IILM GURGAON

----------------------
KEYNOTE ADDRESS
18 APRIL, 2009

IMPACT OF RECESSION ON INDIAN ECONOMY AND

FUTURE TRENDS

PROF. DEEPAK TANDON

 A QUICK LOOK AT FACTS

 World’s largest democracy


 Ethnically diverse

 26% below poverty line

 Struggle for freedom

Price 2009 2008
WPI: 1993 – 94 = 100 (Feb 09) 227.8 218.4
CPI: 2001 = 100 (Jan 09) 148 134

Bank Rate Percent Effective

i. Bank Rate 6.00 29.04.2003

Ratios Percent (w.e.f.)

CRR
 5.00 17.01.2009
2. SLR 24.00 08.11.2008
3. Repo Rate 5.00 04.03.2009
4. Reverse Repo Rate 3.50 04.03.2009
5. Cash Dep Ratio 5.77 27.02.2009
6. Investment Dep Ratio 31.79 27.02.2009
Credit Dep Ratio 71.42 27.02.2009
5-Year Period Average Percent Per
INDIA in 2050

8
7

6
5 Brazil
Annum

China
4 India will be the 3rd Largest economy
India
3 Russia
2 with the Fastest rate of Growth
1
0
2005-10 2015-20 2025-30 2035-40 2045-50
 DEMOGRAPHIC ADVANTAGE

• Youngest Population in the World:

More than half of India’s population is below 25 yrs age

•
•
• Over the next 5 years, India alone will account for
 more than 1/4th of the increase in world’s workforce
•
•
• Least Old-Age Dependency rate in Asia
•
•
• Implications:
– Strong Consumption pattern to continue
– Long term and Stable Growth
– Availability of Skilled Labor Force Assured over Long Term
 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 several quarters of

 slowing down.. It is the contraction phase of a Business cycle

The Impacts in India are:

1. Reduced liquidity in the Indian economy

2. Reduced industrial output
3. Reduced job opportunities
4. Stock Market is lingering in the bottom
5. Real estate market has started to take a beating
6. Inflation has increased
7. GDP has come down and the GPD forecast for the next two quarters are only
 averaging down

 CAUSES OF RECESSION

1. CURRENCY CRISIS

2.

3. INFLATION

4.

5. NATIONAL / GOVERNMENT DEBT

6.

7. SPECULATION

8.

9. WAR

1.
 EFFECTS OF RECESSION

1. BANKRUPTCIES

2.

3. DEFLATION

4.

5. FORECLOSURES

6.

7. REDUCED SALES

8.

9. STOCK MARKET CRASH

10.

11. UNEMPLOYMENT



 Before, understanding “Recession”, we need to understand



 the market economy;








A] TWO STAGES OF MARKET ECONOMY
 A1] Growing Market
Economy

Starting Point = Willingness to

buy
 Declining Market Economy
Starting Point = Unwillingness to
buy
B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer wants his demand always to be high

Consumer wants his buying cost always to be low

Actually, Demand is the price at which

consumer is ready to buy and
producer is ready to sell;

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

Consumer Price
 HOW TO COME OUT OF RECESSION?

Important Point:
Today, it is a market
Economy

Producers; Consumers;
Can produce and Can decide to
sell at their prices buy or not;
 Monetary
Fiscal Policies
(By Govt.) Policies
(By RBI)

Government influences the RBI manipulates

economy by changing how the available supply of
it (Government) spends money in the country
and collects money
MONETARY POLICY - OBJECTIVES
 TWIN OBJECTIVES


“maintaining price stability”

“ensuring availability of adequate credit to productive sectors

of the economy to support growth”
 MONETARY POLICY: BASIC THRUST

ü Ensure a monetary and interest rate environment enabling

 continuation of the growth momentum consistent with price
 stability and inflation expectations
Ø
ü Focus on credit quality and financial market conditions to support export and
 investment demand in the economy
Ø
ü To respond swiftly to evolving global developments.

