Major Recessionary Trends in India and Ways to Overcome It

Presented by :
- Yogesh Kende
EMBA- ITM Kharghar

Before, understanding “Recession” we need to understand the market economy;
A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

A1] Growing Market Economy

Starting Point = Willingness to buy

A2] Declining Market Economy

tarting Point = Unwillingness to buy

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

oducer wants his demand always to be high nsumer wants his buying cost always to be low
Actually, Demand is the price at which consumer is ready to buy and producer is

Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Producer Price Competitive Price = More Demand; In competitive Price = Less Demand Consumer Price

ready to sell;

C] What is Recession?
Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product)

GDP = Value of all the reported goods and services produced by the people operating in the country
GDP = MONEY VALUE OF {C + I + G + (X – M)}

Consumables, I = Gross Investments, G = Government Spendin X = Exports, M = Imports

Note: If the recession continues for next quarter, (>6 months) then we go through “DEPRESSION” Economy;

There is a joke that economists quote to explain the Difference between “Recession & Depression”

RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION
= WHEN YOU LOSE YOUR JOB

• A Recession is a contraction phase of the business cycle. • National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. • They define recession as : • “significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.

D] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

E1] OVER PRODUCTION

PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS

COMPANIES PRODUCED MORE

A situation in which the supply exceeds the nation’s ability to consume what has been produced; Supply > Demand

E2] LOW CONFIDENCE LEVEL E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts,

E2.1] Word of mouth E2.2] Assignable Cause

Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market;

E2.2] Assignable Cause

Bad Incidences Happening; Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc… Series of such incidences leading into a kind of

Terrorists’ Attack on 11th September in US
Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit Airline & Hotel Industries offered discounts, gift coupons, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities
CONTINUED IN NEXT SLIDE

Airline & Hotel Industries started “Cost Reduction” activities

i] Reduce No. of flights

ii] Lay off people

iii] Salary reduction to “Not laid off people”

In flight meals reduced

Low or No income to They became careful due spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money got the hit come down instead of spending Catering company now, lays off people Demand for other goods come down

o, you can see how the hit on Airline and Hotel

dustries can affect the end;

“Un-related” industries

ne industry can hit many other industries when the onfidence level of millions of consumers & producers astically comes down;

E] US Crisis Hits India
US faced major crisis because of – • Subprime mortgage crisis (homeloan defaults) • Rising oil prices at $100 a barrel • Global Inflation • High unemployment rates • A declining dollar value All this slowed down the growth of the economy and as the GDP growth rate fell to 2%, recession set in.

F] Impact on India
A slowdown in the US economy is bad news for India because : • Indian companies have major outsourcing deals from the US • India's exports to the US have also grown substantially over the years. • Indian companies with big tickets deals in the US are seeing their profit margins shrinking.

G] How to know recession?
Indicators to say a nation is in recession;

-

People buying less stuff Decrease in factory production Growing unemployment Slump in personal income An unhealthy stock market

H] Anatomy of the economic depression in India
SHARE MARKET • More people have sold the shares in the indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. • Foreign investors have pulled out from stock markets leading to heavy losses in stocks and mutual funds • Stock broking houses are laying-off people • Because of such uncertainty many people have started saving money in banks rather

IT AND REAL ESTATE SECTOR • The key challenges faced by the industry now are inflation and the psychological impact of the US crisis, leading the companies to hit the panic button. • Bonuses, perks, lavish parties, and many other benefits are missing as companies look to cut cost. • India's IT export growth is also slowering down • One of the casualties this time are real estate, where building projects are half-done all over the country and in this

LAYOFFS AND UNEMPLOYMENT • Hundreds of workers have lost jobs in diamond jewellery, textiles and leather industry. • Companies in IT industry have stopped hiring and projected lower manpower need. • Firms attached to the capital market are laying off people and large companies are putting their future expansion plans on hold.

INDUSTRIAL SECTOR • Government and other private companies are reluctant in starting new ventures and starting new projects. • Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. • Car, bike & truck sales down • Steel plants are cutting production • Hospitality and airlines are hit by poor demand 

• US recession may be a boon for Indian offshore software companies.

I] Opportunities in India due to US recession

• The impact of recession is higher to small and medium sized (SMEs) enterprises whose bottom lines get squeezed due to lack of spending by consumers. • SMEs in the US are under severe pressure to increase profitability and business margins to survive. This will force them to outsource and even have M&A arrangements with Indian firms. • India is going to be a great beneficiary of this trend which will minimize the impact of the US recession on Indian industry.

J] How to come out of recession?

It is unhealthy for any nation to be in Recession; So, Government will take certain countermeasures iminate or reduce the Effect of recession for turnaro
Important Point: Today, it is a market Economy

Producers;
Can produce and sell at their prices

Consumers;
Can decide to buy or not;

Both Producers and Consumers are free to act; Not a forced action

Hence, Government does not have direct control on Producers’ & the Consumers’ behavior; But, they can influence millions of Producers & Consumers with Government’s policies;

Government has 2 plans Fiscal Policies
(By Govt.)

Monetary Policies
(By RBI)

Government influences the economy by changing how it (Government) spends and collects money

RBI manipulates the available supply of money in the country

Fiscal Policies
1] Tax cuts for businesses or for individuals 2] More Spending by Govt. to create jobs 3] Automatic fiscal policy; Unemployme nt Insurance

Government influences the economy by changing how it (Government) spends and collects money More money available for spending Individuals get salary and spend money Some income to unemployed people to spend

Demand picks up; Market can recover;

Government manipulates the available supply Monetary of Policies money in the country 1] Reduce reserve ratio
What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called “Reserves”; RBI sets certain ratio of this reserves and it is called “Reserve Ratio”

More money available for bank to give loans

Demand picks up; Market can recover;

Government manipulates the available supply Monetary of Policies money in the country 1] Reduce reserve ratio 2] Lower the interest rates More money available for bank to give loans Individuals take more loan

Demand picks up; Market can recover;

Government manipulates the available supply Monetary of Policies money in the country 1] Reduce reserve ratio 2] Lower the interest rates 3] Use its own reserved money to buy Govt. bonds More money available for bank to give loans Individuals take more loan It becomes an income to Govt. to inject money into the market

Demand picks up; Market can recover;

RBI’s Power or Government’s Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation;

e advise our people to save money, then, the multiplication effect is tha demand will not pickup and recession will continue; Very peculiar!!!!! B not misguiding you; Just think from a macro level, if everybody in the untry stops spending, what will happen?

Nation’s recession is controlled by the actions of everybody living in that country;

Currently, Most of the developing Slow Down Economies like China, Stage; Not yet India; in Recession

GDP Growth Rate Down; But, Still expected to b Around 6% in Indi

Most of the developed Economies like US, Japan, Germany, etc

Currently, in Recession

GDP Growth Rate Negative;

HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)