2008 Recession

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RECESSION

•In economics , a recession is a business cycle contraction.

•It is a general slowdown in economic activity spread across the economy .

•Lasts more than a few months .

•Macroeconomic indicators such as GDP ( Gross domestic product), investment spending, capacity utilization, household income, business profits and inflation fall .

•Bankruptcies and the unemployment rate rise.

The 2008 Recession

Commonly known as the Great Recession .

Caused by a number of factors , all happening simultaneously and finally caused a downturn in the global economy.

Three factors that cause the recession :

•“Irresponsible ” usage of loan .

•Real estate bubble

•Over borrowing.

Cutting Interest Rates.Preventing Home repossessions. Expansionary Fiscal Policy. Devaluation. Quantitative EasingMonetary Policy

Measures to control Recession

Cutting Interest Rates:-

Cutting interest rates should help to boost aggregate Demand. The monetary authorities could try and reduce other

interest rates in the economy.

Preventing Home repossessions:- Home repossessions can cause bank losses and falls in consumer

spending. The government may try to freeze mortgage rates to preventing house repossession.

Expansionary Fiscal Policy:-

The government could try higher government spending on capital investment projects. This directly injects money into the economy, it may be more effective than tax cuts,

Devaluation:- A devaluation in the exchange rate can cause a boost in

aggregate

demand. A fall in the value of the dollar, makes exports cheaper

and imports more expensive increasing domestic demand.

Quantitative Easing:-

This increases bank reserves and should help encourage

bank lending. Also, it reduces interest rates on bonds which

should help encourage spending and Investment.

EFFECT OF RECESSION ON DIFFERENT SECTOR OF THE

COUNTRY

The Sensex crashed by nearly 13% in just two trading sessions in January 2008

The Indian stock markets also crashed due to the slowdown in the U.S economy.

Information Technology Industry

Recruitment by IT companies at IIT Kanpur has gone down from 130 students in 2007 to 72 in 2008.

IT companies are predicted a drop of 15% in growth from 30% in BPO sector.

India's outsourcing industry slowed down.

SHARE MARKET

Real Estate Sector

•One of the casualties during this time was real estate, building projects were half done all over the country and in this tight liquidity situation developers find it difficult to raise finance.

•Lehman Brothers had signed a partnership with some of the real estate companies like Peninsula Land Ltd and DLF Assets because of heavy loses

Projects were halfway to complete, or companies got stuck with cash flow were unable to reach break even, and were running out of cash.

As very less new production were taking place, this leaded to loss of export deals and created unemployment.

Agricultural Sector

There had been sharp decline in the exports of agricultural products during April 2008-February 2009, the value of export declined from $1,682 million to $735 million to the United States.

There is a ban virtually on all food grains exports, rice and wheat are banned.

Industrial sector

Banking sector

As companies were in loss many banks suffered crises in recovering loans which in turn had an adverse effect on economy and also created liquidity crunch.

Central banks have worked to improve liquidity but were charging higher credits. The interest rates have drastically increased from 11.5% to nearly about16%.

Foreign Direct Investment

Foreign Direct Investment, is the investment by foreign nationals in a country’s industries.

In case of weakening of US$, there will be lesser funds in terms of rupees, invested by the US citizens and thus the FDI from US as such will be effected adversely

Due to decreasing $ rate against Indian rupees exporters were earning less

As such in the case of a depreciating dollar, exporters had to bear the loss as a cut in margins which in some cases leaded to loss.

IMPORT

India imports generally Petroleum products, capital goods, fertilizers, & chemicals.

The importers in the case of a stronger rupee now had to pay more for the same commodity as the exporter increased the price for the same.

Thus it also lead to hike in price and fall in demand having effect on economy.

EXPORT

INFLATION

INFLATION Inflation is a sharp upward rise in price

level. Its is associated with high prices, which

causes decline in the value of money. When the level of currency of a country

exceeds the level of production, inflation occurs.

Value of money depreciates with the occurrence of inflation.

DEFINITIONAccording to Crowther , “Inflation is a state in which the value of money is falling, i.e., prices are rising.”

According to Coulbourn, “Inflation is too much of money chasing too few goods.”

CAUSES OF INFLATION Increase in demand for goods and

services. Increase in private and public

expenditure. Increase in exports. Reduction of taxation. Rapid growth of population. Shortage of supplies. Hoarding by traders and consumers. Natural calamities or war.

TYPES OF INFLATION

There are two types of inflation and are not mutually exclusive, so it is possible for both to occur simultaneously. The two types are as follows:

1. Demand pull inflation

2. Cost push inflation

Demand-pull inflation:• This occurs when Aggregate Demand(AD)

increases at a faster rate than the Aggregate Supply(AS).

• If demand exceeds supply, it causes the general rise in price level of the economy.

Cost-push inflation:• Cost push inflation occurs when the price of

inputs increases.(raw materials, labour, energy, etc)

• This occurs when there is an increase in the cost of production, which causes a leftward shift in the aggregate supply curve.

Controlling inflation

The various measures that can be taken for a better balance between supply and demand are as follows:

1. Monetary measures.2. Fiscal measures.3. Other measures.

1.Monetary measures: Credit control. Demonetisation of currency. Issue of new currency.

2.Fiscal measures: Reduction in unnecessary

expenditure. Increase in taxes. Increase in savings. Surplus budgets. Control over investment.

3. Other measures: Increasing production. Price control. Rationing.

MEANING:

Monetary Policy is the process by which monetary authority of a country controls the supply of money in the economy by its control over interest rates in order to maintain the price stability and to achieve high economic growth.

OBJECTIVES:

•Price Stability• Controlled expansion of bank credit•Promotion of export •Desired and equal distribution of credit•Reducing rigidity

Monetary Operati ons:

It involves monetary techniques which operate on monetary magnitudes such as money supply, interest rates and availability of credit, stable exchange rate, healthy BOP etc. In India RBI monitors and regulates Monetary Operations through Monetary Policies.

Cash Reserve Ratio-Means Banks that should maintain certain amount of deposits in RBI.Current CRR is 4%.

Statutory Liquidity Ratio: The ratio at which financial institution should maintain certain quantity of liquid assets themselves at any point of time of their total time and demand liabilities.Current SLR is 22%.

Repo Rate and Reverse Repo Rate: Where if RBI lends money for commercial banks against government is called Repo Rate (7.75%); If RBI borrows from commercial banks it is called Reverse Repo Rate (6.75).

PRESENTED BY: -SOUGATA-VINAY-SRIDHAR-SUSHMITHA-SMITHA