 Monetary Policy – Instruments

Direct Instruments Indirect Instruments
•Open Market Operations: Reserve  
Bank controls money supply by buying and 
selling government securities, or other 
instruments
•Market Stabilisation Scheme 
(MSS) – Government of India 
dated securities/Treasury Bills 
are being issued to absorb 
enduring surplus liquidity.
•Liquidity Adjustment Facility 
(LAF)
•Repo Auctions and
•Reverse Repo Auctions,
•Cash Reserve Ratio (CRR)
Minimum amount that commercial 
LAF has emerged as the tool for both liquidity management and also as a 
banks must keep as cash reserves
signaling devise for interest rate in the overnight market.
 conclusions
 *In Feb-09, India's exports declined by 21.7% (y-o-y), while imports declined at a faster
 pace of 23.3% (y-o-y), resulting in shrinking of trade deficit to US$ 4.9 bn.
 *The current account deficit amounted to US$ 14.6 bn during Q3 FY09, the highest
 quarterly deficit since 1990.
 *The capital account balance turned negative during Q3 FY09 for the first time since Q1
 FY99.
 *India's total external debt stock increased by 2.8% to US$ 230.9 bn at the end of Dec-
 08 over end Sep-08.
 *The ratio of foreign exchange reserves to total external debt as at end Dec-08 stands at
 110.9 %.
 *India's real effective exchange rate (REER) remains undervalued at 94.0 (as on 19-Feb-09).

 FINANCIAL YEAR 2009

 INFLATION :
 One of the biggest concerns for the Indian Economy seems to have been tackled,
 certainly in the medium term. The inflation for the week-ended March 20, 2009 came in as 7.75%.
 The Prime Minister must be thanking his stars or his calculations, and if the current trend continues ,
 and it should, by the time the 2009 Lok Sabha elections campaigning starts, inflation would no longer
 be an issue and many middle class families might actually be thanking the government.


• Though the exports have declined from $13.74 billion in September to $11.5 billion in November
2008, the imports declined from $24.38 billion to $21.57 billion in the corresponding period,
mainly on the account of the fall in crude prices. The crude bill has dropped from around $9 billion
to $7.25 billion in November 2008.
•
• As a result the Trade Deficit has narrowed to $10.07 billion in November compared with $10.54
billion in October and $10.65 billion in September 2008. The total trade deficit for the period April-
November 2008 stood at $84.34 billion
•
• In short, though recession has hit our exports, the fall in the import bill more than makes up for the effect
of the recession. Even in the recession, the exports in the eight months ended Nov. 30 rose 19.4
percent from a year earlier to $119.3 billion. Certainly not bad by any stretch of imagination
considering the global recession.

 FINANCIAL YEAR 2009

•
• The total import bill for the April-November 2008 period stood at $203.64 billion of which Oil imports
were valued at $74.114 billion. Considering that crude trade well over $100/barrel for around six
months of this eight-month period, and that crude in not expected to go back those highs anytime
soon, the crude import bill for the coming year should be significantly lower. Even if crude trades at
an average price of around 70 dollars/ barrel in 2009, we should expect around 35-40% drop in the
crude import bill.

•
• Most analysts expect crude to trade around the 60 dollar/barrel mark in 2009. Lets be a little generous
and assume crude to trade at an average for 75 dollars/ barrel through 2009, that is where it was for
most of October - November 2008 period. The yearly crude import bill for 2009 should stand in the
region of $80-85 billion. The non-crude import should stand around $200 billion giving a total
import bill of around $280 billion. The government of India has a $200 billion per annum export
target. This should confine the trade deficit to around $80 billion for the entire year 2009. If my
rough calculations, and I must add unqualified calculations, are correct, we would have managed to
tame the monster and the recession should get all credit for it.

