Institute Of Management Technology, Nagpur

BUSINESS COMMUNICATION II
Group Assignment

Global Recession and Its Effect on India

Submitted to:

Prof. V.P Goud

Section - C

Submitted By:
Nikeeta Kataruka 2009146
Nitin Sharma 2009147
 DECLARATION

We, Nikeeta Kataruka and Nitin Sharma, hereby declare that this report on “Global
Recession and Its Effect on India” has been prepared under the guidance of Prof. H
Virupakshi Goud and submitted as an assignment for the Business Communication – II
course at Institute of Management Technology, Nagpur.

The report is authorized by and submitted to Prof. Goud, and it covers a detailed
analysis of recently faced U.S. originated financial crisis and impact on Indian economy.

For preparing this report, various springs of knowledge been approached (mostly
through secondary sources such as newspapers, journals and magazines, internet, etc.)

Nikeeta Kataruka

Nitin Sharma
 ACKNOWLEDGEMENT
At the very inception, we are indebted to Prof. H Virupakshi Goud for bequeathing
upon us the obligation for preparing a report on Global Recession and its Effect on India.
This has been a great learning experience and an opportunity to broaden our knowledge
base and skill sets.

We also express our gratitude to him for having stood by us as a pathfinder and for
showing confidence in us and of course encouraging us during the times, we felt defeated.

We are grateful to the untiring efforts put in by the Librarian of IMT for rendering us
their heartfelt services and cooperation and providing us with appropriate magazines /
journals useful for the topic, and the staff in the IT department who made the internet
surfing possible.

Lastly, we would like to mention the cooperation and help received from our
colleagues in offering us the best of ideas and encouragement.

Place: IMT, Nagpur

Date: 15thDecember 2009

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 ABSTRACT

This report is an attempt to look into the effect of most recent Global financial crisis
originated in United States of America on India, its financial market, major initiatives taken
up by the Government and Reserve Bank of India in the order to contain it with special focus
on employment, import-export, interest rates, risk management, credit demand and taxation.

This report also tries to put an effort in exploring the fiscal predicament impression and
response from several industries based in India.

This reports attempts to discuss the reason behind the financial turmoil, how it spread
and stimulated world economies. It also tries to throw light how an economic boom turns into
a dark night for financial markets across the world.

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 Table of Contents

Contents
DECLARATION.....................................................................................................................................i
ACKNOWLEDGEMENT........................................................................................................................ii
ABSTRACT.........................................................................................................................................iii
1. INTRODUCTION.........................................................................................................................1
2. RECESSION.................................................................................................................................2
Recession...........................................................................................................................................2
Common causes for Recession..........................................................................................................2
General Government Responses.......................................................................................................2
Global Recession................................................................................................................................2
Stock market and recessions.............................................................................................................3
Recession and politics........................................................................................................................3
3. CURRENT CRISIS.........................................................................................................................4
Background and causes.....................................................................................................................4
Bubble that burst...............................................................................................................................4
How the matter got Complicated?....................................................................................................5
Mayhem in the banks........................................................................................................................7
Effect on Money Market?..................................................................................................................7
4. IMPACT ON INDIAN ECONOMY..................................................................................................9
5. INDIAN GOVERNMENT RESPONSE...........................................................................................12
Government Package......................................................................................................................12
Factors Affecting Impact of Fiscal Package......................................................................................15
6. HOW MARKETERS FACED RECESSION IN INDIA.......................................................................16
Introducing new products...............................................................................................................16
New segments.................................................................................................................................16
Increasing promotional spends........................................................................................................17
Reinforcing bestselling brands.........................................................................................................17
Repricing..........................................................................................................................................18
7. CONCLUSION...........................................................................................................................19
8. BIBLIOGRAPHY.........................................................................................................................21
9. APPENDIX 1..............................................................................................................................22
GDP..................................................................................................................................................22
IMF..................................................................................................................................................22
CDO..................................................................................................................................................22
Money Market.................................................................................................................................22
Liquidity...........................................................................................................................................23
India Infrastructure Finance Company Ltd (IIFCL)............................................................................23
RBI...................................................................................................................................................23

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 Global Recession and Its Effect on India

1. INTRODUCTION

Recession has always influenced the world economic growth and so does this recent
one have lived up to its reputation. The recent recession which started with the main reason
as subprime problem, soon hit the U.S. economy with banks and financial institutions going
down with the huge burden of dollars bills.

