, it concurrently brings some players down with it. In today's tumult 'globalization' has been replaced by 'decoupling'. It is the notion of every country to encapsulate itself and avoid being influenced by the US recession. The Government is under the responsibility of restoring the consumer's confidence.
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Tourism:
Anything that has demand has purchasing power. Goods lying in shops for sale have purchasing power because they are demanded by people. Shares purchased by you have purchasing power if they have a demand in the secondary market for shares represented by Stock Exchanges. But as we know that during the times when barter system was prevalent, there were problems of impossibility of double co-incidence of wants, lack of standard measure of purchasing power etc. This led to the advent of Money because Money is a commodity which is demanded by people all the time and Money initially was represented through Commodity Money whereby the actual value of the commodity was the value of money which the commodity represented. It was Fiat Money that is prevalent today that was evolved to represent that Money that had purchasing power solely backed by Government Order for that Money to be recognized as such. Economy is said to develop when it develops resources that have a demand. When resources begin to loose their purchasing power, it is a cause of concern for the economy because that is something which would reflect in the Currency Exchange Rate for that Economy. For example, a fall in the demand for Oil could seriously damage the economy of the Middle Eastern countries because Oil represents the Purchasing Power of the Middle Eastern Countries. A person who earns his living as a computer operator in his office, would be debarred of further purchasing power if he suffers an attack of paralysis of his hands. An economy is healthy if people are able to sustain the satisfaction of their wants through such exchanges. By having something which has demand, i.e. Money, you can exchange it for something which you want. But if the purchasing power lessens without a parallel reduction in production, that would ultimately lead to reduction in prices of goods and services meaning a reduction in the purchasing power of the sellers of such goods and services. This is exactly what happens during Recession. An increase in purchasing power generates demand for goods and services which thus generates purchasing power of sellers of such goods and services. Business enterprises actually enable Value Addition to resources through exchanges. For example, I as a manufacturer of goods hire the skills of labourers and purchase raw material. The laborers apply skill to the raw material converting it into a product that has demand. Thus, what I have actually done is that I have exchanged money for value addition. Thus, I have passed on to the laborers Money, which has a demand representing purchasing power and I have now with me products, which have a market, representing my purchasing power. Now when I will sell those products, I will again get back Money but with profit. This profit represents the Value Addition that I enabled through production. But those who purchased those goods and services from me have consumed those goods and services and thus, they need to replenish their purchasing power through selling their skills and labour once again. Thus,
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natural resources including human labour are source of replenishment of purchasing power in the economy. But when people¶s purchasing power would fall, I would be forced to reduce the prices of my products thus resulting in fall in my purchasing power. Such a fall in the market value of goods and services in totality represents a fall in Gross Domestic Product. This marks Recession. I would now fail to generate sufficient Value Addition as I used to do previously. This would result in prolonging the effect of lack of purchasing power representing a fall in the Purchasing power of the nation. This would discourage Foreign Investors resulting in fall in the demand for my nation¶s currency in the International Currency Market bringing down the exchange rate weakening my nation¶s currency. When demand for goods and services decreases without a corresponding decrease in supply of goods and services, it results in a fall in the market value of goods and services. This is a fall in GDP, representing Recession. When Supply of Goods and services decreases without a corresponding fall in demand for them, that results in Inflation where large purchasing power is chasing few goods. This can also happen when Market Value of goods and services has excessively risen owing to rising cost of inputs due to their shortage. For example, rise in the prices of Oil will result in rise in Ticket Fare for travel by Air. Recession arises from shortage of Money pulling down the market value of goods and services. Inflation arises from a fall in the purchasing power of money, supply of money remaining constant.
