Global Economic Recession and Its Impact on Indian Economy.

The so called economic recession in the world is not only an economical crisis but also it is a financial, social and environmental crisis. Any economic activity spread its effects on the other activities as social and financial activities. Indian economy is a developing economy and it is on the way of development so if this economic recession makes any impact, it will be a short period impact as the on going situation express. Global economic crisis has definitely made an impact on Indian economy but not that extent which was expected. Now it can be answered that our economy is becoming more immune to these kind of crisis all over the world. As compare to other developed country India, having strong financial and social base, can combat successfully to all these diseases provided there are no other natural calamities and political instability. But we have to see at what extent the global economic recession has made an impact on it and how long it is going to reside in India is the basic question of this discussion. Before we disclose the impact of recession on Indian economy let us see what is meaning of recession? And what are the causes of recession? Meaning of Recession: Recession is just a phase of Business cycle. The term ‘Business cycle’ in Economics refers to the wave-like fluctuations in the aggregate economics

activity, particularly in employment, output and income. There are four phases of Business cycle. 1) Prosperity phase 2) Recessionary phase 3) Depressionary phase
4) Revival or recovery phase.

As we are known to these trade cycles we can say that when prosperity ends, the recession begins. Recession relates to a turning point rather than a phase. It is said that when a nation’s gross domestic product is affected negatively on account of a decline in the economic activities, the situation is described as an economic recession and when this recession continues for long, it can turn into depression. According to National Bureau of Economic Research in US defines an economic recession as, “a significant decline in (the) economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” In general a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recession, production as measured by Gross Domestic Product (GDP), employment, investment spending, consumption spending, business profits etc tend to fall.

Background and Causes of Current Recession. This financial crisis of 2007-10 has been called by the leading economists the worst financial crisis since The Great Depression of 1930. The origin of that recession was in US and origin of current recession is also in US. A few years before when rate of interest was very low and prices of houses were booming (Between 1997 and 2006, the price of the typical house in US increased by 124%), people without capacity of repay the loan caught in the financial crisis. Many financial institutions started giving incentives such as easy initial terms when housing prices were rising, people were encouraged to borrow without any capacity to repay the loan, assuming that they would be able to quickly refinance at more favorable terms. But things went wrong and interest rates began increasing and housing prices started declining in US (By 2008, average US housing prices had declined by over 20%) which made people to refinance the home loan very difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. In US many financial companies were engaged in these activities. And the impact was capital started drying up with them which ended with their insolvency and bankruptcy of the many financial institutions. Not only had this reasons for economic recession but there were many reasons also which can be told as follows: a) US Current Account and Trade Deficit:

Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. b) Sub-prime lending: The Sub-prime lending by financial institutions to the borrowers who had no capacity to repay the loan and greater risk, increased dramatically during the years preceding the crisis. Major U.S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of this kind of higher-risk lending. Subprime mortgages remained below 10% of all mortgage originations until 2004, when they spiked to nearly 20% and remained there through the 2005-2006 peak of the United States housing bubble. The value of US subprime mortgages was estimated at $ 1.3 trillion as of March 2007. The interest rate charged on subprime loans was about 2 % higher than the interest on prime loans. c) Predatory lending:

Predatory lending refers to the practice of unscrupulous lenders, to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide, advertising low interest rates for home refinancing. Such loans were written into extensively detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated. d) Increased debt burden or over-leveraging: Households and financial institutions all over the world became

increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn. Five main institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. These institutions were not regulated by the authority. e) Outsourcing: According to some officials and experts, outsourcing has resulted in migration of US jobs to other countries. Out of ten technology jobs one job

goes out f the country which has given rise to unemployment in their states caused to further the recession. f) Oil Crisis: A commodity price bubble was created following the collapse in the housing bubble. The price of oil nearly tripled from $50 to $140 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008. An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states. These are some reasons to further the financial crisis after which the economic recession occurred which then became Global Economic Recession after its effects on all over the world. Indian economy is largely connected with global world especially with US economy in International Trade. Global Economic Recession has definitely made an impact on Indian Economy Which can be seen in following points. 1) Impact on Financial Sectors: During the recessionary period Indian stock market crashed from the high of 20000 to a low of around 8000 points. With the crash of stock market the bearish waves spread throughout the country. The foreign investment in form of equity, debt and also direct investment capital started drying up from Indian financial markets. The profitability of the corporates had already

