3- BGE.

IMPACT OF GLOBAL RECESSION ON INDIAN ECONOMY

Business cycle refers to the occurrence of a regular fluctuations in
the level of economic activities in the economy. In business cycle, there are upswings and down swings in business activities So, business cycle simply means that the whole course of business activity which passes through all phases of prosperity and adversity. It has four phases or stages 1. Prosperity Phase : Expansion (Upswing) 2. Recession Phase : from prosperity to recession (down turning) 3. Depression Phase : Contraction ( Downswing) 4. Recovery Phase : from depression to prosperity (upper turning) In a globalised world the prosperity and recession of one country can be transferred to another country

Diagram of Business Cycle Y

Level of Economic Activity

Time

 Meaning of recession : The economic activities slow down Demand starts falling Production starts falling Steady decline in output, income, employment, and profits The businessmen lose confidence and become pessimistic (negative sentiments) it reduces investment The banks try to acquire greater liquidity, so contraction of credit and stoppage of expansion of business Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand.

 General reasons for Recession:

1. Drought Domestic shock, i.e., below normal rainfall. Since the agricultural sector is still significant part of the economy and has strong demand and supply interlinks with the rest of the economy, this is perhaps the shock that causes maximum damage to any developing economy. 2. Fiscal over-spending of the government Domestic shock, which is a non-developmental expenditure undertaken due to political economic compulsion or to alleviate the effect of other shocks, leading to a fiscal burden. 3. Hike in the international price of oil (petroleum) External shock, This is a major import item and is highly price inelastic as a result of which it has a strong impact on the economy. 4. Stagnation or fall in world trade External shock, World trade is a strong determinant of Indian exports and hence any fluctuation in this also affects the economy adversely. 5. Sudden capital outflow induced foreign exchange market shock External shock, This has created a crisis in many developing economies and India is no exception to that. 6. War External shock 7. Financial crisis External shock

 Origin of Global Recession: It is rightly said that, when US sneezes the world catches the cold In the winter 2006/7 US housing prices started to fall for the first time in 15 years. As a result many of the sub prime housing loans became bad loans or default. This meant that hundreds of billions of dollars of financial derivatives which were based on these underlying mortgage loans also lost most of their value. Thus, by the summer of 2007, many American and European banks announced huge losses on their mortgage related securities and investments. Despite trillions of dollars of bail-outs and fiscal stimulus, bank credit continued to be almost rigid, leading to sharp falls in consumer spending, investment, production and foreign trade. The sharp slowdown in economic activity in the US and Europe quickly spread across the world through the channels of a global credit seize and a massive drop in demand for goods and services from major exporting nations like China, Japan, Germany and India. In this way the financial crisis in the US and parts of Europe not only damaged production and also growth in these countries.

Various parameters to identify Recession in India:

When the economy is going through a recession it is obvious that businesses generally will not be doing well due to low aggregate demand in the economy. 1.Inflation rate: High inflation rate leads to lower purchasing power for consumers resulting in lower demand for goods and services. Moreover, a high inflation rate will make business uncompetitive in the international market leading to lower sales for the business. 2.Prevailing interest rates: Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to difficulty for business to find customers willing to buy its product. Lower interest rates will lead to a increase in demand in the economy. 3.Unemployment level: High level of unemployment in the country can also adversely affect a business. People will not have enough money to purchase a firms product.

4.Labor costs: High labour cost will result higher production costs. This will make a firms product more expensive as compared to other firms affecting its sales and profit margin. 5.Levels of disposable income and income distribution: High level of disposable income is good for business producing luxury goods. A large disparity in income distribution will promote businesses dealing in luxury goods as well as inferior goods. 6.Taxes: High level of taxes will lead to low disposable income and contraction of demand in the economy. Business will find it difficult to attract consumers. 7.Tariffs: Tariffs are taxes and imposed on imported goods. If the tariffs are low the domestic market may be flooded with cheap imported goods and the local businesses will have tough time selling their products

Impact on Various Industries in India

1.Impact on Textile Industry: Textile industry has the state of supremacy, second largest employer in India, next to agriculture. Generates employment opportunities for approximately 33.17 million workers directly, and 54.85 million workers indirectly Around 60% of the total garments manufactured in India are exported to foreign markets like EU, US, and Japan, generating revenue of up to US$ 52 billion Economic slowdown in the US and EU has affected the textile business in India, resulting in a drastic decline in the countrys garment exports Almost 8, 00,000 garment and textile employees had lost their jobs