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IT Sector:
With the warnings flagging the possibilities for US recession, the analysts got a food for thought. All set to sail the same boat. What will be the out turn of the rest of the economies? How will Indian IT industry and economy react to this slow down? Some were saying that economies will suffer a lot and India will also face the harder implications. The contemplations were obvious as US alone accounts for about onefourth of world GDP as cleared by the market reports. Also when Y2K bug was biting or on the time of last IT bubble burst in 2000 India suffered a lot. The Indian index fell by almost 15%. But same can not be mouthed fro this time. In so many years, India has scaled up astronomically. It has shown an enormous growth ratio. The past can repeat itself but when prospects are favoring growth, you can never say what happens next? The time has changed drastically since and then. The economic growth and the strong presence of India on the world map have made it to the non-vulnerable category of the countries. With India the other country sharing the space is China. But there are many implications of this US recession on Indian Economy, some good and bad. Below listed are some of the implications: ·The Indian IT and Its services can be hit harder as US is the largest market for these services. But the implication is supposed to get limited to smaller firms rather than hitting harder on larger firms. Contrary to what above said there are many opportunities waiting for India to bask on with this recession. It can look at the various possibilities available to it in niche areas and win the global mart. The US recession can set new shores for outsourcing services. No doubt Us is the largest client but the reluctance of US companies to offer services due to recession India can take up with this good chance. The appreciation of rupee against dollar is set to hit hard on Indian exporters. The dealings are done in dollar and the payment is done in rupees, so they will get bit lesser than their
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Conclusion
Financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent. India has by-and-large been spared of global financial contagion due to the subprime turmoil for a variety of reasons. India¶s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period. It also has a very comfortable level of forex reserves. The Basel Committee's current and planned initiatives are intended to produce a more robust supervisory and regulatory framework for the banking sector. These efforts, which also are in support of the initiatives and recommendations of the Financial Stability Forum and the G20 leaders, include:
y
better coverage of banks' risk exposures, including for trading book, securitization, and derivative activities; more and higher quality capital to back these exposures; countercyclical capital buffers and provisions that can be built up in good times and drawn down in stress; the introduction of a non-risk based measure to supplement Basel II and help contain leverage in the banking system; higher liquidity buffers; stronger risk management and governance standards; more regulatory focus on system-wide or "macro prudential" supervision; and Greater transparency about the risk in banks' portfolios.
y y
y
y y y y
In discussing the Basel Committee's long-term strategy, MrWellink stated that "we need to establish a clear target for the future regulatory system that substantially reduces both the probability and severity of a crisis like the one we currently are working through." He added that "by providing clarity about the future regulatory framework, we will help reestablish near term confidence, reduce the risk of competitive distortions and limit the degrees of uncertainty for the public and private sector"
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1
INTRODUCTION
In simple words it is flying of money (huge to very huge) from market. When it begins? How it begins? Where it started? It started with a very small thing. At that time very few could have thought of this disaster. It is surprise to many but all begins with disbursement of loan (bad) to buy houses, to people who don¶t have credit worthiness. They called it NINJA loans (No Income No Job Approval). The providers of loans were US Bankers supported by policies of US Government and Federal Reserve (Central Bank of USA). Loans were given to those people who don¶t have job or any income source to repay the loan. Though stringent conditions were attached with such disbursement e.g. in the initial period of loan no interest or very small interest rate has been charged and in later period of loan (after 2-3 yrs) higher interest has been charged for the rest of loan period. That was the point (when higher interest started), when many started defaulting on repayment of these loans. But you must be thinking that how this small thing, a small sparkle can create this big fire? It was a ³Systematic Plan´. US government created two mortgage companies (Fannie Me and Freddie Mac) to disburse the loans. They created bonds of these loans (loans were assets of those companies, they converted loans into bonds) and sold them to investors. Investors included bankers, financial institutions, investment companies (like Lehaman Brothers), foreign banks, foreign governments and small investors (like you and me). Bad loans disbursed were to the tune of some Trillian US dollars. When default started in repayment of these loans the value of bonds started shrinking. That has impacted liquidity as well as profitability of many banks. Many banks shows losses or lesser profits compare to previous periods. Some banks closed down, some sacks employees for cost cutting. Financial impact of this was so huge that it spread across the globe. Overall demand comes down heavily which results in more loss to many companies. Right now nobody can predict how far this will go? Analysis by some economist predicts that this will last for next 1.5 to 2 yrs. So we should be well prepared for this, if it is true as, as of now India has not seen any major event of recession. But we may face trouble in 2009.
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Definition
A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration.
Meaning
A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. The given definition of recession should be a substantial decline in activity across the economy, lasting a longer period which is usually more than a few months. The activity across the economy is reflected by various economic data like, industrial production, employment, gross income and wholesale-retail trade. From a technical point of view, a recession happens when there are two consecutive quarters of negative economic growth as measure by a particular country's Gross Domestic Product (GDP). Usually recession last from 6 to 18 months. So stock markets falling relentlessly do not necessary means that the economy is undergoing a recession. But recession however is something that cannot be avoided as it is considered as a part of the business cycle. For obvious reason, it is also the most dreaded and hated part of a business cycle. Recession is not to be confused with depression. Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to severe depression. Depression is a dead end. It is time to close shop completely. It is a total state of irrevocable economic failure. When a country is doing well all round its
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Gross Domestic Product (GDP) is on the rise. Overall economy is bullish; it is not only the stock exchanges that tell riches to rags stories but even small businesses. It all adds to the national exchequer. An economist is likely to give a detailed, comprehensive definition of recession. But for the layman who has been affected knows it only one way-when he loses his job and has no money to pay his credit and loans. Recession is when the consumer faces foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many companies and whole countries go bankrupt for want of liquid funds and cash flow for even daily requirements. Are we facing a recession or not? Yes, for the simple reason that not only our neighbors but our friends are unemployed. There is less of business talk and more billing worries. Transitory recessions are good for the economy, as it tends to stabilize the prices. It allows run away bullish companies to slow down and take stock. There is a saying, µwhen it¶s tough the tough get going¶. The weaker companies will not survive the brief recession also. Stronger companies will pull through its resources. So when is it time to worry? When you are facing a foreclosure, when the chips are down and out and creditors file cases for recovery. Firms face closures when they go through recession and are not able to recover from losses. If, at this time, they are not able to sustain their prices and stocks then there is more trouble. Even when the recession period gets over, they will not be able to do well. If a business survives a recession period they should be able to survive a depression. But how many recession proof businesses are there? Who will eventually survive the recession? 1. Those that have been able to save their funds. 2. Those who have not invested in fly-by-night companies. 3. Those who remain clam till the storm passes. 4. Those that take stock immediately and decide to reinvest in a recession proof business.
