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A
Project Study ReportOn
Training Undertaking at
INDIA NIVESH SECURITIES PVT. LTD
IMPACT OF RECESSION ON INDIAN FINANCIAL MARKET
MBA
SUBMITTED BY SUPERVISED BYSUMIT JETHI Mrs. Minakshi NagarMBA (FM) LECTURER INID.2009MBA055 FINANCE MANAGEMENT
2009-2011
GECJ JHALAWAR
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Trust..We Earn It!
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Table of Content
Acknowledgement
Preface
Executive summary
Objective of study
Introduction to industry
Introduction of organization
Introduction of Recession
Meaning of Recession
Causes of Recession
Reason of Financial Crisis
Recession Attribute
Market & Recession
Today v/s the 1980-82 Recession
Global Economic
Recession & Politics
Current crisis in US
Impact of an American Recession on India
Consequence of US Recession on India job market
Recession Impact on India
Response to the crises
Conclusion
References
Acknowledgement
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We know that the success is backed up by the helping hands of many people. The same is
the case y my project. Even my project wouldnt have been possible without the eminent
guidance of my teachers, suggestion of my fellows, and all those sources which I used for
preparation of this project.
I am thankful to Mrs. Aditi Dwiwedi, Lecture, GECJ, Jhalawar for giving me continuous help
and guidance for the project. I also want to give him thanks for his vital suggestions and
recommendations in preparation of the report.
I am grateful to Mr. Manoj Porwal for his valuable guidance and necessary encouragement
in this project.
I am in an extreme dilemma as to how I can appropriately acknowledge my deep gratitude
and thanks to Mr. Raj Saini for giving there valuable time and suggestion for this work.
Thanks are due to Dr .Sharad Maheshwari, (HOD) GEC Jhalawar and Mr. Hitesh Sharma. ,
Asst. Professor GEC Jhalawar for kind cooperation during the course of study and
motivating behaviour.
I express my heart full gratitude to family, who assisted and supported to accomplish my
goal. Above all, I am thankful to the almighty that blossomed me with his blessings for the
completion of the project.
SUMIT JETHI
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Preface
The purpose of the research project is carried out to study that how does recession affect
on Indian Financial market. The study reveals the fact of efficiency of Indian capital market
as compare to other country like America and Japan
The research study is carried out in an orderly manner and it is considered for
understanding well about mentioned areas i.e. History of Indian capital market, Primary &
Secondary market, Regulatory bodies, Stock Exchange, comparison with other country,
problems, Findings & Conclusion, Suggestions, and Bibliography will reveal the study result
carefully.
Hope that you will read a good topic on the research base.
Thanks.
Executive Summary
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Objective
Objective of the study
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To have an insight about the Indian Financial Market Recession.
To understand the reasons behind huge fluctuations in Indian Financial Market in
India.
To analyze the psychology of market players in Indian Financial market.
To know the role of Recession in Financial Market in India.
To study the role of cause of Recession.
To understand the effect and causes at Indian Financial Market.
To analyze risk management system in Indian Financial market.
To analyze how fluctuations are Financial calculated.
Chapter 1
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INTRODUCTION TO INDUSTRY
1.1 History of Capital Market in India
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The earliest records of security dealings in India are meager and obscure. The
East India Company was the dominant institution in those days and business in its loan
securities used to be transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place
in Bombay. Though the trading list was broader in 1839, there were only half a dozen
brokers recognized by banks and merchants during 1840 and 1850.The 1850's witnessed a
rapid development of commercial enterprise and brokerage business attracted many men
into the field and by 1860 the number of brokers increased into 60.In 1860-61 the American
Civil War broke out and cotton supply from United States of Europe was stopped; thus, the'Share Mania' in India begun. The number of brokers increased to about 200 to 250.
However, at the end of the American Civil War, in 1865, a disastrous slump began (for
example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs.
87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they formally established in
Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known
as The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same
street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was
consolidated.
1.2 Cities in Stock Market Operations
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Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After
1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were
floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the
brokers formed "The Ahmedabad Share and Stock Brokers' Association".
What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,
which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom
between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock
Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on the way in India
with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel
Company Limited in 1907, an important stage in industrial advancement under Indian
enterprise was reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies
generally enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of "The Madras Stock Exchange" with
100 members. However, when boom faded, the number of members stood reduced from
100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a
rapid increase in the number of textile mills and many plantation companies were floated. In
1937, a stock exchange was once again organized in Madras - Madras Stock Exchange
Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange
Limited).
Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the
Punjab Stock Exchange Limited, which was incorporated in 1936.
1.3 Indian Stock Exchanges - An Umbrella Growth
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The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a
supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found in the stock market as the only outlet for their activities. They
were anxious to join the trade and their number was swelled by numerous others. Many
new associations were constituted for the purpose and Stock Exchanges in all parts of the
country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940)
and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the
Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,
amalgamated into the Delhi Stock Exchange Association Limited.
1.4 Post-independence Scenario
Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchangewas closed during partition of the country and later migrated to Delhi and merged with Delhi
Stock Exchange.Bangalore Stock Exchange Limited was registered in 1957 and recognized
in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central
Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only
Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established
exchanges, were recognized under the Act. Some of the members of the other Associations
were required to be admitted by the recognized stock exchanges on a concessional basis,
but acting on the principle of unitary control, all these pseudo stock exchanges were
refused recognition by the Government of India and they thereupon ceased to function.
Thus, during early sixties there were eight recognized stock exchanges in India (mentioned
above). The number virtually remained unchanged, for nearly two decades. During eighties,
however, many stock exchanges were established: Cochin Stock Exchange (1980), UttarPradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange
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Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock
Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh
Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989),
Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock
Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990)
and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are
totally twenty one recognized stock exchanges in India excluding the Over The Counter
Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited
(NSEIL).
Chapter 2
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INTRODUCTION TO ORGANIZATION
India Nivesh Limited (Parent Company)
India Nivesh Limited (INL) is a Public Limited Company originally incorporated on May 25,
1929, listed on Bombay Stock Exchange Limited (BSE). The company has acquired Debts /
Assets of sick companies and settled with Financial Institutions and Promoters and
acquired the assets of these companies. Basically, INL is into the business of settlement /
acquisition of stressed assets. INL is also registered with Reserve Bank of India (RBI) as a
Non Banking Financial Company (NBFC). The Company is a professionally managed
Company and has a very dedicated and experienced team of professionals who are
competent to identify value assets. In a short span of time INL has been able to create a
niche for itself and has already completed 10 to 15 acquisitions of Debt Assets IndiaNivesh
is a fast growing professionally managed financial services group with presence across all
major cities and metros in India. Our core businesses includes Stressed AssetManagement, Investment Banking, Securities Broking, Commodities & Currency Broking,
Insurance Broking, Depository Services, Wealth Management and various other financial
products. IndiaNivesh is a pioneer in providing customized services to Government
Institutions, Public Finance Institutions, Foreign Institutional Investors, Domestic Institutions
(Mutual Funds, Insurance Companies), HNIs, Corporates and SMEenterprises.
We serve as a bridge for creating wealth and preserving it.IndiaNivesh Stands for Investments in Ind In our Name the (I) resembles an India flying
high with its wings spread all over the world ia. The three red curves on the left wing
represent Trust, Commitment and Results
Trust - The trust our clients have on us
Commitment - The Commitment we have towards our clients
Results - The results which we deliver for our clients
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At India Nivesh, what matters the most is our ability to earn trust and respect of our clients.
