Consequence of Global Recession on India A Study of Selected Industries

Dr. Vijay Pithadia Director, Shri H D Gardi MBA College - Nyara Jamnagar Road, Opposite Garden Dinner Club, Rajkot 360110 GJ drvijaypithadia@gmail.com Mobile: +91 989 842 2655

ABSTRACT The above quotation by Robert Shan exactly describes the reason of current global financial crisis. The current global financial crises are the cause of defaults on sub-prime mortgages in US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major Banks is US have landed in trouble after people could not repay the loans. Many banks have turned to be defaulter. After the case of Lehman Brothers, Merrill Lynch and other American banks, the banks of other countries are also facing the default risk. Because of the sub-prime mortgage, the housing market soared. The realty sector boomed but could not sustain for long, and it collapsed because of the loan defaults. This situation spreaded like wild fire and put the US economy in danger. This coupled with rising oil prices and slowed down the growth of the economy. The US financial crises have affected many countries of the world and India is not an exception to it. Because of these financial crises, Indian economy is likely to lose 1% to 2% of GDP growth. Almost all sectors of the Indian economy are affected by this crisis. The growth rate of almost all sectors has slowed down and many industrial units are facing heavy losses. Many units have declared job cuts to counter the heavy losses. This has scattered the Indian economy. I have tried to mark out the impacts of global financial crisis on Indian economy. For it, we have selected 7 important sectors i.e. Textile Industry, Steel Industry, Cement Industry, FMCG, Realty Sector, Banking Sector and Mutual Funds, on which the financial crisis have landed major impacts.

Introduction:
Recession, depression, inflation, deployment, financial crisisThese are the words that we have been listening for the last a few months. Whats common about these words??? The single commonality of all these words is that they are the gifts from American Economy to the Economies of other countries.

America, the no. 1 economy of the world is in the trap of the recession, once again after 1929. This recession has scattered many other economies of the world. The most famous and strongest American bank, insurance companies, financial companies have declared themselves defaulter and this has affected many other sectors. The people have lost their confidence in the financial system. Hit by US crisis, global economies have plunged in to severe problems. The UK is going deep in the recession. Germany has started suffering the pains of the recession. Russia has been downgraded. Some of the Latin American countries including Argentina are on the verge of defaults. Economies of eastern and Central Europe have also tumbled. India is also not an exception to this global fall down. There is a continuous flow of bad news for the Indian Economy. The recent unprecedented tumble of the sensex is the mark of the effect of recession on Indian Economy. The financial sector continues to be tense, marked by tight liquidity and high interest rates. Exports have registered a major slump for the first time in last five years, reflecting the decline in the demand in the international markets. Job oriented industries such as textiles, leather, handicrafts, diamond and jewellery are affected the worst.

In such scenario, it becomes necessary for us to mark out the impact of Global Recession on the different sectors of Indian Economy. It becomes very difficult and rigorous to mark all the sectors here. So, we have selected some major and important sectors for our study purpose. We hope that this study will be useful and fruitful to find out the ways to tackle the recession.

What is Recession?
To define the term recession perfectly, becomes difficult, because different economist hold different views on recession. However, in macro economics, recession is defined as a distinct decline in any particular countrys Gross Domestic Product which is also called as GDP. In other words, when a country faces negative real economic growth, for two or more successive quarters of a year, is also termed as state of recession.

According to The National Bureau of Economic Research, Recession means a signification decline in economic activity spread across the economy; lasting more than a few months.

This means, the recession affects a countrys overall economic activities, including investment, employment, rate of profit of companies etc. During the recession a sharp increase in the prices of commodities also go hand in hand. When recession continues for a remarkably long duration with its severe effects, it is termed as economic depression, where, an economy faces a complete breakdown which is also termed as economic collapse.

Causes of Economic Recession:

The primary reason of Economic Recession is the actions taken to control the money supply in the Country/Economy. The Federal Reserve is responsible to strike an ideal balance between money supply, interest rates and inflation. When the Reserve bank loses the balance, the economy can spiral out of control. Besides this, some external reasons are also responsible for the economic recession. War, Weather conditions, some kind of natural calamities and some other factors are beyond the control of a particular economy. They are responsible for the recession. Apart from this, high oil prices can also play a major role in the economic recession. Some other economic factors like lower interest rates which adversely affect savings of households and consequently banks. With very little savings, banks cannot

provide loans and that causes severe difficulties for major infrastructure projects which finally lead to slow economic growth and impending recession.

History of Economic Recession:

1814 was the year in which, the countries of the world faced the effects of economic recession. During 1814 to 1933 India has faced the storms of recession four times. But during that time India was ruled by the British Empire. British Empire took enough steps to save India from the trap of economic recession. The first phase of the recession started in 1814 and lasted in 1830. During this 15years, the prices of the commodities decreased but the prices of Gold and Silver remained firm in the International Markets. The second phase of the recession started in 1864 and it lasted in 1897. During this period also the prices of the Gold and Silver remained firm in the International Markets but the prices of other commodities increased. The third phase of recession was more horrible than the previous two phases. This phase started in 1912 and lasted in 1918. During this phase, Punjab National Bank (PNB) and other Co-operative banks were closed and people had lost their confidence in the bank. During this phase, the prices of Gold and Silver tumbled and Rupee and Dollar had also plunged. The fourth Phase of Global Recession started during 1929 and 1933. The prices of gold fell by 40% during this period. Because of the Second World War immediately after this recession, it took very much time to come out of the recession. The nations of the world come out of the recession in 1951, but between 1980 and 1990 the economies of the world had been facing light strokes of recession. Currently, America and many other countries are passing through the storm of recession.