History
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The next recession confirmed occurred in the years between 1807 and 1814, and was called the Depression of 1807. This depression was primarily caused by the Embargo Act of 1807, signed into effect by then President Thomas Jefferson. This act destroyed a good part of the shipping related industries, and it was fought hard by the Federalists, who allowed smuggling to take effect in New England as a result of the Act. The Panic of 1819 soon followed. This was considered the first major financial crisis to unveil itself before the relatively new U.S. economy. This panic brought with it widespread foreclosures, failing banks, huge unemployment rates, and a gigantic slump in manufacturing and agriculture that caused havoc among Americans. This recession also marked the end of great economic expansion that had taken place following the War of 1812. Economic recessions in America continued with the Panic of 1837. This recession can really be attributed to failing banks, and to the lack of confidence people had in paper currency, which was becoming popular at the time. Banks stopped paying out in gold and silver, which really took its toll on American confidence. The Panic of 1857 followed not long after. With the failure of the Ohio Life Insurance and Trust Company (which at the time was one of the biggest in the United States) came the explosion of a European confidence bubble in the U.S. This greatly affected the railroads and U.S. banks, causing over 5,000 businesses in America to fail in the first year of the panic alone. Unemployment rose, and protest meetings became popular. Recessions continued to plague not only America, but the rest of the world as well. Considered part of the natural cycle of the modern economic system, no one can really escape recession in the long run. Countries like Germany, the U.K., China, and Japan have all had trouble with recessions. In fact, economists say that Germany is in for what might be the biggest recession in all of German history not too far down the road. Japanese economic recession has also played a huge part in their history. Japanese recession, just like economic recessions in America, can be linked to the dreadful cycle of imbalanced inflation, money supply, and interest rates that keep things in balance, rolling, and functioning properly. In the year 2001, the early 2000s recession hit America. The collapse of the dot.com bubble was truly the cause of these recessions, as well as the attacks that occurred on September 11th on the World Trade Center Towers in New York City. Accounting scandals also ran rampant, contributing to the overall downward financial spiral that America faced. Everyone remembers the attacks on America¶s soil, and nobody will forget how, despite economic trouble, the attacks brought Americans together, more united than ever. And with that kind of perseverance, America was led out of that struggle to a new future of prosperity. And lastly, America has been hit by what has been called the Late 2000s recession. The collapse of the housing market really set this one off on a bad note, and it, coupled with bank collapses in the U.S. and Europe, have caused consumer confidence and credit
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availability to plummet to new lows. Hopefully, things will turn around. But for now, the modern economic cycle again comes around to purge itself of the problems put on it by humanity, and unfortunately, that purge is known to us as recession. It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasn¶t a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didn¶t bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as ³sub-prime´ clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients weren¶t even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Mae¶s ³bad assets´ reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. The US governments realized the... Introduction: There has been constant fluctuation in the exchange rate of US Dollar (USD) versus the Indian Rupee (INR) in the last few months. From the year high of Rs. 51.88/$ in April µ09 it has declined to Rs. 46.99/$ in the first week of November ¶09. A lot is being debated about the impact this fluctuation on the Indian Economy. We shall take an overview of Forex - Inflow and Outflow, mainly in conjunction with the Dollar Trade and the effect of USD-INR Exchange rates. The Forex rates are determined by market forces and are based on demand & supply of these currencies. If supply exceeds the demand, the value of the currency depreciates, as is the case with US Dollar against the Indian Rupee (INR), since there is a huge inflow of foreign capital into India in USD.