We make a firm commitment to all our work enabling us to deliver the results as desired by
our clients And we earn our clients trust through our commitment and performance and we
rightly claim Trust..we earn it
IndiaNivesh is a professionally managed organisation with a group of eminent professionals
at the helm of its affairs
IndiaNivesh Commodities Private Limited
INCPL is the commodities trading arm of India Nivesh group and it was incorporated in the
year 2005 and is a trading cum clearing member of Multi Commodities Exchange and
National Commodities and Derivatives Exchange of India. INCPL has been providing
commodities trading facilities to both Corporate and retail clients since 2005.
IndiaNivesh Insurance Brokers Private Limited
IndiaNivesh Insurance Brokers Private Limited (INIBPL) is the Insurance broking arm of
IndiaNivesh group. It is registered with Insurance Regulatory and Development Authority
(IRDA) and basically focuses on General Insurance as well as Life Insurance.
IndiaNivesh Management Consultants Pvt Ltd
INMCPL is the investment banking arm of IndiaNivesh Group offering consultancy services
that include mergers, acquisitions and divestitures, capital raising and recapitalization. It
offers expert counseling services in business advisory, transaction support, banking and
financial services. The ambit of services includes management of capital raising activities
through debt or equity from private/public placement and banks/financial institutes
Luminaire Technologies Limited
Luminaire Technologies Limited which is listed on the Bombay Stock Exchange Limited is a
subsidiary of INL and is into the business of software and technology development. We
intend to expand the scope of activities in the software technology space and also to enter
into new business fields such as media and entertainment.
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IndiaNivesh TV Networks Pvt Ltd
IndiaNivesh Group has muted the idea of a property channel which will be the first of its
kind in India. INTVPL has been set up in Singapore as a wholly owned subsidiary of
Luminaire Technologies Limited (Subsidiary of IndiaNivesh Limited) for the purpose of
setting up the infrastructure and the property channel will be launched in Singapore, the
Middle East and India.
OVERVIEW
INSPL is registered as a Stock Broker with SEBI and has memberships of Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) for both Cash and
Derivatives segments.
INSPL is a registered Depository Participant with CDSL and NSDL.
INSPL is also into Paper Distribution - Primary Market and New Fund Offerings
(NFO).
Portfolio Management Services (PMS).
Private Placement of Equity and Debts.
PROMOTERS
Mr. Anil Bafna
Mr. Bafna has rich experience in the areas of Management Consultancy, Investment
Banking, Mergers and Acquisition, Project Financing, Taxation, Auditing and Corporate Law
matters.
In his career spanning more than two and a half decades, Mr. Bafna has made pioneering
contributions to the development of many Small and Medium enterprises and has also
advised several corporates on their strategic and financial needs, especially, capital raising
and mergers & acquisitions, and has also handled foreign assignments. He has also been
appointed as a National Expert on Marble & Granite by United Nation Industrial
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Development Organization (UNIDO), Vienna, Austria. Mr. Bafna brings with him wealth of
experience in dealing with Banks and Financial Institutions and has a deep-rooted network
in the Indian banking sector.
Mr. Bafna has played a vital role in establishing and managing the Stressed Asset portfolio
of the group besides being a strategic decision maker. Mr. Bafna is a Merit holder
Chartered Accountant and is a senior partner in A. Bafna & Co., Chartered Accountants.
Mr. Dinesh Nuwal
Mr. Dinesh Nuwal is a qualified Chartered Accountant. He is having more than 18 years ofrich experience in Finance, Capital & Commodity Markets, Investment Management,
Project Financing, Compliance, Corporate Affairs etc
Mr. Rajesh Nuwal
Mr. Rajesh Nuwal an avant-grade visionary, is the group Managing Director. He is a
qualified Chartered Accountant and Cost and Works Accountant. Mr. Rajesh Nuwal is a
multi faceted businessman having more than 15 years of experience with a wide knowledgein the field of Capital & Commodity Markets, Stressed Asset Management, Investment
Management, Merchant Banking, Real Estates, Project Financing, Compliance, Corporate
Affairs etc. As an effective leader and motivator and having a strong business acumen
along with respect for moral values, he has taken the group to greater heights.
Mr. Hemant Panpalia
Mr. Hemant Panpalia is a fellow member of the Institute of Chartered Accountant of India
and possesses varied experience of more than 11 years in the fields of Finance, Investment
Banking, Primary and Secondary Markets, Merchant Banking, Project Financing and
Consultancy, Corporate Affairs etc. Mr. Panpalia is also engaged as a financial consultant
to the Bajaj group.
Mr. Girish Bhagat
Mr. Girish Bhagat has over thirty years of experience in areas of Capital Markets,
Investment Banking, Alternate Investments, Equities Broking, IT Services, and more
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recently in the development of Indias Urban Infrastructure. During his career he has led
some very successful pioneering start-ups, significantly contributed to capital inflows into
India, structured cross border joint ventures and done transactions in many countries. In the
past, he has held leadership positions in HSBC, HDFC Securities, IIT InvesTrust, Citibank
and with the Unit Trust of India. Mr. Bhagat is an Independent Director of IndiaNivesh
Liimited.
Mr. Deepak Patwari
Mr. Patwari is having more than 18 years of experience in the fields of Capital & Commodity
Markets, Investment Management, Merchant Banking, Project Financing, Compliance,
Corporate Affairs etc. Mr. Patwari is a Science graduate and is on the board of IndiaNivesh
Management Consultants Private Limited.
MANAGEMENT TEAM
Mr. Sunil Avasthi
Mr. Sunil Avasthi has a vast and rich experience of 35 years in the field of Insurance.
He is the chief mentor and brain behind the company. He was earlier working with
The Oriental Insurance Co. Ltd. and looks after Corporate Business.
Mr. Bharat Kotak
Mr. Kotak is a qualified Chartered accountant having a vast experience of more than 20
years in of Capital Markets, Investment Management, Merchant Banking, Project Financing,
Compliance, Corporate Affairs etc. He is a former designated director in an IIT group
company.
Sumit Bohra
Mr. Sumit Bohra is a qualified Chartered Accountant and CEO on the Insurance Broking
Arm. He has been handling the Insurance Broking Company from last 5 years and is
looking into Underwriting, Portfolio Management and Claims. He has good experience in
field of Audit and Taxation
Mr. Ajoy Modi
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He is a qualified chartered accountant, Cost and Works accountant and possesses more
than 14 years of experience in the fields of Technical Equity Research. He is handling the
entire technical research analyst team.
Mr. Nirmal Pareek
Mr. Pareek is a designated director and principal officer of the company. He is having more
than 10 years of varied experience in capital and financial markets. He is primarily
responsible for all front office operations
Mr. Nitesh Kabra
Mr. Kabra is a designated director of the company having more than 8 years of experiencein the field of Capital Markets, Investment Management, Compliance related work,
Corporate Affairs etc. He handles the entire back office operations for the company.
Mr. Govind Saboo
Mr. Saboo is a qualified chartered accountant and possesses more than 6 years experience
in the fields of Equity Research. He is handling the entire technical and fundamental
research analyst team. Prior to joining us he has worked as a business analyst withGoldman Sachs.
