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Presented By:-

Deepty Chawla
MBA-2nd Sem(TYC)

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 What Is Recession ?
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.
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 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”.

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 What
Causes
Recession ?

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 An economy typically expands for 6-10 years and
tends to go into a recession for about six months to 2
years.
 A recession normally takes place when consumers
loose confidence in the growth of the economy and
spend less.
 This leads to a decreased demand for goods and
services, which in turn leads to a decrease in production,
lay-offs and a sharp rise in unemployment.
 Investors spend less as they fear stocks values will
fall and thus stock markets fall on negative sentiment.
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 World Economy

The Global Economy

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The world economy grew 5.2% in 2007
Powered by growth in China (11%), India
(9%) and Russia (8%).

The BRIC countries had been posting

7%-10% grow rates for years.
Property and stock market booms.
Investment was bringing economic
development.

Developing and less developed economies

depend on the developed countries for their
economic wellbeing.
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 What a difference a year
makes??

The global economy has been hit by

a rapid one-two punch that set the
stage for stagflation to make a come-
back.

It started with the sub-prime crisis

in the US. 9
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 U.S.A – Consumption based Economy.
 2/3rd economic activity i.e. GDP –
comes from consumers.
 Credit - free flowing for U.S consumers
Credit card loans for personal consumption

Auto loans for purchase of cars

Home loans for purchase of houses

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for years the prices of homes in the U.S. kept rising.

Result
Overconsumption/
Extravagant
spending
by the consumer

Thus
For years prices
of homes in US
kept rising
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 Felt a need to Preserve capital. Therefore
Started tightening credit ,
Started restricting lending to the U.S
consumer and businesses.

 Since then
Loans became difficult to come by banks,
Bank cut Credit card limits.

U.S. consumer significantly reduce

spending. 14
 Reduced spending meant - reduced activity for most
businesses and consumers.
 businesses started to layoff workers
(firing people as there was no work).

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 Because of layoff Unemployment
started to rise which resulted in further
reduction in spending by consumer.

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Rising oil prices at $100 a barrel
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Dollar value Stock market
Declined crashed

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 All this slowed down the growth of
economy.

 GDP growth rate fell to 2%

All this put together has

driven the U.S. economy in
recession. 21
 In Feb, 63,000 jobs were lost.

 In Sept, 159,000 jobs were lost, the 5 yr U.S

record.

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In early July, depositors at Los Angeles
offices of Indy Mac Bank lined up in the
street to withdraw their money.

On July 11,Indy Mac - the largest mortgage lender

in the US - was seized by federal regulators.

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During the weekend of September 14-15,
Lehman Brothers declared bankruptcy
after failing to find buyers.

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Bank of America agreed to purchase Merrill
Lynch, & consortium of 10 banks created an
emergency fund of at least $70 billion to
deal with the effects of Lehman's closure.

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On Sep 29, Citigroup beat out
Wells Fargo to acquire the
Wachovia's assets will pay $1 a
share, or about $2.2 billion.

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Another bank
failure occurred
on September
25 when JP
Morgan Chase
agreed to
purchase the
banking assets
of Washington
Mutual
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 The year 2008 as of September 17 has seen 81
public corporations file for bankruptcy in the
United States.

 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.

 Other Famous who got bankrupt were, fannies

mae & Freddie Mac, aig, bearstearns etc. 28
 IMPACT OF GLOBAL
RECESSION ON INDIA

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 Indian companies have major outsourcing deals from the
US.

 India's exports to the US have also grown substantially

over the years.

 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.

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 One danger meanwhile is of a dip in the
employment market. There is already anecdotal
evidence of this in the IT and financial sectors, and
reports of quiet downsizing in many other fields as
companies cut costs.

 Many companies has laid off their staffs, the

number of tourists inflow to India has come down,
companies have cut down compensations and
perks etc, government and other private
companies are reluctant in starting new ventures
and starting new projects etc. 31
 One of the casualties this time could be real estate, where
building projects are half-done all over the country and in
this tight liquidity situation developers find it difficult to
raise finances.

 The only way out of the mess is for builders to drop prices,
which had reached unrealistic levels and assumed the
characteristics of a property bubble, so as to bring buyers
back into the market, but there is not enough evidence of
that happening.

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 Recession in jobs availability and companies
following downsizing in the existing available staff
and cutting down of the perks and salary
corrections. Globally the financial sector sacking
the existing base of employees

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In high numbers in US the major example being CITI
Group same still followed by others in hospitality
industry Jet and Kingfisher Airlines too. The cut in
salary for the pilots being 90 % can any one imagine
such a huge cut in salary 34
For the first time in five years, India’s export growth
has turned negative. 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. I
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.

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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.

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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.
This is not a sales pitch for India, but only a gentle
suggestion to US corporations.

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A slowdown in the us economy is bad news for
India because:-

 Indian companies have major outsourcing

deals from the us.
 India’s export to the us also grown
substantially over the years.
 Indian companies with big tickets deals in
the us are seeing their profit margin
shrinking.
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Share market!

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Most people have sold the shares.

Foreign investors have pulled out

from stock market.

Stock broking houses are laying-off people.

People have started saving money.

