Recession

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Recession In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, utilization, household incomes, business profits and inflation  inflation   all fall during recessions; while bankruptcies and the unemployment rate rise. Recess Rec essio ions ns ar aree ge gener neral ally ly belie believed ved to be ca cause used d by a wides widespre pread ad drop drop in spend spendin ing. g. Governme Gove rnments nts usually usually respond respond to recessio recessions ns by adoptin adopting g expansi expansionar onary y macroeconomic  macroeconomic   policies,, such as increasing money supply, policies supply, increasing government spending and decreasing decreasing   taxation.. taxation Recession is the result of reduction in the demand of products in the global market. Recession can also be associated with falling prices known as deflation due to lack of  deman demand d of produ product cts. s. Again Again,, it could could be the result result of inflat inflation ion or a co combi mbinat nation ion of  increasing prices and stagnant economic growth in the west. Recession in the West, especially the United States, is a very bad news for our country. Our companies in India have most outsourcing deals from the US. Even our exports to US have companies increased over the years. Exports for January have declined by 22 per cent. There is a decline in the employment market due to the recession in the West. There has been a significant drop in the new hiring which is a cause of great concern for us. Some companies have laid off their employees and there have been cut in promotions, compensation and perks per ks of the employees. employees. Companie Companiess in the private private sector and government government sector sector are hesit hesitan antt to take take up new new proje projects cts.. And they they ar aree workin working g on existi existing ng pr proje ojects cts only. only. Projections indicate that up to one crore persons could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled by Federation of Indian Export Organizations (FIEO), which says that it has carried out an intensive survey. The textile, garment and handicraft industry are worse affected. Together, they are going to lose four million jobs by April 2009, according to the FIEO survey. There has also been a decline in the tourist inflow lately. The real estate has also a problem of tight liquidity situations, where the developers are finding it hard to raise finances. IT industries, financial sectors, real estate owners, car industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy. Federation of Indian chambers of Commerce and Industry (FICCI) found that faced with the global global recessi recession, on, invento inventorie riess industri industries es like garment garment,, gems, gems, textile textiles, s, chemical chemicalss and  jewellery had cut production by 10 per cent to 50 per cent.

 

Definition of Recession Economic recession is defined as a significant decline in the economic activity across a country, lasting longer than a few months. Normally, the recession is visible in real GDP gr growt owth, h, indus industr trial ial produc productio tion, n, wholes wholesale ale-re -retai taill tr trade ade,, re real al person personal al incom income, e, an and d employment.

Causes of Economic Recession Theoreti Theore tical cally ly,, ec econo onomic mic re rece cessi ssion onss ar aree unavoi unavoidab dable le as in a perpetual perpetual fluctuation fluctuation of  economic boom and decline. Not a single nation is doomed with forever recession nor are they blessed with forever booming. It can be really tricky and confusing to reason in economics because sometimes it’s hard to grasp what is the cause and what is the result anyway. Generally accepted causes for a recessions include: 1. Over spendin spending g of government government oversea overseass or in non-prod non-producti uctive ve ways. It is very much essential for the government to utilize the money of country in a productive way. If  the government fails to do so, then there is a very much possibility for recession to occur. 2. Speculation Speculation for a upcoming upcoming recession recession or just the fear that that they might not get enough enough income to cover all that they want in usual, thus forming a chain to slow down the economic growth.

Other Causes of recessions • • • • • • •

Currency crisis Energy crisis Warr Wa Under consumption Overproduction Financial crisis Price of Fuels

Effects of recessions • • • •

Bankruptcies Credit crunches Foreclosures Unemployment

History of recessions There is no commonly accepted accepted definition of a global recession, recession, IMF regards periods periods when global growth is less than 3% to be global recessions. The IMF estimates that global recessions recessio ns seem to occur over a cycle lasting between 8 and 10 years. During what the IMF

