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Impact Of Global Recession On Indian Corporate Sector

IMPACT OF GLOBAL RECESSION ON INDIAN CORPORATE SECTOR 

Synopsis Submitted To

DRAVIDIAN UNIVERSITY 

in partial fulfillment for the award of the degree

of 

DOCTOR OF PHILOSOPHY IN MANAGEMENT

Submitted by 

M.K.SENTHIL KUMAR 

[Reg. No. 02109222001]

Under the Supervision of 

Dr. L.J. SOUNDAR RAJAN,

Professor and Head, Dept. Of Management Studies,

Christ College of Engineering & Technology,

Moolakulam, Puducherry – 605 010

SCHOOL OF DISTANCE & OFF-CAMPUS EDUCATION

DRAVIDIAN UNIVERSITY 

Srinivasavanam, KUPPAM – INDIA 517 425

2009

Synopsis

IMPACT OF GLOBAL RECESSION ON INDIAN CORPORATE SECTOR (A synopsis submitted

to DRAVIDIAN UNIVERSITY in partial fulfillment for the award of the Degree of Doctor of 

Philosophy in Management)

This Synopsis consists of several chapters,

Chapter I is to talk about introduction, Global Recession, Definition, Historical Background,

Significance

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of the topic, Relevance of the topic for the corporate world and Plan of research.

Chapter II is about literature review, Various Journals, Books, and Articles etc., are referred

talking about recession. The yardstick to measure the impact includes output, Import, Exports,

 Attrition, Job Cuts, and Production Cost etc. Global Recession has impacted negatively various

industries. The industries which have been affected very drastically have been taken as samples.

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In what areas the recession has affected the industries have been discussed.

Chapter III is to devote its attention on Research Methodology of how about and where about

the data is to be collected for analysis of the topic and to discusses the nature of the area

covered for data collection. Hypothesis formulation and limitations of the scope of the study.

Chapter IV is fully concentrated on Data Analysis part of the dissertation.

Chapter V is to throw light on the findings of the study on the topic for the dissertation leading

to the award of the Doctorate Degree.

Chapter VI is to...

Impact Of Global Recession On Indian Market

The recession in the US market and the global meltdown termed as Global recession have

engulfed complete world ecomony with a varying degree of recessional impact. World over the

impact has diversified and its impact can be observed from the very fact of falling Stock market,

recession in jobs availiability and companies following downsizaing in the existing available staff 

and cutting down of the perks and salary corrections. Globally the financial sector sacking the

existing base of employees 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.

In the globalized market scenario, the impact of recession at one place/ indusrty/ sectorperculate down to all the linked indusrty and this can be truly interpreated from the current

market situation which is faced by the world since approx 2 month and still the situation is

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not in control inspite of various measures taken to fight back the recession in the market.The

 badly hit setor at present being the financial sector, and major issue being the "LIQUIDITY 

Crises" in the market.

In-spite of the various measures to subsidise the impact of the recession and cut down the

inflation present nothing really sound have been done.

 Various steps taken by RBI to curb the present recession in the economy and counter act the

prevailing situation.

The sudden drying-up of capital inflows from the FDI which were invested in Indian stock 

markets for greater returns vizualizing the Potential Higher Returns flying back is continuing to

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challenge liquidity management.At the heart of the current liquidity tightening is the balance of 

payments deficit, and this NRI deposit move should help in some small way.

To curb the liquidity crises the RBI will continue to initiate liquidity measures as long as the

current unusually tight domestic liquidity...

