Economic Recession In India : A net based Commentary

What the Issue is all About?

Economic recession and its role in Global economic meltdown has affected
almost all countries. Strongest of American, European and Japanese companies are facing
severe crisis of liquidity and credit. India is not insulated, either. However, India’s cautious
approach towards reforms has saved it from possibly disastrous implications. The truth is,
Indian economy is also facing a kind of slowdown. The prime reason being, world trade
does not functions in isolation. All the economies are interlinked to each other and any
major fluctuation in trade balance and economic conditions causes numerous problems for
all other economies.

The world economic slowdown which had its epicenter in the developed
economies has now found its way into the developing economies also, which didn’t have any
substantial exposure to the toxic assets(CDO) which triggered the entire crises. I had
strongly believed that India would be immune to this economic meltdown as our banks were
not exposed to the sub prime mortgage assets and moreover there was the vibrant domestic
market which would compensate for the declining global demand. But now as we see the
decoupling theory failing ,our growth rates revised downwards ,industrial growth rates
dropping investor and consumer confidence at their abysmal levels, credit becoming costlier
and hoards of monetary and fiscal measures initiated by the government that India also has
to share its bit of the pain. The Davos world summit that brought about no results except
that the developing countries emphasizing that the recession is a common problem for the
world economies and has to be resolved together and the countries should desist from
taking any protectionist policies .This would mean even the developing economies would
have to pay the price for the irresponsible deed done by the financial wizards, political
wonks and the lack of due diligence by the regulatory authorities and the credit rating
agencies .This crises has exposed the weak underbelly of the us giants which were considered
invincible.

In macroeconomics, recession is defined as a distinct decline in any particular

country's Gross Domestic Product which is also called as GDP. In some other cases, when a
country faces negative real economic growth, for two or more successive quarters of a year,
that’s also termed as state of recession. Though, the exact definition of recession has always
been controversial and economists tend to differ in defining recession. According to ‘The
National Bureau of Economic Research’ recession is defined as “a significant decline in
economic activity spread across the economy, lasting more than a few months.” In general,
recession affects a country’s overall economic activities, including, investment, employment
rate, profits data of companies etc. Recession is almost always accompanied by sharp
increase in prices of commodities. When recession continues for a long duration and with
severe implications, it’s termed as economic depression whereas complete breakdown of
economy is referred as economic collapse.

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 The exact causes of recessions are a subject of hot discussions amongst the
economists and academicians. However, the general rule says, it’s caused by combination of
several potential dangerous factors. It could be caused by cyclical movement of economy or
by some external elements. Few major causes are; inflation, currency crisis, speculation,
national debt etc.

External reasons can be war and other factors which are beyond the control of a
particular economy. Apart from these, other reasons can be high oil prices (as most
countries depends upon oil import for industrial growth), weather conditions, some kind of
national calamities among others. Several other economic factors also affect recession factor
like, lower interest rates which adversely affect savings of households and consequently
banks. With very little savings, banks can not provide loans and that causes severe bottleneck
for major infrastructure projects which finally lead to low economic growth and impending
recession. The role of money supply is also very crucial in causing recession. Inflation of
money supply or mishandling of excessive liquidity or even crunch of liquidity also invites
recession. Overall, economic recession badly affects any economy. Recession implies
inflation or deflation, foreclosures, bankruptcies and banks lending less money etc.

Role of moving companies in the economy

The firms engaged in the production, distribution and retail industry will have a positive
impact when the freight movement is cheaper with better quality. Reducing the cost of
carriage and thus efficiently serving wider market with prospective gains. Business is heavily
relied on it productivity capacity to achieve its economic goals. For this, efficient freight
movers are necessary for its productivity. Business tends to increase productivity with lower
costs and improved quality of freight mover’s services.

Economic benefits of the freight movers

With efficient freight mover, purchase and inventory control becomes faster and reliable.
This efficiency can increase productivity in manufacturing and distribution activities which in
turn benefits economic.