 

terms the past three global recessions of the last three decades, global per capita output growth was zero or negative. Economists at the International Monetary Fund (IMF) state that a global recession would take a slowdown in global growth to three percent or less. By this measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002. Accord Acc ording ing to econom economist ists, s, since since 1854, 1854, the U.S U.S.. has enc encoun ounter tered ed 32 cycles cycles of exp expans ansion ionss and contractions, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and four periods considered recessions: January-July 1980 and July 1981-November 1982: 2 years total July 1990-March 1991: 8 months • March 2001-November 2001: 8 months • December 2007-current: 15 months as of March 2009 • From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion, the longest period of  expans exp ansion ion on record. record. For the past past three three recess recession ions, s, the NBER NBER decisi decision on has approx approxima imatel tely y conformed confo rmed to the definition definition involving involving two consecutive consecutive quarters quarters of decli decline. ne. Howev However er the 2001 recession reces sion did not involve two consecuti consecutive ve quarters of decline, decline, it was preceded by two quarters of  alternating decline and weak growth. •

Causes of Economic recession in 2008 The following letter attempts to analyze the causes of the economic downturn done in the second half of 2008, a sketch of crisis to be completed drawing in the next five years. 1 .- Stagnating oil prices (easily surpassing the $ 100 a barrel), driven by geopolitical uncerta unce rtainti inties, es, the collapse collapse of stock stock markets markets and subsequ subsequent ent diversio diversion n of specula speculative tive investment market and the expected oil production cuts by the OPEC. 2.-Continued escalation of prices of staple foods (around 15%), due to the effect called "second "sec ond round" (translati (translation on by companie companiess from increased increased costs costs of crude crude oil and raw materialss along with wage increases material increases the prices of manufactured products; abusive margins of companies and brokers and a totally inefficient administration and lack of mechanisms to co contr ntrol ol the ce cease aseles lesss desbo desboque que with with co conse nseque quent nt ri rises ses in infla inflatio tion n an and d subse subsequ quen entt contraction of consumption.

3.-Runaway inflation rates close to 6% and unbridled growth of foreign debt (d 2.5 billion U.S. dollars) and current account deficit (15% of GDP) for 2008 as a result of the above two points, with a consequent drop in state revenues Autonomies and loss of purchasing power of workers in a near future due to salary increases below the inflation. 4 .- Rise in interest rates by the European Central Bank to reach 4.5% in the last quarter of  2008 with the aim of trying to curb rampant inflation in the euro zone (close to 5%) the immedia imme diate te impact impact on mortgages mortgages and bank loans loans due to increase increasess chilling chilling Euribor (up almost 6%); economic strangulation consequent extensive social and dramatic increase in

 

delinquencie delinque nciess and embargoe embargoess banking banking collapse collapse of securiti securities es (around (around the IBEX 10,000 10,000 points at the end of the year) and diversion of investment to fixed income and real estate. 5 .- An increase in the rate of unemployment up to 12.5% at the end of 2008, due to the outbreak of the housing bubble and subsequent domino effect in the sectors linked to the constru con structio ction n of a united united euro artificiall artificially y appreci appreciated ated that that the cause cause of the bottlene bottleneck  ck  exports and the stagnation of the tourism sector (into recession in the second half of 2008 and ending the year with a meager increase of 1.5% of GDP), with the proverbial drop in state revenues and the consequent contraction of investments basic infrastructure.

Effects of economic recessions The most apparent and straightforward result of an economic recession recession is the reduction in overall national output where wherein in all all peop people le suffer suffer from from a decl decline ined d standa standard rd of living living compared with normal output or full potential output. The overall effects of economic recessions include: 1.

Reduced average wage because of the significant drop in overall demand because in turn the purchasing power shrinks due to reduction in averaged wage

2.

