Recession: Definition

In economics, the term economic recession is generally used to

describe a situation in which a country’s GDP, or Gross Domestic
Product, sustains a negative growth factor for at least 2 consecutive
quarters. Being that the United States is the leader when it comes to
consumption of goods and services, an economic recession here will
send shockwaves across the world, creating a global recession. The only
way to truly recession proof your portfolio during a severe global
recession is to move your money to cash or US treasury instruments.

Recession means a slow down or slump or temporary collapse of a

business activity. The Business Cycle Dating Committee at the National
Bureau of Economic Research (NBER) provides a better way to find out
if there is a recession is taking place. This committee determines
determines the amount of business activity in the economy by looking
at things like employment, industrial production, real income,and
wholesale-retail sales. They define a recession as the time when
business activity has reached its peak and starts to fall until the time
when business activity bottoms out. When the business activity starts
to rise again it is called an expansionary period. By this definition, the
average recession lasts about a year.
 Some economists also suggest that an economic recession occures
when the natural growth rate in GDP is less than the average of
2%.Typically, a normal recession lasts for approximately 1 year.
 Causes of Recession

Recession is primarily caused by the actions taken to control the money

supply in the economy. The federal Reserve is responsible for
maintaining an ideal balance between money supply, interest rates,
and inflation. When the Fed loses the balance in this equation, the
economy can spiral out of control, forcing it to correct itself.

It is also said that economic recession can be caused by factors

that stunt short term growth in the economy, such as spiking oil prices
or war. However, these are mostly short term in nature and tend to
correct themselves in a quicker manner than the full blown recessions
that have occurred in the past.

The risk of a recession in the US in 2008 is high and rising. If the US

goes into recession. You are going to feel it in Asia, You are going to feel
it in India. Eastern Asia and China would be the biggest victims of a US
recession. The subprime crisis in the US would serve as a wake up call
for central banks around the world.

Anybody producing or consuming something plays a role in our

economy. But, what makes consumers and producers behave in a way
that leads to recession? Well, that could be anything and every
recession could have its own immediate cause. The bust of the dotcom
companies or turmoil in the credit markets, anything could act as a
trigger. In the longer term, however, a recession is a cyclical
phenomenon. Every boom is followed by a bust. Once the growth cycle
reaches its peak, it starts a downward journey. Likewise, when the bust
cycle reaches its lowest ebb, things start looking up. The beginning of a
recession is called the peak and its end is called the trough.

We have yet to discover a formula that can give us a one-way ticket to

everlasting growth. At present, our success lies in how quickly we
manage the transition.
 Current Recession in US

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 suits.

The US housing market correction (a consequence of United States

housing bubbles) and sub prime mortgage crisis has significantly
contributed yo 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 life. Consumers in US have been hard hit by the current
recession, with the value of their house 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.

US employers shed 63000 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 50 percent chance the United States could go
into recession.” On October , the bureau of Economic Analysis reported
that an additional 156000 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 533000 jobs, the largest single
month loss in 34 years. For 2008, an estimated 2.6 million US 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, 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 foods,
was the largest since 1950. A November 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 US 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.
 Current Recession in Other Countries

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
 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.
 Impact of 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
Indian economy is likely to loss between 1 to 2 percentages point in
GDP growth in the next fiscal years. 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 prospect for
India are stable. A week dollar could bring more foreign money to
Indian markets. Oil may get cheaper bringing 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 thought 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 percent 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 percent by the IMF-will contract,
and India would be no exception.

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 exports them to the US.

The IT sector will be the worst hit as 75 percent 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,
automobile 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 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 percent
or even less.
Lokendra Tomar, senior vice-president, Integrene, 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 percent, will find it difficult to survive.

According to Dharmakirti Joshi, director and principal economists of

CRISIL, along and severe recession will seriously affect the portfolio and
fixed investment flows. Companies will also suffer from volatility in
foreign exchange rates. The export sector will have to devise new
strategies to enhance productivity.
 Industries To Do Bad in Recession

The Aviation Industry

The fairy tale seems to be ending. The aviation sector, which witnessed
a double-digit growth in recent years, has begun resorting to
‘rationalisation’. The recession, like in many other sectors, is sure to
separate the mediocre from the competent in the aviation sector too.