Economic impact on moving industry

Moving companies had a sever draw back due to the ongoing recession in US
economy. VA- ATA’s (American trucking association) marking the third consecutive month-
to-month drop in advanced seasonally adjusted For-Hire Truck Tonnage Index decreased
0.9 percent in September. This downfall in USA movers industry is due to increased cost of
fuel. Business had lost there confidence, interest rates have gone up, due

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to lay-off’s, consumer spending has decreased because of these manufacturing productivity
has gone down. As the business has to reduce there cost of production through cut in
transportation cost, carrying cost of inventory, cost of owning and ordering cost which in
turn effect the moving companies where the business tend to respond to the moving
companies to reduce there logistic cost. More recently the moving costs have been falling
and increase in reliability with increase in competition and increased trip miles per hour for
each vehicle and thus smaller work force for the same amount of work with lower
maintenance cost and increased reliability.

An efficient and reliable freight movers services like van lines movers can continue growth
in the manufacturing productivity. Congestion in the system can hamper the reliability of the
productivity, which leads to increase in cost of transportation threatening economic growth.

Dynamics Involved In Economic recession

In our life, there is a special place for money (be it in any currency). Most of the
problems that we are facing in our life and day-to-day living are linked with it. Food, shelter,
clothes, life-style, education, comforts and etc and etc, each and everything involves money.
Money should be revolving; it comes, it goes and it comes back again. It should always
change hands or else it is useless. It is this nature of the money that drives the economy of a
country, a company or our life. And when you are going through recession, it means no
money is coming in. Money is not coming in but yet you need to live and hence there is a
need for cost-cutting. But you never know how long the recession will continue and hence
more cost cutting.

Attributes of recessions

In macroeconomics, a recession is a decline in a country's gross domestic product

(GDP), or negative real economic growth, for two or more successive quarters of a year.
Some economists prefer a more robust definition of a 1.5% rise in unemployment within
12 months. In a 1974 New York Times article, Julius Shiskin suggested several rules of
thumb to identify a recession, which included two successive quarterly declines in gross
domestic product (GDP). An alternative, less accepted, definition of recession is a
downward trend in the rate of actual GDP growth as promoted by the business-cycle
dating committee of the National Bureau of Economic Research. That private
organization defines a recession more ambiguously as “a significant decline in economic
activity spread across the economy, lasting more than a few months.” 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.

Predictors of a Recession

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 In the U.S. a significant stock market drop has often preceded the beginning of a
recession. However about half of the declines of 10% or more since 1946 have not been
followed by recessions.[9] In about 50% of the cases a significant stock market decline came

only after the recessions had already begun. Inverted yield curve,[10] the model developed by
economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities
as well as the Fed's overnight funds rate.[11] Another model developed by Federal Reserve
Bank of New York economists uses only the 10-year/three-month spread. It is, however,
not a definite indicator;[12] it is sometimes followed by a recession 6 to 18 months later.

Responding to the recession

Strategies for moving an economy out of a recession vary depending on which

economic school the policymakers follow. While Keynesian economists may advocate deficit
spending by the government to spark economic growth, supply-side economists may suggest
tax cuts to promote business capital investment. Laissez-faire economists may simply
recommend that the government not interfere with natural market forces.Both government
and business have responses to recessions. In the foreign journals like Philadelphia Business
Journal, Strategic Business adviser Carter Schelling has discussed precautions businesses take
to prepare for looming recession, likening it to fire drill. First, he suggests that business
owners gauge customers' ability to resist recession and redesign customer offerings
accordingly. He goes on to suggest they use lean principles, replace unhappy workers with
those more motivated, eager and highly competitive.

In the present time, the whole world is witnessing the effects of global financial
crisis. This crisis came on surface because of sub-prime lending crisis in United states of
America. The situation became more critical due to bankruptcy of Lehman Brothers which
was the fourth largest institutional bank of US. Since, then the Indian economy is also facing
challenges of this economic meltdown. Every sector has been badly hit by this recession.
Quite unfortunately, the Bombay Stock Exchange came plummeting down from 21000
points to 8000 mark. The fast growing real sector is also affected as the capital value of
property is plummeting. Many construction projects are on the brink of collapse because of
liquidity crunch like proposed convention centre in New Delhi, DLF mega-home project in
West Bengal. The inflation scaled high on around 13% but right now the case is even worse.
The information technology sector also cannot be an exception in this regard. Of late, the
Satyam computer also suffered the hits of recession.

