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LOVELY PROFESSIONAL UNIVERSITY

TERM PAPER

OF

BUSINESS ENVIRONMENT

TOPIC: REPORT ON IMPACT OF RECESSION

IN INDIAN ECONOMY.

SUBMITTED TO: SUBMITTED BY:MR.MANISH RAJPUT Shivani Sharma

MBA (2009-11)Roll No.: RS1903,B-61Reg. No.: 10908081Section: 1903

ACKNOWLEDGEMENT


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I feel immense pleasure to give the credit of my term paper not only to one individual as

this work is integrated effort of all those who concerned with it. I want to owe my thanks

to all those individuals who guided me to move on the track.

This report entitled IMPACT OF RECESSION ON INDIAN ECONOMY.

I sincerely express my gratitude and lot of thanks to Mr. MANISH RAJPUT for helping

me in completing my Term paper and give me ideas for doing my job and making it a

great success.

I would like to express my deep sense of gratitude to staff ofLPU who introduced me to

the subject and under whose guidance I am able to complete my project.

INTRODUCTION


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The economic slowdown of the advanced countries which started

around mid-2007, as a result of sub-prime crisis in USA, led to the

spread of economic crisis across the globe.

Many hegemonic financial institutions like Lehman Brothers or

Washington Mutual or General Motors collapsed and several became

bankrupt in this crisis. According to the current available assessment

of the IMF, the global economy is projected to contract by 1.4 per cent

in 2009.

Even as recently as six months ago, there was a view that the fallout of

the crisis will remain confined only to the financial sector of advanced

economies and at the most there would be a shallow effect on

emerging economies like India. These expectations, as it now turns

out, have

been believed.

The contagion has traversed from the financial to the real sector; and it

now looks like the recession will be deeper and the recovery longer

than earlier anticipated.

Many economists are now predicting that this Great Recession of

2008-09 will be the worst global recession since the 1930s.

MEANING OF RECESSION


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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 slowing down. An

economy, which grows over a period of time, tends to slow down the

growth as a part of the normal economic cycle.

An economy typically expands for 6-10 years and tends to go into a

recession for about six months to 2 years.

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 decrease in

production, lay-offs and a sharp rise in unemployment.

Investors spend less; as they fear stocks values will fall and thus stock

markets fall on negative sentiment. Risk aversion, deleveraging and

frozen money markets and reduced investor interest adversely affect

capital and financial flows, import-export and overall GDP of an

economy. This is exactly what happened in US and as a result of

contagion effect spread all over the world due to high integration in the

global economy.

GROWTH AFTER RECESSION:

Growth of 9.8 % in the year 2007-08.


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Expected growth is 7 % but inflation gap will reduce.

Best returns from stock markets.

CHALLENGES AHEAD OF 2009:

Getting inflation under control.

Spreading the benefits of growth more equitably.

Comparing investment projects which are essential for longer term development

of the economy.

Dealing with global financial uncertainity, which will make capital flows and

exports more difficult.

PLUS AND MINUS:

o PLUS:

o cost of living has lowered down.

Export goods sold locally.

Decrease in product price.

Lowering down in real estate helps common man.

MINUS:

o Job scarcity.

o High retrenchment.


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o Low liquidity.

o Hit in export market.

IMPACT ON INDIAN ECONOMY

In India, the impact of the crisis has been deeper than what was estimated by

our policy makers although it is less severe than in other emerging market

economies. The extent of impact has been restricted due to several reasons

such as-

Indian financial sector particularly our banks have no direct exposure to

tainted assets and its off-balance sheet activities have been limited. The

credit derivatives market is in an embryonic stage and there are restrictions

on investments by residents in such products issued abroad.

Indias growth process has been largely domestic demand driven and its

reliance on foreign savings has remained around 1.5 per cent in recent

period.

Indias comfortable foreign exchange reserves provide confidence in our

ability to manage our balance of payments notwithstanding lower export

demand and dampened capital flows.

Headline inflation, as measured by the wholesale price index (WPI), has

declined sharply. Consumer price inflation too has begun to moderate.