Impact Of Recession On Indian Economy

Impact of Recession on Indian Economy 

Table of Contents

Reason for Recession to occur 2Channel through which recession got transmitted to India from US 3

Effect of recession on different sectors 4

Impact on Indian Economy 6

Steps that government took to tackle recession 9

References: 11

 

Reason for Recession to occur

 What happened was this: banks were approached by thousands of possible new home owners

asking for loans. This was during a period where the United States real estate market was

climbing fast, and the value of homes was rising quickly. The banks approved these ‘bad’ or ‘sub-

prime’ mortgages under the mentality that if the

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new home owners were to foreclose, the property would have a higher value than what it

originally was due to the climbing real estate market, meaning that the bank would not lose

money but make a profit! What actually happened was that the real estate market crashed, and

 banks were out of pocket due to the massive numbers of foreclosures on mortgages occurring.This set off the global financial crisis, which led to a global economic downturn and the

recession in most developed countries. All that because of some bad debts in the States!

 What went wrong?

* Increasing pressure of inflation lead to higher interest rate. (Interest Rate cycle turned

around middle of 2007)

* As result cycle of taking loans and consumer spending practically stopped.

* Demand for homes dropped due to rise in interest rates. People with low credit profile (to

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 whom sub-prime loans were given) came under pressure and started defaulting.

* Housing prices came down (the basic calculation of mortgage players of increase in property 

prices went wrong) and mortgage players failed to provide cover for the mortgage loans when

sub-prime borrowers started defaulting.

* Easy liquidity gradually...

Impact Of Global Recession

Global Recession - Causes and Impact

Global economic recession is a well known term among the developed and already developing

countries. It is actually a process which gradually forms a clear picture and not observed in a

particular period of time where the economic conditions as well as other financial indicators of 

the nation confirms its existence such as growth in unemployment rate, low productivity,

negative business expansion etc. The decade has observed such condition in later 2008 which

influenced almost all major economies. To point out the major cause of global recession, its

place of origin has to be mentioned ie. United States of America. Many reasons contributed to

the birth and extension of the situation. Here the discussion is done on the main issues which

led to the serious condition which shrunk the economic growth of nations. The causes can be

indicated by mentioning the policy of USA which had applied low inflation rates in past two or

more decades and as a

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result experienced sustainable economic development. This further lead to fall in price of 

fixed assets such as real estate after a particular period of time. The economy also experienced

excess inflow of foreign funds and low interest rates to raise credit which further was

responsible for the growth of the problem. Further, the economy when showed the favourable

signs led the investors to procure loans and reinvest in real estate. Soon as the condition turned

adverse ie. hike in interest rates, the debts became the point of concern to the private banks and

it turned as investment comprising risk to them which was hard to regain and such institutions

played the major role in corporate profits of USA. Apart from these, many other reasons also

contributed to worsen the situation like securitization, crash of stock market, high rate of interest, failure in balancing the money supply to the world economy, rise in inflation despite of 

money supply to the market, adverse effect on particular...

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 The Causes And Effects Of Global Recession.

INTRODUCTION

Here a definition a recession as well a global recession is mentioned. Some causes and effects

has been listed. Due to recession occurring, I have identified the effects of recession based on

Tesco.

The causes and effects of global recession.

Global financial crisis, increasing for a while, began to show its results in the mid of 2007 into

2008. Worldwide stock markets have subsided, financial institutions have dropped and

governments in even the richest nations have had to develop packages to assist their financial

organizations.

Recession is defined as a slowdown of activities in the economy over a time. The major effect

of recession is Inflation as well as currency crisis. A decrease in income may be another effect of 

recession in the economy. As persons try to save more, this reduces sales therefore there is a

result of no profits. Another effect may be increase in mortgage rates. At the time of recession,lenders

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tend to increase rate in order to cover their losses. While in recession employment occasions are

reduced since companies tend to cut down on these opportunities thus leading to

unemployment in the economy.

Countries around the world are being driven into recession as the economic downturndeteriorates. In Europe, Germany, Italy, Ireland and Denmark they have all suffered two

consecutive quarters of economic decline the first is the technical definition of a recession and

secondly it was already present before. Japan joined the list as it surprised economists and

reduced in size in the ending of the year. The UK economy shrank in the third quarter of 2008,

and is expected to contract through most of 2009. Many are expecting a new world order with

economic power shifting to countries in the east who are better placed to weather the downturn.