The Government of India has also taken many reconciliatory actions to bring the
situation into normal. The RBI has made so many changes in its monetary policy. In fact, the
RBI has increased the bank rate and CRR(cash reserve ratio) rate so that the inflation may
come down. The Indian Government has even proposed many bailout plans to bring more
liquidity in the Indian market. Many economists are anticipating that despite recession, the
GDP growth rate would be 6.5-7% in current fiscal year. In my opinion, the Indian economy

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will soon recover its growth rhythm because of its domestic market structure. Many Indian
companies are appearing on global platform to participate in the corporate restructuring i.e.,

merging and acquisitioning. Although, the banking sector has also been affected by the
meltdown but in comparison to other nations the Indian banks are performing quite well.

The fear of a recession looms over the United States. And as the cliche goes,
whenever the US sneezes, the world catches a cold. This is evident from the way the Indian
markets crashed taking a cue from a probable recession in the US and a global economic
slowdown. And the Weakening of the American economy is bad news, not just for India,
but for the rest of the world too. So what is a 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 allowing down. An economy

which grows over a period of time tends to slow down the growth as a part of the normal
economic cycle. A recession normally 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 decreased in production , lay-off and a sharp rise in
unemployment.5Investors spend less as they fear stocks values will fall and thus stock
markets fall on negative sentiment. Stock markets & recession the economy and the stock
markets are closely related. The stock markets reflect the buoyancy of the economy. In the
US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a
worried lot.

The Indian stock markets also crashed due to a slowdown in the US economy.
The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The
markets bounced back after the US Fed cut interest rates. However, stock prices are now at
a low ebb in India with little cheer coming to investors. Current crisis in the US the defaults
on sub-prime mortgages (homeloan 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.

Impact of the US recession on India

The ripples of a crumbling USA market can be witnessed all over the world. Whatever
happens in America, its impact can be felt way beyond the United States. Indian economy is
no exception to this rule. World over, companies are biting dust including lions of financial

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world like, Lehman Brothers, Bear Sterns, AIG, Merill Lynch etc. It has been an
unprecedented collapse of financial giants of American economy. The effects of American
crisis can be seen in European and Japanese companies. Many banks are almost on the verge
of collapse and frantic steps are undertaken by respective governments to prop them up.

India, on the other hand, is far more fortunate. Many factors are responsible for
relatively less negative impact on Indian economy. The slow pace of financial reforms taking
place in India, cautious approach towards permitting foreign investments in Indian business
sectors, numerous bureaucratic hurdles and regulatory constraints have turned out to be
advantageous for India. India has always been criticized for its slow speed in economic
growth but in hindsight it’s that very turtle speed has proved to be a blessing in disguise.

Indian financial system has very little exposure to foreign assets and their derivative
products and that’s the prime reason India won’t be as adversely affected as other major
countries. Revival of world economy will take a long time. Though, India will be affected in
certain aspects like, low investments by foreign companies. Many FIIs (financial institutional
investors) are heavily selling their holdings in numerous Indian companies and that is
reflecting in gloom and doom scenario in stock exchange. Apart, companies, mainly IT and
ITES companies whose prime business target is USA are bound to suffer. Also, textile
companies will find themselves with low top line and bottom-line growth in their balance
sheets because of less demand from foreign countries and consequently less revenue from
exports.

Another impact would be seen in financial reforms taking place in India. India’s
cautious approach towards integrating with world economy has paid off and now even more
caution would be taken in de-regularization of the financial sector considering conditions of
market based economies. More regulations are expected to come into force so that India
does not have to face similar worst conditions as faced by ASEAN counties in 1997-98 crisis
and recession of 2008.

A slowdown in the US economy is bad news for 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.

Though no one likes or wants a recession, almost everyone appears (looking at

WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to
downplay any fears of global repercussions, citing decoupling of the United States and other

economies as a buffering factor. But what is the reality for countries like India?

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It would be naïve to imagine that a recession in the United States would have no impact on
India. The United States accounts for one-fourth of the world GDP and any significant
slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies
between the US economy and emerging economies like India and China has reduced
considerably over the last two decades. Thus, the effect may not be as drastic as would have
been the case in the 1980s.

