MACRO ECONOMICS

PROJECT REPORT

OF

MACRO ECONOMICS

ON

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MACRO ECONOMICS

PROJECT REPORT

Impact of U.S. Recession on India - An Empirical Study

Group NO. 5
Cohort- Service

Name: Enrollment No. Signature

Abhishek Kumar Singh 8609111

Adarsh Kumar 8609113
Alok Gaur 8609116
Chetan Bhatia 8609112
Kapil Gupta 8609117
Kumar Ravi 8609115
Rajat Jain 8609118
Ridhima Sharma 8609114
Shailly Garg 8609109

Subject: Business Environment

Guide: Dr. Jitendra Kumar Mishra

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ACKNOWLEDGEMENT

We place our immense gratitude to the JBS Faculty in general

to (Prof Jitender Mishra Learning Facilitator) in particular,
with whose whole hearted co-
co-operation and support wewe have
been able to undertake this project on our own and complete
the same successfully. We are also deeply indebted to them for
providing us with an opportunity to undergo our project.

We would also like to thank all those who helped us in

completing this
this project

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Table of Content

Introduction .......................................................................................................... 5

Causes of Recession .............................................................................................. 6

Top Ten Countries with which the U.S. has a Trade Deficit ........................... 8

The market breaks down ..................................................................................... 9

Impact of US recession in India ........................................................................ 10

Impact on different sectors of Indian Economy .............................................. 11

India and US bilateral trade India and US bilateral trade ............................ 12

US Trade with India: 2008 ................................................................................ 13

View Of Former Foreign Minister Yashwant Sinha ...................................... 14

Implication .......................................................................................................... 15

Steps Taken by Govt. and RBI .......................................................................... 16

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INTRODUCTION
RECESSION:
RECESSION -
Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it
can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to
severe depression. It is time to close shop completely. It is a total state of irrevocable economic failure.
When a country is doing well all round its Gross Domestic Product (GDP) is on the rise. In a recession, the
overall economic indicators reveal severe changes, which typically includes a sharp rise or fall in prices
(inflation or deflation). If recession continues for an extended period of time, it is called a depression.

Firms face closures when they go through recession and are not able to recover from losses. If, at this
time, they are not able to sustain their prices and stocks then there is more trouble. Even when the recession
period gets over, they will not be able to do well. If a business survives a recession period they should be
able to survive a depression.
.
Financial institutions are overwhelmed with worried investors. Consultants are trying to clam down
companies who have great risks at the stock exchanges. Panic buttons have been pressed and there are
efforts to stop recession in its tracks. Forecasts are still showing that more losses will be felt in the coming
weeks. In a country, which lives and thrives on credit bills and mortgage loans for just about everything,
there is cause to get worried. Defaults will hit the consumers and companies equally.

The stock exchanges have always been indicative of the recession. The individual investors are still safe.
But the professionals have to bear the burden of recession. Americans already started to feel the heat when
jobs were being outsourced to cheaper countries. The US economy is hurtling towards a recession. It has not
yet turned into a depression.

There is much debate over the causes of recession. Economists and monetarists rarely agree on which
factors are responsible for economic decline. It is perhaps that there are several different factors, when
experienced together, that cause tremendous economic decline. Mishandling of the money supply,
weather conditions, war, and the inflation of import costs (perhaps the decrease in the forex value of a
country currency) could all be contributing factor to a recession. These various factors are alarming to
consider, as they seem to describe current conditions. Mishandling of the money supply is suspect, as facts
and figures show an incredible deficit under the current presidency.

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CAUSES OF RECESSION
1. Subprime mortgage crisis:-
The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage
delinquencies and foreclosures in the United States, with major adverse consequences for banks and
financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century,
became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the
global financial system. The risks to the broader economy created by the housing market downturn and
subsequent financial market crisis were primary factors in several decisions by central banks around the
world to cut interest rates and governments to implement economic stimulus packages. These actions were
designed to stimulate economic growth and inspire confidence in the financial markets.

When USA house prices began to decline in 2006-07, mortgage delinquencies soared, and securities backed
with subprime mortgages, widely held by financial firms, lost most of their value. Effects on global stock
markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in
U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20
trillion to $12 trillion. Losses in other countries have averaged about 40%. Losses in the stock markets and
housing value declines place further downward pressure on consumer spending, a key economic engine.