With the collapse of multinational financial institutions Lehman Brothers and other
Wall Street icons, this growing recession blowout quickly to European and Asian markets
triggering a mayhem in the world economy.

In this, report we have tried to explore what exactly the recession means, when it is
called Global recession. We have also tried to throw light on the evolution of this recent
recession, how it knockout the world economies, how it reached out to India, how it swayed
India, what measures did government undertook, how market reacted to these measures and
how Indian market faced this challenge.
 Global Recession and Its Effect on India

2. RECESSION

Recession

In economics, a recession is a term referring to general slowdown in economic

activity over a long period, or in other words, a business cycle contraction. During recessions,
many macroeconomic indicators vary in a similar way. Production as measured by Gross
Domestic Product (GDP) [Appendix 1], employment, investment spending, capacity
utilization, household incomes, business profits and inflation all fall during recessions;
bankruptcies and the unemployment rate rises.

Common causes for Recession

The common causes for the recession have been

 Crisis theory

 Tendency of the rate of profit to fall

 Currency crisis

 Energy crisis

 War

 Under consumption

 Overproduction

 Financial crisis

General Government Responses

Governments usually respond to recessions by adopting expansionary macroeconomic

policies, such as increasing money supply, increasing government spending and decreasing
taxation.

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 Global Recession and Its Effect on India

Global Recession

A global recession is a period of global economic slowdown. The International

Monetary Fund (IMF) [Appendix 1] considers many factors when defining a global
recession, but it states that global economic growth of 3 percent or less is "equivalent to a
global recession”. Based on this criterion, three periods since 1985 make the grade 1990-
1993, 1998 and 2001-2002.

Stock market and recessions

During an economic decline, normally the stock rates declines but high yield stocks
such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.
However, when the economy starts to recover and the bottom of the market has passed
growth stocks tend to recover faster. There is significant disagreement about how health care
and utilities tend to recover.

Recession and politics

Generally, an administration gets credit or blame for the state of economy during its
time. This has caused disagreements about when a recession actually started. In an economic
cycle, a downturn can be considered a consequence of an expansion reaching an
unsustainable state, and is corrected by a brief decline. Thus, it is not easy to isolate the
causes of specific phases of the cycle

It is generally, assumed that government activity has some influence over the
presence or degree of a recession. Economists, usually teaches that to some degree recession
is unavoidable, and its causes are not well understood. Consequently, modern government
administrations attempt to take steps, also not agreed upon, to soften a recession. They are
often unsuccessful, at least at preventing a recession, and it is difficult to establish whether
they actually made it less severe or longer lasting

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 Global Recession and Its Effect on India

3. CURRENT CRISIS
Background and causes

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 housing sector was driving the economy to a new
level.  A combination 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 were asked to find more potential homebuyers in lieu of huge 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, and 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 as adjustable rate mortgage (ARM).
However, despite 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 prices to decline beginning from the summer of 2006.
Once housing prices started depreciating in many parts of the U.S., refinancing became more
difficult. Homeowners, who were expecting to get a refinance based on increased home

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 Global Recession and Its Effect on India

prices, found themselves unable to re-finance 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. housing properties were subject to foreclosure activity.  Increasing
foreclosure rates and unwillingness of many homeowners to sell their homes at reduced
market prices significantly 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.

How the matter got Complicated?

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 Global Recession and Its Effect on India

Unfortunately, this problem was not as straightforward as it 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.

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 confident 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 options as long as the housing market was booming.
Just at this point, the things started 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 funds to lend. The subprime loan market thus became a
fast growing segment.  Major (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) [Appendix 1].

Owing to heavy buying of Mortgage Backed Securities (MBS) of subprime loans by

major American and European Banks, the problem, which was to remain within the confines
of US propagated into the world’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 dented banks’ investment portfolios and these losses destroyed banks’
capital. 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.

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 Global Recession and Its Effect on India

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 [Appendix 1] 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 capacity
to disburse loans for various businesses and industries.  This presented a serious cash crunch
situation for companies 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 [Appendix 1] the world over.

Effect on Money Market?

As the housing loan crisis intensified, banks grew increasingly suspicious about each
other’s solvency and ability to honor commitments. The inter-bank market shrank as a result
and this began to hurt the flow of funds to the ‘real’ economy. Panic begets panic and as the
loan market went into a tailspin, it sucked other markets into its centrifuge.