However, developing economies rely on the west to buy their goods, so recessions in the US and

UK will also hurt them. This was according to...

Review Of “The Impact Of The Crisis On The Indian Economy” - T Ram Mohan

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[pic]

“The Impact of the crisis on the Indian Economy”

By 

Dr. T T Ram Mohan

[pic]

 Article Review by 

Content Page

1. Objective 3

2. Group IV Analysis 4

3. Conclusion 12

4. References 13

Objective

The article is aimed at a post-mortem explanation of the 2007-2009 financial crises in US

economy in pre and post bankruptcy of Lehman Brothers and the impact analysis on Indian

economy. The whole write-up is tuned towards the impact on the banking and financial

industry. The effect has been severe than initially forecasted. The various cascading effects had

deepened the whole situation.

India has been less affected because of the various regulations well in place and adequate policy 

responses

Group IV Analysis

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Our analysis of the article is being divided in the same way as per the article by Dr. T T

Rammohan as per its various sections.

On US Economy – Tried to explain the fall of Lehman Brothers and its effects on US economy.

 We have agreed with the explanations provided by the author. Though some of the economists

felt that the failure of Lehman Brothers have actually saved the world from greater crisis. That

idea is missing from the article by Dr. Rammohan.

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On Emerging Economies – Tried to explain the cascading effects of subprime effects on

Emerging markets. Disagreed with what Dr. T T Rammohan wants to promote the decoupling

effect with emerging economy. We have tried to show that the emerging economies were also

affected might not be in the same way as US but similarly affected and responded to US markets

in a similar way.

On Indian Economy – Tried to explain the why affects on the market and with the help of IS-LM

model tried to explain the effect of the changes monetary and fiscal policies taken by Reserve

Bank of India (RBI) and Government of India. We agree with what Dr. T T Rammohan says in

his article.

On...

Global Recession

Synopsis

Dissertation topic

“Study of impact of global recession on manufacturing and service sector in India.”

[pic]

[pic]

SUBMITTED TO: SUBMITTED BY: Mr. Shubhagata

Roy SUNIL VISHWAKARMA Sr. LECTURER 

ROLL NO.: IRM/04/32 SMS, VARANASI

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PGDM-IRM 3rd SEM

SCHOOL OF MANAGEMENT SCIENCEs

VARANASI

INTRODUCTION

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of what everyone feels.

 What is a recession?

 A drastic slowing of the economy. Where gross national or domestic product has fallen in two

consecutive quarters. A recession would be indicated by a slowing of a nation's production,rising unemployment and falling interest rates, usually following a decline in the demand for

money. A popular distinction between recession and depression is: 'Recession is when your

neighbors lose his job; depression is when you lose yours.

 What causes it?

 An economy which grows over a period of time tends to slow down the growth as a part of the

normal economic cycle.

 A recession normally takes place when consumers lose 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...

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Effect of The Global Meltdown on the Indian Economy

BUSINESS | FEBRUARY 1, 2009 | SHARE

“Whatever is going to happen, will happen; just don’t let it happen to you”The year 2008, one of 

the worst years in the world’s economic history, experienced a major global meltdown. This

global meltdown led to job lay-offs across the world. It claimed its first casualty in Los Angeles

with a 45 year old NRI killing 5 members of his family before taking his own life. According to

the Labor Department’s report, the unemployment rolls swelled by 2.2 million, over the last year,

to 9.5 million. Different Indian associates and CEOs of multinational companies have started

feeling the heat. The recent downturn is weighing on the minds of employers.

Although India has not been directly impacted by the global financial crisis, we should be

cautious about the indirect knock-on effect of the global crisis. According to the GET report, over 50 million could lose their jobs by 2009 worldwide. The worst thing is that as we live in an

agrarian economy where the unemployment rate is already high and 60% of the population is

still dependent on agriculture, the rate of unemployment is rising further due to these worldwide

lay-offs as most of the students of India go abroad for job purposes.