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Rural demand continues to be robust due to mandated agricultural lending

and social safety-net programmes.

Indias merchandise exports are around 15 per cent of GDP, which is

relatively modest.

Despite these mitigating factors, India too has to weather the negative

impact of the crisis due to rising two-way trade in goods and services and

financial integration with the rest of the world. Today, India is certainly more

integrated into the world economy than ten years ago at the time of the Asian

crisis as the ratio of total external transactions (gross current account flows

plus gross capital flows) to GDP has increased from 46.8 per cent in 1997-98

to 117.4 per cent in 2007-08. Although Indian banks have very limited

exposure to the US mortgage market, directly or through derivatives, and to

the failed and stressed financial institutions yet Indian economy is

experiencing the knock-on effects of the global crisis, through the monetary,

Financial and real channels all of which are coming on top of the already

expected cyclical moderation in growth.

I. STOCK MARKET

The economy and the stock market are closely related as the buoyancy of the


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Economy gets reflected in the stock market. Due to the impact of global

economic recession, Indian stock market crashed from the high of 20000 to a

low of around 8000 points. Corporate performance of most of the companies

Remained subdued, and the impact of moderation in demand was visible in

the substantial deceleration during the current fiscal year. Corporate

profitability also exhibited negative growth in the last three successive

quarters of the year. Indian stock market has tumbled down mainly because

of 'the substitution effect' of:

Drying up of overseas financing for Indian banks and Indian corporate;

Constraints in raising funds in a bearish domestic capital market; and

Decline in the internal accruals of the corporate.

Thus, the combined effect of the reversal of portfolio equity flows, the

reduced availability of international capital both debt and equity and the

perceived increase in the price of equity with lower equity valuations has led

to the bearish influence on stock market.

II. FOREX MARKET

In India, the current economic crisis was largely insulated by the reversal of

Foreign institutional investment (FII), external commercial borrowings

(ECB) and trade credit. Its spillovers became visible in September-October

2008 with overseas investors pulling out a record USD 13.3 billion and fall


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in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to

Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation

during the fiscal 2008-09. The annual average exchange rate during 2008-09

worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in

2007-08 which is the biggest annual loss for the rupee since 1991 crisis.

Moreover, there is reduction in the capital account receipts in 2008-09 with

total net capital flows falling from USD 17.3 billion in April-June 2007 to

USD 13.2 billion in April-June 2008. Hence, sharp fluctuation in the

overnight forex rates and the depreciation of the rupee reflects the combined

impact of the global credit crunch and the deleveraging process underway in

Indian forex market.

III. MONEY MARKET

The money market consists of credit market, debt market and government

securities market. All these markets are in some or other way related to the

soundness of banking system as they are regulated by the Reserve Bank of

India. According to the Report submitted by the Committee for Financial

Sector Assessment (CFSA), set up jointly by the Government and the RBI,

our financial system is essentially sound and resilient, and that systemic

stability is by and large robust and there are no significant vulnerabilities in

the banking system. Yet, NPAs of banks may indeed rise due to slowdown as


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Reserve Bank has pointed out. But given the strength of the banks balance

sheets, that rise is not likely to pose any systemic risks, as it might in many

advanced countries. Nevertheless, the call money rate went over 20 per cent

immediately after the Lehman Brothers collapse and banks borrowing from

the RBI under daily liquidity adjustment facility overshot Rs. 50,000 crore

on several occasions during September-October 2008 under tight liquidity

situation.

IV. SLOWING GDP

In the past 5 years, the economy has grown at an average rate of 8-9 per cent.