Causes & Effects
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CAUSES:
The two main reasons that attracted the borrowers were low interests and huge funds that helped easy loans for people. With such attractive promises, people took more and more loans to build houses and invest money. Since there was surplus amount of money in the banks, all the terms were relaxed and the demarcation between the prime and sub prime loans came at par. Banks merely looked for borrowers irrespective of their background, returning capacity and poor credit history. Borrowers were lured with incentives and bonus offers. The interest rates were also kept low initially and were meant to increase after the initial period. Despite of these borrowers continued to buy even those with a poor credit history called NINJA (No Income No Job No Assets). The house prices started to soar due to huge investments. The splurge proved a good time for all. The lenders and borrowers believed that the interest rates that would increase gradually or the soaring house prices will help in recovering of the loans. In case the borrower is unable to pay the interest, the houses could be sold off until the prices are soaring. Now begun the complication when the overbuilding of houses caused a decline in the prices thereby grasping the returning capacity of the borrowers. The borrowers had no money to repay the loans and meanwhile the interest rates continued to soar. The situation became worst when the loan amounts exceeded the total cost of the house and gave way to the current recession. Recession in economics means a general slowdown in economic activity in a country over a sustained period of time, or a business cycle contraction. During recession sub prime loans came under immense limelight and turned out to be an excellent option for the banks. Many big investors bought such loans from the original lenders thus helping lenders with fresh funds to raise again. These investors were not only from America but also from the other parts and as a result the phenomenon remained no more confined to the U.S. The limelight of the loans remained until the prices soared. But as soon as there saw a decline, loans became unbeneficial and dicey. Investors from all over the world who took loans faced major losses. These losses trickled down to other banks that were in chain with the international banks of America who formed the backbone of many banks. As the banks were left with no money, the major industries and companies worldwide that depended on loans from these banks for their activities faced closure. The recession became hazardous for the world market soon. It¶s been a lot of time we hear of ³Recession´ going on in US market. Everyone is talking about recession. We cling to newspapers, television news channels, and financial reports only to discover ³what next´ in recession. Technically, recession means decline in GDP or Gross Domestic Product of a country for two consecutive quarters. Now, this explains recession only as a definition to remember. When we go more deep, we need to first understand the meaning of GDP. Gross Domestic Product is the value of all final goods and services produced in an economy in a given year. These final goods are those goods which are not transformed into other goods. These goods are evaluated as per their market value. It means when the value of all final goods and services produced in a given
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year declines for two consecutive quarters, the state is referred to as ³recession´. It is visible in real GDP, real income, employment, industrial production, and wholesale-retail sales in an economy. As per NBER (National Bureau of Economic Research), there have been ten recessions since 1945. From mid 1940s till 2007, the average recession lasted 10 months, while the average expansion lasted 57 months, giving us an average business cycle of 67 months or about 5 years and seven months. In this period, the shortest recession lasted only 6 months, from January to July 1980. The two longest recessions during this period lasted 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. There was a noticeable decline in real GDP in both of these periods. The shortest expansion period from the mid-1940s until 2007 lasted only 24 months, from April 1958 to April 1960. The longest expansion continued from March 1991 to March 2001, setting a record of 120 consecutive months of growth. As luck would have it, United States has experienced only two relatively mild recessions and extended periods of expansion over the past 25 years. There are various factors that flush an economy into the weird state of recession but Inflation is the main factor which contributes more towards the situation. Inflation is a condition of an economy when the prices of goods and services rise immensely over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. This may be because of increased production costs, higher energy costs and national debt. When the prices of goods reach their ever higher stage, people tend to cut on overall spending, luxurious spending, restrict them towards basic necessities and thus save more n more. As a result, GDP declines when people begin to cut expenditures in order to cut down costs. This makes the companies to cut their costs as well and they chuck out workers which brings unemployment. Thereby, following are some of the factors that push an economy into recession«..
y y y y
Credit crunch - shortage of finance Falling house prices - related to shortage of mortgages and credit crunch Cost push inflation squeezing incomes and reducing disposable income Collapse in confidence of finance sector causing lower confidence amongst 'real economy
EFFECTS:
1) Share markets were falling: If our share markets ever touched new heights, it was due to investments from international banks. Now that- due to recession banks- faced shortage of liquidity; they started to withdraw their investments from India.
