Recession & its Impact on Recession & its Impact on Indian EconomyIndian Economy

--B.V.Raghunandan, SVS College, BantwalB.V.Raghunandan, SVS College, Bantwal

SDM College of Management,Mangalore.

February 26, 2009

Recession: What it MeansRecession: What it Means

An economic situation of continuously declining demand

resulting in dwindling business and industrial confidence

Characteristics of Characteristics of RecessionRecession

• Reducing Sales and profits

• Increasing Unemployment

• Hesitation of New Investment

• Reducing Government Revenue

• Gold replacing Dollar as Reserve Currency

• Risk free Investments

• Larger Holding of Cash by Institutions

• Lesser FII• Basic Commodities • Expectation of

Intervention by Government

Role of GovernmentRole of Government

• Passive upto 1929-32• Keynesian Economics• WTO against any Government Role• In 2009, no voice of discontent about

Government Intervention• Nationalisation which was a dirty word

in Liberalisation has become very much relevant even in the USA

Genesis of A RecessionGenesis of A Recession

• Consequence of a Hyper Industrial Activity

• Very High Level of Speculation• Huge Turnover in Derivatives• Real Estate Boom and the Speculation• Central Bank’s Efforts in Contraction of

Credit

US RecessionUS Recession

• Collateralised Debt Obligations (CDOs): Started in 1970s by packaging mortgages and selling them as CDOs

• Mortgage Backed Securities(MBSs): In 1983, Larry Fink of First Boston Corporation pioneers MBSs by dividing mortgages on the basis of Risk. Interest varied with Risk. Toxic Debt gave highest Rate of Interest

US Recession …(contd)US Recession …(contd)

• 1990s- Supreme success of MBSs put a lot of money with Banks & Mortgage Houses

• Lenders lower interest rates to 100% sub-prime mortgages. Rising house prices gave a false sense of security in case of defaulters

• Credit Default Swaps (CDSs): In 1997, Blythe Masters of JP Morgan Chase invented CDS, whereby the buyer paid a premium to seller to protect the buyer against default

US Recession….contdUS Recession….contd

• Shadow Banking System: Swaps cover mortgages, business loans, credit card debt and student loans

• Transactions through e-mails by speculators, insurance companies, hedge funds and pension funds worldwide

• 2000-03-Alan Greenspan cut Federal Fund Rates from 6% to 1%

US Recession….contdUS Recession….contd

• 2004: Government Sponsored lenders Fannie Mae, Ginnie Mae and Freddie Mac have mortgages that are hugely sub-prime

• 2005: Housing Boom-80% of lending is in Shadow Banking

• 2006: Housing Markets begin to collapse

• 2007-08: Banks start failing worldwide

Recession Then & NowRecession Then & Now

• Government's Determination for Intervention

• International Financial Bodies Determination to Help

• Central Banks’ Close Monitoring• Huge Funds Waiting for Deployment• Third World Countries Less Affected by

Recession

India & RecessionIndia & Recession

• Export Oriented Units getting Affected• Reduced FDI & FII Activity• Lesser Revenue to the Government• Lesser Foreign Exchange Reserves• Dull Organised Markets• Lackluster Employment Markets• RBI’s Close Watch

Beneficial Impact on IndiaBeneficial Impact on India

• Stoppage of the Mad Spree of Westernisation• Recognition of a Bigger Role to Government• Questioning the Utility of Derivatives• Domestic Industries are being Explored by

Export Oriented Units• Lop sided Development is getting Corrected• Managerial Remuneration is being Revisited

An Agenda for An Agenda for Management Students Management Students

• Be an Entrepreneur• Follow Blue Ocean Strategy• Develop a Socially Relevant Business• Consider CSR to be far more important

than profit or Efficiency• Join Government Departments

connected directly with Business & Industry

THANK YOUTHANK YOU