The liquidity [Appendix 1] crunch in the banks has resulted in a tight situation where
it has become extremely difficult even for top companies to take loans for their needs. A

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 Global Recession and Its Effect on India

sense of disbelief and extreme precaution is prevailing in the banking sectors. The global
investment community has become extremely risk-averse. They are pulling out of assets that
are even remotely considered risky and buying things traditionally considered safe-gold,
government bonds and bank deposits (in banks that are still considered solvent).

As such, this financial crisis is the culmination of the above mentioned problems in
the global banking system. Inter-bank markets across the world have frozen over. The
meltdown in stock markets across the world is a victim of this contagion.

Governments and central banks (like Fed in US) are trying every trick in the book to
stabilize the markets. They have pumped hundreds of billions of dollars into their money
markets to try and unfreeze their inter-bank and credit markets. Large financial entities have
been nationalized. The US government has set aside $700 billion to buy the ‘toxic’ assets like
CDOs that sparked off the crisis. Central banks have got together to co-ordinate cuts in
interest rates. None of this has stabilized the global markets so far. However, it is hoped that
proper monitoring and controlling of the money market will eventually control the situation.

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 Global Recession and Its Effect on India

4. IMPACT ON INDIAN ECONOMY

In India, the impact of the crisis has been deeper than what was estimated by our
policy makers although it is less severe than in other emerging market economies. The extent
of impact has been restricted due to several reasons such as –

• Indian financial sector particularly our banks have no direct exposure to tainted
assets and its off-balance sheet activities have been limited. The credit derivatives
market is in an embryonic stage and there are restrictions on investments by residents
in such products issued abroad.

• India’s growth process has been largely domestic demand driven and its reliance on
foreign savings has remained around 1.5 per cent in recent period.

• India’s comfortable foreign exchange reserves provide confidence in our ability to

manage our balance of payments notwithstanding lower export demand and
dampened capital flows.

• Headline inflation, as measured by the wholesale price index (WPI), has declined
sharply. Consumer price inflation too has begun to moderate.

• Rural demand continues to be robust due to mandated agricultural lending and social
safety-net programs.

• India’s merchandise exports are around 15 per cent of GDP, which is relatively
modest.

Still the global economic recession has taken its toll on the Indian economy that has
led to multi-crore loss in business and export orders, tens of thousands of job losses. It has
also shaken up the investment regime, which is being restructured, with the telecom sector
likely to be declared off-limits for foreign investors.

The industries most affected by weakening demand were airlines, hotels, real estate.
Besides this, Indian exports suffered a setback and there was a setback in the production of
export-oriented sectors.

There were significant declines in output of automobiles, commercial vehicles, steel,

textiles, petrochemicals, construction, real estate, finance, retail activity and many other
sectors in year 2008. Exports fell by 12 percent in dollar terms in October 2008, while core
industries slowed to 3.4 % during the same month from 4.6 % a year ago.

Due to the impact of global economic recession, Indian stock market crashed from the
high of 20000 to a low of around 8000 points. Corporate performance of most of the
companies remained subdued, and the impact of moderation in demand was visible in the
substantial deceleration during the current fiscal year. Corporate profitability also exhibited

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 Global Recession and Its Effect on India

negative growth in the last three successive quarters of the year. Indian stock market has
tumbled down mainly because of 'the substitution effect' of:

• Drying up of overseas financing for Indian banks and Indian corporates;

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

• Decline in the internal accruals of the corporates.

Also,sharp fluctuation in the overnight forex rates and the depreciation of the rupee
reflects the combined impact of the global credit crunch and the deleveraging process
underway in Indian forex market.

To worsen the situation, the call money rate went over 20 per cent immediately after
the Lehman Brothers’ collapse and banks borrowing from the RBI under daily liquidity
adjustment facility overshot Rs.50,000 crore on several occasions during September-October
2008 under tight liquidity situation.

The government advised the sectors of weakening demand to reduce prices. It

provided some relief by cutting down excise duties, but such simplistic solutions were
doomed to failure. Weakening demand led to producers cutting production. To reduce the
impact of the crisis, firms reduced their workforce, to reduce costs. This led to increase in
unemployment but the total impact on the economy was not very large. Industrial production
and manufacturing output declined to five per cent in the last quarter of 2008-09.
Consequently, a vicious cycle of weak demand and falling output developed in the Indian
economy.