started declining. About the Rupee value, during the period of March 2008 to March 2009, the nominal value of Rupee decreased from 40.36 per USD to Rs. 51.23 per USD, 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. In Money market, the call money rate suddenly went over 20 %. And there has been a noticeable decline in the credit demand in the economy shows declining growth of the Economy. Commercial Banks faced huge shortage of funds and soon collapsed. 2) The Real Estate Sector: The Real Estate Sector also caught in the grip of recession as there was very less investment in this sector. The real estate prices fell almost by 20 % to 30 % and the developers were thrown into a position where in it became very difficult for them to complete the existing projects and start the new ones. 3) Industrial Sector: It was assumed that Indian Industrial Sector was the main sector to be worsely affected because of lower demand for Indian goods and services from developed and other developing countries and also from within the country. This was not only the effect but it was also a cause for recession as lower expectation about the future demand for products. Federation of

Indian Chambers of Commerce and Industry (FICCI) found that faced with the global recession, industries like garment, gems, textile, chemicals and jewellery had cut production by 10 % to 50 %. Indian Car Industry has seen only 7-8 % growth during the recession period comparatively to 17.2 % growth rate before 2006-07. The overall growth rate of Industrial sector was reduced from 7.4 % in 2007-08 to 4.2 % in 2008-09. This growth rate was 8.5 % in first quarter of 2007-08 which is highly reduced to 0.8 % in the third quarter of 2008-09. 4) Impact on IT Industries: IT Sector has been seeing low demand during the so called global financial recession. It suffered 5 % decline in manpower utilization. Employment opportunities have also decreased by 3 to 5 % during the AprilSeptember 2008 period. As 75 % demand for the IT companies of India comes from US, these IT companies suffered during the sluggish period. The worse thing to be mentioned here that nearly 43 % of Western companies are cutting back their IT spending and nearly 30 % are scrutinizing IT project for better returns. Some of this can lead to offshoring. Finally we can say downward pressure from the developed countries putting more pressure on Indian IT Industries.

5) Impact on Employment in India:

The impact of any economic severe situation can be best seen in terms of employment situation in the country. A survey conducted by the Labour Bureau of ministry of Labour and Employment, Government of India as part of a study on the effect of economic slowdown on employment in India shows us that five lakh people were rendered jobless between October to December 2008 due to the recession. Major sectors like textile and garment industry, metals and metal products, Information Technology and BPO, automobiles, gems & jewellery, transportation, construction and mining industries have employed less number of people during the recession. The total employment in all these sectors had come down from 16.2 million in September 2008 to 15.7 million by December 2008. Exporting units had observed a higher decline in employment with gems & jewellery sector shedding 8.43% of its work force. This is followed by metals and textile sector which laid off 2.6% and 1.29% of their work force respectively. Among the domestic sector units, gems & jewellery sector again witnessed the maximum decline in employment with 11.9% of their work force losing jobs. This was followed by automobiles and transport sectors who shed 4.79% and 4.03% of their work force. 6) Impact on Agricultural Sector: Agriculture has been a backbone of Indian Economy. Even thought the share of this sector to GDP is declining which express the less concentration on the sector, it plays a very important and vital role of in the development

process and especially in this kind situation which prevails in the world. To be strong and unaffected, Agriculture as being a key industry in our country has been a consistent and major contributor to our growth and development of our economy. Except some export oriented products, there is no harm seen for this industry. 7) Impact on Export from India: Exports for October 2008 contracted by 15% on a year-on-year basis. This should not surprise as the OECD economies that account for over 40% of India’s export market have been slowing for months. With the US and EU already entering a phase of recession, India’s export growth had to fall sharply. It must be noted this growth contraction has come after a robust 25%-plus average export growth since 2003. A low-to-negative growth in exports may continue for sometime until consumption revives in the developed economies. A decelerating export growth has implications for India, even though our economy is far more domestically driven than those of the East Asia. Still, the contribution of merchandise exports to GDP has risen steadily over the past six years — from about 10% of GDP in 2002-03, to nearly 17% by 2007-08. If one includes service exports, the ratio goes up further. Therefore, any downturn in the global economy will hurt India. A slowdown in export growth also has other implications for the economy. Close to 50% of India’s exports — textiles, garments, gems and