Going further, not only the labor market, but also the financial market, IT/ITes, export and

manufacturing sectors have been affected adversely. The IT/ITes sector is the major component

of India’s growth because the share in GDP given by agriculture has been taken up by the

services sector in recent past.

The global meltdown is not only affecting the services sector, even the industrial sector hasbeen affected adversely. Major projects and expansion plans are being reviewed by the

corporate sector and they have started focusing on reducing costs and borrowings. The first half 

of the year 2009 is considered as the worst period. Despite all these problems, the biggest

problem that still exists from the past is ‘Information asymmetry’. It would be fine if our 

Government or the members of the major corporate sector don’t know the problem or where to

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find the answer, but the truth is that they know both and are waiting for other countries to take

steps.

The most important challenge faced by our Government during this time is to ensure a balance

between inflation and growth. If our economy experiences high growth rates, it will lead to major 

exports from our nation which will affect our domestic market and if economy experiences adecline in the inflation rate, it will lead to major imports to our country which will affect the

government budget.

Though the impact of global financial crisis on India is stronger than expected, it will be the first

to recover if the Government takes correct decisions and changes the established fiscal and

monetary policies. The wholesale price index and the consumer  price index need to be

watched. The Government should ensure continuous credit flow at a low rate of interest to the

private sector and especially to small and medium enterprises for their expansion and the

growth projects. Low rate of interest is not the only way of boosting the economic growth.

Increase in government expenditure will stimulate the demand so that industry will produce

which will effect the economic growth. The Government should also initiate measures to

address the mutual funds and non-banking financial companies. They should also keep an eye

on the market manipulators and the institutional speculators, as when most individual investors

lose when the market falls, the institutional speculators make money when there are financial

speculative transactions.

Hence, it can be seen that although we have been hit hard, but “Every black cloud has a silver 

lining”; with stern steps being taken in the right direction, we shall soon come out of this crisis

without much damage.

Reasons for Global Recession: In plain simple English

 by Eklavya on OCTOBER 18, 2008

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These days the most talked about news is the current financial crisis that has engulfed the world

economy. Every day the main headline of all newspapers is about our falling share markets,

decreasing industrial growth and the overall negative mood of the economy. For many people

an economic depression has already arrived whereas for some it is just round the corner. In my 

opinion the depression has already arrived and it has started showing its effect on India.

So what has caused this major economic upheaval in the world? What is the cause of falling

share markets the world over and bankruptcy of major banks? In this article, I shall try to

explain the reasons for recent economic depression for all those who find it difficult tounderstand the complex economics lingo and are looking for a simple explanation.

It all started in US…

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 home buyers in lieu of huge bonus and

incentives. Since it was a good time and property prices were soaring, the only aim of most

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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, 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. Home

owners, who were expecting to get a refinance on the basis of increased home 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.

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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 millionU.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.

Now you must be wondering how this housing boom and its subsequent decline is related to

current economic depression? After all it appears to be a local problem of America.

 What complicated the matter?…

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. Let us understand what complicated the problem.

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 confidant that they would get a handsome

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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).

CDOs are just like mutual funds with two significant differences. First unlike mutual funds, in

CDOs all investors do not 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 by loans (just like the MBS of subprime loans.)

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 word’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.

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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.

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 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 the world over.

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 Now what is a money market? 

Money Market is actually an inter-bank market where banks borrow and lend money among

themselves 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

delivery to companies (for working capital and capacity creation) and consumers (for buying

cars, white goods etc). As the housing loan crisis intensified, banks grew increasingly suspicious

about each other’s solvency and ability to honour 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 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 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.

How it has affected India?

In the age of globalization, no country can remains isolated from the fluctuations of world

economy. Heavy losses suffered by major International Banks is going to affect all countries of 

the world as these financial institutes have their investment interest in almost all countries.