Before the crisis erupted, there were more than 1500 software firms in the country,
while the employee base of the sector had grown to 553,000 (from 415,000 in FY 06). More
than 1300 IT companies were operating in Bangalore alone

A weakening of demand in the US affected our IT and Business Process Outsourcing

(BPO) sector and the loss of opportunities for young persons seeking employment at lucrative
salaries abroad. India’s famous IT sector, which earned about $ 50 billion as annual revenue,
is expected to fall by 50 per cent of its total revenues. This would reduce the cushion to set
off the deficit in balance of trade and thus enlarge our balance of payments deficit. It has now
been estimated that sluggish demand for exports would result in a loss of 10 million jobs in
the export sector alone.

In February 2008, Tata Consultancy Services (TCS) had asked about 500 employees
to leave due to non-performance. Patni Computer Systems (PCS) has already laid off around
400 employees, or nearly 3% of its 14,800 workforce, on the same ground, while IBM Corp.
followed suit in the case of 700 fresher.

The reduced purchasing power of Indian consumers in the recession situation has
revved up competition among shopping malls. They now have to step up their ad spend along

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 Global Recession and Its Effect on India

with discounts to lure consumers who have restricted their shopping list to essentials, such as
food and other consumables.

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 Global Recession and Its Effect on India

5. INDIAN GOVERNMENT RESPONSE

Government Package

To lift the economy out of the recession the Government announced a package of Rs
35,000 crores in the first instance on December 7, 2008. The main areas to benefit were the
following:

(a) Housing—A refinance facility of Rs.4000 crores was provided to the National
Housing Bank. Following this, public sector banks announced to provide small home loans
seekers loans at reduced rates to step up demand in retail housing sector.

(i) Loans up to Rs.5 lakhs: Maximum interest rate fixed at 8.5 per cent.

(ii) Loans from Rs.5-20 lakhs: Maximum interest rate at 9.25 per cent.

(iii) No processing charges to be levied on borrowers.

(iv) No penalty to be charged in case of pre-payment.

(v) Free life insurance cover for the entire outstanding amount.

This means a borrower can get a loan up to 90 per cent of the value of the house. The
government hopes to disburse Rs.15,000 to 20,000 crores under the new package.

The housing package is the core of the government’s new fiscal policy. It will give a
fillip to other sectors such as steel, cement, brick kilns etc. Besides, the small and medium
industries (SMEs) too get a boost by manufacturing all kinds of fittings and furnishings.

The success of the housing package will, however, depend on the State governments
efforts to free up surplus land so that land prices come down and the cost of housing becomes
reasonable.

(b) Textiles—Due to declining orders from the world’s largest market the United
States, the textile sector has been seriously affected. An allocation of Rs.1400 crores has been
made to clear the entire backlog in the Technology Upgradation Fund (TUF) scheme.

The Apparel Export Promotion Council (AEPC) Chairman, however, said: “It is a
disappointing package. The allocation of Rs.1,400 crores has been pending for many years
and thus, it is the payment of arrears only. There is nothing new in it. It would have been
much better if more concrete measures have been taken to reverse the downturn in the
exports of readymade garments and avoid further job losses in the textile sector.”

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(c) Infrastructure—the government has been proclaiming that infrastructure is the

engine of growth. To boost the infrastructure, the India Infrastructure Finance Company Ltd.
(IIFCL) has been authorised to raise Rs.14,000 crores through tax-free bonds. These funds
will be used to finance infrastructure, more especially highways and ports. It may be
mentioned that ‘refinance’ refers to the replacement of an existing debt obligation with a debt
obligation bearing better terms, meaning thereby at lower rates or a changed repayment
schedule. The IIFCL will be permitted to raise further resources by the issue of such bonds so
that a public-private partnership (PPP) programme of Rs.1,00,000 crores in the highway
sector is promoted.

(d) Exports—Exports, which accounted for 22 per cent of the GDP are expected to
fall by 12 per cent. The government’s fiscal package provides an interest rate subsidy of two
per cent on exports for the labour–intensive sectors such as textiles, handicrafts, leather, gems
and jewellery, but the Federation of Indian Export Organization (FIEO) felt the measures are
not enough as they will not make the exports price-competitive and, therefore, will not boost
exports. G.K. Pillai, the Commerce Secretary, has estimated a loss of 1.5 million jobs in the
export sector alone during 2008-09 on account of the $15 billion decline in the expected
exports.