2. High Oil Prices:-

The rise in oil prices has become a very pressing issue. Certainly, nobody has to be reminded that crude was
hovering just below $150 per barrel, while gasoline has surpassed $6 per gallon on average around the
nation. The widely accepted explanation for oil prices' recent steep climb is strong demand. The global
economy is firing on all cylinders, and that US and India have emerged as major consumers. In addition,
supplies are tight; that the margin between what is produced and what is consumed on a daily basis has
never been narrower; and furthermore, that major new discoveries of oil are few and far between.

These explanations certainly sound plausible, and perhaps we can even attribute some portion of the price
rise to them. A closer analysis, however, shows that they are not sufficient to explain the full extent of the
increases. A new report released last month by the Senate Permanent Subcommittee on Investigations
concludes that market speculation has played a role in the rise of oil and gas prices. It points a finger not
only at commodity funds and hedge funds, but also at large institutional investors such as pension funds and
mutual funds, which have become major participants in the energy markets over the past several years. The
investigations, found that an estimated $75 billion has poured into regulated U.S. oil futures markets in
the past few years. While this sounds like a lot (and it certainly is), the amount that has gone into non-
regulated exchanges overseas is inestimable.

The Commodity Futures Trading Commission oversees all futures trading on U.S. markets, and it's
constantly monitoring the positions of large speculators. However, the CFTC (Commodity Futures Trading
Commission) has no jurisdiction over exchanges that are outside the U.S. or in the murky over-the-counter
market where billions of dollars of contracts are traded all the time.

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3. Inflation, the silent killer:-

Most likely, the prime cause has been the important role of productivity growth in developing countries,
especially the large-sized countries like US and India. With Africa and Latin America now joining the
development party, subdued world inflation is more likely than not. World inflation is broadly composed of
three commodities: energy, agriculture and metals (both precious and other metals). In India only inflation
rate touched to just below 13% in mid of 2008.

A reasonable speculation is that this recent burst in prices has more to do with old-fashioned speculation
than even older-fashioned fundamentals. In this regard, the recent hysteria pertaining to the Indian rupee is
relevant. The normal inflation rate in developed countries 1% to 4% typically; developing countries 5% to
20% typically; national inflation rates vary widely in individual cases, from declining prices in Japan to
hyperinflation in one Third World country (Zimbabwe), inflation rates have declined for most countries for
the last several years, held in check by increasing international competition from several low wage countries
(2005 est.) .In 2008, the prices of many commodities, notably oil and food, got so high to cause genuine
economic damage, threatening stagflation and a reversal of globalization .In January 2008, oil prices
surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the
year. By July the price of oil reached as high as $147 a barrel although prices fell soon after.

4. Liquidity crisis:-
From late 2007 through September 2008, before the official October 3rd bailout, there was a series of
smaller bank rescues that occurred which totaled almost $800 billion. In the summer of 2007, Countrywide
Financial drew down $11 billion line of credit and then secured an additional $12 billion bailout in
September. This may be considered the start of the crisis. In mid-December 2007, Washington Mutual bank
cut more than 3,000 jobs and closed its sub prime mortgage business. In mid-March 2008, Bear Stearns
was bailed out by a gift of $29 billion non-recourse Treasury bill debt assets.

In early July 2008, depositors at the Los Angeles offices of Indy Mac Bank frantically lined up in the street
to withdraw their money. On July 11, Indy Mac, a spin-off of Countrywide, was seized by federal regulators
- and called for a $32 billion bailout. The mortgage lender succumbed to the pressures of tighter credit,
tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to
gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The
two were placed into conservator ship on September 7, 2008. On September 16 2008, news emerged that the
Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed.
The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the
firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to
purchase the banking assets of Washington Mutual

The year 2008, as of September 17, has seen 81 public corporations file for bankruptcy in the United
States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history
also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual
totals. The year also saw the ninth biggest bankruptcy with the failure of Indy Mac Bank. The Wall Street
Journal states that venture capital funding has slowed down which in the past led to unemployment and
slowed new job creation.

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5. Large Trade Deficit Spells More Difficulties Ahead for US

Economy:-
.
Since December 2001, the monthly trade deficit has increased $37.6 billion, and petroleum products
account for 47 percent of this increase. The growing U.S. appetite for low-cost consumer goods, capital
goods, and industrial materials and components, especially from Asia, account for more than half of the
growth of the trade deficit. This situation is likely to become worse in the months ahead. Crude oil prices,
after falling in November, have been rising again, and the dollar has strengthened in recent months, making
most imports cheaper. In 2005, business and political conditions in Europe weakened, and prospects for the
Japanese economy improved only modestly; consequently, the dollar rose against industrial country
currencies. The dollar remains as much as 40 percent overvalued against the Chinese Yuan and other Asia
currencies.

