Term paper on Micro

Economics

Topic- Impact of global

financial crisis on
industrial sector of Indian
economy

Submitted by:
Zonunmawii
R/No.- 22
Section- S1013
Regn No.- 11003689
Acknowledgement
My deepest thanks to my lecturer Mr. Mithun
Kumar Guha for the guidance and supports in
preparing my term paper.

I would also like to thank my institution and faculty

members who have taken troubles to prepare the
term paper topics without whom this project would
have been a distant reality.

Introduction
Industry accounts for 28% of the GDP and employ 14% of
the total workforce. However, about one-third of the
industrial labour force is engaged in simple household
manufacturing only. In absolute terms, India is 16th in the
world in terms of nominal factory output. A financial crisis
is a situation when money demand quickly rises relative to
money supply. Until a few decades ago, a financial crisis
was equivalent to a banking crisis. Today it may also take
the form of a currency crisis. Many economists have come
up with theories on how a financial crisis develops and
how it could be prevented. There is, however, no
consensus and financial crises are still a regular
phenomenon. A stock market crash is an example of a
financial crisis. In short term financial crisis can also be
called ‘recession’. Economics describe recession as
reduction of country’s GDP (Gross Domestic Production)
for two consecutive quarters i.e. an increase in
unemployment (1.5% in a period of 12 months).

The National Bureau of economic research in USA defines

a recession more broadly as a significant decline in
economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP
growth, real personal, income employment, industrial
production and whole sale retail sales. Some economists
suggest that a recession occurs when the natural growth
rate in GDP is less than the average of 2%. A recession
may be defined as a contraction phase of the business
cycle or a period of reduced economic activity.

America is the most effected country due to global

financial crisis, which comes as a bad news for India. India
has most outsourcing deals from the US. Even our exports
to US have increased over the years. Exports for
January,2007 declined by 22 per cent.

Global financial crisis are the result of reduction in the

demand of products in the global market. Financial crisis
can also be associated with falling prices known as
deflation due to lack of demand of products. Again, it
could be the result of inflation or a combination of
increasing prices and stagnant economic growth in the
west.

Financial crisis in the west, especially the United States, is

a very bad news for India. Our companies in India have
most outsourcing deals from the US. Even our exports to
US have increased over the years. Exports for
January,2007 have declined by 22 per cent. There is a
decline in the employment market due to the recession in
the West. There has been a significant drop in the new
hiring which is a cause of great concern for us. Some
companies have laid off their employees and there have
been cut in promotions, compensation and perks of the
employees. Companies in the private sector and
government sector are hesitant to take up new projects.
And they are working on existing projects only. Projections
indicate that up to one crore persons could lose their jobs
in the correct fiscal ending March. The one crore figure
has been compiled by Federation of Indian Export
Organisations (FIEO), which says that it has carried out an
intensive survey. The textile, garment and handicraft
industry are worse affected. Together, they are going to
lose four million jobs by April 2009, according to the FIEO
survey. There has also been a decline in the tourist inflow
lately. The real estate has also a problem of tight liquidity
situations, where the developers are finding it hard to
raise finances.

IT industries, financial sectors, real estate owners, car

industry, investment banking and other industries as well
are confronting heavy loss due to the fall down of global
economy. Federation of Indian chambers of Commerce
and Industry (FICCI) found that faced with the global
recession, inventories industries like garment, gems,
textiles, chemicals and jewellery had cut production by 10
per cent to 50 per cent.

India's merchandise export figures, balance of payments

surpluses and foreign exchange reserves suggest that the
country has weathered the global recession well.
Following on figures pointing to a robust recovery in GDP
growth, the evidence that India's month-on-month export
growth has returned to positive territory after 13 months
has generated much optimism. The value of aggregate
merchandise exports during November 2009 stood at
$13,199 million (Rs 61,462 crore), which was 18.2 per
cent higher than its level in November 2008.

Part of the increase was on account of dollar depreciation,

with the rupee value of exports rising by a lower 12.4 per
cent. But even this is significantly positive. However, there
is a case for exercising caution when interpreting this
evidence as a sign of recovery.

First, there is a clear base effect operative here. The

monthly value of India's exports in dollar terms had begun
to decline since August 2008 and had fallen by 41 per cent
by November 2008 as a result of the impact of the global
recession.