2. Impact on Indian Banking Industry: Banks are like backbone for industries. They provide loans and capital to the business, industry, agriculture etc. Loss of profit and Capital of these banks bring serious threat to the economic development of the country. Indian banks are facing through a tough time of liquidity. Lehman Brothers had invested a great amount in the stocks of Indian banks that have invested in derivatives. Falling down of Lehman had a great impact on the leading international bank, ICICI Bank, a bank that had invested in Lehmans bonds. Banks have suffered losses, including some public sector banks like Punjab National Bank, Bank of India, State Bank of India and Bank of Baroda as they had an exposure to the instruments issued by Lehman and Merrill Lynch. The banking system in India had no direct exposure to the subprime assets that triggered the crisis in the advanced economies. The Reserve Bank had taken a number of measures which contributed to strengthening the flexibility in the Indian banking system

3. Impact on Indian Aviation Industry:

Aviation before recession: Indian aviation industry was expanding There were new budget airlines and private players The number of job opportunities in the industry was going up Students started signing up for courses like airline pilots, flight attendants, ground crew etc. High Aviation Turbine Fuel (ATF) prices Rising labor costs Shortage of skilled labor Excess capacity Huge debt burden Intense price competition Job losses

4. Impact on Indian Stock Market:

We take you through Economic Growth in Advanced nations had close to 2 to 5 % . The biggest falls in the Indian stock market history. March 3, 2008 February 11,2008 January 22, 2008 January 21, 2008 October 24, 2008 October 25, 2008 Investors in Indian markets lost more than 16 trillion Rupees in just 2 days. The ICUs of almost all city hospitals were full. More people have sold the shares in the Indian share market than they bought from the market. This has added to the fall of sensex to lower points.

5. Impact on Automobile Industry:

India is the worlds largest two wheeler manufacturer. India is the worlds second largest tractor manufacturer. India has the fourth largest car market in Asia. India has the worlds largest three wheeler market. India is fourth largest Automobile exporter in the world. Major Automobile Company :TATA MOTORS MARUTI SUZUKI MAHINDRA & MAHINDRA

Uncertain exchange rate and a sudden increase in dollar value against Indian Rupee Delayed Payments from the OEMs (Original Equipment Manufacturer) Alloy and steel prices have also not shown any reduction in their prices Slowdown in automobile industry Challenge of Chinese Automobile Industry. New Innovation

6. Impact on Real Estate Industry:

Contribution to GDP of about 7% .Largest employment generator in the country. Real estate is a growth engine for development of steel and cement sectors and other allied industries Uniformity of land laws, slowdown and approval delays, the developers missed to complete their projects within the boom period. Withdrawing of money from Real Estate sector Major Players in Real Estate Developers are Parsavnath,DLF,Unitech Group and Ansals Increase in prices of inputs due to inflation effecting all areas of economy like cement, steel, etc. Increase in home loan interest rates resulting into additional EMI burden on the borrowers. Demand-supply imbalance Overall downfall in profit and sales Slow down in infrastructure projects Loss of Jobs and shortage of skilled workers

7. Impact on Indian BPO and IT Industry: BPO CONTRIBUTION IN INDIA India has revenues of 10.9 billion USD 30 billion USD from IT and total BPO 5-6% share of the total BPO Industry Employs more than 700,000 people 35 percent of the BPO market worldwide Eastern Europe, Philippines, Morocco, Egypt and South Africa have emerged to take a share of the market Market share of the offshore piece is expected to decline. BPO and IT sector employment opportunity started falling due to global recession attack on India

 Various Steps taken to overcome Recession :

Public should spend wisely and save more. Taxes including excise duty and custom duty should be reduced. In the IT sector, there should be correction in salary offerings rather than job cutting. In real estate the builders should drop prices, so as to bring buyers back into the market. Also, the government should try and improve liquidity, while CRR and SLR must be cut down further Recession has grabbed almost all the organizations of the world. Several people have lost jobs - facing the financial problems. Government - doing best to come out of the problem. Banks are providing business loans at low rate. Government - providing money packages to organizations. If I talk about India, here the situation is still satisfactory if compare it with other countries of the world. Reserve bank of India (RBI) has decreased the rate of interest, CRR and SLR.