US Recession Impact In India

8/9/2019 US Recession Impact In India

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AMERICAN RECESSIONAND ITS IMPACT ON

INDIA


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CONTENTS

WHAT IS RECESSION

INTRODUCTION

CAUSES OF RECESSION CAUSES OF US

RECESSION

HOW GOVERNMENTTACKLES RECESSION

IMPACT ON INDIA


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What Is Recession ?

A recession is a contraction phase of the businesscycle.

National Bureau of Economic Research (NBER).

defines recession as a "significant decline in economicactivity lasting more than a few months, which isnormally visible in real GDP, real income,employment, industrial production, and wholesale-

retail sales. For this reason, the official designation of recession

may not come until after we are in a recession for sixmonths or even longer.


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The fear of a recession looms over the UnitedStates.

And as the cliche goes, whenever the USsneezes, the world catches a cold. This isevident from the way the Indian marketscrashed taking a cue from a probable recessionin the US and a global economic slowdown.

Weakening of the American economy is badnews, not just for India, but for the rest of the

world too.


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What Causes Recession?

An economy which grows over a period of timetends to slow down the growth as a part of thenormal economic cycle.

An economy typically expands for 6-10 yearsand tends to go into a recession for about sixmonths to 2 years.

A recession normally takes place whenconsumers lose confidence in the growth of theeconomy and spend less.


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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.


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Past recessions The US economy has suffered 10 recessions since the end of

World War II. The Great Depression in the United was aneconomic slowdown, from 1930 to 1939. It was a decade ofhigh unemployment, low profits, low prices of goods, andhigh poverty.

The trade market was brought to a standstill, whichconsequently affected the world markets in the 1930s.Industries that suffered the most included agriculture,mining, and logging.

In 1937, the American economy unexpectedly fell, lastingthrough most of 1938. Production declined sharply, as didprofits and employment. Unemployment jumped from 14.3per cent in 1937 to 19.0 per cent in 1938.


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The US saw a recession during 1982-83 due to a tight

monetary policy to control inflation and sharp

correction to overproduction of the previous decade.

This was followed by Black Monday in October

1987, when a stock market collapse saw the DowJones Industrial Average plunge by 22.6 per cent

affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and afinancial crisis.


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The US saw one of its biggest recessions in 2001,ending ten years of growth, the longest expansion on

record. From March to November 2001, employment dropped

by almost 1.7 million. In the 1990-91 recession, the

GDP fell 1.5 per cent from its peak in the secondquarter of 1990. The 2001 recession saw a 0.6 percent decline from the peak in the fourth quarter of2000.

The dot-com burst hit the US economy and manydeveloping countries as well. The economy alsosuffered after the 9/11 attacks. In 2001, investors'wealth dwindled as technology stock prices crashed.


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Causes Of US Recession

The general consensus is that a recession isprimarily caused by the actions taken to control

the money supply in the economy The Federal Reserve is responsible formaintaining an ideal balance between moneysupply, interest rates, and inflation.

When the Fed loses balance in this equation,the economy can spiral out of control, forcing itto correct itself.


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Relaxed policies in lending practices making iteasy to borrow money

The economic activity became unsustainable

resulting in the economy coming to a near halt. Recession can be caused by factors that stunt

short term growth in the economy, such as

spiking oil prices or war.


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Stock markets & recession

The economy and the stock market are closely related.The stock markets reflect the optimism of theeconomy. In the US, a recession is yet to be declared

by the Bureau of Economic Analysis, but investorsare worried a lot. The Indian stock markets alsocrashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just twotrading sessions in January. The markets bouncedback after the US Fed cut interest rates. However,stock prices are now at a low ebb in India with little

cheer coming to investors.


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Current crisis in the US

The defaults on sub-prime mortgages (homeloandefaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poorcredit worthiness or unstable incomes. Major bankshave landed in trouble after people could not payback loans.

The housing market soared on the back of easyavailability of loans. The realty sector boomed butcould not sustain the momentum for long, and itcollapsed under the gargantuan weight of cripplingloan defaults. Foreclosures spread like wildfireputting the US economy on shaky ground. This,coupled with rising oil prices at $100 a barrel, slowed

down the growth of the economy.


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How The Government Tackles

Recession Tax cuts are the first step that a government

fighting recessionary trends or a full-fledged

recession proposes to do. The government also hikes its spending to create

more jobs and boost the manufacturing and

services sectors and to prop up the economy. The government also takes steps to help the

private sector come out of the crisis.


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Impact On India

A slowdown in the US economy is bad news for

India.

Indian companies have major outsourcing deals fromthe US.

India's exports to the US have also grown

substantially over the years.

Indian companies with big tickets deals in the US are

seeing their profit margins shrinking.


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More people have sold thesharesin the indian

share market than they bought in the recent weeks.This has added to the fall of sensex to lower

points.

One danger meanwhile is of a dip in the

employment market. There is alreadyunreliable

evidence of this in the IT and financial sectors,and reports of quiet downsizing in many other

fields as companies cut costs.


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More than the downsizing itself, which may not

involve large numbers, what this implies is a

significant drop in new hiring -- and that will

change the complexion of the job market.

Many companies has laid off their staffs, the

number of tourists inflow to india has come down,

companies have cut down compensations and perks

etc, government and other private companies are

reluctant in starting new ventures and starting new

projects etc.


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Meanwhile, there is an upside to be considered as well.

The falling rupee (against the dollar, more than against

other currencies) will mean that exporters who feltsqueezed by the earlier rise of the currency can breathe

easy again, though buyers overseas may now become

more scarce.Overheated markets in general (stocks, real estate,

employment-among others) will all have an element of

sanity restored.

And for importers, the oil price fall (and the general fall

in commodity prices) will neutralise the impact of the

dollar's decline against the rupee.


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Overheated markets in general (stocks, real estate,employment-among others) will all have an element

of sanity restored.

And for importers, the oil price fall (and the

general fall in commodity prices) will neutralise the

impact of the dollar's decline against the rupee.


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CONCLUSION

At the heart of the problem lie questions of liquidityand confidence.

What the RBI needs to do, as events unfold, is toneutralise the outflow of FII money by unwindingthe market stabilisation securities that it had used tosterilise the inflows when they happened.

This will mean drawing down the dollar reserves, butthat is the logical thing to do at such a time.


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If done sensibly, it would prevent a sudden tightening

of liquidity, and also not allow the credit market to

overshoot by taking interest rates up too high.

US Recession Impact In India

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