Impact of Recession on Indian Economy

IntroductionRecession are the result of reduction in the demand of products in the Global market. Recession can also be associated with falling prices known as deflection due to lack of demand of products. Again it could be the result of inflation or a combination of incriasing prices & segment economic growth in the west. Almost everybody today seems to be discussing about the US Recessionary trend and its impact on emerging countries, more particularly Indian Economists, Industrialists and the common man on the streets seem to have been horrified by the very thought of recession in India and that too due to US. Decreasing industrial production, inflation, decreasing job opportunities, cost cutting, reducing purchasing power parity, etc. all are the aspects discussed among them through every possible mode like articles, talks & walks and places like washrooms, canteens, etc But to me the reality is very different! Yes...... India will not be impacted largely by the US recession, simply because India is not which it was in the '80s-'90s.Although it will be immature on my part to say that India will not be impacted by the US recession at all, but the truth is that it will not get impacted adversely in the magnitude 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... Background of the Global Financial Crisis;What is it all about? It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasnt a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didnt bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as sub-prime clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients werent even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Maes bad assets reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch

meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. The US governments realized the... Introduction: There has been constant fluctuation in the exchange rate of US Dollar (USD) versus the Indian Rupee (INR) in the last few months. From the year high of Rs. 51.88/$ in April 09 it has declined to Rs. 46.99/$ in the first week of November 09. A lot is being debated about the impact this fluctuation on the Indian Economy. We shall take an overview of Forex - Inflow and Outflow, mainly in conjunction with the Dollar Trade and the effect of USD-INR Exchange rates. The Forex rates are determined by market forces and are based on demand & supply of these currencies. If supply exceeds the demand, the value of the currency depreciates, as is the case with US Dollar against the Indian Rupee (INR), since there is a huge inflow of foreign capital into India in USD. Impact on Indian Economy: The main Inflow and Outflow can be categorized as follows:Main USD Inflow: 1. Export earnings: 2. IT Sector Earnings 3. NRI Remittances 4. Foreign Direct Investments (FDI) 5. Portfolio Investment 6. Loans from other governments, IMF, World Bank, etc 7. External Commercial Borrowings (ECB) THE RECESSION

India is facing the position of recession as globalization showing its negative scenario. As it was started in US and now it's touching the boundary of India also. Recession is a phase in which rupee depreciate, cash crunches, money market slowdown, inflation comes. All in all it's become difficult to bring money from the pocket of an individual. As we know price of the steel, iron goes up, we would like to postpone our purchasing but if we won't spend, how producer could makes his bread. If the producer starts reducing the price of the commodity with such belief that customer buy the product in all case. This will bring only when he starts cutting its cost of production. Cost cutting means reduction in variable cost. As price of steel, iron, equipments, machinery, are touching sky, only way to reduce the cost is the reduction in employees. Hence people fear of their job security. In fear of the job security, people are generally shifting their purchasing. All of them either producer, investor, customer, employee posing each other to create recession Negative Aspect of Recession on Indian Economy As recession have various negative effects on Indian economy. The capital market was facing the downfall, liquidity is dropping down, an individual don't have money to spend, producers are increasing their price, but to cope with market they are creating deployment. Positive effect of recession on Indian economy The recession in US led to decrease in demand... Economic Slowdown/Recession of 2008The recent slowdown (2008) in the North American macroeconomic environment also follows the same trends as its predecessors. Typically an economic slowdown is defined as an economy which has Declining aggregate demand Contracting employment/rising unemployment

 Sharp fall in business confidence & profits including a reduction in investment spending Reduced inventory levels and heavy discounting, Falling demand for imports Increased government borrowing Lower central banks interest rates.

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Unemployment
Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession. In other words, unemployment will never reach 0 percent and thus is not a negative indicator of the health of an economy unless it is above the "natural rate," in which case it corresponds directly to a loss in gross domestic product, or GDP.[41] The examples and perspective in this article deal primarily with the United Kingdom and do not represent a worldwide view of the subject.Please improve this article and discuss the issue on the talk page. (August 2011) The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment[42] in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels.[43] Many companies often expect employment discrimination claims to rise during a recession.[44] [edit]Business Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.[43] [edit]Social

effects

The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and wellbeing.[43]

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.
In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was "two down consecutive quarters of GDP".[3] In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.[4] In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in economic activity spread across

the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, andwholesaleretail sales."[5] Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end. In the UK recessions are generally defined as 2 successive quarters of negative growth (or 6 months). [6]

A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration. Read more: http://www.investorwords.com/4086/recession.html#ixzz25wyXRbho

Consumer Attitudes During a Recession

During recessionary periods, individuals aren't able to spend as much money on high-tech gadgets or big-ticket items, such as cars or high end electronics; instead, people tend to put their dollars toward necessities, such as food or utilities. In addition, according to a McGraw-Hill study of advertising performance, companies that can affordto advertise will win consumers at the local markets, regardless of brand name recognition pre-recession, making them strong contenders for your portfolio. According to a McGraw-Hill study of advertising performance, "business-to-business firms that maintained or increased their advertising expenditures during the 198182 recessionaveraged significantly higher sales growth both during the recession and for the following three years than those that eliminated or decreased advertising" ("When The Going Gets Tough, The Tough Ramp Up," San Diego Daily Transcript, May 2001). In addition. MarketSense compared 101 household name brands during the recessionaryperiod 1989-1991. Jell-O, Crisco, Hellman's, Green Giant and Doritos saw sales drop by as much as 26-64%. Jiff peanut butter raised ad support and sales went up 57%; Kraft salad dressings saw a rise of 70%. In the beer category, overall spending was down 1% while Bud Light and Coors Light, each spending ahead of the category, saw sales increases of 15% and 16% respectfully. Pizza Hut sales rose 61% and Taco Bell's 40% thanks to strong advertising support, with McDonald's volume down approximately 28%.

Investing in Equity Markets During a Recession Consider the macroeconomic issues of a recession and how they affect capital markets. When a recession hits, companies slow down business investment, consumers slow down their spending, and people's perceptions shift from being optimistic and expecting a continuation of recent good times to becoming pessimistic and uncertain about the future. As such, people get understandably frightened, become worried about prospective investment returns and rationally scale back risk in their portfolios. The results of these psychological factors manifest themselves in a few broad capital market trends. Within equity markets, the results are pretty obvious. As people become uncertain about prospective earnings, they perceive a greater amount of risk in their investments, which broadly leads investors to require a higher potential rate of return for holding equities. Of course, for expected returns to go higher, current prices need to drop, which occurs as investors sell their higher risk investments and move into safer securities including government debt. This is why equity markets tend to fall, often precipitously, prior to recessions as investors shift their investments.

Investing in Commodities During a Recession by Eric Petroff Another area of investing you want to consider in the context of a recession is commodity markets. The general rule to understand about these investments is to keep in mind that growing economies need inputs, or natural resources. As economies grow, the need for natural resources grows, and the prices for those resources rise. Conversely, as economies slow, the demand slows and prices go down. So, if investors believe a recession is forthcoming, they will sell commodities, driving prices lower. However, commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources such as oil, gas, steel, etc. So don't necessarilyexpect a recession in the U.S. to have a direct impact on commodity prices, at least not as strong of an effect as we have seen in the past. At some point in time, the world's various economies will separate from the U.S., creating a demand for resources that is increasingly less sensitive to U.S. growth in GDP. If you expect a recession,positioning your portfolio is quite simple. Shift assets away from equities, especially the riskiest equities like small stocks. You should also move away from credit risk in fixed-income markets and into Treasuries.

Definition of 'Recession' A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.

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