•
 Indian trade scenario
March 2009 (not affect as Great as Global Developed Countries )
 Recession in developed economies crimped demand for Indian goods and export growth slowed to 7.3
percent in April-February to $156.6 billion from a year earlier, sharply lower from close to 20 percent
seen in 2007/08. Final figures for 2008/09 exports is seen touching a lower revised annual target of
$170 billion and may remain flat at that level in 2009/10, he said.
 The demand for Indian goods in Latin America and South-east Asia remains "quite high", but it needs to
pick up in U.S. and Europe, which consume about 35 percent of Indian exports
 Growth of less than 7 percent . High borrowing costs and followed by the global crisis slowed Asia's third
largest economy last year, and analysts forecast less than 6 percent expansion in the current year to
March 2010.
 Contraction in demand at home and abroad has cut India's factory output and exports sharply since
October.
 India's industrial output contracted 1.2 percent in February from a year earlier and exports were down
more than a fifth.
 CAUSES

1. SUB PRIME LENDING CRISIS

2.
3.
4. TIGHTENING OF LIQUIDITY
5.
6.
7. RISING OIL PRICES
8.
9.
10. CAPITAL FLIGHT IN EMERGING MARKETS
 EFFECTS

1. DIFFICULTY IN BORROWING
2.
3.
4.
5. UNEMPLOYMENT
6.
7.
8.
9. FAILING PROFITABILITY
10.
11.
12.
13. FALLING STOCK MARKET
14.
15.
16.
17. DECLINE IN CUSTOMER CONFIDENCE
Trade liberalization:
reduction in tariffs
Despite a secular reduction in peak tariffs,


the tax to GDP ratio is still showing an upward trend



 Government is focused on improving the business and investment environment


 No licensing required, except in five sectors

 100% FDI permitted in manufacturing (except atomic energy)

 100% FDI permitted in most service sectors

 Investments, dividends, fees are freely repatriable

 Foreign investments allowed in capital markets



India in the emerging
order - aim
 BPLR which is at 17.25% to be 12%

 Lowering of the domestic interest rates to make retail banking more attractive

 Swapping of the local currency with respect to the foreign currency

 ECB norms liberalized to infuse liquidity

 Uncertainty in the stock market

 Resource mobilization

 Credit growth to be pushed up by planned allocation in various sectors; SME

 Banking- Profitability, Basel II implementation, financial inclusion, ATM and POS
in villages

 Multi faceted growth in 11th five year plan.
Key concepts and developments
1. BANK RATE
1.

2. CRR
1.

3. SLR
1.

4. REPO RATE
1.
2.
5. REVERSE REPO RATE
MONETARY POLICY
 STATE OF WORLD ECONOMY

• World economy expected to slow down from 5% in ’07 and 3.7% in ’08 to just 0.5% in ’09
• The world economy is in ‘precarious’ territory - Output in advanced economies will contract in
2009
• A deep financial crisis and volatile commodity prices have led to fast deteriorating global growth


W orldEconom icOutlook,
January28, 2009
International MonetaryFund

0
'03 '04 '05 '06 '07 '08 '09
 STATE OF WORLD ECONOMY: SCENE 1

GDP Growth Rates by Country/Region 2005 2006 2007 2008 2009

United States of America 2.5 2.9 2.2 0.5 0.6
Europe Part (Germany, France, Italy & 1.5 2.8 2.6 1.4 1.2
Spain)
Japan 1.9 2.4 2.1 1.4 1.5
Russia 6.4 7.4 8.1 6.8 6.3
CIS 6.6 10.1 9.6 7.4 7.0

China 10.4 11.1 11.4 9.3 9.5

ASEAN + 4 (Indonesia, Malaysia, the 5.1 5.7 6.3 5.8 6.0

Philippines & Thailand)
India 9.0 9.7 9.2 7.9 8.0
 STATE OF WORLD ECONOMY: SCENE 2

GDP Growth Rates by Country/Region 2005 2006 2007 2008 2009

United States of America 2.5 2.9 2.0 0.6 0.1
Europe Part (Germany, France, Italy & 1.5 2.8 2.0 1.3 0.2
Spain)
Japan 1.9 2.4 2.1 0.7 0.5
Russia 6.4 7.4 8.1 6.6 5.5
CIS 6.6 8.2 8.6 7.2 5.7