(e) Small and Medium Enterprises (SMEs)— Government has announced a

guarantee cover of 50 per cent for loans between Rs.50 lakhs to Rs.1 crore for SMEs. The
lockin period for loans covered under the existing schemes will be reduced from 24 months
to 18 months to encourage banks to cover more loans under the scheme. Besides, the
government will instruct state-owned companies to ensure prompt payment of bills of SMEs
so that they do not suffer on account of delay in the payment of their bills.

In short, the fiscal package is aimed at boosting growth in exports, real estate, auto,
textiles and small and medium enterprises. The aim is to encourage growth and boost
employment which have been threatened by the recession in the world economy, more
especially in the United States.

Just within a month, the government announced another package to bail out the Indian
economy. Dr. Montek Singh Ahluwalia said: “We should expect, from all global projections
that the next year (2009) is going to be a very difficult year for the global economy.”

The purpose of the new package announced on January 1, 2009 was to minimize the
pain. With this end in view, the new package included the following measures:-

1. To boost investment and spending to revive growth, the RBI cut the repo
rate, which it charges on short-term loans to banks from 6.5 per cent to 5.5 per cent

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 Global Recession and Its Effect on India

and also reduced the Cash Reserve Ratio (CRR)—the share of deposits which has to
be kept with the RBI from 5.5 per cent to five per cent.

2. To revive exports, which has resulted in a contraction of industrial output,

drawback benefits have been enhanced for some exporters. Export-Import Bank also
gets Rs. 5000 crores as credit from the RBI.

3. To help the realty sector, realty companies have been allowed to borrow
from overseas to develop “integrated townships”.

4. To boost infrastructure, the India Infrastructure Finance Company Ltd.

(IIFCL) has been allowed to raise Rs.30,000 crores from tax-free bonds. Besides,
Non-Banking Finance Companies (NBFCs) need no government approval to borrow
from overseas for infrastructure projects. This will sustain the growth momentum on
infrastructure.

5. To make more funds available, ceiling on foreign institutional investments

(FIIs) in corporate bonds has been increased to $ 15 billion from $ 6 billion. The
purpose is to seek much bigger FII investment.

6. To stimulate the Commercial Vehicles (CVs) sector, depreciation benefit on

commercial vehicles has been increased form 15 per cent to 50 per cent on purchases.
Besides, the States will get one-time funding from the Centre to buy buses for urban
transport. In addition, public sector banks would provide finance firms funds for
commercial vehicles. It is hoped that Tata Motors and Ashok Leyland’s sales would
revive.

On February 24, 2009, the government announced a slashing down of excise duty
from 10 per cent to eight per cent—a reduction by two per cent. Since 90 per cent of the
manufactured goods attract 10 per cent excise duty, this measure is designed to reduce the
prices of colour TV sets, washing machines, refrigerators, soap, detergents, colas, cars and
commercial vehicles. Cement prices are likely to drop Rs.4-5 per bag of 50 kg while steel
prices may cost Rs.500-600 per tonne less.

In addition to this, the government decided to cut service tax form 12 per cent to 10
per cent—a reduction by two per cent. As a consequence, phone bills, airline tickets, credit
card charges, tour packages etc. would cost less. A two per cent reduction in service tax will
directly touch the lives of over 500 million persons by reducing monthly expenses. The entire
stimulus package of Rs.30,000 crores to boost demand in the economy and thus reduce the
impact of recession.

Commerce and Industry Minister Kamal Nath announced a small relief package of
Rs.325 crores for leather, textiles, gems and jewelry on February 26, 2009.

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Factors Affecting Impact of Fiscal Package

The success of the fiscal package will depend on the quality and speed of
implementation so that delays in implementation may not aggravate the economic recession
to move into the dangerous zone of depression.

One of the major stumbling blocks which may neutralize the positive effects of large
expenditure on infrastructure is corruption. In case corruption is not simultaneously curbed to
reasonably low levels, it may delay and reduce the much-desired effect in enlarging
infrastructure. It may result in the Indian infrastructure network being geared into a
temporary employment generation programme with much smaller impact on the economy as
against the intended objectives.