Mr. Jinesh Doshi
Mr. Doshi a qualified company secretary and a law graduate is the group company
secretary having more than 5 years of vast experience of compliance with various
regulatory authorities, such as SEBI, NSE, BSE, ROC, RBI, Company Law Board, MCX &
NCDEX
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OUR FORT
One Stop Shop:
Provider of comprehensive broking and wealth management services under one
roof.
Strong Research Base:
Fundamentals based Primary and Secondary Market research services.
Sound Financials:
The Net worth of INSPL as on 31st March 2008 stands at more than Rupees 26.50
Crores.
Good Governance:
Adherence to the rules and regulations laid down by regulatory authorities and
functioning as per the bye-laws of the respective governing authorities.
Client Redressal:
Zero tolerance for client grievances, and minimum TAT
Vision
Our Vision is to emerge as a dynamic, customer - centric, and progressive financial group
in the country with pan India presence, sharply focused on business growth and profitability,with due emphasis on risk management in an environment of professionalism, trust and
transparency, observing the highest standards of corporate governance and corporate
social responsibilities, meeting the expectations of all our stakeholders as well as the
aspirations of our employees.
Essentially, Combining integrity with pursuit of excellence to ensure prosperity to all
stakeholders on a continuous basis is going to be the core philosophy and driving force for
the group.
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Our Mission
One of our Key endeavor is to become one of the top ten financial powerhouses in India
within the coming 5-6 years by constantly exploring future business models and offering the
entire bouquet of financial services to our clients under one single roof.
We serve as a bridge for creating wealth and preserving it.
Integrity - Our Group, through the actions of our partners and associates, will reflect
the highest ethical standards at all times. Trust is an essential element of our
industry. Our clients and collaborating partners and associates can expect ourdealings with them to be honest and forthright - we will not waver in our commitment
to this principal.
Respect - We will always treat each other and those with whom we come in contact
with dignity and respect. We are a global firm and embrace diversity of culture and
religion in our workplace. We are open to the thoughts and opinions of others
irrespective of race, creed or ethnic origin, and relish the creativity that comes from
collaborating with those who may view things from a different perspective.
Leadership - Every associate and partner of IndiaNivesh is empowered as a leader
both in our workplace and the communities where we work. We are confident of the
firm's support as we strive to implement innovation, efficiency and growth.
IndiaNivesh supports community service activities, recognizing the debt owed to a
society that enables our group to flourish.
Excellence - We are a service organization. Our worth is measured daily by our
clients and our collaborating partners, associates, customers etc. We will
consistently provide service at a level that exceeds expectations through our focus
on quality.
Teamwork - We are loyal to our clients, our collaborators, our firm and each other. We will
work together and are accountable to each other to provide the absolute best results for our
clients. We are rewarded for our collaborative efforts without regard for individual credit. We
recognize that we are of varying talents and abilities; therefore, a cooperative effort is the
best effort for
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INL DETAILS
India Nivesh Limited provides various financial services in India. The company offers asset
management, securities broking, commodities broking, insurance broking, depository,
investment banking, and wealth management services. It also provides other financial
products, including private placements of debt or equity. In addition, the company, through
its subsidiary, Luminaire Technologies Limited, engages in the business of software and
technology development. Further, IndiaNivesh Limited, through its other subsidiary,
Krishnadeep Marketing Services Private Limited, involves in strategic investment for the
revival and rehabilitation of sick industrial undertakings and real estate business. The
company was formerly known as Sanyei Corporation Limited and changed its name to
IndiaNivesh Limited in September 2006. IndiaNivesh Limited was incorporated in 1929 and
is based in Mumbai, India
KEY DEVELOPMENTS FOR INDIANIVESH LTD (INL)
IndiaNivesh Ltd. expected to report Q1 2011 results on August 13, 2010. This event
was calculated by Capital IQ (Created on August 7, 2010).
08/7/2010
IndiaNivesh Ltd. expected to report Q1 2011 results on August 13, 2010. This event was calculated
by Capital IQ (Created on August 7, 2010).
IndiaNivesh Ltd. expected to report Fiscal Year 2011 results on May 30, 2011. This
event was calculated by Capital IQ (Created on June 27, 2010).
06/27/2010
IndiaNivesh Ltd. expected to report Fiscal Year 2011 results on May 30, 2011. This event was
calculated by Capital IQ (Created on June 27, 2010).
IndiaNivesh Ltd. Recommends Final Dividend
06/1/2010
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IndiaNivesh Ltd. has informed that the Board of Directors of the company at its meeting held on
May 31, 2010, inter alia, has recommended a final dividend of INR 1 (10%) per equity share of INR
10 each for the fiscal 2010 subject to approval of members in Annual General Meeting of the
company.
Technology
India Nivesh state of the art facility has all it takes to support the zealous future growth
plans and to maintain global quality standards. We have installed the latest Front office and
Back office software which ensures hassle free continuous services.
i] Hardware: Use of high end HP and IBM servers for front office and back office
software system, back up devices, workstations.
ii] Software: Use of ODIN software for front office operations and Lidha Didha (LD) for
back office operations.
iii] Communication: We have set up the requisite communication infrastructure for Pan
India presence. We have V-Sat and leased line based connectivity. Back up ISDN lines are
also taken as an alternative connectivity arrangements so as to safeguard against failure of
main links.
iv] Technical Team: The qualified technical team keeps on updating with the
technological needs of India Nivesh thus ensuring maximum advantage of innovation and
modernization in all activities.
Research
INSPL has witnessed tremendous growth in business in a short span of time since
its inception primarily due to making available value added services to its clients including
research and advisory services.
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Professional Approach: A strong research team of competent and experienced
professionals continuously striving to pick up the best investment opportunities for our
clients.
Secondary Market: We provide Fundamental research reviews on news and events
such as results, announcements on key stocks and its likely impact on companies & stock
prices. Technical research giving broad overview of equity market as a whole on a daily
basis.
Primary Markets: IPO Research report provides an in-depth analysis viz. the
background of company, financial health, comparative valuations, comments and overall
market views for forthcoming IPOs. We provide Mutual fund research reports, advisoryservices to clients for selection of schemes etc.
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OUR BRANCHES
Andheri East:
3 & 4, La-Spazio Showroom, Plot No. 487, Next to Chakala Petrol Pump, Andheri - Kurla
Road, Andheri East, Mumbai 400 069.
Contact person: Manmohan Choudhary
Tel: +91 22 28201661/62/63
Malad East:
26 Ruia Market, Bhadarmal Ruia Marg, Off. Rani Sati Marg, Malad East, Mumbai 400 097.
Contact person: Paras Pachori
Tel: +91 22 28712861
Marine Lines:
203, Standard House, 83, M. K. Road, Marin Lines, Mumbai 400 002.
Contact person: Manmohan Choudhary
Tel: +91 22 28201661/62/63
Fort:
A/11 Tamarind House, Tamarind Lane, Fort, Mumbai 400 001.
Contact person: Dinesh Arya
Tel: +91 22 66158880/885
Jaipur:
4, The Mile Stone, 6th floor, Bapu Nagar, Gandhi Nagar, Jaipur.