Impact of Global Recession on Indian Economy:

There can be seen the effects of US economic crisis all over the world. Indian economy can also not be an exception to this. Falling sales, rising inflation, increasing costs and drying cash flow are some of the effects that India has derived from US economic crisis. Indian companies have major outsourcing deals from the US. There are large scale exports contracts with the US. There was a large scale direct and indirect investment in Indian 4

companies. This entire thing will fall down if the US economy falls. The Indian economy is likely to lose 1% or 2% in GDP growth in the current and next fiscal year. IT, IT enabled services, textiles, jewellery, handicrafts and leather will suffer heavy looses because of their links with the US. The worst effects of US recession will be in the service industry of India. BPO, KPO, IT etc. are included in the service industry that contributes about 52% to Indias GDP growth, but very significantly.

To check the effects of global recession on Indian economy, we have prepared a sector wise study. In this study i have covered the sectors like, Textile Industry, Steel Industry, Cement Industry, FMCG, Realty Sector, Banking Sector and Mutual Funds.

1)

Textile Industry:
Major textiles companies are facing heavy losses. The collective loss of the 50 major textile companies listed on BSE has touched Rs.206 crores in the second quarter of the current fiscal year. In the previous fiscal year, they have posted a net profit of Rs.223 crores in same quarter. Nitin Spinners, Pat spin India, GTN Industries, RSWM and Bombay Dyeing have seen sharp declines in the profitability in the second quarter. Their profitability fell by a whopping 11.598%, 7.257%, 398%, 925% and 825% respectively for the period. Production grew only 0.3% during the first six months of the current fiscal against 5.2% in the same period last year. The following tables show the turn over and net profit and performance of textile sector.

Turnover and Net Profit of Textile Sector

Turnover of Top 50 Companies (Rs. In crores) Quarter-II 2008-09 8,414 2007-08 6,828

Net Profit of Top 50 Companies (Rs. In crores) Quarter-II 2008-09 -206 2007-08 223

Performance of Textile Sector

Name of the company % change Quarter-I 2008-09 over 2007-08 Arvind Mills Bannari Amman Spinning Mills Bombay Dyeing S Kumar Nation Wide Century Textiles Welspun India Raymond -34 -19 -370 29 -42 -92 -875 % change Quarter-II 2008-09 over 2007-08 -84 40 -828 34 -60 -97 -21

(Source: Confederation of Indian Textile Industry- CIIT)

2.

Steel Industry:

There is a major impact of Global financial crisis on Steel industry also. 25% fall in the prices of steel products has been recorded in the last month. And in comparison with June-2008, the prices have fallen by 40%, as the prices of its raw material i.e. iron and coal have fallen by 61% and 33% respectively.

Position of Sales, Consumption & Net Profit of Major Steel Companies in October-2008 [Figures in percentage]
Name of the company SAIL TATA Steel JSW Steel Sales 33.56 43.14 58.46 Consumption of Raw material 52.76 72.75 116.01 Net Profit 18.20 50.13 -40.57

ISPAT Industries J.S.L. Total

57.97 -3.16 41.91

79.13 -5.52 51.75

Net loss Net loss 17.65

[Source: ET Bureau]

From the above table, it can be seen that ISPAT and JSL shows net loss where as TATA steel and JSW Industries having moderate performance. The overall performance of the steel industry remained hopeless.

3.

Cement Industry:

Cement industry shows 15% rise in sales but its net profit has declined by 25%. Heavy burden of interest and high prices of raw material are responsible for this decline. We can see the mix trend, if we analyse the figures of cement industry. In terms of sales, the companies of southern region have performed well, whereas the companies of western region show the growth in single digit. In terms of Net profit, all the companies have declined. However, the rise in total production cost is responsible for it. In addition, the slow in construction and real estate sector is also responsible for it.

Position of Sales, Consumption of Raw Material and Net Profit of Major Cement Companies in October-2008

Name of the company ACC Ultra tech Ambuja India cement Madras cement Total

Sales 8.96 19.58 7.78 25.21 33.48 15.08

Consumption of Raw material 9.68 31.63 32.25 18.53 45.31 23.66

Net Profit -0.05 -11.66 -7.40 -39.69 -6.02 -25.81

[Source: BS Survey]

The above five cement companies lead the whole industry which does not show good performance

4.

FMCG Companies:

FMCG companies include companies producing food items, cigarette, soap washing powder etc. their situation is somewhat better as compared to other sectors. The increase in rural demand is responsible for such condition. Satisfactory monsoon season, debt waiver by the govt. and employment generating schemes applied in the rural areas has caused increase in rural demand for FMCG. 50% of the total demand of FMCG is belongs to rural area.