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 IT &
real
estate
sector
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 IT industries, financial sectors, real estate owners,
car Industry, investment banking and other
industries as well are confronting heavy loss due to
the fall down of global economy.
 Inflation and psychological impact of the us crisis.
 benefits are missing as companies look to cut cost.
 India's export growth is also slowering down.
 one of the casualties this time are real estate,
where building projects are half done al over the
country and in this tight liquidity situation
developers find it difficult to raise finance.

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Federation of Indian chambers of
Commerce and Industry (FICCI) found
that faced with the global recession,
inventories industries like garment,
gems, textiles, chemicals and
jewellery had cut production by 10 per
cent to 50 per cent.

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Industrial sector!

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 Government and other private companies are
reluctant in starting new ventures and starting new
projects.

 Projects that are halfway to completion, or companies

that stuck with cash flow issues on business that are
yet to reach break even, will run out of cash.

 Car, bike & truck sales down.

 Steel plants also cutting production.

 Hospitality and airlines are hit by poor demand.

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 Companies in the private sector and government
sector are hesitant to take up new projects. And they
are working on existing projects only.

 Projections indicate that up to one crore persons could

lose their jobs in the correct fiscal ending March. . The
one crore figure has been compiled by Federation of
Indian Export Organisations (FIEO), which says that it
has carried out an intensive survey.

 The textile, garment and handicraft industry are worse

effected. Together, they are going to lose four million
jobs by April 2009, according to the FIEO survey
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Banking sector!

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 Indian banks are facing through a tough time of
liquidity crunch. Lehman Brothers had invested a
great amount in the stocks of Indian banks that have
invested in derivatives.

 A sudden fall in the economy directly affected

Lehman and Merill, eventually forcing them to file a
bankruptcy.

 Falling down of Lehman had a great impact on the

leading international bank, ICICI Bank, a bank that had
invested in Lehman’s bonds. This meltdown even have
covered the Axis Bank but not to a great extent. 48
 Lehman Brothers had signed a partnership with some
of the real estate companies like Peninsula Land Ltd
and DLF Assets. These have also suffered a heavy loss.

 With all this, the Indian Sensex swung violently

downward, mainly because of the foreign companies
pulling out credits to meet high inflations.

 Central banks have worked to improve liquidity but

are charging higher credits. The interest rates have
drastically increased from 11.5% to nearly about 16%.

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 On the issue Mr. Manmohan Singh suggested-

“ A coordinated fiscal stimulus by countries that are in a

position to do so would help to mitigate the severity
and duration of the recession.”

“ It would also send a strong signal to investors around

the world. resort to fiscal stimulus may be viewed as
risky in some situation, but if we are indeed on the
brink of the worst downturn since the great
depression, the risk may be worth taking,” he added.

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CORRECTIVE
STEPS
TAKEN TO
CHECK
RECESSION

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 RBI needs to neutralise the outflow of FII
money by unwinding the market
stabilisation securities that it had used to
sterilise the inflows when they happened.

 This will mean drawing down the dollar

reserves which is important at this hour.

 In the IT sector, there should be

correction in salary offerings rather than
job cutting.
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 Public should spend wisely and save
more.

 Taxes including excise duty and custom

duty should be reduced to lighten the
adverse effect of economic crunch on
various industries.

 In real estate the builders should drop

prices, so as to bring buyers back into the
market.
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 Also, the government should try and
improve liquidity , while CRR and SLR
must be cut further.

 Indian Companies have to adopt a multi-

pronged strategy, which includes
diversification of the export markets,
improving internal efficiencies to maintain
cost competitiveness in a tight export
market situation .
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Policy rate (02-jan-2009)

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 The Repo Rate has been cut by 50 bps to 5.5 % w.e.f.
November 03, 2008.

 The SLR has been cut by 100 bps to 24.0 % w.e.f.

November 08, 2008.

 The CRR has been cut by 100 bps in two stages.

First 50 bps cut w.se.f. October 25, 2008 and another
50 bps cut from November 08, 2008. The current
CRR is thus 5.5. The Cash Reserve Ratio (CRR) has
been further cut by 50 basis points from 5.5 per cent
to 5.0 per cent from the fortnight beginning January
17, 2009.
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 Reserve Ratios (2008)
Cash Reserve Ratio 5%. Statutory Liquidity Ratio 24.0%.

Lending or Deposit Rates (2008)

Prime Lending Rate 12.75%-13.25%. Saving Bank Rate 3.5%
Deposit Rate 7.50%-10.75 .

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Current economic scenario -
Impact of recession on India
 Recession has grabbed almost all the
organizations of the world.
 Several people have lost jobs - facing
the financial problems.
 Government - doing best to come out of
the problem.
 Banks are providing business loans at
low rate. 58
 Government - providing money
packages to organizations.
 If I talk about India, here the situation is
still satisfactory if compare it with
other countries of the world.
 Reserve bank of India (RBI) has
decreased the rate of interest.
 SBI and ICICI are also providing
different types of loans at a low rate of
interest.
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 Organizations are cutting cost to
stand in the market.
 Export businesses of India is going
up.
 The real state was doing good
business.
 But nowadays the condition of real
state is still worse because of
recession.
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Sources
 www.google.com.
 www.wikipedia.com.
 Business line – the magazine.

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