Final 3 Business Cycle

7/31/2019 Final 3 Business Cycle

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Business cycle is the periodic up & down movements ineconomic activities.

The term business cycle (or economic cycle) refers to

economy-wide fluctuations in production or economicactivity over several months or years.


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Lets Define

John Maynard Keynes

According to John MaynardKeynes,Business cycle or Trade cycle iscomposed of periods of goodtrade characterized by rising

price and low unemploymentaltering with periods of badtrade characterized by fallingprice and high unemploymentpercentage.


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Phases of Business Cycle

The prosperity phase(Expansion)

The recession phase

The depression(Contraction)phase

The recovery phase


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RecessionIt means slowing downprocess of all economicactivities.

In this stage, there are

workers who are willing towork, but cannot,because no one is willingto hire them.


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It all started in U.S. ..

ConsumptionBased

economy

Credit freeflow for U.Sconsumers


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Impact of recession on IndiaA slowdown in the US economy is bad news for India because:

Indian companies have major outsourcing deals from the US.

India's exports to the US have also grown substantially overthe years.

Indian companies with big tickets deals in the US are seeingtheir profit margins shrinking.

More people have sold the shares in the Indian share marketthan they bought in the recent weeks. This has added to thefall of sensex to lower points.


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Sectors Most Affected .


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Optimistic sectors of the Economy


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DepressionThis is the lowestebb of economiccycle.

And it is followedby the next turningpoint in the cycle,when new growthprocess starts afresh.


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Great Depression Of 1929 October 29, 1929 Stock

Market Crash in UnitedStates of America.

Steep Decline in IndustrialOutput and rise in levels of

unemployment. By 1933 nearly 13 to 15

millions of Americans wereunemployed.

Bank Failures in terms oftheir own survival.

Reduction in Purchases.

American Economic Policy.

Drought Conditions.


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Impact Of Depression In Indian Economy

The effect of depression was

felt through a sharp decline inagricultural prices and a severepressure on the balance ofpayment of the country.

It did not affect industrialoutput considerably or directemployment because thenewly adopted policy ofprotection has given Indian

industry a shelter in domesticmarket and also there wasdiversion of demand from highpriced imports to low pricedIndian goods.


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Agriculture

Income fell in Agricultureprices not because ofoutput but a fall in prices.

Food crops to Cash cropscultivation.

Value of Agriculturalcrops fell from Rs.1,021crores in 1928-29 toRs. 474crores in 1933-34and increase in burden ofseveral debts.

Restrictions on Cash Flow.

Boycott of foreign goods.


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Month & Year PriceSeptember 1929 143

September 1931 91

December 1931 98

March 1932 94

Export & Import Great fall in the prices of export.

Imports fell by 47% and Exports fell by 49%

between 1929 and 1932. By 1931 suspension of Gold Standard by

England, India and other countries.

Prices of Exported articles fell more thanImported articles.

Effect of Export on Agricultural products and

Import on Manufacturing goods.

Month & Year PricesExportImport

September 1929 217 167

March 1931 132 144

September 1931 116 139

Export & Import Percentage

Export

Tea 51

Raw cotton 49Raw Jute 43

Import

Other Commodities 36

Cotton Manufactures 27

Metal 19


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Railways

Decline in passenger traffic

and freight affect therailways.

In 1931 Government appointRetrenchment Committee.

In 1932 Pope Committee was

appointed to suggesteconomies in working ofrailways.

In 1936 WedgewoodCommittee was appointed toexamine the financial positionand suggest measure forimprovement.

Protection from unfaircompetition from roadtransport.


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Countries Depression Began Recovery Began

United States 1929:3 1933:2

Great Britain 1930:1 1932:4

Germany 1928:1 1932:3

France 1930:2 1932:3

Canada 1929:2 1933:2

Italy 1929:3 1933:1

Belgium 1929:3 1932:4

Netherlands 1929:4 1933:2

Sweden 1930:2 1932:3

Denmark 1930:4 1933:2

Japan 1930:1 1932:3Poland 1929:1 1933:2

India 1929:4 1931:4

Brazil 1928:3 1931:4

South Africa 1930:1 1933:1


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RecoveryDepression phasecannot continueindefinitely.