Unemployment rate climbs because considerable portions of national production cannot find its way into households

3. Bankrupt Bankruptcies cies happen happen more more often often than than usual usual 4. Inflation that devalues domestic currency 5. Stock Stock market market suffer suffer from from a bleak bleak seaso season n

It all started in US… In order to understand what is now happening in the world economy, we need to go a little back in past and understand what was happening in the housing sector of America for past many years. In US, a boom in the housi housing ng sector was driving driving the economy to a new level. A combina combination tion of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans. As more and more people took home loans, the demands for property increased and fueled the home prices further. As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions. The loan agents agents were ask asked ed to find more more pot potent ential ial home buyers buyers in lie lieu u of huge huge bonus bonus and incentives. Since it was a good time and property prices were soaring, the only aim of most lending institutions and mortgage firms was to give loans to as many potential customers as possible. Since almost everybody was driving by the greed factor during that housing boom period, the common sense practice of checking the customer’s repaying capacity was also ignored in many cases. As a result, many people with low income & bad credit history or those who come under the NINJA (No Income, No Job, No Assets) category were given housing loans in disregard to all principles of  financial prudence. These types of loans were known as sub-prime loans as those were are not part of prime loan market (as the repaying capacity of the borrowers was doubtful).

 

Since the demands for homes were at an all time high, many homeowners used the increased property value to refinance their homes with lower interest rates and take out second mortgages against the added value (of home) to use the funds for consumer spending. The lending companies also lured the borrowers with attractive loan conditions where for an initial period the interest rates were low (known (known as adjustable rate mortgage (ARM). However, However, despite despite knowing knowing that the interest rates would increase after an initial period, many sub-prime borrowers opted for them in the hope that as a result of soaring housing prices they would be able to quickly refinance at more favorable terms.

Bubble that burst… However, as the saying goes, “No boom lasts forever”, the housing bubble was to burst eventually. Overbuilding of houses during the boom period finally led to a surplus inventory of homes, causing home home prices prices to decl declin inee begi beginn nnin ing g from from th thee summ summer er of 20 2006 06.. Once Once hous housin ing g pr pric ices es st star arted ted depreciating in many parts of the U.S., refinancing became more difficult. Home owners, who were expecting to get a refinance on the basis of increased home prices, found themselves unable to refinance and began to default on loans as their loans reset to higher interest rates and payment amounts. In the US, an estimated 8.8 million homeowners – nearly 10.8% of total homeowners – had zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provided an incentive to “walk away” from the home than to pay the mortgage. Foreclosures ( i.e. the legal proceedings initiated by a creditor to repossess the property for loan that is in default ) accelerated in the United States in late 2006. During 2007, nearly 1.3 million U.S. housin hou sing g proper propertie tiess were were subject subject to forecl foreclosu osure re activi activity. ty. Increa Increasin sing g forecl foreclosu osure re rates rates and unwilling unwil lingness ness of many homeowners homeowners to sell their homes at reduced reduced mark market et prices significan significantly tly increased the supply of housing inventory available. Sales volume (units) of new homes dropped by 26.4% in 2007 as compare to 2006. Further, a record nearly four million unsold existing homes were for sale including nearly 2.9 million that were vacant. This excess supply of home inventory placed significant downward pressure on prices. As prices declined, more homeowners were at risk  of default and foreclosure. Now you must be wondering how this housing boom and its subsequent decline is related to current economic depression? After all it appears to be a local problem of America.

What complicated the matter?…

Unfortunately, Unfortunate ly, this problem was not as straight straightforwa forward rd as it appears. appears. Had it remained a matter between the lenders (who disbursed risky loans) and unreliable borrowers (who took loans and then got defaulted) then probably it would remain a local problem of America. However, this was not the case. Let us understand what complicated complicated the problem.

 

For original lenders these subprime loans were very lucrative part of their investment portfolio as they were expected to yield a very high return in view of the increasing home prices. Since, the interest rate charged on subprime loans was about 2% higher than the interest on prime loans (owing to their risky nature); lenders were confidant that they would get a handsome return on their investment. In case a sub-prime borrower continued to pay his loans installment, the lender would get higher interest on the loans. And in case a sub-prime borrower could not pay his loan and defaulted, the lender would have the option to sell his home (on a high market price) and recovered his loan amount. In both the situations the Sub-prime loans were excellent investment opti option onss as long long as the the hous housin ing g ma mark rket et was was boom boomin ing. g. Ju Just st at th this is poin point, t, th thee th thin ings gs st star arte ted d complicating.

