Global Economic Recession and Its Impact on Indian

Economy.

The so called economic recession in the world is not only an economical

crisis but also it is a financial, social and environmental crisis. Any economic

activity spread its effects on the other activities as social and financial

activities. Indian economy is a developing economy and it is on the way of

development so if this economic recession makes any impact, it will be a

short period impact as the on going situation express. Global economic crisis

has definitely made an impact on Indian economy but not that extent which

was expected. Now it can be answered that our economy is becoming more

immune to these kind of crisis all over the world. As compare to other

developed country India, having strong financial and social base, can combat

successfully to all these diseases provided there are no other natural

calamities and political instability. But we have to see at what extent the

global economic recession has made an impact on it and how long it is going

to reside in India is the basic question of this discussion. Before we disclose

the impact of recession on Indian economy let us see what is meaning of

recession? And what are the causes of recession?

Meaning of Recession:

Recession is just a phase of Business cycle. The term ‘Business cycle’ in

Economics refers to the wave-like fluctuations in the aggregate economics

activity, particularly in employment, output and income. There are four

phases of Business cycle.

1) Prosperity phase

2) Recessionary phase

3) Depressionary phase

4) Revival or recovery phase.

As we are known to these trade cycles we can say that when prosperity

ends, the recession begins. Recession relates to a turning point rather than a

phase. It is said that when a nation’s gross domestic product is affected

negatively on account of a decline in the economic activities, the situation is

described as an economic recession and when this recession continues for

long, it can turn into depression.

According to National Bureau of Economic Research in US defines an

economic recession as, “a significant decline in (the) economic activity

spread across the country, lasting more than a few months, normally visible

in real GDP growth, real personal income, employment (non-farm payrolls),

industrial production, and wholesale-retail sales.”

In general a recession is a business cycle contraction, a general slowdown

in economic activity over a period of time. During recession, production as

measured by Gross Domestic Product (GDP), employment, investment

spending, consumption spending, business profits etc tend to fall.

Background and Causes of Current Recession.

This financial crisis of 2007-10 has been called by the leading economists

the worst financial crisis since The Great Depression of 1930. The origin of

that recession was in US and origin of current recession is also in US. A few

years before when rate of interest was very low and prices of houses were

booming (Between 1997 and 2006, the price of the typical house in US

increased by 124%), people without capacity of repay the loan caught in the

financial crisis. Many financial institutions started giving incentives such as

easy initial terms when housing prices were rising, people were encouraged

to borrow without any capacity to repay the loan, assuming that they would

be able to quickly refinance at more favorable terms. But things went wrong

and interest rates began increasing and housing prices started declining in

US (By 2008, average US housing prices had declined by over 20%) which

made people to refinance the home loan very difficult. Defaults and

foreclosure activity increased dramatically as easy initial terms expired,

home prices failed to go up as anticipated, and ARM interest rates reset

higher. In US many financial companies were engaged in these activities.

And the impact was capital started drying up with them which ended with

their insolvency and bankruptcy of the many financial institutions. Not only

had this reasons for economic recession but there were many reasons also

which can be told as follows:

a) US Current Account and Trade Deficit:

 Between 1996 and 2004, the USA current account deficit increased by

$650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the

USA to borrow large sums from abroad, much of it from countries running

trade surpluses, mainly the emerging economies in Asia and oil-exporting

nations. The balance of payments identity requires that a country (such as

the USA) running a current account deficit also have a capital account

(investment) surplus of the same amount. Hence large and growing amounts

of foreign funds (capital) flowed into the USA to finance its imports. This

created demand for various types of financial assets, raising the prices of

those assets while lowering interest rates.

b) Sub-prime lending:

The Sub-prime lending by financial institutions to the borrowers who

had no capacity to repay the loan and greater risk, increased dramatically

during the years preceding the crisis. Major U.S. investment banks and

government sponsored enterprises like Fannie Mae played an important role

in the expansion of this kind of higher-risk lending. Subprime mortgages

remained below 10% of all mortgage originations until 2004, when they

spiked to nearly 20% and remained there through the 2005-2006 peak of the

United States housing bubble. The value of US subprime mortgages was

estimated at $ 1.3 trillion as of March 2007. The interest rate charged on

subprime loans was about 2 % higher than the interest on prime loans.

c) Predatory lending:
Predatory lending refers to the practice of unscrupulous lenders, to enter into

"unsafe" or "unsound" secured loans for inappropriate purposes. A classic

bait-and-switch method was used by Countrywide, advertising low interest

rates for home refinancing. Such loans were written into extensively detailed

contracts, and swapped for more expensive loan products on the day of

closing. Whereas the advertisement might state that 1% or 1.5% interest

would be charged, the consumer would be put into an adjustable rate

mortgage (ARM) in which the interest charged would be greater than the

amount of interest paid. This created negative amortization, which the credit

consumer might not notice until long after the loan transaction had been

consummated.

d) Increased debt burden or over-leveraging:

Households and financial institutions all over the world became

increasingly indebted or overleveraged during the years preceding the crisis.