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2) The Indian currency got weakened against dollar: Before recession, banks continued to buy stock from India but now they are selling. The same stock thus converting Rupee into Dollars and weakening our currency. 3) Banks faced huge shortage of funds and soon collapsed: As banks kept giving loans and funds at reasonable terms. At the end of the day, they were left with nothing. Comparatively, India faced much lesser effects of this hazard. On the other hand, Iceland has become completely bankrupt and a country such as America is under a dreadful shock. World¶s greatest banks suffered losses and thousands of people lost their jobs. Statistics say 4000 jobs cut at Motorola, 100 at Google, Louis Vuitton cancelled the idea of setting up a mega store in Tokyo, Chanel have put down 200 staff in Paris and many other huge companies have done the same. Banks are short of money and capacity to run huge stuff has become impossible. Nobel Prize winner Paul Krugman said up to $5 trillion money can expedite recovery from recession and projects such as Freight rail could bring fast money. Many more solutions have been talked about but things will not recover soon. In case all turns out to be in vain, time is the greatest healer. Recession brings with itself all major consequences which create mayhem within the economy. One of the major effects of recession is Inflation. Recession comes into effect with inflation while on the other hand; it is one of the after effects of recession. This means the commodities reach their ever highest prices and people generally cut down on costs. Hence, inflation becomes the major effect left out by recession. Lower income is another effect of recession in the economy. As people cut down on costs, they tend to buy less which reduces the income and thereby fewer profits or no profits. The next consequence is the increment in mortgage rates. Lenders increase the mortgage rates in a bid to cover the losses they bear during that time. Employment opportunities are also one of the main targets when the economy is burning under recession. In order to cut down on costs, companies cut down on employment opportunities thereby leading with unemployment in the economy. So when an economy enters into recession, firms experience a decline in profitability. This is because: 1. Tendency for price wars to develop in a recession. Low sales encourage firms to cut prices 2. Falling sales will lead to lower revenues.
Recession 2011 in india
India was one of the lucky few countries that staged a smart recovery after the global
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financial crisis. The turnaround impressed the entire world. Its higher economic growth rate made it one of the hottest investment destinations. Conservative growth backed by prudent economic policies was the hallmark of India's steady recovery. However, the continued global economic stress has not left India untouched. A trident of higher inflation, interest rates and slower growth is now plunging deep into India's heart. The country has been battling the inflationary pressures through stricter monetary policies. The Reserve Bank of India (RBI) has already raised interest rates eight times in one year. But inflation still continues to spiral upwards. And the higher cost of borrowing is forcing companies to delay their budget spends. This in turn is hurting GDP growth rates. Slower growth would put pressure on the country's burgeoning fiscal deficit in the form of higher subsidy payout. And if the spiral continues, then India would find itself sinking into the whirlpool of recession (lower consumption and growth rates). It is more important to deal with the reasons behind this inflation monster. For this, the government needs to remove the bottlenecks that are causing prices to go up and lead to inflationary pressures. A major overhaul of reform policies is thus in order. Agreed that debating on bills for ruling out corruption is necessary. However, it is pertinent that policymakers work on reforms to arrest the recessionary trend on a more urgent basis. Else there is little to suggest that India's short term problems cannot spill over to the long term. Having said that we believe that the very reasons that helped India emerge stronger after the crisis of 2008 will help it tide over problems this time as well. All we need is some more commitment and timely execution of the long term planning. Recession in India 2011 - Foreign institutional investors pulling out of India: NEW DELHI: During the global recession, India was "the" place to put one's money in. The Bombay Stock Exchange's benchmark Sensex breached 21,000 levels and was expected to climb even higher. The index has now tapered to around 18,000 levels. The reason - US equity markets recovered earlier than expected and Indian stocks are seen as over-valued. In three months, foreign institutional investors (FIIs) pulled out US$1.7 billion. Sunil Shah, Director of Khambatta Securities, said: "North America and Europe are reviving and are doing well. So definitely some capital will go these countries. Then the Asian economies, which are highly dependent on the European and the US economies, they would do well because of this economic revival. So some capital will go to these countries like Taiwan, Korea and Asia Pacific." India's investment climate seems to have become unfavorable, with no clear policy on