Also, November 2008 was the first month in recent times

when export values declined significantly (by 13.5 per
cent) when compared with the corresponding month of the
previous year (Charts 1 and 2). Since the November 2009
performance is being compared with a month that saw a
sharp downturn, even a modest recovery in absolute
levels can deliver a creditable month-on-month growth
rate.

Second, in absolute terms the dollar value of exports in

November 2008 was below its July 2008 peak value by 31
per cent.

Third, India's exports in November 2009 were in absolute

terms below the average level of July to September 2009,
when the first signs of the export downturn bottoming out
had been observed, with month-on-month declines falling
from a high of 36 per cent in April 2009 to 14 per cent in
September 2009. Since then export performance has
slipped rather than improved.

In sum, if at all anything can be said about the export

figures it is merely that the downturn in exports has
possibly bottomed out, but any significant recovery is yet
to come. In fact, the evidence suggests that we are still
faced with the danger that export performance could slip
again.

The limited buoyancy on the merchandise export front is

disconcerting, also because of the effect that the global
recession has had on India's exports of software and
business services.

Data for receipts from abroad under these heads are

released by the Reserve Bank of India on a quarterly basis
and are now available for the first two quarters of 2009-
10. Those figures suggest that exports of software
services fell from $24.2 billion during April to September
2008 to $21.4 billion during April-September 2009, and
exports of miscellaneous non-software services fell much
more sharply from $14.9 billion to $7.8 billion. The hardest
hit in the latter area were business services, receipts from
which fell from $8.4 billion to $5.1 billion between April-
September 2008 and April-September 2009.

The net result of this was that, even though remittances

from non-resident Indians remained strong, net invisibles
receipts fell sharply from $48.5 billion during April-
September 2008 to $39.6 billion during April-September
2009. Given the importance of invisibles in the current
account of India's balance of payments, this has meant
that the country's current account deficit has widened
from $15.8 billion to $18.6 billion.

Unless this trend has corrected itself over the subsequent

two months, the reduction in the rate of export decline
does not amount to much in terms of a strengthening of
the balance of payments since the global recession had its
first impact.

Despite these developments, the picture of India's balance

of payments is one of strength rather than of weakness.
The country's foreign exchange reserves, which fell by
$2.5 billion during April-September 2008, rose by $9.5
billion during April-September 2009.

The main reason for this was the large inflows of equity
and debt capital. Inward FDI flows, which totalled $20.7
billion during April-September 2008, remained at $21
billion during the corresponding period of 2009. Portfolio
inflows, which had fallen by $5.6 billion during April-
September 2008 when foreign institutional investors
booked profits and repatriated capital to meet
commitments at home, rose by $17.9 billion during April-
September 2009, when the crisis in the developed
countries was still ongoing.

India clearly has once again attracted the attention of

institutional investors, resulting in a sharp rebound in the
stock market in the country.

This was not just an Indian phenomenon. According to the

Financial Times (January 1, 2010): “Russia's Micex index
rose 802 per cent over the decade after a boom in
commodities spurred its oil and metals industries. Brazil's
Bovespa, again driven by the commodity boom, climbed
301 per cent. India's Sensex jumped 249 per cent.”

And property prices in emerging markets are once again

rising. The reason for this rebound is now well-recognised.
The boom has been driven by investments financed with
cheap credit pumped into the economy as part of the
effort to resolve the crisis in the financial sectors in the
US, the UK and Europe.

Exploiting this access, the banks, especially investments

banks, have gone back to their old ways and decided to
use the cheap money offered by central banks and
governments to speculate in stock, commodity and
property markets, wherever they appeared profitable.

The fact that some emerging economies were much less

affected by the recession and had active even if not
buoyant stock and property markets, has made the
investment of cheap money in these destinations an
attractive option. In the event, the rush of capital to these
markets fuelled a boom that delivered better than
expected profits.

India too has been a “beneficiary” of this speculative rush.

As a result, according to the Reserve Bank of India's latest
estimates of India's net international investment position,
the stock of liabilities of the country to non-residents on
account of direct investments and portfolio investments in
equity securities has risen by $28.6 billion and $22 billion
respectively between March and September 2009 (Chart
3).
The fact that a substantial share is in the form of direct
investment flows must not give too much comfort,
because the distinction between direct and portfolio
investments is not clear, with equity acquisitions of more
than 10 per cent of the stock of a company by a single
foreign investor being treated as direct investment. Very
often even these investments are by financial investors
looking to make capital gains rather than as long-term
investors. They are as much “hot money” as pure portfolio
investments.