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 As of now India is facing heat on three grounds: (1) Our Share Markets are falling everyday, (2)

Rupee is weakening against dollars and (3) Our banks are facing severe crash crunch resulting in

shortage of liquidity in the market.

 Actually all the above three problems are interconnected and have their roots in the above-

mentioned global crisis.

For the last two years, our stock market was touching new heights thanks to heavy investments

 by Foreign Institutional Investors (FIIs). However, when the parent companies of these

investors (based mainly in US and Europe) found themselves in a severe credit crunch as a

result of sub-prime mess, the only option left with these investors was to withdraw their money 

from Indian Stock Markets to meet liabilities at home. FIIs were the main buyers of Indian

Stocks and their exit from the market is certain to wreak havoc in the market. FIIs who were on

a buying spree last year, are now in the mood of selling their stocks in India. As a result our

Share Markets are touching new lows everyday.

Since, the money, which FIIs get after selling their stocks, needs to be converted into dollars

 before they can sent it home, the demands for dollars has suddenly increased. As more and more

FIIs are buying dollars, the rupee is loosing its strength against dollar. As long as demands for

dollars remain high, the rupee will keep loosing its strength against dollar.

The current financial crisis has also started directly affecting Indian Industries. For the past few 

 years, the two most preferred method of raising money by the companies were Stock Markets

and external borrowings on low interest rates. Stock Markets are bleeding everyday and it is not

possible to raise money there. Regarding external borrowing from world markets, this option

has also become difficult.

In the last fiscal year alone, India borrowed $29 billion from foreign lenders and got $34 billion

of foreign direct investment. A global recession has hurt external demand. International lenders

 who have become extremely risk aversive can limit access to international capital. If that

happens, both India’s financial markets and the real economy will be hurt in the process.

Suddenly, the 9% growth target does not seem that ‘doable’ any more; we should be happy to

clock 7% this fiscal year and the next.

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However, one positive point in favor of India is the fact that Indian Banks are more or less

secured from the ill-effects of sub-prime mess. A glance at Indian banks’ balance sheets would

show that their exposure to complex instruments like CDOs is almost nil. In India, still the

major banking operations are in the hands of Public Sector Banks who exercise extreme cautions

in disbursing loans to needy people/companies. As a result, we are not likely to see a repeat of 

sub-prime crisis in India. Though there have been a presence of big US/European Banks in

India and even some Indian banks (like ICICI) have some foreign subsidiary with stake in the

sub-prime losses, there presence is miniscule as compare to the overall size of Indian banking

industry. So at least on this major front we need not worry much.

However, a global depression is likely to result in a fall in demand of all types of consumer

goods. In 2007-08, India sold 13.5% of its goods to foreign buyers. A fall in demand is likely to

affect the growth rate this year. Our export may get affected badly.

 A negative atmosphere, shortage of cash, fall in demands, reducing growth rate and

uncertainties in the market are some of the most visible aspects of an economic depression.

 What started as a small matter of sub-prime loan defaulters has now become a subject of global

discussion and has engulfed the global economy scenario.

Greed of some…woes of billions

If you think about this with a cool mind, you will find that the underlying cause of this

depression is the greed of those who failed to anticipate the consequence of their actions. On a

more ideological front, it is high time to have a rethink on the very idea of free markets and

capitalism. I think the time has come to evolve a capitalism where everything works under a

 broad regulatory framework and we do not see a repeat of this condition where greed of some

people can affect the lives of billions.

So here concludes my attempt to explain the current economic crisis which has started to affect

the lives of all of us. The above explanation is very simple and by no means it presents an

accurate picture (i.e the one that includes all the micro/macro factors) of the crisis. However, I

hope that it must have given you a broad idea of the reasons behind current economic

depression. Feel free to post your comments on this issue.