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taming inflation. The Reserve Bank of India raised its forecast on inflation for the third time, currently projected at 8 per cent. For Indian companies, the higher cost has put earnings under pressure, making them an unviable investment option. Corruption scandals have also put the government's reform agenda under a scanner. Ashok Ajmera, Chairman and Managing Director of Ajcon Global Services Pvt Ltd, said: "Lot of such things are going on, which we have not heard of in the last five to 10 years. The kind of corruption cases, with the 2G scam, Commonwealth Games. Everyday, we hear one or the other person being rounded up. So markets don't like these kinds of uncertainties and actions. So that is the reason FIIs are not coming in a big way to buy because they also want to local position to settle down." This year, FII inflows are expected to fall by a third as compared to last year. Bombay Stock Exchanges' Sensex fell below 18,000 levels after India's central bank raised interest rates for the eighth time in a year recently. That day's session saw FIIs logging a net outflow of about US$250 million. There is a possibility of more hikes as the bank fights inflation. With this, stocks of auto, real estate and consumer durables will be the hardest hit as they are most sensitive to interest rates
RECESSION : IMPACT ON INDIAN ECONOMY
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The main Inflow and Outflow can be categorized as follows: Main USD Inflow: 1. Export earnings: 2. IT Sector Earnings 3. NRI Remittances 4. Foreign Direct Investments (FDI) 5. Portfolio Investment 6. Loans from other governments, IMF, World Bank, etc 7. External Commercial Borrowings (ECB) India is facing the position of recession as globalization showing its negative scenario. As it was started in US and now it's touching the boundary of India also. Recession is a phase in which rupee depreciate, cash crunches, money market slowdown, inflation comes. All in all it's become difficult to bring money from the pocket of an individual. As we know price of the steel, iron goes up, we would like to postpone our purchasing but if we won't spend, how producer could makes his bread. If the producer starts reducing the price of the commodity with such belief that customer buy the product in all case. This will bring only when he starts cutting its cost of production. Cost cutting means reduction in variable cost. As price of steel, iron, equipments, machinery, are touching sky, only way to reduce the cost is the reduction in employees. Hence people fear of their job security. In fear of the job security, people are generally shifting their purchasing. All of them either producer, investor, customer, employee posing each other to create Recession Negative Aspect of Recession on Indian Economy As recession have various negative effects on Indian economy. The capital market wasfacing the downfall, liquidity is dropping down, an individual don't have money to spend,producers are increasing their price, but to cope with market they are creating deployment. Positive effect of recession on Indian economy The recession in US led to decrease in demand... Economic Slowdown/Recession of 2008the recent slowdown (2008) in the North American macroeconomic environment alsofollows the same trends as its predecessors. Typically an economic slowdown is definedas an economy which has Declining aggregate demand Contracting employment/rising unemployment Sharp fall in business confidence & profits including a reduction in investment spending Reduced inventory levels and heavy discounting,
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Falling demand for imports
IMPACT ON INDIAN««.
Stock market:
Most of us these days hear re-assuring words from some or the other economist or politicians in recent times: ³Don¶t Panic, India is not in recession as of now, we are far better than other countries´. This is not another Great Depression or recession, the heat of which most of the countries have and are facing. ´ What have we learned? In 1929 investors had a currency backed by gold; nowadays our rupee or for that matter any other currency are backed by an IOU from the world¶s biggest debtor. In the year 1929 the financial system was far less sophisticated: no global markets and ecommerce was there. There was not much interdependence of developing countries on developed countries. But, today we have complex and sophisticated financial models which we although trust implicitly until they fail to predict the impending collapse and major failure. In 1929, majorly communication was mostly by postal mail. Whereas, today we are all inter-liked, with communications around, the globe measured in fractions of seconds. Then the relatively new Federal Reserve was still cautiously finding their way and regularly making mistakes. But today we have a Fed confidently patrolling the financial markets with a huge can of crude. And assuring most of the world that, they will use it to control and improve the situation. But later they realize, Why they are not confident that we they are in good hands? These mistakes were being made to under rule the mistakes being made to dwarf those of the great depression time. Most economist and politicians seem to be ignorant that negative real interest rates and budgetary deficits are the reason which created the problem in first place. Further more we have noticed that these major problems have started with the housing sector and the major culprit has been the infrastructure sector. The reserve bank of India rapidly lowered real interest rates to stimulate borrowing / lending and further the expenditure, though a very less has been done in this regard and no results have been seen for the same. The financial sector is being highly leveraged, which debt-equity ratio going to (6:1): selling assets in order to reduce debt on their balance sheets. Also we have seen the Reserve Bank of India has been making efforts to bring down the interest rate to cushion money supply and boosting the economy. Also efforts have been make to bring down the PLR (Prime lending rate).Further the world economy is heading towards a liquidity trap with all money supply sources drying up, also investors are not getting good rate of return on saving
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which demotivates them to save. Major outflow of deposits from the commercial is forcing banks to liquidate their illiquid assets.