Prices of variouseconomic resources are

low, some business firmsthat have previouslyceased operations willattempt to operateagain


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Recovery phase

In business cycle after recession, Recovery phase comesand in this phase the business start getting its positioninstead of getting more worse. If in recession furtherinvestment is not made then business can go forliquidation but if Productive capital investment is made

in recession then Recovery phase in business cyclecomes. If the company makes good decisions in thisphase then business start establishing again.


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More on recovery phase

Consequently, the levels of employment, earnings andproductivity augment steadily in the fiscal system. In theprior phases of the revival stage there is considerableexcess or idle capacity in the fiscal economy so thatproductivity hikes devoid of a proportionate hike in

aggregate costs. However, as phase goes on productivity becomes less

elastic, restricted access, appear with rising costsdeliveries are trickier and plants may have to beextended. Under these stipulations, prices rise.


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Recovery - continued The turning point from depression to expansion is termed as Recovery

orRevival Phase.

During the period of revival or recovery, there are expansions andrise in economic activities. When demand starts rising, productionincreases and this causes an increase in investment. There is a steadyrise in output, income, employment, prices and profits. Thebusinessmen gain confidence and become optimistic (Positive). This

increases investments. The stimulation of investment brings about therevival or recovery of the economy. The banks expand credit,business expansion takes place and stock markets are activated.There is an increase in employment, production, income andaggregate demand, prices and profits start rising, and businessexpands. Revival slowly emerges into prosperity, and the businesscycle is repeated.

Thus we see that, during the expansionary or prosperity phase, thereis inflation and during the contraction or depression phase, there is adeflation.


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Example

After registering a downturn in the period from February 2007 (hencepredating the cyclical downturn), the leading index started showinga sharp upturn from September 2007 to July 2008. This movementcould have indicated that a recovery from the cyclical downturn

was on the offing. However there is no scope to confirm this since inend-2008, the global crisis struck India and the growth storydramatically changed


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Oil, Commodities Down 25%: Recovery to pick uppace

The fact that oil and all major commodities are down more than25% from about a year ago is an indicator that the recovery inthe Indian economy is set to pick up the pace.

My previous analysis suggested the Indian long-term growth storyis intact and that a recovery is now underway from a short-termslowdown.

Here are some of the latest news and data that reinforce myhypothesis:

Corporate India has posted a robust top-line and bottom-linegrowth of around 20% for the March 2012 quarter. It would beridiculous, nay insane, to consider a 20% bottom-line growth as aslowdown!

FII remain long-term bullish based on equity inflows, with massivenet inflows of moke than $ 7 Bn so far during 2012.


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Oil, Commodities Down 25%: Recovery to pick up

pace

Heres a PTI report from a few days back, on what Indias topbankers had to say: Amid a growing number of industry leadersexpressing anguish over policy paralysis, top banker ChandaKochhar has said that people are talking more about challenges

while taking the positives for granted. Kochhars mentor and ICICIBank Chairman K V Kamath has also sounded an optimistic note. Inhis latest letter to ICICI Bank shareholders, Kamath said he isconfident about a robust and sustained (economic) growth overthe medium to long term.


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J.P. Morgan upgraded Indian equities to overweight fromneutral, despite acknowledging the risk factors facing theeconomy, encouraged by what it called a number of more positivefactors including historic valuations. I usually dont give much

credence to reports from agencies like S&P, Moodys, GoldmanSachs, Morgan Stanley and most others. However, J.P. Morgan India,under Kalpana Morparia, seems to have got the long-term trendright, even as far back as October 2008 when the markets weremaking a capitulation bottom


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In September 2011, they had the courage to call the IIP numbersmisleading and take a stand that economic growth is not collapsing.Among the major global financial firms, J.P. Morgan is not just the firstout of the blocks in acknowledging the strengths of the India story,but it has also made a bullish call when pretty much every othermajor firm has made a bearish call. That takes a lot of courage in the

murky world of large and influential financial firms.


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Prosperity

A period where continuousexpansion of economicactivity happens.


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Final 3 Business Cycle

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