With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw subprime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh fre sh funds funds to lend. The subpri subprime me loa loan n mar market ket thus becam becamee a fas fastt growin growing g segmen segment. t. Maj Major or (American and European) investment banks and institutions heavily bought these loans (known as Mortgage Backed Securities, MBS) to diversify their investment portfolios. Most of these loans were brought as parts of CDOs (Collateralized Debt Obligations). CDOs are just like mutual funds with two significant differences. First unlike mutual funds, in CDOs all investors do not assume the risk equally and each participatory group has different risk profiles. Secondly, in contrast to mutual funds which normally buy shares and bonds, CDOs usually buy securities that are backed by loans (just like the MBS of subprime loans.) Owing to heavy Owing heavy buying buying of Mortga Mortgage ge Bac Backed ked Securi Securitie tiess (MBS) (MBS) of sub subpri prime me loans loans by maj major or American and European Banks, the problem, which was to remain within the confines of US propagated into the word’s financial markets. Ideally, the MBS were a very attractive option as long as home prices were soaring in US. However, when the home prices started declining, the attractive investments in Subprime loans become risky and unprofitable.

As the home prices started declining in the US, sub-prime borrowers found themselves in a messy situation. Their house prices were decreasing and the loan interest on these houses was soaring. As they could not manage a second mortgage on their home, it became very difficult for them to pay the higher interest rate. As a result many of them opted to default on their home loans and vacated the house. However, as the home prices were falling rapidly, the lending companies, which were hoping to sell them and recover the loan amount, found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans. The problem got worsened as the Mortgage Backed Securities (MBS), which by that time had become parts of CDOs of giant investments banks of US & Europe, lost their value. Falling prices of CDOs CDOs dented dented ban banks’ ks’ invest investmen mentt portfo portfolio lioss and these these los losses ses des destro troyed yed banks’ banks’ capita capital. l. The complexity of these instruments and their wide spread to major International banks created a

 

situation where no one was too sure either about how big these losses were or which banks had been hit the hardest.

Mayhem in the banks…. The effects of these losses were huge. Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or $260 billion, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 billion by Asian ones.

Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the US Federal Bank (The central Bank of America just like RBI in India)

The crisis has also seen Lehman Brothers – the fourth largest investment bank in the US and the one which had survived every major upheaval for the past 158 years – file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae, two giant mortgage companies of US, have effectively been nationalized to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has so far taken over $82.9 billion so far to tide over the crisis. From this point, a chain reaction of panic started. Since banks and other financial institutes are like backbone for other major industries and provide them with investment capital and loans, a loss in the net capital of banks meant a serious detriment in their capa capacity city to disburse loans for vario various us businesses busin esses and industries. industries. This presented presented a serious serious cash crunch situation for compani companies es who needed cash for performing their business activities. Now it became extremely difficult for them to raise money from banks. What is worse is the fact that the losses suffered by banks in the subprime mess have directly affected their money market the world over.

Impact of an 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 India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. 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 prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining 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 though 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 per cent of the world's GDP.