Contact person: Naveen Jain
Tel: +91 141 4034575/76
Surat:
Shop No. M-19, Metro Tower, Ring Road, Surat 395 002.
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Contact person: Sunil Kabra
Tel: +91 9374539276
Indore:168, Rathi Mansion, Jaora Compound, Indore
Contact person: Rajesh Sirothiya
Tel: +91 9893032223
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Chapter 3
INTRODUCTION OF RECESSION
Introduction:-
The economic slowdown of the advanced countries which started around mid-2007,
as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe.
Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or
General Motors collapsed and several became bankrupt in this crisis. According to the
current available assessment of the IMF, the global economy is projected to contract by 1.4
per cent in 2009.Even as recently as six months ago, there was a view that the fallout of the
crisis will remain confined only to the financial sector of advanced economies and at the
most there would be a shallow effect on emerging economies like India. These
expectations, as it now turns out, have been belied. The contagion has traversed from the
financial to the real sector; and it now looks like the recession will be deeper and the
recovery longer than earlier anticipated. Many economists are now predicting that this
GreatRecession of 2008-09 will be the worst global recession since the 1930s.
The current global financial crisis is rooted in the subprime crisis which surfaced over
a year ago in the United States of America. During the boom years, mortgage brokers
attracted by the big commissions, encouraged buyers with poor credit to accept housing
mortgages with little or no down payment and without credit checks. A combination of low
interest rates and large inflow of foreign funds during the booming years helped the banks
to create easy credit conditions for many years. Banks lent money on the assumption that
housing prices would continue to rise. Also the real estate bubble encouraged the demand
or houses as financial assets. Banks and financial institutions later repackaged these debts
with ther high-risk debts and sold them to world- wide nvestors creating financial
instruments called CDOs or Collateralized Debt Obligations (Sadhu2008). In this way risk
was passed on multifold through derivatives trade.
Less than a year ago, much of what has happened in the Indian economy since lastOctober would have been hard to anticipate. I recall, around this time last year, the most
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frequently asked questions (FAQs) were, what are the factors that put India on a high
growth trajectory and what can we do to remain there? Today, the FAQ is, when and how
do we get back on to the high growth trajectory? The sharp turn around in the FAQs
summarizes in a nutshell the impact of the global financial crisis on India.
The global financial crisis originated in United States of America. During booming
years when interest rates were low and there was great demand for houses, banks
advanced housing loans to people with low credit worthiness on the assumption that
housing prices would continue to rise. Later, the financial institutions repackaged these
debts into financial instruments called Collateralized Debt Obligations and sold them to
investors world-wide. In this way the risk was passed on multifold through derivatives trade.
Surplus inventory of houses and the subsequent rise in interest rates led to the decline of
housing prices in the year 2006-07 which resulted in unaffordable mortgage payments and
many people defaulted or undertook foreclosure. The house prices crashed and the
mortgage crisis affected many banks, mortgage companies and investment firms world-
wide that had invested heavily in sub-prime mortgages.
Different views on the reasons of the crisis include boom in the housing market,
speculation, high-risk mortgage loans and lending practices, securitization practices,
inaccurate credit ratings and poor regulation of the financial institutions. The financial crisis
has not only affected United States of America, but also European Union, U.K and Asia.
The Indian Economy too has felt the impact of the crisis to some extent. Though it is difficult
to quantify the impact of the crisis on India, it is felt that certain sectors of the economy
would be affected by the spillover effects of the financial crisis. Surplus inventory of houses
and increase in interest rates led to a decline in housing prices in 2006-2007 resulting in an
increased defaults and foreclosure activity that collapsed the housing market ( Sengupta
2008 ). Consequently, a large number of properties were up for sale affecting mortgage
companies, investment firms and government sponsored enterprises which had invested
heavily in sub prime mortgages. Since the collateral debt instruments had been globally
distributed, many banks and other financial institutions around the world were affected.
Major Banks and other financial institutions around the world have reported losses of
approximately US $ 435 billion as on 17th July, 2008 (Onaran 2008). Thus with the failure
of a few leading institutions in United States, the entire financial system in the world has
been affected
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Chapter 3
MEANING OF RECESSION
Meaning Of Recession:-
A recession is a decline in a country's gross domestic product (GDP) growth for two
or more consecutive quarters of a year. A recession is also preceded by several quarters of
slowing down. An economy, which grows over a period of time, tends to slow down the
growth as a part of the normal economic cycle. An economy typically expands for 6-10
years and tends to go into a recession for about six months to 2 years. A recessionnormally takes place when consumers lose confidence in the growth of the economy and
spend less. This leads to a decreased demand for goods and services, which in turn leads
to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend
less; as they fear stocks values will fall and thus stock markets fall on negative sentiment.
Risk aversion, deleveraging and frozen money markets and reduced investor interest
adversely affect capital and financial flows, import-export and overall GDP of an economy.
This is exactly what happened in US and as a result of contagion effect spread all over theworld due to high integration in the global economy.
RECESSIONS ARE the result of reduction in the demand of products in the global
market. Recession 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.Recession in the West,
especially the United States, is a very bad news for our country. Our companies in India
have most outsourcing deals from the US. Even our exports to US have increased over the
years. Exports for January 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
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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 Organizations (FIEO), which says that it has carried out an intensive 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.
Definition of recession:-
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 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 If you look at it from the point of
view of a businessman, recession is a transitory phase. The Business Cycle Dating
Committee of the National Bureau of Economic Research has another definition. It profiles
the businesses that have peaked with their activity in one season and it falls naturally in the
next season. It regains its original position with new products or sales and continues to
expand. This revival makes the recession a mild phase that large companies tolerate.
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As the fiscal position rises, there is no reason to worry. Recession can last up to a
year. When it happens year after year then it is serious. Are we facing a recession or not?
Yes, for the simple reason that not only our neighbuors 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, when its 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.
In a 1975 New York Times article, economic statistician Julius Shiskin suggested
several rules of thumb to identify a recession; these included the rule of 'two successive
quarterly declines in GDP. Over time, the other rules have been largely forgotten, and a
recession is now often identified as the reduction of a country's GDP (or negative real
economic growth) for at least two quarters. Some economists prefer a more robust
definition of a 1.5% rise in unemployment within 12 months.In the United States the
Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is
generally seen as the authority for dating US recessions. The NBER defines an economic
recession as: "a significant decline in [the] economic activity spread across the country,
lasting more than a few months, normally visible in real GDP growth, real personal income,
employment (non-farm payrolls), industrial production, and wholesale-retail sales." Almost
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universally, academic economists, policy makers, and businesses defer to the
determination by the NBER for the precise dating of a recession's onset and end.