This increased their vulnerability to the collapse of the housing bubble and

worsened the ensuing economic downturn. Five main institutions reported

over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP

for 2007. These institutions were not regulated by the authority.

e) Outsourcing:

According to some officials and experts, outsourcing has resulted in

migration of US jobs to other countries. Out of ten technology jobs one job
goes out f the country which has given rise to unemployment in their states

caused to further the recession.

f) Oil Crisis:

A commodity price bubble was created following the collapse in the

housing bubble. The price of oil nearly tripled from $50 to $140 from early

2007 to 2008, before plunging as the financial crisis began to take hold in

late 2008. An increase in oil prices tends to divert a larger share of consumer

spending into gasoline, which creates downward pressure on economic

growth in oil importing countries, as wealth flows to oil-producing states.

These are some reasons to further the financial crisis after which the

economic recession occurred which then became Global Economic Recession

after its effects on all over the world. Indian economy is largely connected

with global world especially with US economy in International Trade. Global

Economic Recession has definitely made an impact on Indian Economy

Which can be seen in following points.

1) Impact on Financial Sectors:

During the recessionary period Indian stock market crashed from the high

of 20000 to a low of around 8000 points. With the crash of stock market the

bearish waves spread throughout the country. The foreign investment in

form of equity, debt and also direct investment capital started drying up

from Indian financial markets. The profitability of the corporates had already
started declining. About the Rupee value, during the period of March 2008 to

March 2009, the nominal value of Rupee decreased from 40.36 per USD to

Rs. 51.23 per USD, reflecting at 21.2 per cent depreciation during the fiscal

2008-09. The annual average exchange rate during 2008-09 worked out to

Rs. 45.99 per US dollar compared to Rs.40.26 per USD in 2007-08 which is

the biggest annual loss for the rupee since 1991 crisis. In Money market, the

call money rate suddenly went over 20 %. And there has been a noticeable

decline in the credit demand in the economy shows declining growth of the

Economy. Commercial Banks faced huge shortage of funds and soon

collapsed.

2) The Real Estate Sector:

The Real Estate Sector also caught in the grip of recession as there was

very less investment in this sector. The real estate prices fell almost by 20 %

to 30 % and the developers were thrown into a position where in it became

very difficult for them to complete the existing projects and start the new

ones.

3) Industrial Sector:

It was assumed that Indian Industrial Sector was the main sector to be

worsely affected because of lower demand for Indian goods and services

from developed and other developing countries and also from within the

country. This was not only the effect but it was also a cause for recession as

lower expectation about the future demand for products. Federation of

Indian Chambers of Commerce and Industry (FICCI) found that faced with the

global recession, industries like garment, gems, textile, chemicals and

jewellery had cut production by 10 % to 50 %. Indian Car Industry has seen

only 7-8 % growth during the recession period comparatively to 17.2 %

growth rate before 2006-07.

The overall growth rate of Industrial sector was reduced from 7.4 % in

2007-08 to 4.2 % in 2008-09. This growth rate was 8.5 % in first quarter of

2007-08 which is highly reduced to 0.8 % in the third quarter of 2008-09.

4) Impact on IT Industries:

IT Sector has been seeing low demand during the so called global

financial recession. It suffered 5 % decline in manpower utilization.

Employment opportunities have also decreased by 3 to 5 % during the April-

September 2008 period. As 75 % demand for the IT companies of India

comes from US, these IT companies suffered during the sluggish period. The

worse thing to be mentioned here that nearly 43 % of Western companies

are cutting back their IT spending and nearly 30 % are scrutinizing IT project

for better returns. Some of this can lead to offshoring. Finally we can say

downward pressure from the developed countries putting more pressure on

Indian IT Industries.

5) Impact on Employment in India:

 The impact of any economic severe situation can be best seen in terms

of employment situation in the country. A survey conducted by the Labour

Bureau of ministry of Labour and Employment, Government of India as part

of a study on the effect of economic slowdown on employment in India

shows us that five lakh people were rendered jobless between October to

December 2008 due to the recession. Major sectors like textile and garment

industry, metals and metal products, Information Technology and BPO,

automobiles, gems & jewellery, transportation, construction and mining

industries have employed less number of people during the recession. The

total employment in all these sectors had come down from 16.2 million in

September 2008 to 15.7 million by December 2008. Exporting units had

observed a higher decline in employment with gems & jewellery sector

shedding 8.43% of its work force. This is followed by metals and textile

sector which laid off 2.6% and 1.29% of their work force respectively. Among

the domestic sector units, gems & jewellery sector again witnessed the

maximum decline in employment with 11.9% of their work force losing jobs.

This was followed by automobiles and transport sectors who shed 4.79% and

4.03% of their work force.

6) Impact on Agricultural Sector:

Agriculture has been a backbone of Indian Economy. Even thought the

share of this sector to GDP is declining which express the less concentration

on the sector, it plays a very important and vital role of in the development
process and especially in this kind situation which prevails in the world. To

be strong and unaffected, Agriculture as being a key industry in our country

has been a consistent and major contributor to our growth and development

of our economy. Except some export oriented products, there is no harm

seen for this industry.