Says Sudip Bandyopadhyay, Bandyopadhyay, director and CEO, C EO, Reliance Money: "In the globalised world, complete decoupling is impossible. But India may remain relatively less affected by adverse globa globall events events." ." In fact, fact, many many small small an and d medium medium compa companie niess ha have ve al alre ready ady start started ed developing trade ties with China and European countries to ward off big losses. Manish Sonthalia, Sonthalia, head, equity, Motilal Oswal Securities, says if the US economy contracts contracts much more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent 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, 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 export them to the US. The IT sector will be the worst hit as 75 per cent of its revenues come from the US. Low demand dema nd for services services may force most Indian Indian Fortune Fortune 500 companie companiess to slash slash their their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies from ITeS and BPO, automotive components will be affected. During a full recession, US companies in health care, financial services and all consumers demand dema nd driven driven firms firms are likely to cut down on their their spending spending.. Among Among other other sectors, 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 per cent or even less. Lokendra Tomar, senior vice-president, Integreon, 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 per cent, will find it difficult to survive. According to Dharmakirti Joshi, director and principal economist of CRISIL, along and severe recession will seriously affect the portfolio and fixed investment flows. Corporates will also suffer from volatility in foreign exchange rates. The export sector will have to devise new strategies to enhance productivity.

 

Impact of Recession on ICICI Bank Ltd. •

The Goodwill of ICICI was hampered very badly at the time of recession.



The news spread all around that there is a possibility that ICICI may shut down.







The customers loose faith from the bank & started switching over to other secured bank. The employees of ICICI were asked to leave the job as the bank is not in a position to pay them salaries. The Bank was not in a position to meet its debts.

Measures adopted by ICICI to recover from Recession •

Financial Assistance from Reserve Bank of India helped to survive from recession.



Effective strategies formulated in order to reduce cost.



Changes in the loan giving Changes giving pattern. pattern. Made Compulso Compulsory ry mortage mortage of a proper property ty against a loan taken.

Impact of Recession on Maruti Suzuki •

7% decline in sales of Maruti Suzuki

 

• • • •

Increase in cost of raw materials & moreover overall increase in cost of production. A financial crisis was strongly felt by the company during recession. At this time, Banks were not giving Easy credit to the company. The Company was not able to make the payment to creditors on time.

Measures adopted by Maru aruti Suzuki to recov oveer from Recession •

Strategies formulated to make reduction in the cost of production.



Purchase of raw material made limited according to the requirements.

Impact of Recession on King Fisher Airlines •

Kingfisher Airlines alone suffered a loss of Rs.640 Crores.



Thee incr Th increa ease se in fare faress resu result lted ed in drop drop in pa pass ssen enge gers rs an and d al also so lo low w ca capa paci city ty utilization.

• •

The period saw Kingfisher's seat factor dropping by about 6%. The Company has to lay off many of its employees due to this financial crisis.



Measures adopted by King Fisher Airlines to recover from Recession

 

The Company initiated a number of steps to mitigate and manage their costs .  Key Measures Include:

I) Network alignment consequent to the merger of Kingfisher and Deccan: The capacity deployed has been brought down by about 4% and further reductions are planned. 2) Two aircrafts have already been returned to Lessors with no additional cost, and the Company is in discussion for the return of a further eight aircraft. The impact of this capacity contraction will be visible during the second halfofthe Financial Year. 3) The Compa Company ny has has defer deferre red d its intern internati ationa onall ro rollll-out out plans plans ap apar artt from from one fli fligh ghtt operating between Bangalore and London. Consequent, to this decision taken in the light of  the global economic environment and the near recession conditions prevalent in much ofthe Western world, there will be reduced deployment ofwide-body aircraft in the near term.

 