Services which contribute more than half of GDP have grown fastest along

with manufacturing which has also done well. But this impressive run of

GDP ended in the first quarter of 2008 and is gradually reduced. Even before

the global confidence dived, the economy was slowing. According to the

revised estimates released by the CSO (May 29, 2009) for the overall growth

of GDP at factor cost at constant prices in 2008-09 was 6.7 per cent as

against the 7 per cent projection in the midyear review of the Economy

presented in the Parliament on

The slowdown in growth of GDP is more clearly visible from the

growth rates over successive quarters of 2008- 09. In the first two quarters of

2008-09, the growth in GDP was 7.8 and 7.7 respectively which fell to 5.8


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per cent in the third and fourth quarters of 2008-09. The third quarter

witnessed a sharp fall

December 23, 2008. The growth of GDP at factor cost (at constant

1999-2000 prices) at 6.7 per cent in 2008-09 nevertheless represents a

deceleration from high growth of 9 per cent and 9.7 per cent in 2007-08 and

2006-07 respectively. The RBI annual policy statement 2009 presented on

July 28, 2009 projects GDP growth at 6 per cent in 2009-10 in 2009-10. in

the growth of manufacturing, construction, trade, hotels and restaurants. The

last quarter was an added deterioration in manufacturing due to the

deepening impact of the global crisis and a slowdown in domestic demand.


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Hence, the slowdown in Indian economy is evident from the low GDP

growth with deceleration in the industrial activity, particularly in the

manufacturing and infrastructure sectors and moderation in the services

sector mainly in the construction, transport and communication, trade, hotels

and restaurants.

V. STRAIN ON BALANCE OF PAYMENTS

The overall balance of payments (Bop) situation remained resilient in 2008-

09 despite signs of strain in the capital and current accounts, due to the

global crisis. During the first three quarters of 2008- 09 (April-December

2008), the current account deficit (CAD) was US $ 36.5 billion as against US

$ 15.5 billion for the corresponding period in 2007-08.


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The capital account balance declined significantly to US $ 16.09 billion in

2008-09 as compared to US $ 82.68 billion during the corresponding

period

in 2007-08. As at end-March 2009 the foreign exchange reserves stood at US

$ 252 billion.

VI. REDUCTION IN IMPORT-EXPORT

During 2008-09, the growth in exports was robust till August 2008.

However, in September 2008, export growth evinced a sharp dip and turned

negative in October 2008 and remained negative till the end of the financial


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year. For the first time in seven years, exports have declined in absolute

terms in October 2008.

The above chart show that the exports have declined since October 2008 due

to contraction in global demand due to the synchronised global recession.

Similarly, imports growth also witnessed a deceleration during October-

November 2008, before turning negative thereafter. The merchandise

trade deficit declined during 2009-10 (April-May) over the

corresponding period of the previous year, reflecting the sharper decline

in the imports in relation to exports.


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VII. REDUCTION IN EMPLOYMENT

Employment is worst affected during any financial crisis. So is true with the

Current global meltdown. This recession has adversely affected the service

Industry of India mainly the BPO, KPO, IT companies etc. According to a

sample survey by the commerce ministry 109,513 people lost their jobs

between August and October 2008, in export related companies in several

sectors, primarily textiles, leather, engineering, gems and jewelry, handicraft

and food processing. Economic Survey of India gives alarming bell about the

on-going effects of the global slowdown on employment and has pressed

upon the government the urgency of the major response, especially in the

unorganized sector.


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VIII. TAXATION

The economic slowdown has severely dented the Centres tax collections

with indirect taxes bearing the brunt. The tax- GDP ratio registered a steady

increase from 8.97 per cent to 12.56 per cent

between 2000-01 and 2007-08. But this trend has been reversed as the tax-

GDP ratio has fallen to 10.95 per cent during current fiscal year mainly on

account of reduction in Customs and Excise Tax due to effect of economic

slowdown.

RESPONSE TO THE CRISIS

The future trajectory of the economic meltdown is not yet clear. However,

the Government and the Reserve Bank responded to the challenge strongly

and promptly to infuse liquidity and restore confidence in Indian financial

markets. The Government introduced stimulus package while the Reserve


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Bank shifted its policy stance from monetary tightening in response to the

elevated inflationary pressures in the first half of 2008-09 to monetary easing

in response to easing inflationary pressures and moderation of growth

engendered by the crisis. The fiscal and monetary response

to the crisis has been discussed in the

following points-

I. FISCAL RESPONSE

The Government launched three fiscal stimulus packages between December

2008 and February 2009. These stimulus packages came on top of an already

Announced expanded safety-net programme for the rural poor, the farm loan

waiver package and payout following the Sixth Pay Commission report, all

of which added to stimulating demand.