Two events in this regard stand out. In the first instance, private Indian
airlines, which in the past have experienced massive growth, have
demanded a “bailout” in the form of reduction in taxes and airport
charges etc from the government and even threatened to ground their
planes if their demands are not met!

And the second is the sad case of Air India. The Maharaja (as it is called)
has piled up accumulated losses of over Rs 7,000 crore and debt
exceeding Rs 16,000 crore. It has been forced to cut salaries and cancel
order for new jets. The situation is so serious that it is headed for a
major government sponsored restructuring, after being denied bailout.
2nd Hand Retailers

Though the retail sector has been severely affected the world over during
this financial crisis with many big retail chains/outlets, shopping malls,
multiplexes opting for closure after finding it difficult to feed their lavish
expensive resources (large pool of highly skilled/groomed/professional
staff, huge inventories, capital intensive infrastructure and an upmarket
property), smaller 2nd hand retail players (books, clothes, DVDs) have
not only managed to stay afloat some of them have in fact managed a
higher growth rate than previous years.
With job losses and accompanied reduction in purchasing power of
consumers the concepts of “bargain” and “recycling” is fast catching up
aiding the 2nd hand retail sector to bloom and prosper.

Telecom

Telecom has been yet another sector which has managed to grow at a
healthy rate during the past year thanks to emerging and fast growing
economies like India and China.

In particular India has seen a mini revolution of sorts in the telecom

landscape during the last couple of years with subscriber base growing
exponentially. Purely in terms of growth rate Telecom has outperformed
most other segments of the industry if not all.

In spite of the size of the Indian telecom market the overall rate of
mobile penetration is still far lower than most developed world
economies and therein lies the opportunity for this sector to keep
growing.

Healthcare-

Healthcare or Pharmaceuticals is another sector which is recession proof

because people can’t really get away from their share of medical
expenditure on drugs, hospitalisation and general health and disease
management activities even in times of recession.

Hospital chains like Apollo, TMH, HCG and pharmaceutical companies

like Dabur, Zandu, Biocon, Glaxo, Phizer, Ranbaxy have not only being
doing well in terms of turnover or revenue but have actually been
investing in clinical research to develop new drugs/vaccines/treatments
for modern day diseases.

(HCG has brought a new breakthrough cyberknife technology for cancer

treatment in India; Biocon is trying to develop oral insulin tablets for
diabetics)

Higher Education-

In times of lower available job opportunities people seek for higher and
professional education to improve their resume and enhance their job
prospects.

Around 8 lakh students appeared for AIEEE (CBSE Engineering) exams

in 2008 and the number is expected to rise to 10 lakh this year. In fact
enrolment in all professional higher education courses like engineering
and management have been growing at a phenomenal rate for quite some
time now, the current recession being no exception.

FMCG-

Fast Moving Consumer Goods (FMCG) sector which caters mainly to

perishable consumer products (like soaps, shampoos, detergents,
biscuits, confectionary, chips, toffee, battery, torches, tea, ice cream,
cosmetics etc) doesn’t get too affected with recession.

Although demand in cosmetics and other lifestyle products may decrease

a little but no real impact comes in the overall demand of food items
(like biscuits and confectionaries); batteries and torches; tea, coffee and
other beverages; toiletries (soap, shampoo, detergents) etc, which
comprises essential commodities of day to day use.

It’s the diverse product portfolio which keeps these FMCG companies
going even in a slowdown.
 IMPACT OF RECESSION ON INDIAN
STOCK MARKET

BSE Sensex fell to below 10,000 levels for the first time since January,
2006. This crash to 4 digits is a big blow to new investors who have
never seen the implications of the bear market. Don’t try to find the
logic behind this fall. FIIs are selling out of necessity but domestic funds
are not in a position to fully stop the fall. Only positive aspect is that
unlike in January, trading was not stopped even for a single minute
means buying is still there from some quarters.