Together, higher oil prices and a strong dollar will push the trade deficit to new record highs, with the
monthly trade deficit likely exceed $75 billion by mid 2007. High and rising trade deficits tax economic
growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces
domestic demand and employment. Worker productivity is at least 50 percent higher in industries that
export and compete with imports, and reducing the trade deficit and moving workers into these industries
would increase GDP. Were the trade deficit cut in half, GDP would increase by nearly $300 billion, or
about $2000 for every working American. Workers wages would not be lagging inflation, and ordinary
working Americans would more easily find jobs paying good wages and offering decent benefits.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the
manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the
manufacturing sector should have regained about 2 million of these jobs, especially given the very strong
productivity growth accomplished in durable goods and throughout manufacturing.

TOP TEN COUNTRIES WITH WHICH

U.S. HAS A TRADE DEFICIT
Deficit in Millions ($U.S) Deficit in Millions ($U.S)

Country Name Year (2006) Year (2008)

China -27,956.65 -223,395.84

Japan -6,046.85 -62,426.73
Canada -5,956.50 -68,513.41
Mexico -4,804.47 -56,781.12
Saudi Arabia -4,069.64 -39,797.27
Germany -3,368.14 -36,812.72
Ireland -2,795.35 -18,858.10
Venezuela -2,660.30 -36,298.91
Nigeria -2,631.80 -31,422.79
Italy -1,756.64 -17,712.29
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THE MARKET BREAKS DOWN

The big problem now is that speculation has gotten so out of hand that it is distorting the very mechanism by
which the market allocates supply. For example, a commodity that is in tight supply will normally exhibit a
spot price that's higher than futures prices, since consumers are willing to pay up to obtain supplies that have
suddenly become scarce. In turn, higher spot prices act as an inducement to producers or inventory-holders
to sell their inventories into the market now, rather than hold them and realize a lower price at some future
point. Selling inventory into the marketplace alleviates the shortage.

On the other hand oil is exactly the opposite. Despite all the talk of supply tightness and a concomitant
700% run-up in the price over the past seven years, it seems speculators are buying oil and holding it for the
purposes of financial gain, in such huge quantities that it precludes the normal price relationship from
occurring. With the price curve as it is, an incentive is created to hold oil in inventory rather than sell it into
the marketplace, and this creates a vicious circle: the more oil held in inventory, the more spot prices remain
weak relative to futures, and the more investors want to hold it in inventory. The bottom line is that supplies
are held off the market exactly at a time when they should be brought on. The price of oil had hovered
close to the $150-a-barrel level. US inventories are now at a three-year low. This is prompting some
analysts to call for the Energy Department to stop putting oil into the nation's Strategic Petroleum Reserve
(SPR) so the oil instead can be used in the marketplace

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IMPACT OF US RECESSION IN INDIA

INDIA

Indian industry recorded negative growth for the first time in 15 years, falling to 0.4 per cent in October as
against 12.2 per cent expansion a year ago as the impact of the global economic downturn deepened in the
country. The fall is partly due to a dip of over 12 per cent in India's exports. Policy makers said the fall was
bigger than expected even as they exuded confidence that the December 7 stimulus package would arrest
any further decline. Industrial output had last fallen in April 1993.Manufacturing, comprising around 80 per
cent of the Index of Industrial Production, clocked a negative 1.2 per cent growth in the month from a
whopping 13.8 per cent a year ago.

In fact, output in two of the four sectors that make up the index -- intermediate goods and consumer goods
contracted to 3.7 per cent and 2.3 per cent, respectively, from a growth of 13.9 per cent and 13.7 per cent,
respectively. Within consumer durable goods, both segments -- consumer durables and consumer non-
durables -- shrank by three per cent and two per cent, respectively.

Of the total 17 industries, captured in the IIP figure, as many as 10 recorded a negative growth and could
have a similar bearing on economic growth, given the fact that industry accounts for 29.4 per cent of
GDP. India's foreign exchange reserves fell to $245.857 billion as on Dec. 5, from $247.686 billion a
week earlier. Foreign currency assets, expressed in dollar terms, included the effect of appreciation or
depreciation of other currencies held in its reserves such as the euro, pound sterling and yen. Reserves have
declined sharply in recent weeks mostly due to the central bank's dollar selling intervention in the currency
markets to shore up a falling rupee.