For reducing corruption, two things need to be ensured—transparency and avoidance

of arbitrariness. By cutting arbitrariness in decision-making, corruption can be curbed to a
great extent. Transparency instills confidence in the government.

Secondly, there is a need to orient the fiscal package towards inclusive growth so that
the weaker sections benefit. This would require special emphasis, for instance, on rural
infrastructure—rural roads and housing, instead of only highways and urban housing.
Similarly, a much larger expenditure on primary and secondary education, health and
sanitation can also result in a more inclusive growth process.

Thirdly, the chances of our exports increasing are very limited unless the G-3
economies, namely, the US, EU and Japan, are able to bring about a positive shift in their
growth in the near future for which the predictions at present are not very optimistic. The
Indian economy should concentrate on developing the domestic market. Thus, inward
looking policies should be preferred as against the outward looking approach of integrating
the Indian economy to the world economy is followed during the last decade. It is heartening
that the Prime Minister intends to insulate the Indian economy from the world economy.

Fourthly, although there is a demand for a much larger Fiscal Package to bail out the
Indian economy, there are serious limitations faced by the government because it has to fight
terrorism on the one hand and financial meltdown on the other. The government has to
undertake a huge expenditure at the Central as well as State levels to enhance security. It is
difficult to precisely estimate this expenditure at this stage since it entails larger recruitment
of police and paramilitary forces along with equipping them with the most up-to-date
weapons. However, there is a massive increase in expenditure to combat terrorism, along
with a fiscal package to boost the Indian economy; there is also likely to be shortfall in tax
revenues. Consequently, the Budget deficit is bound to increase.

The very sharp decline in international crude oil prices from $140 per barrel to around
$ 70 per barrel is a welcome relief.

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6. HOW MARKETERS FACED RECESSION IN INDIA

Marketers respond to recession in different ways. Faced with slowing demand, cost
reduction and negative sentiments, some marketers react to downturn by withdrawing to a
shell.

On the contrary, there are marketers who become aggressive during these tough times.
They come with new ambitious products and offers trying their level best to provoke the
customers who postpone their purchases.

It is interesting to see how Indian marketers responded to recession. Although there is

a perception that Indian marketing practitioners are conservative, this recession proved the
sceptics wrong. Many Indian brands reacted aggressively to the downturn determined to ride
the storm rather than hiding in a safe place.

Introducing new products

While the global auto industry was reeling under pressure, Indian automobile markets
were witnessing hot action. While global automakers were pruning their product lines and
selling off their brands, Indian auto makers were launching new brands like never before.

Leading the pack was the market leader Maruti Suzuki. In this difficult period, Maruti
launched models like A-star and Ritz and has been aggressively investing in the new product
development. Tata Motors shook the market with the launch of Nano . International auto
majors who have their presence in the Indian market also joined the party with new launches.
Latest in the list was Honda with their premium hatchback Jazz.

The new product launches were not limited to automobile industry. This summer
witnessed lot of action from the softdrink marketers. Parle Agro was in an aggressive mode
launching brands like Grappo Fizz and LMN. Soft drinks major Pepsi introduced the lemon
variant 7Up Nimbooz

New segments

Indian marketers also took the risk of searching out new segments for their brands and
even introducing new products for new segments. Honda, which was focusing on
sedans, entered the premium hatchback segment with its brand Jazz. GSK is expanding its
blockbuster brand Horlicks into new segments like Nutrition Bar and milk based beverages.

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Many personal care brands like Nivea, Garnieretc are launching products in the male
grooming segment where there is a plenty of opportunity for growth. Mahindra launched
Xylo, which is expected to create a new segment that is looking for a cross over between a
sedan and SUV.

Increasing promotional spends

Several   Indian marketers viewed the downturn as an opportunity to get heard.

Despite the credit crunch, brands spend heavily in the recent months. The IPL and 20-20
world cup saw many brands upping their media spends. Notably Vodafone stole the show
through ZooZoo.

This period also saw brands seriously focusing on the social media. Social media
provided the much needed window through which brands could reach many customers with
less cost. In terms of the nature of promotions, many brands used celebrities more than ever
before.  Despite the initial expenses, marketers felt that the presence of celebrity will give
more credibility and push to the brand

Recession did not stop Indian brands from fighting each other. Horlicks and Complan
are challenging each other and spending on comparative advertising as if there is no
recession. Pepsi and Coke also upped their noise bring in new campaigns for their brands. 
Snack food brands like Bingo and Lays also did not hesitate in making noise

Reinforcing bestselling brands

One of the most important steps that marketers did was to reinforce their existing
mega brands. FMCG majors like HUL, P&G, Godrej devoted much of their resources in
reinforcing and strengthening their core brands.