4) The merger of the two operating airlines into one corporate entity has also enabled savings savi ngs on operatin operating g costs costs such as Engineer Engineering ing and Ground Ground Handling Handling,, Insuranc Insurancee and Catering. Employee costs have also been addressed through an integrated organization which enabled the Company to terminate the contracts of most expatriate staffand impose a hiring freeze on new appointments. Despite the challenging environment, the Company has managed to significantly improve its topline performance. • The The uni unitt rev reven enue uess hav havee iinc ncre reas ased ed by ov over er 33 33% % bet betwe ween en HI FY09 FY09 an and d HI HI FY0 FY08. 8. • The The Ave Avera rage ge Tick Ticket et Valu Valuee has has impr improv oved ed by 55 55% % ove overr the the same same pe peri riod od.. • The The abs absol olut utee rev reven enue uess h hav avee inc incre reas ased ed by by 33% 33% de desp spit itee a ca capa paci city ty red reduc ucti tion on of 4%. 4%. The recent discussion between Kingfisher Airlines and Jet Airways is expected to help both carriers to significantly rationalize and reduce costs by offering a unique high product quality with improved standards of service to its consumers. The two airlin airlines es will will be ab able le to deriv derivee maximu maximum m syne synergi rgies es by worki working ng to toget gether her an and d thereby offer best possible fares for the benefit of the end users i.e., the travelling customer. The scope of this discussion is expected to include the following on the operational and cost aspect. • Joi oin nt fue uell manage agement ent to reduc duce fu fueel expe pen nses • Comm Commo on gr gro ound han handling ing oft fth he highe hest st quali litty • Common Gl Global Di Distribution sy system pl platform • Cros Crosss util utiliz izat atio ion n of crew crew on on simi simila larr airc aircra raft ft typ types es and and com commo mona nali lity ty of tra train inin ing g as also ofthe technical resources, subject to DGCA approval. Areas covered on the revenues and revenue related operational aspects are: • Code Code-s -sha hare ress on bo both th dom domes esti ticc and and inte intern rnat atio iona nall flig flight htss subj subjec ectt to DGCA DGCA app appro rova vall • Inte In terl rlin ine/ e/Sp Spec ecia iall Pror Prorat ate e agre ag82 reem emen ents ts to lever levflights erag agee the th e jo join intt ne nettwork work depl deploy oyin ing g 18 189 9 aircraft offering 927 domestic and International daily. • • •

Joi oin nt Net Networ work rati ationa onaliz iza atio tion and and syne nerrgies Cross selling offlight inventories Reci Recipr proc ocit ity y in Je Jett Pri Privi vile lege ge an and d Ki King ng Cl Club ub fr freq eque uent nt flie flierr pr prog ogra rams ms

The soften softening ing of the fuel price pricess has has re resul sulte ted d in an impro improvem vement ent in the Company' Company'ss performance in September 2008 (fuel prices reduced by 15.5%).

Major Economic Effects of Recession on Economy

 

There is a general economic decline during recession. The economy has a tremendous setback. The purchase of the people comes down due to low salaries or lack of sufficient income. This results in slump in market with goods and services not being availed of by people. Production slows down and in turn prices go up. In fact during recession, many firms are forced to sell their products at throw-away prices and suffer from losses as a result. Recession is something to be dreaded by producers as well as consumers. Both suffer durin dur ing g these these hard times. times. Both Both need need ea each ch ot other her.. In ca case, se, consu consumer merss do not have the purch pur chasi asing ng power power,, then then produ producti ction on suffer suffers. s. Less Less pr produ oducti ction on means means le less ss pr profi ofits ts for for producers who will find it difficult to run their business houses. The econo economic mic sc scena enari rio o durin during g re rece cessi ssion on is path patheti etic. c. It is intere interesti sting ng to no note te how the economy suffers during such traumatic times as it affects us all.

Recession impact on the economy •

Slump in the market – Goods and services are difficult to be sold as the purchasing power of the people comes down.



Stock prices come down – Investment suffers. The industrial production is badly affected as investors avoid investing in companies that might suffer losses during re rece cessi ssion. on. Bigge Biggerr co compa mpanie niess are able able to withst withstan and d the setbac setbacks ks but but smalle smallerr companies have a tough time and some may end up closing down.



Increase in unemployment – People are thrown out of jobs. They are left in the lurch. They are unable to meet both ends. Many goods and services are not within their reach.



Depression – Recession causes depression if it persists for a long time. Negative trends are visible in the stock market and rapid unemployment is there. Companies need to be bailed out by the government. Public spending suffers a set back.

 



National debts on the rise – Increase in national debts means less money can be spent spe nt by the the go gover vernme nment nt on devel developm opment ent.. Money Money ge gets ts divert diverted ed in ba baili iling ng out companies. The recent recession in the U.S. indicates how banks have to depend upon federal aid for their survival. Taxpayers money is being spent in giving these banks a boost.