China 10.4 11.6 11.9 9.7 9.3

ASEAN + 4 (Indonesia, Malaysia, the 5.1 5.7 6.3 5.5 4.9

Philippines & Thailand)
India 9.0 9.8 9.3 7.9 6.9
 STATE OF WORLD ECONOMY: SCENE 3

GDP Growth Rates by Country/Region 2005 2006 2007 2008 2009

United States of America 2.5 2.8 2.0 1.4 -0.7
Europe Part (Germany, France, Italy & 1.5 2.8 2.6 1.2 -0.5
Spain)
Japan 1.9 2.4 2.1 0.5 -0.2
Russia 6.4 7.4 8.1 6.6 5.5
CIS 6.6 8.2 8.6 6.9 3.2

China 10.4 11.6 11.9 9.7 8.5

ASEAN + 4 (Indonesia, Malaysia, the 5.1 5.7 6.3 5.4 4.2

Philippines & Thailand)

India 9.0 9.8 9.3 7.8 6.3

 STATE OF WORLD ECONOMY: SCENE 4

GDP Growth Rates by Country/Region 2005 2006 2007 2008 2009

United States of America 2.5 2.8 2.0 1.4 -1.6
Europe Part (Germany, France, Italy & 1.5 2.8 2.6 1.2 -2.0
Spain)
Japan 1.9 2.4 2.1 0.5 -2.6
Russia 6.4 7.4 8.1 6.6 - 0.7
CIS 6.6 8.2 8.6 6.9 - 0.4

China 10.4 11.6 11.9 9.7 6.7

ASEAN + 4 (Indonesia, Malaysia, the 5.1 5.7 6.3 5.4 2.7

Philippines & Thailand)
India 9.0 9.8 9.3 7.8 5.1
 SURVIVAL STRATEGIES

1. RE EVALUATE YOUR ENTIRE PRICING STRUCTURE

2.
3. THINK STRATEGICALLY

4.
5. GO BARGAIN HUNTING

6.
7. CONSIDER STRATEGIC INVESTMENTS

8.
9. MONITOR YOUR CASH FLOWS

10.
11. ENGAGE YOUR EMPLOYEES IN THE PROCESS

12.
13. TALK TO YOUR BANK, INVESTORS, AND OTHER SOURCES OF CAPITAL
 ADAPT TO RECESSION

1. PROJECT CASH FLOW IN ADVANCE AND MONITOR BUDGET

2.
3. PRESSURISE DEBTORS TO PAY UP

4.
5. REVIEW OVERHEADS AND IMPROVE COST EFFICIENCY

6.
7. REDUCE STOCK LEVELS

8.
9. KEEP UP TO DATE WITH LATEST FINANCIAL INFORMATION

10.
11. AGGRESIVELY SEEK NEW BUSINESSES

12.
13. BE OPEN TO NEW IDEAS AND ACCEPT

 SWOT ANALYSIS

1. AVOID TAKING BAD BUSINESS

2.
3. SURVIVAL IS MORE IMPORTANT THAN SIZE
4.
5. OPERATE IN “LEAN AND MEAN” MODE
6.
7. LOOK FOR TALENTED UNEMPLOYED PEOPLE
8.
9. MARKETING ASSUMES FURTHER IMPORTANCE
10.
11. AGGRESIVELY PURSUE DEBTORS FOR PAYMENTS
12.
 REMEDIAL MEASURES

• Monthly forecasts for WPI, CPI, IIP Growth, Bank Credit, 15-91 day-T-Bills yield, 10 year

 G-sec yield, and Exchange rate

• Some early signs of stability emerge in the economy

• The WPI inflation expected to touch sub-zero level in Apr-09

• The RBI expected to ease its monetary stance further.

• Rupee expected to appreciate marginally

1.
“Things will change with hard work & time ... But
there will be pain initially.”

THANK YOU