The challenge for fiscal policy is to balance immediate support for the

economy with the need to get back on track on the medium term fiscal

consolidation process. The fiscal stimulus packages and other measures have

led to sharp increase in the revenue and fiscal deficits which, in the face of

slowing private investment, have cushioned the pace of economic activity.

The borrowing programme of the government has already expanded rapidly

in an orderly manner by the Reserve Bank of India which would spur

investment demand in the domestic market. So while the government will


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continue to support liquidity in the economy, it will have to ensure that as

economic growth gathers momentum, the excess liquidity is rolled back in an

orderly manner. In India monetary transmission has had a differential impact

across different segments of the financial market. While the transmission has

been faster in the money and bond markets, it has been relatively muted in

the credit market on account of several structural rigidities. In order to

address these issues, the government has to effectively and carefully take up

the following steps -

Enhance coordination and harmonization of the regulatory apparatus

internationally, given the global scope of the recent crises with

increased cross border financial integration.

Introduction of counter cyclical prudential regulatory policy;

Design regulation and supervision of financial companies for non-

deposit taking financial entities having the potential to cause

systematic instability, as evident in the current crisis;

Supervision and management of liquidity risk and greater transparency

in the financial sector to improve better risk assessment by the

customers and investors;

Improvement in transparency in the structured credit instruments.


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to the banks to reduce their deposit and lending rates. The major changes in

the interest rate policy of RBI are given below-

Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per

cent in August 2008 to 5 per cent in January 2009

Reduction in the repo rate (rate at which RBI lends to the banks) by 425

basis points from 9.0 per cent as on October 19 to 4.75 per cent by July 2009

(the lowest in past 9 years) in order to improve the flow of credit to

productive sectors at viable costs so as to sustain the growth momentum.

In order to make parking of funds with RBI unattractive for banks, the

reverse repo rate (RBIs borrowing rate) was reduced by 275 points which

currently stands at 3.25 per cent.

The above said policy changes since mid-September 2008, enabled Reserve

Bank of India to infuse Rs.5,61,700 crore (excluding Rs.40, 000 crore under

SLR reduction) in market in order to ensure ample liquidity in the banking

system.

2. RISK MANAGEMENT

There has been a sustained demand from various quarters for exercising

regulatory forbearance in regard to extant prudential regulations applicable to

the banking sector. As a part of counter-cyclical package, RBI has already


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made several changes to the current prudential norms for robust risk

disclosures, transparency in restructured products and standard assets such

as-

Implementation of Basel II w.e.f. March 2009 by all Scheduled

Commercial Banks except RRBs which would promote closer

cooperation, information sharing and coordination of policies among

sector wise regulators, especially in the context of financial

conglomerates.

Further guidance to strengthen disclosure requirements under Pillar 3

of Basel II.

Counter-cyclical adjustment of provisioning norms for all types of

standard assets (except in case of direct advances to agriculture and

small and medium enterprises which continue to be at 0.25 per cent)

Reduction in the risk weights for claims on unrated corporate and

commercial real estate to 100 per cent;

Reduction in the provisioning requirement for all standard assets to

0.40 per cent;

Improve and converge financial reporting standards for off balance

sheet vehicles;


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Develop guidance on valuations when markets are no longer active,

establishing an expert advisory panel in 2008.

Market participants and securities regulators will expand the

information provided about securitized products and their underlying

assets.

Permitting housing loans to be restructured even if the revised

payment period exceeds ten years;

Making the restructured commercial real estate exposures eligible for

special treatment if restructured before June 30, 2009.

Hence, RBI has ensured perseverance of prudential policies which

prevent institutions from excessive risk taking, and financial markets from

becoming extremely volatile and turbulent.

3. CREDIT MANAGEMENT

There was a noticeable decline in the credit demand during 2008-09 which

is indicative of slowing economic activity- a major challenge for the banks to

ensure healthy flow of credit to the productive sectors of the economy. The

reduced funding demand on the banks should enable them to reduce the

interest rates on deposit and thereby reduce the overall cost of funds.