Banking Sector:
In India, it is the real economy that got impacted first ² on account of exports and the drying up of overseas finance for many firms. Banks are affected indirectly by the slowing down of the economy. The direct impact of the crisis on the Indian banking system has been small because Indian banks do not have big exposures to the subprime market. Indian banks are well placed to weather this impact. This is not a contrarian view. The RBI itself exudes optimism about the outlook for Indian banking in its latest Report on Trend and Progress in Banking. The banking sector in India is largely (70%) dominated by the public sector. Partly as a result, India has not been witness to the kind of crisis of confidence seen in advanced countries. Additionally, strict regulation and conservative policies adopted by the Reserve Bank of India have ensured that banks in India are relatively insulated from the travails of their Western counterparts. However, this cannot be advanced as a reason either for continuance of public sector dominance or for resistance to further financial sector reform.. It has cut the cash reserve ratio to 5.5% and the repo rate at which the central bank pumps liquidity into the system to 7.5%. It has also reduced the SLR or statutory liquidity ratio to 24%, down from 25% earlier. The reasons for tight liquidity conditions in the Indian market in recent times are quite different from the factors driving the global liquidity crisis. Some reasons include large selling by Foreign Institutional Investors (FIIs) and subsequent Reserve Bank of India (RBI) interventions in the foreign currency market, continuing growth in advances, and earlier increases in cash reserve ratio (CRR) to contain inflation. RBI¶s recent initiatives, including the reduction in CRR by 150 basis points from October 11, 2008, cancellation of two auctions of government securities, and confidence-building communication, have already begun easing liquidity pressures.
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The strong capitalization of Indian banks, with an average Tier I capital adequacy ratio of above 8 per cent, is a positive feature in their credit risk profile. Nevertheless, Indian banks do face challenges in the current Indian economic environment, marked by a slower gross domestic product growth, depressed capital market conditions, and relatively high interest rate regime. The profitability of Indian banks is expected to remain under pressure due to increased cost of borrowing, declining interest spreads, and lower fee income due to slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-market provisions on investment portfolios and considerably lower
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profit on sale of investments, as compared with previous years. Moreover, those Indian banks considering accessing the capital markets for shoring up capital adequacy may be forced to curtail growth plans, if capital markets remain depressed.
Market:
y Recession Infects the Indian Textile Industry Indian textile industry is integrated with the US economy to the extent, that the effects of recession is visible in the downstream of fabric exports due to the decreasing demand from US and European markets. With a decrease in demand for retail garments, Indian fabric manufacturers are restricting their production volume. Simultaneously, this also affects the yarn production, making it to decline. Financial turmoil in the US is likely to have a grave influence on Indian textile manufacturers as almost 50% of the total textile production is being exported to US and EU. Weakening of the US dollar also foretells issues for the Indian exporters. Indian export sector, which is already suffering from the depreciating value of dollar, will feel the recession much more intensely. y Financial Crunch Influences Credit Market: Until a few months before RBI was taking initiative to restrict the flow of money. Now with the recession, the condition turned topsy-turvy. An unprecedented financial crisis is seen in the domestic as well as the global markets. There is always a potential risk in the Indian credit market due to the changes in the global market conditions. Despite the fact that Indian markets offer high returns, still industry analysts predict that there would be pressure on the capital inflows. Liquidity is getting tight affecting the money markets since they, being interlinked with each other, the infection spreads among them quickly. Blocked credit markets may freeze the economic growth of the country. Financial crisis in US is freezing the credit markets all across the globe; gradually. The bank is now liberalizing its bans on capital inflows and is turning on the money tap. Credit crunch in US not only affects the Indian exports, but also the money that is being invested in India from abroad. American companies will have less money to invest in other countries including India. Now, the concern of every country is to ride out of the storm without much damage. When the financial condition on a country goes down, it concurrently brings some players down with it. In today's tumult 'globalization' has been replaced by 'decoupling'. It is the notion of every country to encapsulate itself and avoid being influenced by the US recession. The Government is under the responsibility of restoring the consumer's confidence.
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Tourism:
Anything that has demand has purchasing power. Goods lying in shops for sale have purchasing power because they are demanded by people. Shares purchased by you have purchasing power if they have a demand in the secondary market for shares represented by Stock Exchanges. But as we know that during the times when barter system was prevalent, there were problems of impossibility of double co-incidence of wants, lack of standard measure of purchasing power etc. This led to the advent of Money because Money is a commodity which is demanded by people all the time and Money initially was represented through Commodity Money whereby the actual value of the commodity was the value of money which the commodity represented. It was Fiat Money that is prevalent today that was evolved to represent that Money that had purchasing power solely backed by Government Order for that Money to be recognized as such. Economy is said to develop when it develops resources that have a demand. When resources begin to loose their purchasing power, it is a cause of concern for the economy because that is something which would reflect in the Currency Exchange Rate for that Economy. For example, a fall in the demand for Oil could seriously damage the economy of the Middle Eastern countries because Oil represents the Purchasing Power of the Middle Eastern Countries. A person who earns his living as a computer operator in his office, would be debarred of further purchasing power if he suffers an attack of paralysis of his hands. An economy is healthy if people are able to sustain the satisfaction of their