Automobile marketers strengthened their core brands by bringing in product

improvements and variants. Bajaj came out with the new generation Pulsar while Hero Honda
launched an improved Passion Plus. Tata Motors launched the next generation Indica Vista
and Honda launched the new Generation City.

Maggi celebrated its 25th Anniversary by reaching out to the customers. Many banks
including the public sector banks revamped their positioning strategies and even invested lot
of money on rebranding .HUL invested in further reinforcing its leading Deo brand Axe by
launching yet another international campaign. Reckitt & Benckiser is currently running a
high decibel campaign for its flagship brand Dettol. Honda Motors restyled its bestseller
Activa scooters with a new look

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Repricing

Indian marketers viewed recession as the best time to rework on the pricing strategies.
HUL spent a lot of time and resources in repricing some of their major brands. The company
observed that the consumers are cutting spends on certain FMCG categories either by
postponing the purchase or moving towards low priced products. Many brands tried various
price promotions and sales promotion activities to motivate the consumers to splurge.  The
recession also prompted certain marketers to introduce luxury products.

The current downturn saw Indian marketers coming off age. While being cautious,
Indian brands showed remarkable resilience and maturity in dealing with the current
situation.

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7. CONCLUSION

As against the US package of $ 800 billion to bail out the US economy and the
Chinese package to $ 580 billion to salvage its economy, the Indian fiscal package of
Rs.35,000 crores ($ 7.3 billion approximately) is a small measure to boost the Indian
economy. It is due to this reason that the chieftains of industry want a much bigger package
to bail out the Indian economy, as against the minuscule announced by the government.

But the plan to spend more on housing is commendable if it can be implemented in a

short time and an effective manner. The government should have transparency and avoid
arbitrariness in the implementation so that corruption can be kept within reasonable limits.

The government has been provided relief with the sharp fall in the international price
of crude oil and this should be taken advantage of in reducing expenditure to subsidize oil
imports. Additional employment generation by helping SMEs will be a step towards inclusive
growth since they are labour intensive.

The intention to create infrastructure by expanding highways and ports and to spend
Rs.1,00,000 crores through India Infrastructure Finance Company Ltd ( IIFCL) [Appendix 1]
is commendable. However, it may be more prudent to expand rural roads and rural housing to
promote growth. This would require proper planning which may take more time and does not
provide immediate benefit.

It may not be possible to reduce the fiscal deficit during 2008-09 since much larger
expenditures are needed to combat terrorism and as there is recession in the Indian economy,
but international factors will influence the process. As the G-3 economies of the US, EU and
Japan pick up, the Indian economy will also benefit from their reversal of recessionary trends.
In this situation, the expectation of seven per cent growth of the GDP in 2008-09 and six per
cent in 2009-10 reflects a good performance of the Indian economy.

Now that the three packages have been announced, it is high time that the policy-
makers in the Ministry of Finance, Commerce, Industry and Rural Development should get
together to ensure that the planned expenditure—budgeted and provided in the two stimulus
packages—is quickly translated into productive capacities so as to create the much-needed
multiplier effect on private investment.

It is easier to provide funds, but it is more difficult to ensure their speedy and proper
utilization. In infrastructure, we suffer from inordinate delays and these results in cost
overruns, which the nation has to bear. The huge amount of funds placed with the India
Infrastructure Finance Company Ltd (IIFCL) would require identification of new projects or
expansion of the existing projects. This is not an easy task because the IIFCL is only a
funding agency and implementation has to carry out by other entities, may be the State
governments, public sector undertakings or private sector corporations. To upgrade the level
of infrastructure spending by a factor of two requires gigantic efforts of co-ordination

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between different agencies for speedy implementation. The government should, therefore,
concentrate its efforts to remove hurdles in the path of implementation.

The package has also provided finances to the non-banking finance companies
(NBFCs), but there is serious lack of skill with the NBFCs on project appraisals and to
ascertain the credit-worthiness of the borrowers and the accompanying project risks. There
has to a national campaign for training the NBFCs in project appraisals.