Causes of Recession
• Currency crisis
• Energy crisis
• War
• Under consumption
• Overproduction
• Financial crisis
• Price of fuels

Impact of Global Financial

crisis on Indian Car Industry
Indian car industry is one of the most promising car
industries across the globe. It has gradually
strengthened its foothold in the international arena as
well. The country is dealing with many car
manufacturers, dealers, and associations in various
different countries including U.S. From some countries,
India imports cars and car components and to some
India exports. With this, the global financial crisis is
clearly to have its impact on the Indian car
industry. Though India has witnessed a growing
customer base, it has not inoculated them from the
global crisis. The crippling liquidity and high interest
rates have slowed down the vehicle demand. However,
the fall down started in July with a decline of 1.9% and
thereafter the industry saw a major slowdown in
October 2008.
Business Analysts reported that Indian car market had
recorded a continuous growth of about 17.2% over the
last few years but this year the recession has brought
the growth to about 7-8%. Be it Tata Motors or Maruti
Suzuki or even Mercedes-Benz, the car market has gone
down to a tremendously negative terrain.

Tata has reported that its profit fell from 34.1 percent to
3.47 billion rupees because of the slower growth in the
industrial production. Further, the company has also
recorded a 20% decline in the sales as compared to last
year. And with its Nano making a big impact before the
downturn as such, but after the downturn may hold a
bleak future for the world's cheapest car, because the
consumer spending has gone very low.

Even Maruti Suzuki reported a 7% decline in sales due

to rising cost of the materials and a falling rupee value.
Even Mahindra & Mahindra, the India's largest SUV and
tractor manufacturer, is not immunized, showing profit
fall of 20.6%.

In the recent months, banks and car financers have

disbursed the approved loan because of the cash
crunch. Payments from the OEMs (Original Equipment
Manufacturer) have also been delayed and in most
cases banks have deferred or disbursed the approved
loan. OEMs take this loan from banks and financers for
establishments, capacity expansions, or even for the
requirement of high-end equipments for car designing
and production.

In addition, the uncertain exchange rate and a sudden

increase in dollar value against Indian Rupee have
contributed to the slowdown. Increasing dollar value
has raised the landed cost of imported machine tools
and even raw materials required for production by
about 14%. Alloy and steel prices have also not shown
any reduction in their prices and this high price has
actually forced the car manufacturers to hike the car
prices. To make the matter worse, it is believed that
 steel manufacturers across the country are looking for
re-imposition of custom duty on steel. Increased cost of
raw materials directly affects the cost of the car rolled
out, eventually tagging a particular car model with a
higher price tag.

The conclusion is that the present global recession has

hit very hard on the Indian car industry.

Impact of Global Financial

crisis on Indian IT industry
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. The financial press often uses the
recessionary definition of two or more consecutive
quarters of declining Gross Domestic Product (GDP). GDP
is defined as the total market value of all final goods and
services produced within the country in a given period of
time.

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the
US. India's exports to the US have also grown
substantially over the years. Indian IT companies with big
tickets deals in the US would see their profit margins
shrinking. The whole of Asia would be hit by a recession as
it depends on the US economy. Asia is yet to totally
decouple itself (or be independent) from the rest of the
world, say experts. Outsourcing market is suffering from
the recession in whole world and India IT sector is highly
dependent on outsourcing mainly 60% on US.

IT industries are confronting heavy loss due to the fall

down of global economy. One danger meanwhile is of a
dip in the employment market. There is already short
amusing story, evidence of this in the IT and financial
sectors, and reports of quiet downsizing in many other
fields as companies cut costs. E.g.:- BPO Sector $11 Billion
Sector projected to cut 2.5 lakhs starting first quarter
2009. Nasscom (7,00,000 Jobs) IT Companies are
predicted a drop of 15% in growth from 30% last year in
BPO Sector.

Opportunities for Indian IT due to US recession US

recession may be a boon for Indian offshore software
companies. The impact of recession is higher to small and
medium sized (SMEs) enterprises whose bottom lines get
squeezed due to lack of spending by consumers SMEs in
the US are under severe pressure to increase profitability
and business margins to survive. This will force them to
outsource and even have M&A arrangements with Indian
firms. India is going to be a great beneficiary of this trend
which will minimize the impact of the US recession on
Indian industry By March 2008, India had received SME
outsourcing deals worth $7 billion from the US as against
$6.2 billion in the previous year. Eg. (Satyam got 15 new
Outsourcing Projects).