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Chapter 4
RECESSION OF FINANCIAL CRISIS
Every single day, we spend some of our time catching up with the rise and the fall of
the world economy. Even today, months after the world economy simply crashed from its
long maintained great heights, people try to learn about its main reason. For a common
man, it all happened in just a few days time. But for those dealing with the share markets
and FOREX, the reasons take us far behind todays time. USA- The key factor for the fall
of world economy:
For a clear view, we need to get back to the past of the housing sector of America. Over
sometime back, the property value in the housing sector of America was driving the
countrys economy to a completely new level. People easily gained the credit conditions to
take the home loans from the perfect combination of the low interest rates and that of the
large inflow of the foreign funds. Thus, within a very short span of time, the demand for
property shot up and thus also fuelled the home prices further more than earlier. At the
same time, the loan agencies widened their plans and strategies to lure people take the
*loans for their new properties. Looking at the demand for properties, they provided huge
bonus values to the customers and thus succeeded in attracting a respectable number of
customers. But, at this point in the greed for money, they ignored the general checking
procedures such as the repaying capacity of the customers. They had blindly provided huge
loans to even those people who are included in the NINJA category, No Income, No Job,
No Assets. This disregarded all the principle of financial cautions. Moreover, as the
property value was at an all time high, people made the use of the increased property value
so as to refinance their homes at a much lower rate and further gained the second
mortgage. The loans providers despite of knowing that the interest rates would increase
with the passing time, lured the customers with an all time low interest rate thinking that
they would quickly refinance their money under more favorable terms. But this is where the
things went wrong. Over construction of houses thus led to the fall of the extra accounts of
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homes from the year 2006. Thus refinancing became extremely difficult and many people,
who were unable to refinance their homes, began defaulting the loans which thus raised the
interest rates which worsened the matter.
High price of crude oil:
The Middle East war fears that was pushed upwards by the world wide speculations
and the increase in the demand for the crude oil across the world increased the price of the
energy sources which acted as the inflationary tax. The high priced production thus lowered
the profit value and also at the same time reduced the consumption across. This partially
affected the fund of countries across the globe
Devaluation of the dollars:
The value of dollars in the global market is the key factor for its economy. The Iraq blunder
along with the Federal Reserve generated excess of dollars which thus caused the
continuous decline in the value of dollars in the global markets. This was pushed further
into a grave due to a few other factors related to that of dollar values.
The purchase of crude oil across the world takes place through the dollars. Thus, the fall in
the value of dollars means hike in the prices of crude oil. This further added to the problems
of high value of the crude oil. Across the international currency system, dollars are the
major reserve currency. Moreover, the various dollar paying investments that include of the
US treasury bills, etc. deal with excessive amounts of governments and foreign banks. With
the decline in the value of the dollars in the world economy, these huge investments
become less luring. But, the smallest disinvestment in these investments would directly
affect the bond prices and simultaneously increase the interest rate.
The outlook for India going forward is mixed. There is clear evidence of economic activity
slowing down. Real GDP growth has moderated modestly in the first and second quarters
of 2008/09, and sharply in the third quarter. The services sector, which has been our prime
growth engine for the last five years, is slowing, mainly in construction, transport and
communication, trade, hotels and restaurants sub-sectors. For the first time in seven years,
exports have declined in absolute terms for four months in a row during October 2008 -
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January 2009. Recent data indicate that the demand for bank credit is slackening despite
comfortable liquidity in the system. Dampened demand has dented corporate margins while
the uncertainty surrounding the crisis has affected business confidence. The index of
industrial production has shown negative growth for two recent months and 13 investment
demand is decelerating. All these factors suggest that growth will
moderate more than we had earlier thought.
In addressing the fall out of the crisis, India has several advantages. Some of these
are recent developments. Most notably, headline inflation, as measured by the wholesale
price index, has fallen sharply though consumer price inflation is yet to moderate. Clearly,
falling commodity prices have been the key drivers behind the disinflation; however, some
contribution has alsocome from slowing domestic demand. The decline in inflation should
revive and support consumption demand and reduce input costs for corporates.
Furthermore, the decline in global crude prices and naphtha prices, if sustained, will reduce
the size of subsidies to oil and fertilizer companies, opening up fiscal space for
infrastructure spending. From the external sector perspective, it is projected that imports will
shrink more than exports keeping the current account deficit modest.
There are also several structural factors that have come to India's aid. First,
notwithstanding the severity and multiplicity of the adverse shocks, India's financial markets
have shown admirable resilience. This is in large part because India's banking system
remains sound, healthy, well capitalized and prudently regulated. Second, our comfortable
reserve position provides confidence to overseas investors. Third, since a large majority of
Indians do not participate in equity and asset markets, the negative impact of the wealth
loss effect that is plaguing the advanced economies should be quite muted Consequently,
consumption demand should hold up well. Fourth, because of India's mandated priority
sector lending, institutional credit for agriculture has remained unaffected. The farm loan
waiver package implemented by the Government should further insulate the agriculture
sector from the crisis. Finally, over the years, India has built an extensive network of social
safetynet programmes, including the flagship rural employment guarantee programme.
These uniquely Indian versions of automatic stabilizers should
protect the poor from the extreme impact of the global crisis.
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Lastly, dollar value simply prevents the dragging of the US interest rates further
lower by the Federal Reserve. Thus, any small value of additional Federal Reserve easing
would further cause recession. Thus, all that we can do is wait and let the global market
force liquidation on the varied mal-investments. Liquidation is the only way to restore the
economic conditions of the market for a better future.
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REASON OF FINANCIAL CRISIS
The first hint of the trouble came from the collapse of two Bear Stearns hedge funds
early 2007. Subsequently a number of other banks and financial institutions also began to
show signs of distress. Matters really came to the fore with the bankruptcy of Lehman
Brothers, a big investment bank, in September 2008. The reasons for the crisis are varied
and complex. Some of them include boom in the housing market, speculation, high-risk
mortgage loans and lending practices, securitization practices, inaccurate credit ratings and
poor regulation.
1. Boom in the Housing Market:
Sub prime borrowing was a major contributor to an increase in house ownership
rates and the demand for housing. This demand helped fuel housing price increase and
consumer spending. Some house owners used the increased property value experienced in
housing bubble to re-finance their homes with lower interest rates and take second
mortgages against the added value to use the funds for consumer spending. Increase in
house purchases during the boom period eventually led to surplus inventory of houses,
causing house prices to decline, beginning in the summer of 2006. Easy credit, combinedwith the assumption that housing prices would continue to appreciate, had encouraged
many sub prime borrowers to obtain adjustable-rate mortgages which they could not afford
after the initial incentive period. Once housing prices started depreciating moderately in
many parts of the U.S, re-financing became more difficult. Some house owners were
unable to re-finance their loans reset to higher interest rates and payment amounts. Excess
supply of houses placed significant downward pressure on prices. As prices declined, more
house owners were at risk of default and foreclosure.
2. Speculation:
Speculation in real estate was a contributing factor. During 2006, 22 per cent of
houses purchased (1.65 million units) were for investment purposes with an additional 14
per cent (1.07 million units) purchased as vacation homes. In other words, nearly 40 per
cent of house purchases were not primary residences. Speculators left the market
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in2006,which caused investment sales to fall much faster than the primary market.
3. High- Risk Mortgage Loans and Lending Practices:
A variety of factors caused lenders tooffer higher-risk loans to higher-risk borrowers.
The risk premium required by lenders to offer a subprime loan declined. In addition to
considering high-risk borrowers, lenders have offered increasingly high-risk loan options
and incentives. These high-risk loans included No Income, No Job and No Assets loans. It
is criticized that mortgage underwriting practices including automated loan approvals were
not subjected to appropriate review and documentation.
4. Securitization Practices:
Securitization of housing loans for people with poor credit- not the loans
themselves-is also a reason behind the current global credit crisis. Securitization is a
structured finance process in which assets, receivables or financial instruments are
acquired, pooled together as collateral for the third party investments (Investment Banks).