Similarly, the State governments must improve the share of their implementation and
co-operate with the Central Government to improve various infrastructure projects in their
domain or in collaboration with the Centre.

It needs to be emphasized that implementation holds the key to bail out the Indian
economy from the economic crisis.

Pranab Mukherjee has suggested that to reduce the pain of recession, employers
should cut wages all along the line to reduce costs, rather than retrenching workers and thus
add to job losses. To quote: “Jobs must be protected even if it means some reduction in
compensation at various levels.” This is a useful tool to fight recession and it has also been
tried in several countries. This suggestion should be implemented until such time that the
economy is revived.

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8. BIBLIOGRAPHY

1. Lall, Subir. "IMF Predicts Slower World Growth Amid Serious Market Crisis,"
International Monetary Fund, April 9, 2008.

2. "Global Recession Risk Grows as U.S. `Damage' Spreads. Jan 2008".

Bloomberg.com. 2008-01-28.

3. http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm IMF Jan 2009

update

4. Achuthan, Lakshman. "The risk of redefining recession, Lakshman Achuthan and

Anirvan Banerji, Economic Cycle Research Institute, May 7, 2008".

5. "IMF World Economic Outlook (WEO) Update - Rapidly Weakening Prospects Call
for New Policy Stimulus - November 2008". Imf.org. 2008-11-06.

6. Macroeconomic and Monetary Developments: First Quarter Review 2009-10, Reserve

Bank of India .

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9. APPENDIX 1

GDP

The gross domestic product (GDP) or gross domestic income (GDI) is a basic
measure of a country's overall economic performance. It is the market value of all final goods
and services made within the borders of a country in a year. It is often, positively correlated
with the standard of living, though its use as a stand-in for measuring the standard of living
has come under increasing criticism and many countries are actively exploring alternative
measures to GDP for that purpose.

IMF

The International Monetary Fund (IMF) is an international organization that

oversees the global financial system by following the macroeconomic policies of its member
countries; in particular, those with an impact on exchange rates and the balance of payments.
It is an organization formed with a stated objective of stabilizing international exchange rates
and facilitating development. It also offers highly leveraged loans mainly to poorer countries.
Its headquarters are located in Washington, D.C., United States.

CDO

CDOs are just like mutual funds with two significant differences. First unlike mutual
funds, in CDOs, not all investors 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 up by loans (just like the MBS of
subprime loans.)

Money Market

Money Market is actually an inter-bank market where banks borrow and lend money
among them to meet short-term need for funds. Banks usually never hold the exact amount of
cash that they need to disburse as credit. The ‘inter-bank’ market performs this critical role of
bringing cash-surplus and cash-deficit banks together and lubricates the process of credit

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delivery to companies (for working capital and capacity creation) and consumers (for buying
cars, white goods etc.).

Liquidity

The degree to which an asset or security can be bought or sold in the market without
affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets
that can be easily bought or sold, are known as liquid assets. It is also known as ability to
convert an asset to cash quickly. Another term for liquidity is "marketability".

India Infrastructure Finance Company Ltd (IIFCL)

India Infrastructure Finance Company Limited (IIFCL) was incorporated on January

5, 2006 under the Companies Act 1956 as a wholly Government owned Company. IIFCL is a
dedicated institution purported to assume an apex  role for financing and development of
infrastructure projects in the country. The authorized capital of the Company is Rs. 2,000
crore of which, paid up capital, at present, isRs. 1,000 crore. Besides, the resource-raising
programme of the Company would have sovereign support, wherever required.

The Company renders financial assistance through:

 Direct lending to eligible projects

 Refinance to banks and FIs for loans with tenor of five years or more

 Any other method approved by Government of India

RBI

The Reserve Bank of India (RBI) is the central bank of India, was established on
April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The
Central Office of the Reserve Bank was initially established in Kolkata but was permanently
moved to Mumbai in 1937. Though originally privately owned, the RBI has been fully owned
by the Government of India since nationalization in 1949.

The Main objectives of RBI are

 Implements and monitors the monetary policy.

 Prescribes broad parameters of banking operations within which the country's

banking and financial system functions.

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 Manages the Foreign Exchange Management Act, 1999.

 Issues and exchanges or destroys currency and coins not fit for circulation.

 Performs a wide range of promotional functions to support national objectives.

 Performs merchant banking function for the central and the state governments;
also acts as their banker

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