There should be correction in salary offerings rather than

job cutting. Taxes including excise duty and custom duty
should be reduced to lighten the adverse effect of
economic crunch on various industries. IT Industry has
been largely hit by Recession, resulting in Lay-Offs. But
people with skill set are required in the Industry. Layoffs in
Technical Sector need not be a doom and gloom. They
could actually boost innovation as laid-off engineers,
scientists and other skilled individuals decide to pursue
their own ideas. Calling it “forced” entrepreneurship.

Effects of Recession
• Bankruptcies
• Credit crunches
• Deflation
• Foreclosures
• Unemployment
Impact of Global financial
crisis on stock markets

Some recessions have been anticipated by stock market

declines. In Stocks for the Long Run, Siegel mentions that
since 1948, ten recessions were preceded by a stock
market decline, by a lead time of 0 to 13 months (average
5.7 months), while ten stock market declines of greater
than 10%in the DJIA were not followed by a recession.
The real-estate market also usually weakens before a
recession. However real-estate declines can last much
longer than recessions. Since the business cycle is very
hard to predict, Siegel argues that it is not possible to take
advantage of economic cycles for timing investments.
Even the National Bureau of Economic Research (NBER)
takes a few months to determine if a peak or trough has
occurred in the US.
During an economic decline, high yield stocks such as fast
moving consumer goods, pharmaceuticals, and tobacco
tend to hold up better .However when the economy starts
to recover and the bottom of the market has passed
(sometimes identified on charts as a MACD), growth stocks
tend to recover faster. There is significant disagreement
about how health care and utilities tend to recover.
Diversifying one's portfolio into international stocks may
provide some safety; however, economies that are closely
correlated with that of the U.S. may also be affected by a
recession in the U.S. There is a view termed the halfway
rule according to which investors start discounting an
economic recovery about halfway through a recession. In
the 16 U.S. recessions since 1919, the average length has
been 13 months, although the recent recessions have
been shorter. Thus if the 2008recession followed the
average, the downturn in the stock market would have
bottomed around November 2008.

Impact of Global financial

crisis Telecom industries
People will not stop to communicate with each other due
to global crises rather it has been seen that it will increase
much particularly with mobile communication. With cheap
cell phones available in the Indian market and cheaper call
rates, the sector has become the necessity and primary
need of everyday life. Telecom sector, according to
industry estimates, year 2008 started with a subscriber
base of 228 million and will likely to end with a subscriber
base of 332 million – a full century. The telecom industry
expects to add at least another 90 million subscribers in
2009 despite of recession. The Indian telecommunications
industry is one of the fastest growing in the world and
India is projected to become the second largest telecom
market globally by 2010.

Despite all the losses it suffered, the global financial crisis

had a good impact on the Indian telecom industries.

Impact of global financial

crisis on Media and
Entertainment Industry
In current bad times, where people are losing jobs and
getting enough time to watch TV, they will seek
entertainment at home and hence advertising revenues
will increase for the commercial channels. Also businesses
like production of religious texts and religious materials,
religious channels will do well. The TRP of religious
channels will increase compare to the other
entertaining/commercial channels.

According to a report published by the Federation of

Indian Chambers of Commerce and Industry (FICCI), the
Indian M&E industry is expected to grow at a compound
annual growth rate (CAGR) of 18 per cent to reach US$
23.81 billion by 2012. According to the PWC report, the
television industry was worth US$ 5. 48 billion in 2007,
recording a growth of 18 per cent over 2006. It is further
likely to grow by 22 per cent over the next five years and
be worth US$ 12. 34 billion by 2012.

Conclusion
Peoples are thinking that recession is becoming a disaster
for the Indian economy but in my believe recession is
actually a great time to start a new venture. Great time to
take advantage of the lack, when talent is available,
resources is cheaper. Facts whenever there is lack person
outsource more. Western companies started viewing India
as good place to outsource big research work, website
development, designing work etc. Long-term market then
they can say when the recession in the US financial
market come down, Indian IT and BPO/ KPO companies will
be in good position to get more outsource projects from
the US companies. Recently Indian outsourcing software
and web development industry have started a new
strategy to compete with recession by keeping their
expenses as such and higher the working time of the staff,
higher the quality of out put and reduce the out put time.
•Eg:- Apex Decisions (Pilot Project Strategy).

Bibliography
• www.google.com
• www.harvard.org
• www.wikipedia.com
• www.oppapers.com