Due to securitization, investor appetite for mortgage backed securities (MBS), and the
tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high
risk of default could be originated, packaged and the risk readily transferred to others.
5. Inaccurate Credit Ratings:
Credit rating process was faulty. High ratings given by credit rating agencies
encouraged the flow of investor funds into mortgage-backed securities helping finance the
housing boom. Risk rating agencies were unable to give proper ratings to complex
instruments (Gregorio 2008). Several products and financial institutions, including hedge
funds, and rating agencies are largely if not completely unregulated.
6. Poor Regulation:
The problem has occurred during an extremely accelerated process of financial
innovation in market segments that were poorly or ambiguously regulated mainly in the
U.S. The fall of the financial institutions is a reflection of the lax internal controls and the
ineffectiveness of regulatory oversight in the context of a large volume of non-transparent
assets. It is indeed amazing that there were simply no checks and balances in the financialsystem to prevent such a crisis and not one of the socalled pundits in the field has
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sounded a word of caution. There are doubts whether the operations of derivatives markets
have been as transparent as they should have been or if they have been manipulated.
Recession Attributes
A recession has many attributes that can occur simultaneously and can include declines in
coincident measures of activity such as employment, investment, and corporate
profits.A severe (GDP down by 10%) or prolonged (three or four years) recession is
referred to as an economic depression, although some argue that their causes and
cures can be different.
Causes of recessions
Currency crisis
Energy crisis
War
Under consumption
Overproduction
Financial crisis
Price of Fuels
Effects of recessions
Bankruptcies
Credit crunches
Deflation (or disinflation)
Foreclosures
Unemployment
Market and Recession:-
Stock 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.
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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 2008 recession followed the
average, the downturn in the stock market would have bottomed around November 2008.
Today vs. the 1980-82 Recession
Output, Employment and Industrial Production in the "1980-82 Recession", econbrowser: In
today's NYT, Casey Mulligan presents an interesting picture of GDP during the "1980-82
recession" -- the conjoining of the two NBER\ defined recessions in 1980 and 1981-82.
Based on the comparison with the current recession, he concludes: While the job losses,
foreclosures, stock declines and other casualties of the current recession have been very
painful, substantially more bad economic news is needed to make this recession worse
than the downturns of 1980-'82, at least in G.D.P. terms.
Here is Professor Mulligan's graph.
http://economistsview.typepad.com/economistsview/2009/06/today-vs-the-198082-recession.htmlhttp://www.econbrowser.com/archives/2009/06/employment_and_1.htmlhttp://economix.blogs.nytimes.com/2009/06/03/worse-than-1982/http://economix.blogs.nytimes.com/2009/06/03/worse-than-1982/http://economistsview.typepad.com/economistsview/2009/06/today-vs-the-198082-recession.htmlhttp://www.econbrowser.com/archives/2009/06/employment_and_1.htmlhttp://economix.blogs.nytimes.com/2009/06/03/worse-than-1982/8/8/2019 Sumit Jethi Main 4
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.
Here, without comment, are three graphs of employment and industrial production,but normalizing the start date instead of the end date. Why one would want to
normalize on the trough especially when the trough date is unknown, I'm not certain,
but there's nothing to stop one from doing so. But, as I say, I'll normalize on the start
date in the graphs below.
http://economistsview.typepad.com/.a/6a00d83451b33869e2011570bdfa8e970b-popup8/8/2019 Sumit Jethi Main 4
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Log real GDP normalized on 2007Q4 (blue), May WSJ mean survey forecast (teal x), log
real GDP from "1980-82 recession" normalized on 1980Q1 (red). Source: BEA, preliminary
2009Q1 release, WSJ May survey, NBER and author's calculations.
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Log nonfarm payroll employment normalized on 2007M12(blue), log NFP from "1980-82
recession" normalized on 1980M01 (red). Source: BLS via FREDII, NBER and author's
calculations.
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Log industrial production normalized on 2007M12(blue), log NFP from "1980-82 recession"
normalized on 1980M01 (red). Source: Federal Reserve via FREDII, NBER and author's
calculations.
One observation, regarding data revisions. NBER doesn't place central import to GDP, in
part because GDP is subject to sometimes substantial revisions that alter not only the level,
but contourof GDP. This is important to the extent that Professor Mulligan's graph (and my
Figure 1) compare preliminary 2009Q1 data to final (and repeatedly revised) GDP figures. I
suspect (although have no independent validation) that recent GDP figures will probably be
revised downward. In this latest episode, I also wonder about the large contributions to
overall GDP growth coming from the finance sector (think about how easy it is to calculate
real value added in that sector), when the "F" in FIRE accounts for something like 5% of
GDP (see an interesting article by Ed Leamerhere).
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Financial Crisis Tests the Private Equity Industry
Submitted by InsideTrade Staffon Monday, 18 January 2010Comments (2)
Whether you are an investor, trader, or just a consumer, the financial crisis has affected
EVERYONE. Though many sectors of the investment world have been hit hard, few can
compare to the private equity market. Since it is intimately tied to stock performance, as
you will see, it can become VERY volatile in times of panic. In this article, we will provide
you facts which demonstrate this point, while also covering the rapid growth AND decline of
private equity over the last decade.
Before the crisis, the private equity market had been flourishing since its MVP year of
1978. In this year, venture capital investments SKYROCKETED from a measly $39 Million
in 1977, to an astounding $570 Million in 1978. You may be asking yourself, What could
cause a 1000%+ increase in private equity investing in just one year? Well, thats a
question with a two-part answer. First, the government lowered the capital gains tax from a
maximum of 49% to 28%, leaving investors with HIGHER net profits. Second, the
government removed some of the strict legislation from ERISA, allowing pension funds to
become major investors in private equity funds. As a result of these new laws, institutional
investors began piling into the private equity markets and things were great, until it all came
to a screeching halt in late 2007.
Once market sentiment changed during the HEART of the financial crisis, it was almost
impossible to find investors for private equity. Unfortunately, with little to no faith in the
economy, MOST of these investors left the market, protecting themselves from future risk.
Though this was the case in almost EVERY investment market, as you can see in the graph
below, it was especially true in the private equity industry. Scroll down and take a look!
http://insidetradellc.com/blog/author/admin/http://insidetradellc.com/blog/financial-crisis-tests-private-equity-industry/#idc-containerhttp://insidetradellc.com/blog/private-equity-investing-a-growing-market/http://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Acthttp://insidetradellc.com/blog/author/admin/http://insidetradellc.com/blog/financial-crisis-tests-private-equity-industry/#idc-containerhttp://insidetradellc.com/blog/private-equity-investing-a-growing-market/http://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Act8/8/2019 Sumit Jethi Main 4
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When you first glance at the chart, you have to be amazed by the HUGE drop in equity from
Q4 2007 to Q2 2009. Believe it or not, $178 Billion was raised by private equity funds in
2008, and ONLY $12 Billion was raised in 2009! Thats a 93.3% DROP in money raisedover just one year! As you can see, raising money in the private equity markets is almost
impossible when theres poor market sentiment. The reason for this is simple, steady
growth is what interests private equity investors, not value hunting during unstable times.
