GLOBAL RECESSIONAND IMPACT ON INDIA

Group 5Shailendra singh N61Shailendra singh N62Subhash Kumar N63Shweta Malik N66Virender Singh N69Virender Kumar N68Sumeet Hans N64Saumitro Banerjee N57Sourabh Diddi N71

SCHEME OF PRESENTATION

1

•Global Recession

2

•How It Works

3

•Impact on India

4

•Lessons

What is Recession

In economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction.[1][2] During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; bankruptcies and the unemployment rate rises

What is Global Recession

A global recession is a period of global economic slowdown.

(IMF) takes many factors into account when defining a global recession, but it states that global economic growth of 3 percent or less is "equivalent to a global recession

Attributes of Recession

Employment

Investment

Corporate profits.

Predictors of Recession

• In the US a significant stock market drop has often preceded the beginning of a recession

• Inverted yield curve,the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate

• The three-month change in the unemployment rate and initial jobless claims

• Lowering of Home Prices. Lowering of home prices or value, too much personal debts.

Causes

Crisis theory

Tendency of the rate of profit to fall

Currency crisis

Energy crisis

War

Underconsumption

Overproduction

Financial crisis

Effects of Recession

Bankruptcies

Credit crunches

Deflation (or disinflation)

Foreclosures

Unemployment

Government Responses• Most mainstream economists believe that recessions

are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favour the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. Laissez-faire minded economists may simply recommend that the government not interfere with natural market forces.

HOW IT WORKS

Recessions bring anxiety and fear, not to mention financial disaster for many.

The 2008 recession had global effects. An Indian stock dealer copes with news that Indian share prices fell 6 percent.

Problems began when the subprime mortgage industry

collapsed in late 2007.

Indymac was the first of many banks to close its doors. The real estate collapse affected the banking industry that provided mortgage loans, and before long, bank closings took over the headlines. As credit dried up and new construction slowed, unemployment rates spiked.

Some economists define a recession as two consecutive quarters in which the gross domestic product (GDP) decreases. Unemployment often rises as this occurs. And when people are unemployed, they're unable to pay their debts.

Many consumers felt trapped by credit card companies, who raised interest rates and lowered credit limits.

Gas prices approached $4 per gallon in May 2008

Tax payers got a break from the IRS in 2008 and 2009

Instead, financing plans like layaway made a comeback, as shoppers tried

to avoid debt.

The "hemline index" and "lipstick indicator" are two ways retailers (and

even some economists) try to gauge consumer

confidence.

Ordinary Citizens proposed $700 billion in federal bailouts of

investment banks and mortgage buyers.

Citizens take aim at predatory lending and credit card practices.

Meanwhile, as the recession dragged on,

the presidential election heated up.

Senator Barack Obama unveiled a plan to help small business owners provide health

insurance for their employees

By the 2008 election, clean energy was a top

priority in Obama's plan to create jobs and

reduce dependence on foreign oil.

Community gardens sprung up all across the country as food

and energy costs soared

In many ways, the recession has promoted "green" living, as

consumers convert to energy-saving products to help conserve

cash.

IMPACT ON INDIA

Indicator Period 2007-08 2008-09

Growth, per cent

Real GDP Growth April-December 9.0 6.9

Industrial production

April-February 8.8 2.8

Services April-December 10.5 9.7

Exports April-March 28.4 6.4

Imports April-March 40.2 17.9

Stock Market (BSE Sensex)

April-March 16,569 12,366

Rs.per US$ April-March 40.24 45.92

Impact on India Key Macro Indicators

Component Period 2007-08   2008-09

Foreign Direct Investment to India April-February 27.6 31.7

FIIs (net) April-March 20.3 -15.0

External Commercial Borrowings (net) April- December 17.5 6.0

Short-term Trade Credits (net) April- December 10.7 0.5

Valuation Gains (+)/Losses (-) on Foreign Exchange Reserves April- December 9.0 -33.4

Foreign Exchange Reserves (variation)

April-December 76.1 -53.8

April-March 110.5  -57.7

Trends in Capital Flows

Impact on Capital Market

Index Movement in last one year

Impact on yield on 10 years Government Bond

. Fiscal Impact

Govt. did higher expenditure on account of higher crude price, subsidies, debt waiver scheme in 2008-09.