jewellery, leather and so on — originate from the labour-intensive small- and medium-enterprises. A sharp fall in export growth could mean job losses in this sector. This would necessitate government intervention. A silver lining here, however, is the global slowdown will also lower cost of imports significantly, thereby easing pressures on the balance of payment. India’s overall export growth decreased from 26.9 % to 10 % due to global economic recession. 8) Impact on GDP growth: The growth of an economy for any short period can be measure by the growth of the real GDP (Gross Domestic Product). During recession GDP is surely got affected so as in India. Growth rate of 8 % in 2007-08 had come down to 7.1 % in 2008-09. And to be mentioned, according to International Financial Service provider Morgan Stanley, the continuation of the bearish phase in the global economy could pull down India's economic growth rate to a dismal 3 per cent in 2009. In the third quarter of 2009, India's economy expanded only by 7.9%. These are some points of the impact of global economic recession on Indian economy to be mentioned here. As per the recent speeches by eminent personality like P. Chidambaram, Honorable Home minister of India, there is no more recession in India. Optimistic waves are found in Indian Economy and the revival phase which was expected to start soon has come to door of recession. Government always takes the responsibility to tackle

the problem like recession so as in India, it has already taken the necessary steps in this concerned. By way of introducing moderate fiscal and monetary policies, government can face the challenge like recession to eradicate. Following measures have been introduced by the Government of India in this context. Fiscal Measures: 1) Tax cuts are the first step that a government fighting recessionary trends or a fully 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. 2) Central government has launched two fiscal stimulus packages in December 2008 and January 2009. These fiscal stimulus packages, together amounting to about 3 per cent of GDP, included additional public spending, particularly capital expenditure, government guaranteed funds for

infrastructure spending, cuts in indirect taxes, expanded guarantee cover for credit to micro and small enterprises, and additional support to exporters. These stimulus packages came on top of an already announced expanded safety-net for rural poor, a farm loan waiver package and salary increases for government staff (accordingly to the Sixth Pay Commission), all of which too should stimulate demand.

3) Government has recently handed over a pay hike that ranges from 40% to 100%. Employees will get hundreds of thousands of rupees as Arrears. 4) Also, a post-interim budget 2009-10 stimulus package was announced by the government in February 2009, slashing excise and service taxes which will benefit producers and consumers alike. 5) The government injected fiscal and monetary stimulus worth more than 12% of gross domestic product between September 2008 and April 2009 as the global recession deepened. Monetary Measures: As monetary policy concentrate on volume of money in the economy, RBI has been introducing moderate monetary policy and cutting down the basic rates in monetary policy which makes supply of money more available for use in Indian economy which are as follows: 1) The Cash Reserve Rate (CRR) has been reduced from 6.5 % to 5 %. 2) The Repo rate has been reduced from 9 % to 4.75 %. 3) The reduction from 6% to 3.25 % has been introduced. 5) Statutory Liquidity Ratio also was reduced from 25 % to 24 %. 4) Between October 6 and 20, the RBI has injected Rs 1, 85,000 crore liquidity into the system and all this aimed at getting the financial markets going and giving them confidence.

Conclusion: Living in developing country, we Indian people are all aware of the worse things which we have experienced. Recession is not as bad as British rule. Now we have our own ways to tackle all the problem such as economic problems, social problems and political problems. A transformation of agricultural economy to industrial economy has made Indian Economy more directional towards the growth. International trade as source of growth and development we have accepted it. But the limitations are always there on the road of international trade. This international trade opens up the door of India for the superiority and also to the recession. The so called recession has definitely made impact on Indian economy but there is no any difficulty to overcome the ongoing recession. Recovery is already on door of India; let us see how long it takes to the phase of superiority. The very best solution for the recession is not only curbing it out from India, it is also necessary to phase it out from other countries with whom we are concerned.

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