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GLOBAL RECESSION AND

ITS IMPACT ON

INDIAN ECONOMYPankaj Dogra, Sheikh Kashif UNIVERSITY OF JAMMU, INDIAAbstract: This paper is an attempt to look

into the impact of global recession on Indian

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, creditdemand and taxation.Key Words: Global Recession, Impact onIndian Economy, GDP, Taxation, andInterest Rate, RiskIntroduction

The economic slowdown of the

advanced countries which started around

mid-2007, as a result of sub-prime crisis

in USA, led to the spread of economic

crisis across the globe. Many hegemonic

financial institutions like Lehman

Brothers or Washington Mutual or 

General Motors collapsed and several

became bankrupt in this crisis. Even as

recently as six months ago, there was a view

that the fallout of the crisis will remain

confined only to the financial sector of 

advanced economies and at the most there

would be a shallow effect on emerging

economies like India. Many economists are

now predicting that this µGreatRecession¶ of 2008-09 will be the worstglobal recession since the 1930s.Meaning Of Recession

A recession is a decline in a country's

Gross domestic product (GDP) growth

for two or more consecutive quarters of 

a year. A recession is also preceded by

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several quarters of slowing down. An

economy, which grows over a period of 

time, tends to slow down the growth as a

part of the normal economic cycle. 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

lose 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 unemploymentImpact On Indian Economy

In India, the impact of the crisis has beendeeper 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 sheetactivities have been limited.

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 merchandise exports are

around 15 per cent of GDP,

.I. Stock Market

The economy and the stock market areclosely related as the buoyancy of the

economy gets reflected in the stock

market. 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

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remained subdued, and the impact of 

moderation in demand was visible in the

substantial deceleration during thecurrent fiscal year. Corporateprofitability also exhibited negative

growth in the last three successive

quarters of the year 

II. Forex Market

In India, the current economic crisis waslargely insulated by the reversal of 

foreign institutional investment (FII),

external commercial borrowings (ECB)

and trade credit. Its spillovers became

visible in September-October 2008 with

overseas investors pulling out a record

USD 13.3 billion and fall in the nominal

value of the rupee from Rs. 40.36 per 

USD in March 2008 to Rs. 51.23 per 

USD in March 2009, reflecting at 21.2per cent depreciation during the fiscal

2008-09.Hence, sharp fluctuation in the

overnight forex rates and the depreciation of 

therupee reflects the combined impact of 

the global credit crunch and the

deleveraging process underway in Indian

forex market.

III. Money Market

The money market consists of credit

market, debt market and government

securities market. All these markets are

in some or other way related to the

soundness of banking system as they are

regulated by the Reserve Bank of India.

According to the Report submitted by

the Committee for Financial Sector 

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Assessment (CFSA), set up jointly by

the Government and the RBI, our 

financial system is essentially sound and

resilient, and that systemic stability is by

and large robust and there are no

significant vulnerabilities in the banking

system. Yet, NPAs of banks may indeed

rise due to slowdown as Reserve Bank

has pointed out. But given the strength

of the banks¶ balance sheets, that rise is

not likely to pose any systemic risks, as

it might in many advanced countries.

IV. Slowing GDP

In the past 5 years, the economy has

grown at an average rate of 8-9 per cent.

Services which contribute more than half 

of GDP have grown fastest along with

manufacturing which has also done well.

But this impressive run of GDP ended in

the first quarter of 2008 and is gradually

reduced. Even before the global

confidence dived, the economy was

slowing.

V Reduction In Import-Export

During 2008-09, the growth in exports

was robust till August 2008. However, in

September 2008, export growth evinced

a sharp dip and turned negative in

October 2008 and remained negative till

the end of the financial year. For the first

time in seven years, exports have

declined in absolute terms in October 

2008.. Similarly, imports growth also

witnessed a deceleration during October-

November 2008, before turning negative

thereafter.