Recessio Rece ssion n is definit definitely ely bad for economi economicc growth growth and developmen development. t. It slows slows down the economy. Investors hesitate to invest, and producers are unable to churn out products. Consumer lack the necessary money due to unemployment and cannot therefore buy goods available in the market. Impact of Us Recession On India A slowdown in the US economy is bad news for India. • Indian companies have major outsourcing deals from the 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. More people have have sold the shares shares in the indian share share market than than they bought in the recent weeks. This has added to the fall of sensex to lower points. One danger danger meanwhile meanwhile is of a dip in the employme employment nt market. market. There is already already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs.   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. Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. One of the casualties this time could be real estate, where building projects are half-done all over the country and in this tight liquidity situation developers find it difficult to raise finances. The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring bri ng buye buyers rs back back into into the the market market,, but there there is no nott enoug enough h ev evide idenc ncee of that that happening. Consumers are also frozen in this sudden glare of the headlights.More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent.

 

10 Indian industry to do well during recession AS EVERY business sector is affected by present global crisis and everybody is talking of  slow down in business, still in India there are few sectors which will grow in this adverse situation. Lets have a look. 1. Food No one can survive without basic food material like milk, vegetables and drinking water. Food Foo d processi processing ng companie companiess will not be affecte affected d much and rather rather will earn profits profits by increasing the prices. These are the basic needs which we as a common man can not produce by our self. According to Ministry of Food Processing Industry (MFPI), the food processing industry in India was seeing growth even as the world was facing economic recession. According to the minister, the industry is presently growing at 14 per cent against six to seven per cent gr growt owth h in 200 2003– 3–04. 04.The The In India dian n food food market market is estima estimate ted d at over over US$ US$ 182 billi billion on and accounts for about two thirds of the total Indian retail market. Further, the retail food sector in India is likely to grow from around US$ 70 billion in 2008 to US$ 150 billion by 2025 2. Railway As the aviation sector has been affect much badly and resulting in sharp rise in the air ticket rates the frequent travellers will prefer railways to cut the cost of travelling and this will result in increased traffic in railways and long queues at railway booking counters. The freight traffic of Indian Railways has continued to grow in the last few months, albeit at slow pace, indicating only marginal impact of the global recession on the Indian economy. The railways registered 13.87 per cent growth in revenue to Rs 57,863.90 crore in the first nine months ended December 31, 2008. While total earnings from freight increased by 14.53 per cent at Rs 39,085.22 crore during the period, passenger revenue earnings were up 11.81 11.8 1 per cent at Rs 16,242.4 16,242.44 4 crore. crore. The railways railways have enhanced enhanced freight freight revenue revenue by increasing its axle loading, improving customer services and adopting an innovative pricing strategy. 3. PSU Banks As seen in the private sector much of the job cuts due to global slowdown, its the public sector sect or underta undertaking king (PSU) banks which which gained gained much confidence confidence due to job safety and secur sec urity ity.. More More an and d more more people people ar aree likel likely y to turn turn to towar wards ds gover governme nment nt instit instituti utions ons,, particularly banks in the quest for safety and security. A repor reportt "Oppor "Opportun tuniti ities es in India Indian n Banki Banking ng Sector Sector", ", by market market re resea searc rch h co compa mpany, ny, RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011.