According to the analyst of Motilal Oswal group, the demand for Toilet soap, Detergent and Paints have declined sharply.

Position of Sales, Consumption of Raw Materials and Net Profit of Major FMCG Companies
Name of the company Hindustan Uni Leaver ITC Nestle India Britania Industries Nirma Total Sales 19.71 15.08 22.15 27.29 40.40 20.86 Consumption of Raw material 37.11 30.79 31.01 35.52 65.24 36.45 Net Profit 33.95 4.13 13.53 9.96 -97.88 10.55

[Source: BT Survey 2008]

5.

Realty Sector:-

This sector is the most affected by financial crisis and decline in demand. Because of the probable decline in GDP, many companies have postponed their project. According to the survey undertaken by center for Monitoring Industrial Projects, during the first and second sector shows the following situation during, September - 2005 to September 2008

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Position of Realty Sector during September-05 to September-08

New Project Month September -05 December 05 March 06 June 06 September 06 December 06 March 07 June 07 September 07 December 07 March 08 June 08 September 08 No. of Projects 594 535 582 740 1121 1366 503 526 1213 700 656 507 570 Rs. In Crores 177920 285912 135010 232036 574113 304441 216964 25737 428889 450236 487246 531644 528285

Discontinued project No. of Projects 3 10 5 6 16 12 16 21 19 46 40 52 45 Rs. In Crores 405 6011 12960 14357 9928 2306 10695 22529 11871 40629 18196 42740 33789

[Source: ET Bureau]

Some of the above project has also been discontinued.

Number of New projects and Discontinued Projects During the period of September- 05 to September- 08

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Position of investments in New Projects and Discontinued Projects during September-05 to September-08

6.

Banking Sector:

Banking sector also proves the impact of Global financial crisis on Indian Economy. During July to September, 25 Indian banks have shown increase in weak solvency Margin and Bad

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Loans. According to the survey of ASSOCHEM Eco plus (AEP), none performing assets of 25 Indian banks, have risen by 24% during this period. Capital Adequacy Ratio has declined by 2%. Monthly Bulletin of Reserve Bank of India show total NRI Deposits in Indian Banks.

Trends of NRI Deposits in Indian Banks

Months April May June July August September

2007 08 -257 -302 113 294 -428 90

2008 09 -7 459 361 -111 -16 513

[Sources: ET Bureau]

Thus, NRIs have invested in Indian Banks to remain safe.

7.

Mutual Funds:

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In the current fiscal year, All Equity related Mutual Funds have shown the decline of Rs. 75,966 Crores in the first seven months. According to Association of Mutual Fund of India (AMFI), there was a rundown of whopping Rs. 40,608 crores, during the single month October, 2008. In October 2007, when share market was blooming, the value of Mutual Funds had increased to Rs. 80,984 crores. In the first seven months of 2008 09 Sensex has declined by 37.4%. Following trend is seen in some Mutual Funds.

Position of Mutual Funds

Reserve & Surplus Mutual Fund March 2008 Reliance ICICI Prudential HDFC TATA Birla Sun Life J. M. Financial Fidelity HSBC Kotak I.D.F.C. L.I.C. 14,696 6,193 10,606 2,586 3,225 512 1,891 1,465 1,061 876 8 10,338 2,859 9,060 1,218 1,900 -717 851 785 391 423 -272 -4,358 -3,354 -1,545 -1,369 -1,325 -1,229 -1,040 -680 -670 -453 -280 16,883 10,680 7,441 3,950 4,222 4,088 5,309 2,507 3,614 2,683 1,611 Sept. 2008 Difference March 2008

Unit Capital Sept. 2008 Difference

16,707 9,202 7,392 3,857 4,185 3,802 4,993 2,469 3,459 2,364 1,588

-17 -1,478 -48 -94 -37 -286 -316 -37 -154 -319 -23

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Position of Reserves and Surplus in Mutual Funds in March 2008 and Sept. - 2008

Position of Unit Capital in Mutual Funds in March 2008 and September - 2008

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Conclusion:
In the end, we would say A ton of talk cannot solve an ounce of the problem. So, instead of talking about problems, we need to talk about its solution. Though India is a strong economy and Indian government is boasting of its strength, the global crises have laid some serious impacts on the important sectors of Indian economy. Though Indian government has declared many consolation packages, they are not enough to rejuvenate the economy. Some more helping hands are required to get the growth train on the right track.

References:
Discussion Paper prepared by the IMF Research Department Reaping the Benefits of Financial Globalization, June, 2007 The Times of India, daily, India must banish thought of recession, November 24, 2008. The Economic Times, daily, November 20, 2008 Global Financial Stability Report, published by IMF, October, 2008 Global Financial Crisis and Key Risks: Impact on India and Asia By- Rakish Mohan, Deputy Governor RBI Magazines: Yojana, Arth sankalan, Indian Management, Front Line, Outlook,

Business World News Papers: The Times of India, The Indian Express, The Economic Times, Gujarat Samachar, Sandesh, Phulchhab, Divya Bhaskar published during October 2008 to December 2,008

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