VI. Reduction In Employment

Employment is worst affected during

any financial crisis. So is true with the

current global meltdown. This recession

has adversely affected the service

industry of India mainly the BPO, KPO,

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IT companies etc. According to a sample

survey by the commerce ministry

109,513 people lost their jobs between

August and October 2008, in export related

companies in several sectors,

primarily textiles, leather, engineering,

gems and jewelry, handicraft and food

processing

VIII. Taxation

The economic slowdown has severely

dented the Centre¶s tax collections with

indirect taxes bearing the brunt. The tax-

GDP ratio registered a steady increase

from 8.97 per cent to 12.56 per cent

between 2000-01 and 2007-08. But thistrend has been reversed as the tax-GDP

ratio has fallen to 10.95 per cent during

current fiscal year mainly on account of 

reduction in Customs and Excise Tax

due to effect of economic slowdown

Response To The CrisisThe future trajectory of the economicmeltdown is not yet clear. However, theGovernment and the Reserve Bank

responded to the challenge strongly and

promptly to infuse liquidity and restore

confidence in Indian financial markets.

The fiscal and monetary response

to the crisis has been discussed in the

following points-I. Fiscal ResponseThe Government launched three fiscal

stimulus packages between December 

2008 and February 2009. These stimulus

packages came on top of an already

announced expanded safety-net

programme for the rural poor, the farm

loan waiver package and payout

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following the Sixth Pay Commission

report, all of which added to stimulating

demand.

The challenge for fiscal policy is to

balance immediate support for the

economy with the need to get back on

track on the medium term fiscal

consolidation process. The fiscal

stimulus packages and other measures

have led to sharp increase in the revenue

and fiscal deficits which, in the face of 

slowing private investment, have

cushioned the pace of economic activity.II. Monetary Response

The RBI has taken several measures

aimed at infusing rupee as well asforeign exchange liquidity and to

maintain credit flow to productive

sectors of the economy such as infusing

liquidity through interest ratemanagement, risk management andcredit management which is described indetail under the following heads:-1. Interest Rate Management

In order to deal with the liquiditycrunch and the virtual freezing ofinternational credit, RBI tooksteps for monetary expansion

which gave a cue to the banks toreduce their deposit and lendingrates.2. Risk Management

There has been a sustained demand

from various quarters for exercising

regulatory forbearance in regard to

extant prudential regulations

applicable to the banking sector. As

a part of counter-cyclical package,

RBI has already made several

changes to the current prudential

norms for robust risk disclosures,

transparency in restructured products

and standard assets.3. Credit Management

There was a noticeable decline in the

credit demand during 2008-09 which

is indicative of slowing economic

activity- a major challenge for the

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banks to ensure healthy flow of 

credit to the productive sectors of the

economy. The reduced funding

demand on the banks should enable

them to reduce the interest rates on

deposit and thereby reduce the

overall cost of funds. Although

deposit rates are declining and

effective lending rates are falling,

there is clearly more space to cut

rates given declining inflation. In

order to facilitate demand for credit

in the economy the Reserve Bank

has taken certain steps.Future Outlook For India

To sum up we can say that the globalfinancial recession which started off as a

sub-prime crisis of USA has brought all

nations including India into its fold. The

GDP growth rate which was around nine

per cent over the last four years has

slowed since the last quarter of 2008

owing to deceleration in employment,

export-import, tax-GDP ratio, reduction

in capital inflows and significant

outflows due to economic slowdown.

The demand for bank credit is also

slackening despite comfortable liquidity

in the system. Indian financial

markets are capable of withstanding the

global shock, perhaps somewhat bruisedbut definitely not battered. India, with its

strong internal drivers for growth, may

escape the worst consequences of the

global financial crisis. In other words,

the fundamentals of our economy

continue to be strong and robust.

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Yet, it is not possible to clearly

see the path of the crisis and its

resolution over the coming months. In

this sense, India is not unique as almost

every country, whether or not directly

affected, has to manage the current

economic crisis under uncertainty.