More than half of India’s services and merchandise exports go to the US. Countries like India, China and
Japan, which have been registering steady growth in exports, especially to the US, are likely to be affected
by the slowdown in the US economy. Experts predict that eventually US businesses would either reduce
outsourcing or withhold expansion plans.

Consequently, BPOs, financial services and other software exports contributing to about 2% of India’s
GDP are likely to be affected along with another 7% constituting service exports, which are vulnerable to
the US economy swings. Despite significant Asian growth and India’s strategy to focus on non-US markets
for exports, a slowdown in the US is expected to influence almost all economies worldwide. However there
has been a significant and positive change in the way India has been managing its external sector with
respect to changes in the global scenario. Appropriate exchange rate methods and good external debt
management are some of the positive traits of the Indian economy. New policies and mature governance has
helped India face numerous global crises and yet maintain an enviable growth rate.

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IMPACT ON DIFFERENT
SECTORS OF INDIAN ECONOMY
The United States accounts second largest economy of the world from GDP and any significant slowdown is
bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and
emerging economies like India and China has reduced considerably over the last two decades. Thus, the
effect may not be as drastic as would have been the case in the 1980s.Even so, fears of a US recession led to
panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US $450 billion
in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on
January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with
Hang-Seng, Nikkei, and Kospi.

History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA (Dow Jones
Industrial Average) went down by 23%, while the Indian Index fell by 15%.Much has happened between
then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection
for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy
trade surplus with the United States

1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It
has been suggested that CalPERS (California Public Employees' Retirement System) is likely to shift an
additional US $24 billion to its international portfolio. A large portion of this is likely to flow into India and
China. If other funds follow suit, a cascading effect can be expected. Along with the already significant
dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and
seaports--and be ready for a rapid takeoff when normalcy is restored.

2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT
firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in
one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected.
Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as
opposed to merely providing services). If this is done, India can emerge as a major player in the IT products
category as well.

3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational
efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The
demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to
advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see
the emergence of new regional groupings--India, China, and Korea.

4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given
the availability of talented professionals, and with a distinct cost advantage, India can be the destination of
choice for health tourism.

5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security,
that has been absent until now, may gain momentum. (Conti…..)

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6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government
intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would
reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of
India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing
domestic demand. A strong domestic demand would also help in competing globally when the recession is
over.

In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At
the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth
when the next boom occurs. For US firms, who have long looked at China as a better investment
destination, this may be a good time to look at India as well. After all, 350 million people with purchasing
power cannot be ignored.

INDIA AND US BILATERAL TRADE

Indo-US bilateral trade has been upbeat, except for the nuclear deal that is facing a stormy period.
According to the Indian Finance Minister, USA will not go through the impending recession. Even if it
does, it is not likely to impact India. Having said that, in the last week of January 2008, the actually story
seems to be different. But trade and commerce, is affected. Investors are aggrieved at the trading activity
coming to a grinding halt frequently in the last three months. Indian exports to the US are less than earlier
and dependence is less as it is also exporting to rich European nations, China and Japan. Asian markets have
also felt the slump when Dow Jones hit the low notes. How much can India withstand the impact?

In the first place, the crisis of US recession is looming on its policies in the Middle East and home turf.
There is no immediate concern for Indians. The jobs are not being threatened as yet. BPOs are still working
24 X 7 and jobs are being generated in other sectors. Real estate has more or less stabilized in many cities
and small towns. Infrastructure activity has not slowed down either. The software professionals are
returning home and Indian students prefer to study in Australia, New Zealand and Britain.

Since US is one of the major super powers, a recession–mild or deeper will have eventual global
consequences? USA may cut their capital investments into the country if they have to control recession at
their end. The year 2008 has not started on a good note for the US economy. Till the stocks don’t climb
upwards chances are that investors will loose more money. Despite world recession and India’s optimistic
outlook, the results will not show at least in the next two years.
The rupee may have appreciated against the shrinking dollar. But Indians are enjoying the new found
material wealth and flaunting it. The reigns have to be tighter at the US end till the economy becomes
buoyant.

India can get affected by the BPO units becoming less aggressive. The American food chains that have
opened up will be impacted. There could be down sizing on staff and advertising. The equity market will see
a slide in a few months, if things go out of control. Consultants across the world are hoping that they will be
able to keep their clients upbeat in the face of recession. The prolonged recession is likely to result in further
weakening of the dollar.
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US TRADE WITH INDIA: 2008

All Figures are in Millions $US.