Sensex below 10,000 in June, 2006: Good growth with optimism.

Sensex below 10,000 in October, 2008: Slow growth with pessimism.

significant rumours:
1. RBI will cut repo rate on October 24. Source: Times of India.

If this is true, Stock Markets will stabilise above 11,000 levels over short
term. Indian Companies will take a breather and mutual funds will
inject some money into the markets. If RBI delays this decision, BSE
Sensex will soon touch below 9,000 levels.

2. High Court will give judgement in RIL-RNRL case by November. This

will have huge implications on many Companies. Sooner the better!
Loser may drag the case by going to the Supreme Court.

3. 3G auction will be held in January. Bad news.

1. Warren Buffett wrote a good article in the New York Times on

“Why I am buying Stocks?” But how many of us have his vision
and patience levels. We buy stocks today and watch their prices
from tomorrow onwards. Investors spoilt due to the last Bull Run.
2. Positive news:

1. Government is planning to remove the 49-MW cap on Wind

Energy projects. This move will attract more foreign investments
into this emerging sector.

2. United Phosphorus announced acquisition plans.

How to revive Indian Stock Market:

Why good Companies are falling even after announcing bumper

results? Why no one is buying even good Companies at cheap
valuations? This is because of sentiment. Unless sentiment turns
positive, it is impossible for stock markets to make positive gains.
As long as panic is ruling, no one cares about results, valuations
and fundamentals etc. Government, RBI and Industrialists need to
do take steps that will drastically change the sentiment of
investors especially FIIs.

1. RBI should immediately reduce interest rates by at least 1%.

This is the most crucial step. CRR cuts will not help any more.

2. Ambani brothers should stop quarrelling in Courts and find an

amicable solution. Reliance Gas has the potential to change the
energy landscape of the country. Unless Reliance stocks perform,
Stock markets will never recover in a big way. This spat is sending
negative signals to the international community.

3. Rupee fall: RBI should stop this slide to save Indian Stock
Markets. Why do FIIs want to invest in a country with weak
currency?

4. Inflations need to continue its downward march. Oil prices

should stay below $80 per barrel level.

5. Oil ministry should decrease petro product prices to control the

inflation and input costs.

6. Companies need to announce more buybacks and acquisitions

to trigger economy in positive direction. Liquidity is the
problem. Financial Institutions should support such
managements.
Openion: Unless RBI takes measures like rate cuts; current market
has more downside especially in large caps. But stocks (especially
mid caps and small caps) which had more FII holdings before
October are now corrected heavily and trading at least 50% below
their fundamental prices. Except ICSA and Glenmark, most of
these stocks have not recovered due to lack of support from
either promoters or funds. But ICSA was well supported by
promoters while Glenmark was supported by big investors.
 Conclusion

Over the past couple of months, fears of a slowdown in the United

States of America have increased. The impact of the subprime crisis
along with a slowdown in mortgages has led to a significant lowering of
growth estimates .Since the United States dominates the global
economy ,any slowdown there would have an impact on most of the
global economic variables.

For India, it could mean a further appreciation in the rupee VIS—Vis the
US dollar and a darkening of business outlook for sector dependent on
US companies. The overall impact of a US slowdown on India would,
however, be minimal as the factor driving growth here are more local in
nature .unlike the rest of Asia, India is a strong domestic demand story,
so any slowing in the US is likely to have a more muted impact on
India .strong growth in domestic consumption and significant spending
on infrastructure are the two pillars of India’s growth story. No sector
has a dominant influence on earning growth and risks to our estimate
are limited. Corporate India is also learning to master the art of efficient
capital management reduction in costs and delivery of value added
services to sustain profit margin .further ,interest rates are expected to
be stable primarily due to control over inflation and proactive measures
undertaken by the RBI.
 BIBLIOGRAPHY

1. www.gogle.com
2. www.moneycontrol.com
3. www.investopedia.com
4. www.indiabulls.com
5. www.indiainfoline.com
6. www.wikipadia.com