wants through such exchanges. By having something which has demand, i.e. Money, you can exchange it for something which you want. But if the purchasing power lessens without a parallel reduction in production, that would ultimately lead to reduction in prices of goods and services meaning a reduction in the purchasing power of the sellers of such goods and services. This is exactly what happens during Recession. An increase in purchasing power generates demand for goods and services which thus generates purchasing power of sellers of such goods and services. Business enterprises actually enable Value Addition to resources through exchanges. For example, I as a manufacturer of goods hire the skills of labourers and purchase raw material. The laborers apply skill to the raw material converting it into a product that has demand. Thus, what I have actually done is that I have exchanged money for value addition. Thus, I have passed on to the laborers Money, which has a demand representing purchasing power and I have now with me products, which have a market, representing my purchasing power. Now when I will sell those products, I will again get back Money but with profit. This profit represents the Value Addition that I enabled through production. But those who purchased those goods and services from me have consumed those goods and services and thus, they need to replenish their purchasing power through selling their skills and labour once again. Thus,
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natural resources including human labour are source of replenishment of purchasing power in the economy. But when people¶s purchasing power would fall, I would be forced to reduce the prices of my products thus resulting in fall in my purchasing power. Such a fall in the market value of goods and services in totality represents a fall in Gross Domestic Product. This marks Recession. I would now fail to generate sufficient Value Addition as I used to do previously. This would result in prolonging the effect of lack of purchasing power representing a fall in the Purchasing power of the nation. This would discourage Foreign Investors resulting in fall in the demand for my nation¶s currency in the International Currency Market bringing down the exchange rate weakening my nation¶s currency. When demand for goods and services decreases without a corresponding decrease in supply of goods and services, it results in a fall in the market value of goods and services. This is a fall in GDP, representing Recession. When Supply of Goods and services decreases without a corresponding fall in demand for them, that results in Inflation where large purchasing power is chasing few goods. This can also happen when Market Value of goods and services has excessively risen owing to rising cost of inputs due to their shortage. For example, rise in the prices of Oil will result in rise in Ticket Fare for travel by Air. Recession arises from shortage of Money pulling down the market value of goods and services. Inflation arises from a fall in the purchasing power of money, supply of money remaining constant.
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IT Sector:
With the warnings flagging the possibilities for US recession, the analysts got a food for thought. All set to sail the same boat. What will be the out turn of the rest of the economies? How will Indian IT industry and economy react to this slow down? Some were saying that economies will suffer a lot and India will also face the harder implications. The contemplations were obvious as US alone accounts for about onefourth of world GDP as cleared by the market reports. Also when Y2K bug was biting or on the time of last IT bubble burst in 2000 India suffered a lot. The Indian index fell by almost 15%. But same can not be mouthed fro this time. In so many years, India has scaled up astronomically. It has shown an enormous growth ratio. The past can repeat itself but when prospects are favoring growth, you can never say what happens next? The time has changed drastically since and then. The economic growth and the strong presence of India on the world map have made it to the non-vulnerable category of the countries. With India the other country sharing the space is China. But there are many implications of this US recession on Indian Economy, some good and bad. Below listed are some of the implications: ·The Indian IT and Its services can be hit harder as US is the largest market for these services. But the implication is supposed to get limited to smaller firms rather than hitting harder on larger firms. Contrary to what above said there are many opportunities waiting for India to bask on with this recession. It can look at the various possibilities available to it in niche areas and win the global mart. The US recession can set new shores for outsourcing services. No doubt Us is the largest client but the reluctance of US companies to offer services due to recession India can take up with this good chance. The appreciation of rupee against dollar is set to hit hard on Indian exporters. The dealings are done in dollar and the payment is done in rupees, so they will get bit lesser than their
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Conclusion
Financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent. India has by-and-large been spared of global financial contagion due to the subprime turmoil for a variety of reasons. India¶s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period. It also has a very comfortable level of forex reserves. The Basel Committee's current and planned initiatives are intended to produce a more robust supervisory and regulatory framework for the banking sector. These efforts, which also are in support of the initiatives and recommendations of the Financial Stability Forum and the G20 leaders, include:
y
better coverage of banks' risk exposures, including for trading book, securitization, and derivative activities; more and higher quality capital to back these exposures; countercyclical capital buffers and provisions that can be built up in good times and drawn down in stress; the introduction of a non-risk based measure to supplement Basel II and help contain leverage in the banking system; higher liquidity buffers; stronger risk management and governance standards; more regulatory focus on system-wide or "macro prudential" supervision; and Greater transparency about the risk in banks' portfolios.
y y
y
y y y y
In discussing the Basel Committee's long-term strategy, MrWellink stated that "we need to establish a clear target for the future regulatory system that substantially reduces both the probability and severity of a crisis like the one we currently are working through." He added that "by providing clarity about the future regulatory framework, we will help reestablish near term confidence, reduce the risk of competitive distortions and limit the degrees of uncertainty for the public and private sector"
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