Month Exports Imports Balance

January 2008 1,078.4 2,306.7 -1,228.3

February 2008 1,505.5 2,118.5 -613.0

March 2008 1,644.7 2,254.7 -610.0

April 2008 1,105.3 2,125.8 -1,020.4

May 2008 1,493.5 2,190.3 -696.8

June 2008 2,047.3 1,869.2 178.1

July 2008 1,986.6 2,069.7 -83.1

August 2008 1,864.4 2,210.6 -346.2

September 2008 2,032.8 2,398.5 -365.7

October 2008 1,640.5 2,452.4 -811.8

TOTAL 16,399.1 21,996.3 -5,597.2

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VIEWS
VIEWS OF FORMER FOREIGN
MINISTER YASHWANT SINHA
INDIA is currently facing two different kinds of crisis on the economic front. The first is self-inflicted,
and the second of the world by the US, The origins of the first crisis lie in the manner in which the
government tackled the problem of inflation. Along with the Reserve Bank of India, it took a number of
steps to tighten liquidity, force financial institutions to raise interest rates and not only make credit
unavailable but also very expensive. The government was already running a huge fiscal deficit, which
though not reflected fully in the budget, had already sucked a lot of liquidity out of the system.
these steps were avoidable; that the rising prices of the demand-inelastic essential commodities would not
respond to monetary measures and that these steps would have an adverse impact on growth. Thus, by its
mistaken policies the government made matters worse. Money became scarce, it became unaffordable, it
had an impact on demand, both consumer and investment, and the economy, as predicted, slowed down. If
the government had not panicked, if it had anticipated the subsequent developments, India would have
been in a much better position today to face the global meltdown.
The financial crisis in the US has multiplied our problems, as it has caught us off guard. The
prime minister is clearly wrong when he claims that the government had anticipated this crisis and
provided for it in the current year’s budget. The FM had dismissed this problem only in exactly two
sentences in his budget speech and ended by saying that “the consequences for developing countries are
also not yet clear”. Even in the economic outlook report for 2008-09 released in July this year, the
Economic Advisory Council to the PM felt that the main global shocks for India would come from the
sharp increase in the prices of primary goods, particularly of crude petroleum and food. The turbulence in
the international financial markets was considered to be just one among the many factors impacting on the
Indian economy.
Under-pricing of risk is inherent in the modern financial system. But, clearly the system has to be
properly regulated and closely supervised. The US failed miserably to do so. The rating agencies failed
too. International financial institutions like the IMF also failed to anticipate the crisis. No one knows even
today the extent of the risk involved, where the risk is lodged and who owns the risk. Clearly, we have not
yet seen the bottom. The worst is yet to come.
The result is that liquidity has vanished from the system globally. The consumer does not want to
borrow and buy. He wants to save whatever he has. The financial institutions are getting increasingly
saddled with non-performing assets. Even if they have the money, they are reluctant to lend. Nobody is
keen to make fresh investments. Lay-offs have become the order of the day. The same is happening in
India.

Reference: THE ECONOMIC TIMES

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IMPLICATION

It is time to focus on how to generate the demand. Govt. should reconstruct Roads, irrigation projects,
housing, health and education in the rural areas should receive our highest priority. Highways, power plants,
transportation systems, railway tracks, ports and airports should be our next target. Quality higher and
technical educational institutions and institutions imparting skills must be set up on a large scale. Our cities
must be revitalized with most modern civic amenities. All this could be done through vigorous public-
private partnership. All economically viable schemes could be funded through the market with only seed
capital from the government. The government could help the others through interest rate subvention and
viability gap funding. In this way, we could make our limited resources go far.
Housing has been a driver of our economy. Home loans must be made cheaper and the income-tax
concession on interest paid on home loans should be raised to at least Rs 2, 50,000 per year from the present
Rs 1, 50,000 fixed by me many years ago.
The global meltdown has come as a great boon for the government, for it has given it a place to hide. The
government has successfully convinced the people that all the present economic ills are because of the
global crisis. But, the moment of truth will have to be faced sooner than later, because things will only get
worse in future