The reality of the current economy is this, there has been a massive financial disaster that
has affected every market world-wide, and though it seems to be coming to an end, it may
take years to fully resolve. Now in the aftermath there is still plenty of hope, but the fact is,
many investors are badly scarred from these recent events. Despite all of the fear in the
market, remember this, if you time things right in a depressed economy, you CAN turn dust
into diamonds while it recovers. To illustrate this critically IMPORTANT point, we have
provided another chart below!
Deepening relationship with the exiting clients: A big area of focus
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The global economic slowdown caused by subprime crisis particularly in the US and
Europe has largely impacted the Indian ITeS and BPO sector during the financial year
2009. The clients in the western countries are affected due to slowdown and many of them
are re-negotiating the pricing, or opting for other vendors which has further affected the
Indian ITeS-BPO companies earnings. Hence, the Indian BPO companies have witnessed
low revenue growth and hence low profits growth. The Indian ITeS-BPO companies are
increasingly focussing on adopting various strategies to tackle the current slowdown. As per
the survey, deepening relationship with the existing clients remained the most preferred
option for the Indian ITeS-BPO companies, followed by offering more value added services
to the clients. Likewise, companies are also entering new verticals to expand their
businesses.
In the past few years, verticals such as healthcare and telecom seem to be catching up as
more companies are foraying into these verticals. Healthcare, which was considered the
second mostpromising vertical according to last years study, has today taken the first
position. Telecom has taken the second position, thus pushing BFSI to the third position. As
mentioned earlier, the slow down in the banking sector is forcing companies to look towards
other prospective verticals.
Global economic slowdown affects pricing the most
The global economic slowdown has affected the plans of ITeS-BPO companies inmany ways. Pricing and volume of business of these companies, for instance, has taken
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the biggest hit owing to the slowdown. The respondent companies have awarded an
average rank of 2.4 to pricing, whereas business volume has been ranked 2.6. As a result,
pricing is under pressure for new contracts as well as the existing ones. Additionally,
volume of business awarded to a company may also be a cause of concern.
Companies positive on industry growth in the next two years
While last year skilled manpower was cited as the hurdle to industry growth, this year
economic slowdown was cited as the hurdle to industry growth. Besides, other emerging
markets like China also pose a threat to the domestic market. Some respondents (23.0%)
felt that the industry is likely to grow by more than 21% in 2010.The downturn in the global markets is expected to increase the reliance of companies on
outsourcing to reduce operating costs and to attain higher productivity; our survey results
corroborates this fact as around 35.1% companies expect the industry to grow by more
than 21% in 2011.
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Companies positive on industry growth in the next two years
While last year skilled manpower was cited as the hurdle to industry growth, this year
economic slowdown was cited as the hurdle to industry growth. Besides, other emerging
markets like China also pose a threat to the domestic market. Some respondents (23.0%)
felt that the industry is likely to grow by more than 21% in 2010.
The downturn in the global markets is expected to increase the reliance of
companies on outsourcing to reduce operating costs and to attain higher productivity; our
survey results corroborates this fact as around 35.1% companies expect the industry to
grow by more than 21% in 2011.
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Recession and politics
Generally an administration gets credit or blame for the state of economy during its time.
This has caused disagreements about when a recession actually started. In an
economic cycle, a downturn can be considered a consequence of an expansion reaching
an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the
causes of specific phases of the cycle.The 1981 recession is thought to have been caused
by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board,
before Ronald Reagan took office. Reagan supported that policy. Economist Walter Heller,
chairman of the Council of Economic Advisers in the 1960s, said that "I call it a Reagan-
Volcker-Carter recession.
The resulting taming of inflation did, however, set the stage for a robust growth
period during Reagan's administration.It is generally assumed that government activity has
some influence over the presence or degree of a recession. Economists usually teach that
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to some degree recession is unavoidable, and its causes are not well understood.
Consequently, modern government administrations attempt to take steps, also not agreed
upon, to soften a recession. They are often unsuccessful, at least at preventing a recession,
and it is difficult to establish whether they actually made it less severe or longer lasting.
History of recessions
Global recessions:-
There is no commonly accepted definition of a global recession, IMF regards periods
when global growth is less than 3% to be global recessions. The IMF estimates that global
recessions seem to occur over a cycle lasting between 8 and 10 years. During what the
IMF terms the past three global recessions of the last three decades, global per capitaoutput growth was zero or negative.Economists at the International Monetary Fund (IMF)
state that a global recession would take a slowdown in global growth to three percent or
less. By this measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-
2002.According to economists, since 1854, the U.S. has encountered 32 cycles of
expansions and contractions, with an average of 17 months of contraction and 38 months
of expansion. However, since 1980 there have been only eight periods of negative
economic growth over one fiscal quarter or more, and four periods considered recessions:
January-July 1980 and July 1981-November 1982: 2 years total
July 1990-March 1991: 8 months
March 2001-November 2001: 8 months
December 2007-current: 15 months as of March 2009From 1991 to 2000, the U.S.
experienced 37 quarters of economic expansion, the longest period of expansion on
record.For the past three recessions, the NBER decision has approximately conformed to
the definition involving two consecutive quarters of decline. However the 2001 recession did
not involve two consecutive quarters of decline, it was preceded by two quarters of
alternating decline and weak growth.
Current recession in some countries Official economic data shows that a substantial
number of nations are in recession as of early 2009. The US entered a recession at the end
of 2007, and 2008 saw many other nations follow suit.
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United States
The United States housing market correction (a consequence of United States
housing bubbles) and sub prime mortgage crisis has significantly contributed to a
recession.The 2008/2009 recession is seeing private consumption fall for the first time in
nearly 20 years. This indicates the depth and severity of the current recession With
consumer confidence so low, recovery will take a long time. Consumers in the U.S. have
been hard hit by the current recession, with the value of their houses dropping and their
pension savings decimated on the stock market. Not only have consumers watched their
wealth being eroded they are now fearing for their jobs as unemployment rises. U.S.
employers shed 63,000 jobs in February 2008, the most in five years.
Former Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There
is more than a 50 percent chance the United States could go into recession.". On October
1, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost
in September. On April 29, 2008, nine US states were declared by Moody's to be in a
recession. In November 2008 Employers eliminated 533,000 jobs, the largest single month
loss in 34 years. For 2008, an estimated 2.6 million U.S. jobs were eliminated.Although the
US Economy grew in the first quarter by 1%, by June 2008 some analysts stated that due
to a protracted credit crisis and "rampant inflation in commodities such as oil, food and
steel", the country was nonetheless in a recession.
The third quarter of 2008 brought on a GDP retraction of 0.5% the biggest decline
since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like clothing
and food, was the largest since 1950. A Nov 17, 2008 report from the Federal Reserve
Bank of Philadelphia based on the survey of 51 forecasters suggested that the recession
started in April 2008 and will last 14 months. They project real GDP declining at an annual
rate of 2.9% in the fourth quarter and 1.1% in the first quarter of 2009. These forecasts
represent significant downward revisions from the forecasts of three months ago.A
December 1, 2008, report from the National Bureau of Economic Research stated that the
U.S. has been in a recession since December 2007 (when economic activity peaked),
based on a number of measures including job losses, declines in personal income, and
declines in real GDP.