Fiscal deficit doubled from 2.7% of GDP in 2007-08 to 6.8 % (latest) in 2008-09.

Net Market borrowing tripled from Rs. 130 billion to Rs. 329.65 billion.

As initial impact of sub – prime crisis, followed by cuts in US fed fund rates, resulted in massive jump in net capital in flow.

RBI sterlize liquidity by increase in cash reserve rates and through market Stablisation scheme (MSS)

Policy rates were also raised

Limited exposure on complex derivations.

Lower presence of foreign banks also minimised direct impact.

IMPACT OF SUB PRIME CRISIS

Impact on Exchange Rates

ACTION BY CENTRAL BANK

Cash Reserve Ratio brought down to 5% in January 2009 from 9% (September 2008) injecting Rs. 1600 billion in primary liquidity.

Statutory liquidity ratios brought down, opening of refinance windows, refines to SIDBI and EXIM banks

Repo and Reverse Repo rates are cut down from 9% to 4.75% and 6% to 3.25% respectively.

MSS operations were reversed Balance Rs. 860 billion end March 2009 against Rs. 1754 billion at May 2007.

Various monitory and liquid measures released

liquidity of Rs. 4900 Billion since mid September 2008 (about 9% GDP)

Banks were advised to step up lending to core sectors.

Banks were advised to bring down BPLR. Restriction on interest rate to bulk deposits. Restrictions loosened on External commercial

borrowing by corporates.

Full but gradual opening of current account.

Foreign investment flows are encouraged.

External commercial borrowing is subject to ceiling and end – use restrictions.

Macro ceiling stipulated on portfolio investment in Govt. Securities and Corporate Bonds by FIIs.

Imposition of prudential limits on Banks, such as inter-bank liabilities, borrowing and lending, money market, assets - liability Management for both on and off balance sheet terms.

STRENGTH OF INDIAN FINANCIAL SECTOR

Implementation of Based II ……. Minimum 9% CRAR. CRAR of all scheduled commercial banks at 13% at end

March 2008. Single factor stress tests reveal that Banks can

withstand shocks on account of change in credit quality, interest rates and liquidity conditions.

Strict prudential norms towards income recognition, Asset classifications and provisions by the Banks.

WHY THE INDIAN FINANCIAL SECTOR WEATHERED THE STORM

Negligible direct exposure to toxic assets which contaminated Western Banking System.

Banks credit quality remained high.

Credit Growth apx. 30% during 2004-07.

RBI tightened prudential norms CRR at 13% at March 2008 end against regulatory requirement of 9%.

Net NPA at 1% of net advance and 0.6% of assets. Better management of financial capitalism. High saving rate of indian house hold.

• PRE-POLL CRITICAL ISSUES

Global Financial crisis.

Razor-thin majority Government.

Melt down in Capital Market. Sensex touching a low of 8160 in April 2009, down from a peak of 20728, a fall of 61%.

Weakening economy. Rising job losses in export sector.

General Election in May 2009. Political Uncertainty

Formation of 4 front – UPA led by Congress, NDA led by BJP, Third Front – led by Left Parties.

No coalition likely to get majority

ECONOMIC OUTLOOK

Accommodating monetary Policy

Reverse Repo rate

3.25%

CRR cut by 4%

Repo Rate 4.5%

SENSEX INDEX AND OTHER TRENDS

100-----192------Sensex

100-----134-----Gold

100-----171-----Silver

U Shaped recovery

High Fiscal deficit

Rise in Oil Price

Food price Inflation

Capital Inflows

Declining Dollars

Asset bubble

Changing World Order

Projected growth

2009-106.75%

2008-096.7%

Agriculture (-) 2% 1.6%Foodgrain Production

223MT 234MT

Industrty Growth 8.2% 3.9%Services 8.2% 9.7%Savings Rate 34.5% 33.9%Current A/c deficit

(-)2% (-)2.6%

Exports projected

$188.9Bn $175.2Bn

Capital inflows $57.3 Bn $ 9.1 Bn

GDP SEEN GROWING

6.75%

Lessons From recession• Avoid high volatility in monetary policy• Appropriate response of monetary

policy to asset prices• Manage capital flow volatility• Look for signs of over leveraging• Active dynamic financial regulation

Capital buffers, dynamic provisioning • Look for regulatory arbitrage

incentives/ possibilities