7) Impact on Export from India:

Exports for October 2008 contracted by 15% on a year-on-year basis.

This should not surprise as the OECD economies that account for over 40%

of India’s export market have been slowing for months. With the US and EU

already entering a phase of recession, India’s export growth had to fall

sharply. It must be noted this growth contraction has come after a robust

25%-plus average export growth since 2003. A low-to-negative growth in

exports may continue for sometime until consumption revives in the

developed economies.

A decelerating export growth has implications for India, even though

our economy is far more domestically driven than those of the East Asia.

Still, the contribution of merchandise exports to GDP has risen steadily over

the past six years — from about 10% of GDP in 2002-03, to nearly 17% by

2007-08. If one includes service exports, the ratio goes up further. Therefore,

any downturn in the global economy will hurt India.

A slowdown in export growth also has other implications for the

economy. Close to 50% of India’s exports — textiles, garments, gems and

jewellery, leather and so on — originate from the labour-intensive small- and

medium-enterprises.

A sharp fall in export growth could mean job losses in this sector. This

would necessitate government intervention. A silver lining here, however, is

the global slowdown will also lower cost of imports significantly, thereby

easing pressures on the balance of payment. India’s overall export growth

decreased from 26.9 % to 10 % due to global economic recession.

8) Impact on GDP growth:

The growth of an economy for any short period can be measure by the

growth of the real GDP (Gross Domestic Product). During recession GDP is

surely got affected so as in India. Growth rate of 8 % in 2007-08 had come

down to 7.1 % in 2008-09. And to be mentioned, according to International

Financial Service provider Morgan Stanley, the continuation of the bearish

phase in the global economy could pull down India's economic growth rate to

a dismal 3 per cent in 2009. In the third quarter of 2009, India's economy

expanded only by 7.9%.

These are some points of the impact of global economic recession on

Indian economy to be mentioned here. As per the recent speeches by

eminent personality like P. Chidambaram, Honorable Home minister of India,

there is no more recession in India. Optimistic waves are found in Indian

Economy and the revival phase which was expected to start soon has come

to door of recession. Government always takes the responsibility to tackle

the problem like recession so as in India, it has already taken the necessary

steps in this concerned.

By way of introducing moderate fiscal and monetary policies, government

can face the challenge like recession to eradicate. Following measures have

been introduced by the Government of India in this context.

Fiscal Measures:

1) Tax cuts are the first step that a government fighting recessionary

trends or a fully fledged recession proposes to do. The government also

hikes its spending to create more jobs and boost the manufacturing and

services sectors and to prop up the economy. The government also takes

steps to help the private sector come out of the crisis.

2) Central government has launched two fiscal stimulus packages in

December 2008 and January 2009. These fiscal stimulus packages, together

amounting to about 3 per cent of GDP, included additional public spending,

particularly capital expenditure, government guaranteed funds for

infrastructure spending, cuts in indirect taxes, expanded guarantee cover for

credit to micro and small enterprises, and additional support to exporters.

These stimulus packages came on top of an already announced expanded

safety-net for rural poor, a farm loan waiver package and salary increases for

government staff (accordingly to the Sixth Pay Commission), all of which too

should stimulate demand.

3) Government has recently handed over a pay hike that ranges from 40%

to 100%. Employees will get hundreds of thousands of rupees as Arrears.

4) Also, a post-interim budget 2009-10 stimulus package was announced by

the government in February 2009, slashing excise and service taxes which

will benefit producers and consumers alike.

5) The government injected fiscal and monetary stimulus worth more than

12% of gross domestic product between September 2008 and April 2009 as

the global recession deepened.

Monetary Measures:

As monetary policy concentrate on volume of money in the economy, RBI

has been introducing moderate monetary policy and cutting down the basic

rates in monetary policy which makes supply of money more available for

use in Indian economy which are as follows:

1) The Cash Reserve Rate (CRR) has been reduced from 6.5 % to 5 %.

2) The Repo rate has been reduced from 9 % to 4.75 %.

3) The reduction from 6% to 3.25 % has been introduced.

5) Statutory Liquidity Ratio also was reduced from 25 % to 24 %.

4) Between October 6 and 20, the RBI has injected Rs 1, 85,000 crore

liquidity into the system and all this aimed at getting the financial

markets going and giving them confidence.

Conclusion:

Living in developing country, we Indian people are all aware of the worse

things which we have experienced. Recession is not as bad as British rule.

Now we have our own ways to tackle all the problem such as economic

problems, social problems and political problems. A transformation of

agricultural economy to industrial economy has made Indian Economy more

directional towards the growth. International trade as source of growth and

development we have accepted it. But the limitations are always there on

the road of international trade. This international trade opens up the door of

India for the superiority and also to the recession. The so called recession

has definitely made impact on Indian economy but there is no any difficulty

to overcome the ongoing recession. Recovery is already on door of India; let

us see how long it takes to the phase of superiority. The very best solution

for the recession is not only curbing it out from India, it is also necessary to

phase it out from other countries with whom we are concerned.