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Other countries:-
A few other countries have seen the rate of growth of GDP decrease, generally
attributed to reduced liquidity, sector price inflation in food and energy, and the U.S.
slowdown. These include the United Kingdom, Canada, Japan, Australia, China, India, New
Zealand and the Euro zone. In some, the recession has already been confirmed by experts,
while others are still waiting for the fourth quarter GDP growth data to show two
consecutive quarters of negative growth. India along with China is experiencing an
economic slowdown but not a recession.
Current crisis in the US
The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis
in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or
unstable incomes. Major Banks have landed in trouble after people could not pay back
loans.The housing market soared on the back of easy availability of loans. The realty sector
boomed but could not sustain the momentum for long, and it collapsed under the
gargantuan weight of crippling loan defaults.
Foreclosures spread like wildfire putting the US economy on shaky ground. This,
coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy.
Past recessions in the US The US economy has suffered 10 recessions since the end of
World War II. The Great Depression in the United was an economic slowdown, from 1930
to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high
poverty.The trade market was brought to a standstill, which consequently affected the world
markets in the 1930s. Industries that suffered the most included agriculture, mining, and
logging.In 1937, the American economy unexpectedly fell, lasting through most of 1938.
Production declined sharply, as did profits and employment. Unemployment jumped
from 14.3 per cent in 1937 to 19.0 per cent in 1938.The US saw a recession during 1982-83
due to a tight monetary policy to control inflation and sharp correction to overproduction ofthe previous decade. This was followed by Black Monday in October 1987, when a stock
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market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting
the lives of millions of Americans.The early 1990s saw a collapse of junk bonds and a
financial crisis.The US saw one of its biggest recessions in 2001, ending ten years of
growth, the longest expansion on record.From March to November 2001, employment
dropped by almost 1.7 million. In the 1990-91 recessions, the GDP fell 1.5 per cent from its
peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from
the peak in the fourth quarter of 2000.The dot-com burst hit the US economy and many
developing countries as well. The economy also suffered after the 9/11 attacks. In 2001,
investors' wealth dwindled as technology stock prices crashed.
Impact of an American Recession on India:-Indian companies have major outsourcing deals from the US. India's exports to the
US have also grown substantially over the years. The India economy is likely to lose
between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies
with big tickets deals in the US would see their profit margins shrinking.The worries for
exporters will grow as rupee strengthens further against the dollar. But experts note that the
long-term prospects for India are stable. A weak dollar could bring more foreign money to
Indian markets. Oil may get cheaper brining down inflation. A recession could bring down
oil prices to $70.
The whole of Asia would be hit by a recession as it depends on the US economy.
Even though domestic demand and diversification of trade in the Asian region will partly
counter any drop in the US demand, one simply can't escape a downturn in the world's
largest economy. The US economy accounts for 30 per cent of the world's GDP.Says Sudip
Bandyopadhyay, director and CEO, Reliance Money: "In the globalised world, complete
decoupling is impossible. But India may remain relatively less affected by adverse global
events." In fact, many small and medium companies have already started developing trade
ties with China and European countries to ward off big losses. Manish Sonthalia, head,
equity, Motilal Oswal Securities, says if the US economy contracts much more than
anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent by the IMF-
will contract, and India would be no exception.
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The only silver lining is that the recession will happen slowly, probably in six months
or so. As of now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather
segments will suffer losses because of their trade link. Certain sections of commodities
could face sharp impact due to the volatile nature of these sectors. C.J. George, managing
director, Geojit Financial Services, says profits of lots of re-export firms may be affected.
Countries like China import commodities from India do some value-addition and then export
them to the US.The IT sector will be the worst hit as 75 per cent of its revenues come from
the US. Low demand for services may force most Indian Fortune 500 companies to slash
their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides
companies from ITeS and BPO, automotive components will be affected.During a full
recession, US companies in health care, financial services and all consumers demand
driven firms are likely to cut down on their spending.
Among other sectors, manufacturing and financial institutions are moderately
vulnerable. If the service sector takes a serious hit, India may have to revise its GDP to
about 8 to 8.5 per cent or even less. Lokendra Tomar, senior vice-president, Integrand, a
BPO firm, says the US recession is likely to have a dual impact on the outsourcing industry.
Appreciating rupee along with poor performance of US companies (law firms, investment
banks and media houses) will affect the bottom line of the outsourcing industry. Small
BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to
survive.According to Dharmakirti Joshi, director and principal economist of CRISIL, along
and severe recession will seriously affect the portfolio and fixed investment flows.
Corporates will also suffer from volatility in foreign exchange rates. The export sector will
have to devise new strategies to enhance productivity.
In India, the impact of the crisis has been deeper than what was estimated by our policy
makers although it is less severe than in other emerging market economies. The extent of
impact has een restricted due to several reasons such as-
Indian financial sector particularly our banks have no direct exposure to tainted assets and
its off-balance sheet activities have been limited. The credit derivatives market is in an
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embryonic stage and there are restrictions on investments by residents in such products
issued abroad.
Indias growth process has been largely domestic demand driven and its reliance on
foreign savings has remained around 1.5 per cent in recent period.
Indias comfortable foreign exchange reserves provide confidence in our ability to manage
our balance of payments notwithstanding lower export demand and dampened capital
flows.
Headline inflation, as measured by the wholesale price index (WPI), has declined sharply.
Consumer price inflation too has begun to moderate.
Rural demand continues to be robust due to mandated agricultural lending and social
safety-net programmes.
Indias merchandise exports are around 15 per cent of GDP, which is relatively modest.
Despite these mitigating factors, India too has to weather the negative impact of the crisis
due to rising two-way trade in goods and services and financial integration with the rest of
the world.
Consequences of US recession on India job market
Worst affected because of US recession will be the service industry of India. Under
service industries come BPO, KPO, IT, ITeS etc. Service industry contributes about 52% toIndia's GDP growth. Now if that is going to get hurt then it will also hurt India's overall
growth but very slightly. India is not going to face a major impact due to US recession.
People may say that there is going to be a huge job loss due to recession. and will cite the
example of TCS firing about 500 employees but these were employees who didnt perform
and for cost cutting one have to reduce Non performing asset and that exactly what has
been done.
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There is no threat to the skilled people. According to NASSCOM India will have a
shortage of about 5 million skilled people in IT/ITeS. So there are lots of opportunities.Apart
from this India's travel, tourism and power industry is going to grow at a better rate. This is
again a good sign. India has a huge population so a huge consumer base so we dont have
to always depend on US for our growth. India's GDP is expected to grow at the rate of 8.5-
8.9 % which is again way above the growth rate of US and only second highest in the world
after China.This recession gives us opportunity to be innovative and to think out of box so
that the US directly doesnt affect our robust growth.
Due to increasing Rupee exporters are having a hard time but it has been noted that our
exporters are not that efficient and in past they got the benefit of depreciating rupee. So
now its time to be innovative and more effective and increase the over all efficiency and go
for systematic cost cutting to balance the rupee effect. Infact there are lots of scope for
improvement. In West Africa goods at departmental stores are sold at the rate 5 times than
Indian price and Indian goods are not exported to several countries in West Africa. Its an
excellent opportunity for our exporters.
10 Indian industries to do well during recession In the current global economic slowdown,
every sector of business is being affected and is witnessing a hard time. But IKON
Marke