Further more recession is not only effected Indian economy but also world sector. Many industries have to
suffer a lot due to this in term of trade and domestic demand. Above figure shows the fact. Mainly
manufacturing firms and industries are suffering from this on the other hand service firm are not much
effective because of outsourcing business, but aviation industries suffer a lot. In short US recession effect
bad on Indian economy

Reference: THE ECONOMIC TIMES

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STEPS TAKEN BY GOVT. AND RBI

The central bank even cut its benchmark repo rate by 150 basis points (bps) to 7.5% on October 19 in an
attempt to get some of that money moving out of the bank vaults. Still no go.
The RBI recently turned up the thermostat once more, this time to prod banks to start lending at reduced
interest rates. It cut its benchmark repo and reverse rate by 100 bps. But, again, there’s hardly any
movement. The banks are still carting their surplus cash over to the RBI and dumping it there for safe-
keeping, for even as a low a return as 5%. Take a look at the money being tipped over at the RBI window.
For the first five days of the month, till the RBI cut the rates, banks plunked Rs 243,310 crore with the
Reserve Bank, for a return of only 6%. Over the next three working days, banks again deposited Rs 84,635
crore with the central bank, for a return of just 5%. The total — for just eight days — works out to over Rs
327,000 crore.
In effect, this means banks are still wary of lending to corporate, despite the sea of liquidity and rate cuts
unleashed by the central bank. This also then conveys how banks are still uncertain about the future and that
they are doubtful about the ability of their corporate clients to pay up in time. HERE’S an example a public
sector unit was able to issue five-year bonds to banks with a coupon of 9.33%. Around the same time, one
of the Top five India Inc companies also borrowed three year money, but at 10.10%. Clearly, banks are
willing to take a risk on the government, even if it is a subsumed sovereign guarantee, but not on even
AAA-rated private companies. Banks have not forgotten the nightmares of the early 1990s, when bank
NPAs ruled around 10-14%. This time, despite the prodding from the government and the central bank, they
are unwilling to stick their necks out. The RBI has allowed banks to restructure loans a euphemism for
looking the other way when a loan turns bad that might in ordinary times have been called for stricter
treatment. But, the banks are still not biting.
The problem also seems to be in the system’s liquidity absorption capacity. Whatever steps the
government takes at the moment such as, providing cheap cash to corporate through a variety of refinance
windows — not only are banks reluctant to lend, even corporate are loath to load up their balance sheets
with fresh debt. Many of them are drawing down their existing credit lines with banks emboldened
somewhat by the new restructuring space to finish existing projects but are unwilling to bet on new projects.
With aggregate demand having fallen, India Inc is also contending with reduced top line and bottom line
projections. In such a scenario, they may not be in a mood to pile up additional debt.
Therefore, the key to the current economic impasse might lie on the demand side. The government has
tried addressing the issue by spending on infrastructure and by cutting taxes to boost demand. These are also
not without their associated problems. Any investment in infrastructure will yield results only after a long
lag, and the nature of improved technology does not allow for the higher employment generation that one
saw a few years ago. Plus, to get an infrastructure project started is also time-consuming financial closure in
these days of clammy credit markets is a tough call.
Some economists say that the production orientation of the economy has changed in favor of expensive
consumer products, a sector that might be slow off the blocks in reviving. In such a situation, reviving
demand for wage goods might just do the trick. Even this hypothesis needs to be tested. The occasion might
present itself soon — with experts forecasting a better-than-average winter crop, the government should
facilitate hassle-free movement of the harvest to the markets and consumables to centers where the ensuing
agricultural income can be spent. This may sound simplistic, but sorting the physical, infrastructural
infirmities could be one of the first achievable steps on the long road to recovery.

Reference: THE ECONIMIC TIMES

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MACRO ECONOMICS

BIBLIOGRAPHY

Ø http://www.commodityonline.com/hottopics/US-Recession.html

Ø http://www.fibre2fashion.com/industry-article/9/877/impact-of-recession-in-american-
economy-on-india1.asp

Ø http://www.indiadaily.com/editorial/09-12f-04.asp

Ø http://www.economywatch.com/world_economy/usa/indo-usa-trade-relation.html

Ø http://www.thehindubusinessline.com/2008/12/31/stories/2008123151300500.htm

Ø http://profit.ndtv.com/2008/11/01005242/IndoUS-trade-relations-What.html

Ø http://www.thestandard.com/news/2008/03/20/five-reasons-why-recession-good-time-start-
company

Ø http://forum.lowyat.net/topic/610764

PRINT MEDIA
The Economist Times

The Hindu

The Times of India

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