Although deposit rates are declining and effective lending rates are falling,

there is clearly more space to cut rates given declining inflation. In order to


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facilitate demand for credit in the economy the Reserve Bank has taken

certain steps such as-

Opening a special repo window under the liquidity adjustment facility

for banks for on-lending to the non-banking financial companies,

housing finance companies and mutual funds.

Extending a special refinance facility, which banks can access without

any collateral

Unwinding the Market Stabilization Scheme (MSS) securities, in order

to manage liquidity

Accelerating Governments borrowing programme Upward

adjustment of the interest rate ceilings on the foreign currency non-

resident (banks) and non-resident (external) rupee account deposits

Relaxing the external commercial borrowings (ECB) regime

Allowing the NBFCs and HFCs access to foreign borrowing

Allowing corporate to buy back foreign currency convertible bonds

(FCCBs) to take advantage of the discount in the prevailing depressed

global markets

Instituting a rupee-dollar swap facility for banks with overseas

branches to give them comfort in managing their short-term funding

requirements


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Extending flow of credit to sectors which are coming under pressure

include extending the period of pre-shipment and post shipment credit

for exports

Expanding the refinance facility for exports

Expanding the lendable resources available to the Small Industries

Development Bank of India, the National Housing Bank and the

Export-Import Bank of India


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FUTURE OUTLOOK FOR INDIA

To sum up we can say that the global financial recession which started

off as a sub-prime crisis of USA has brought all nations including

India into its fold.

The GDP growth rate which was around nine per cent over the last

four years has slowed since the last quarter of 2008 owing to

deceleration in employment, export-import, tax-GDP ratio, reduction

in capital inflows and significant outflows due to economic slowdown.

The demand for bank credit is also slackening despite comfortable

liquidity in the system. Higher input costs and dampened demand have

dented corporate margins while the uncertainty surrounding the crisis

has affected business confidence leading to the crash of Indian stock

market and volatility in Forex market.

Nevertheless, a sound and resilient banking sector, well-functioning

financial markets, robust liquidity management and payment and

settlement infrastructure, buoyancy of foreign exchange reserves have

helped Indian economy to remain largely immune from the contagious

effect of global meltdown.

Indian financial markets are capable of withstanding the global shock,

perhaps somewhat bruised but definitely not battered. India, with its


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strong internal drivers for growth, may escape the worst consequences

of the

Global financial crisis. In other words, the fundamentals of our

economy continue to be strong and robust.

The global economic environment continues to remain uncertain,

although the rate of contraction in economic activities and the extent

of pressures on financial systems eased in the first quarter of 2009-10.

Yet, it is not possible to clearly see the path of the crisis and its

resolution over the coming months. In this sense, India is not unique as

almost every country, whether or not directly affected, has to manage

the current economic crisis under uncertainty.

CONCLUSION:

Recession is the real killer not the terrorists.


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Decreased consumer demand affecting trades.

Indian companies lead to reduced capacity of expansion leading to supply

pressure.

The phases of business cycle in recession are characterized by changing

employment, industrial productivity and interest rates.

Global financial crisis is the unwinding of debts bubbles between 2007-2009.

However, one positive point in favor of India is the fact that Indian Banks are

more or less secured from the ill-effects of sub-prime mess. However, one

positive point in favor of India is the fact that Indian Banks are more or less

secured from the ill-effects of sub-prime mess.

A global depression is likely to result in a fall in demand of all types of

consumer goods.

BIBLIOGRAPHY


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1. Annual Report 2008-09, Reserve Bank of India

2. Macroeconomic and Monetary Developments: First Quarter Review

2009-10, Reserve Bank of India

3. Bank Quest Vol. 80 January- March 2009, IIBF

4. Economic Survey, Government of India

5. http://www.economics.harvard.edu/about/views

6. www.finmin.nic.ins

7. www.rbi.org.in

8. www.google.com
http://www.economics.harvard.edu/about/viewshttp://www.rbi.org.in/http://www.economics.harvard.edu/about/viewshttp://www.rbi.org.in/

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