Even so, fears of a US recession led to panic in the Indian stock market. January 21
and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being
vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and
at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with
Hang-Seng, Nikkei, and Kospi. History might hold a clue here. The last time the bubble
burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%. Much
has happened between then and now. The Indian economy has shown a robust and
consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United
States account for just over 3% of GDP. India has a healthy trade surplus with the United
States. In other words, the effects of this recession on India may be quite distinct from those
of the past. Here are some areas worth following:

The Effects of the recession on India

A credit crisis in the United States might lead to a restructuring of asset allocation
at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24
billion to its international portfolio. A large portion of this is likely to flow into India and
China. If other funds follow suit, a cascading effect can be expected. Along with the already
significant dollar funds available, the additional funds could be deployed to create
infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy
is restored.

In terms of specific sectors, the IT Enabled Services sector may be hit since a
majority of Indian IT firms derive 75% or more of their revenues from the United States--a
classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT
budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a
threat, the sector would do well to focus on product innovation (as opposed to merely
providing services). If this is done, India can emerge as a major player in the IT products
category as well. The manufacturing sector has to ramp up scale economies, and improve
productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of
revenue from a possible US recession. The demand for appliances, consumer electronics,
apparel, and a host of products is huge and can be exploited to advantage by adopting
appropriate pricing strategies. Although unlikely, a prolonged recession might see the
emergence of new regional groupings--India, China, and Korea. The tourism sector could
be affected. Now is the time to aggressively promote health tourism. Given the availability of
talented professionals, and with a distinct cost advantage, India can be the destination of
choice for health tourism. A recession in the United States may see the loss of some jobs in
India. The concept of Social Security, that has been absent until now, may gain momentum.

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 The Indian Rupee has appreciated in relation to the US dollar. Exporters are
pushing for government intervention and rate cuts. What is conveniently forgotten in this
debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade
deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut
interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong
domestic demand would also help in competing globally when the recession is over.8

The Role of the Public sector Banks in Economic recession in India

Banks have suffered losses, including some public sector banks like Punjab
National Bank, Bank of India, State Bank of India and Bank of Baroda as they had an
exposure to the instruments issued by Lehman and Merrill Lynch. It wasn’t just the private
bank ICICI, although the latter posted the maximum losses due to their exposure.However,
if we take the overall the Banking sector in India, there is nothing to worry as heavy
regulation coupled with the tendency of banks to be cautious (more than regulations
stipulated) has protected the Indian banking industry.

Even ICICI can easily handle the loss it has suffered. Under the sector of
Information Technology Strangely it is those top IT companies with a lot of business abroad
and in the US which are a safer bet because all their eggs are not in one basket. They also
have more reserves. However the impact of loss of business will continue to be felt over the
next one year as business of IT companies will reduce.

Conclusion

This crises has exposed the weak underbelly of the us gaints which were
considered invincible. In summing up, at the macro-level, a recession in the US may bring
down GDP growth, but not by much. At the micro-level, specific sectors could be affected.
Innovation now may prove to be the engine for growth when the next boom occurs. Sectors
most affected by the slowdown in the Indian Economy Everyone’s talking of the slowing
down of the Indian economy. For us, so used to robust growth of around 8-9 percent,
anything less is hurting. So how badly has the global financial meltdown really hit us?

• The sectors least affected (directly) by the slowdown are Pharmaceuticals, Oil & Gas,
FMCG, Media & Entertainment

• Those which will feel a moderate impact of the global crises are Power, Automobiles,
Retail, Hospitality and Tourism

In the present context, most of the countries all over the world are going through
this phase of economic recession. Many old and big companies have already been brought
down on their knees to bite the dust. Many companies as well as countries have become
bankrupt or are on the verge of it. Millions and millions of people have lost their jobs. Many
people have lost millions and billions of dollars. People in general are scared and fearsome.

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This is not the first time that the global economy is going through recession and this is also
not the last time.

Bibliography

1. http://www.mumbaispace.com/economics/recession-in-india.htm
2. http://www.mumbaispace.com/economics/economic-recession.htm
3. http://www.mumbaispace.com/economics/economic-recession.htm
4. http://www.bpoindia.org/research/global-economic-recession.shtml
5. http://en.wikipedia.org/wiki/Recession
6. http://www.southasiablog.com/2009/02/economic-recession-and-outsourcing-
industry-of-india
7. http://smetimes.tradeindia.com/smetimes/news/top-stories/2008/Aug/14/global-
recession-hurting-india-inc.html
8. http://www.webguru-india.com/blog/scenario-after-the-financial-crisis

Authors : Pankaj Bansiwal & Pawan Singh, Gujarat National Law University