 

4. Education As education is considered as the basic necessity and in India it is seen as a long term investment by parents and with respect to the demand still there is a huge supply gap. The craze to study in foreign university among the Indian youth still alive which will prompt foreign education institute to target India provided vast young population willing to join. We will see more and more foreign educational institutions coming up in India in recent coming years. Huge government government as well as private investment is likely to flow into the Indian education educational al system. D E Shaw, a US$ 36 billion, global private equity firm is planning to invest around US$ 200 million in the Indian education sector. 5. Telecom People will not stop to communicate with each other due to global crises rather it has been seen that it will increase much particularly with mobile communication. With cheap cell phones available in the Indian market and cheaper call rates, the sector has become the necessity and primary need of everyday life. Telecom sector, according to industry estimates, year 2008 started with a subscriber base of 228 million and will likely to end with a subscriber base of 332 million – a full century. The telecom industry expects to add at least another 90 million subscribers subscribers in 2009 despite of recession. TheisIndian telecommunications industry is telecom one of the fastest growing the world and India projected to become the second largest market globally by in 2010. 6. IT Recent news shown that Indian IT sector will grow 30 to 40 per cent next year. And on the other side to survive in current slowdown, slowdown, industries have to decrease decrease the cost and for that they will resort to customised IT solutions which will further boost up the software solution demand. In India dia is fa fast st becomi becoming ng a hot desti destinat nation ion for ou outso tsourc urced ed e-publ e-publish ishin ing g work. work. As per a Confederation Confedera tion of Indian Industry (CII) report, the industry is growing at an annual rate of  35 per cent and India’s outsourcing opportunities in the value-added and core services such as copy editing, project management, indexing, media services and content deployment will help make the publishing BPO industry worth US$ 1.46 billion by 2010. 7. Health care India in case of health care facilities still lakes the adequate supply. In health care sector also there is huge gap between demand and supply at all the levels of society. Still there are so many urban areas were you could hardly find any multi specialty hospital. And in case of metros the market sentiments itself created a need of psychological consultation. Healthcare, which is a US$ 35 billion industry in India, is expected to reach over US$ 75 billion by 2012 and US$ 150 billion by 2017. The healthcare industry is interestingly poised as it strives to emerge as a global hub due to the distinct advantages it enjoys in clinical excellence and low costs. 8. Luxury products The andisaffluent of society They will not affected much this global even if  theirhigh worth reducedclass significantly. willbenot change theirby lifestyle and crises will not stop

 

spending on luxurious goods. So luxurious product market will not be affected and in fact to maintain the lifestyle those affluent will spend more for it. Luxury car makers are pouring in to woo the nouveau riche (Audi, BMW are the most recent entrants). 9. M&A & Marketing Consultants As in the current business slow down survival will be the main focus, the marketing and management consultants will be called for to reduce the costs and to show the ways to survive in market. may join hands with this ket situation will ca call ll fo forr and the the stay Marke Marketi ting ng & Others M&A co consu nsulta ltants nts. . In to a fight bo boomi oming ng market mar ther theree together are gr growt owth h strate str ategi gies es an and d M&A op oppor portun tuniti ities es to ad advis visee on. When When busin busines esses ses are cu cutti tting ng ba back, ck, consultancies will be right there to help clients decide where to wield the axe. Accordin Accor ding g to Minist Ministry ry of Commer Commerce ce an and d Indust Industry’ ry’ss estima estimatio tion, n, the the cu curre rrent nt size size of  consulting industry in India is about Rs 10000 crores including exports and is expected to grow further at a CAGR of aproximately 25 per cent in next few years. 10. Media and Entertainment In current bad times, where people are losing jobs and getting enough time to watch TV, they will seek entertainment at home and hence advertising revenues will increase for the commerci comm ercial al channels channels.. Also busines businesses ses like produc production tion of religiou religiouss texts texts and religio religious us material mate rials, s, religiou religiouss channel channelss will do well. well. The TRP of religio religious us channe channels ls will increas increasee compare to the other entertaining/commercial channels. According to a report published by the Federation of Indian Chambers of Commerce and Industry (FICCI), the Indian M&E industry is expected to grow at a compound annual growth rate (CAGR) of 18 per cent to reach US$ 23.81 billion by 2012. According to the PWC report, the television industry was worth US$ 5. 48 billion in 2007, recording a growth of 18 per cent over 2006. It is further likely to grow by 22 per cent over the next five years and be worth US$ 12. 34 billion by 2012.

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