recession in india

[areejaf]

The fear of a recession looms over the United States. And as the cliche goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.
Weakening of the American economy is bad news, not just for India, but for the rest of the world too.
So what is a 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.
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. 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 unemployment.
Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.
Stock markets & recession
The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy.
The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in India with little cheer coming to investors.
Current crisis in the US
The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans .The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy.
Impact of a US recession on India
A slowdown in the US economy is bad news for India.
Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.
The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70.
Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent.
The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.
Will US recession hit india

The world economic slowdown which had its epicenter in the developed economies has now found its way into the developing econoimies also,which didnt have any substantial exposure to the toxic assets(CDO) which triggered the entire crises.I had strongly beleived that india would be immune to this economic meltdown as our banks werent exposed to the sub prime mortgage assets and moreover there was the vibrant domestic market which would compensate for the declining global demand.But now as we see the decoupling theory failing ,our growth rates revised downwards,industrial growth rates dropping,investor and consumer confidence at their abyssmal levels, credit becoming costlier and hoards of monetary and fiscal measures initiated by the government that india also has to share its bit of the pain. The Davos world summit that brought about no results except that the developing countries emphasisng that the recession is a common problem for the world economies and has to be resolved together and the countries should desist friom taking any protectionist policies .This would mean even the developing ecionomies would have to pay the price for the irresposible deed done by the financial wizards,political wonks and the lack of due deligence by the regulatory authorities and the credit rating agencies .This crises has exposed the weak underbelly of the us gaints which were considered invincible.That leaves back a lesson to be learnt by the world that capitalism isnt all that great.
































Impact of a Possible US Recession in India
Though no one likes or wants a recession, almost everyone appears (looking at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the United States and other economies as a buffering factor. But what is the reality for countries like India?
It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.
Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.
History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%.
Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States.
In other words, the effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following:
1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored.
2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well.
3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea?
4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism.
5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum.
6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.
In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.
Sectors most affected by the slowdown in the Indian economy
Everyone’s talking of the slowing down of the Indian economy. For us, so used to robust growth of around 8-9 percent, anything less is hurting. So how badly has the global financial meltdown really hit us?
• The sectors least affected (directly) by the slowdown are Pharmaceuticals, Oil & Gas, FMCG, Media & Entertainment
• Those which will feel a moderate impact of the global crises are Power, Automobiles, Retail, Hospitality and Tourism
• The sectors most severely affected are Banks, Financial Services, Real Estate, Infrastructure and Information Technology
Lets take the severely hit industries first.
Banks
Banks have suffered losses, including some public sector banks like Punjab National Bank, Bank of India, State Bank of India and Bank of Baroda as they had an exposure to the instruments issued by Lehman and Merrill Lynch. It wasn’t just the private bank ICICI, although the latter posted the maximum losses due to their exposure.
However, if we take the overall the Banking sector in India, there is nothing to worry as heavy regulation coupled with the tendency of banks to be cautious (more than regulations stipulated) has protected the Indian banking industry. Even ICICI can easily handle the loss it has suffered. What it might impact is ICICI’s future plans to expand, but deposits are safe.
Infrastructure companies:
Ongoing projects may not be affected but future ones might, by both private companies and the government. For example in Mumbai the future phases of the Metro might get hit. Many such future plans of all cities in India will get delayed and/or stalled. Stocks of infrastructure companies will take a hit.
Information Technology
Strangely it is those top IT companies with a lot of business abroad and in the US which are a safer bet because all their eggs are not in one basket. They also (usually) have more reserves. However the impact of loss of business will continue to be felt over the next one year as business of IT companies will reduce.financial institutions in particular will reduce their IT spends. Consolidation (abroad) of companies and Integration of their IT processes might mean more outsourcing (and more business for IT cos), but there is no guarantee that this outsourcing will go to Indian IT companies. The negatives for Indian IT is that two sectors, Manufacturing and Retail, will drastically cut their IT costs.
Indian employees on clients’ projects abroad would have to be relocated and/or issued pink slips.
Real Estate
The industry has taken a hit, with builders begging the government to reduce interest rates and give them other sops. But the sluggishness has been good for buyers. Housing prices have dropped 5 to 20 percent in all major cities. Retail rentals have also dropped.
When it comes to a slowdown in the housing market, one of the reasons put forward is that now speculators are wary of entering the market for short-term gains and this has reduced demand. Genuine buyers are more picky and hunt for bargains. Sellers have no choice but to give discounts…and this situation is expected to continue for at least a year.
As to how much further the real estate prices will decrease is a tricky question because even now there are some areas where the prices have hardly fallen at all. Clearly real estate at some prime locations is likely to remain more stable. With builders facing liquidity problems, their expansion plans have been hit and their present projects are being delayed. The minute the oversupply situation is corrected the real estate prices will stabilize. Maybe a year, maybe 18 months. No one really knows for sure.
Other sectors which have had a moderate effect of the economic meltdown
Power
Demand will decrease, but replacement demand will not be affected.
Automobiles
This sector, like the real estate sector, was already facing problems due to increase in interest rates and the auto sector more so due to increase in fuel costs, but now the demand for automobiles has sunk further due to an overall slowdown in the economy. The auto companies bottomlines will suffer as their exports will take a hit, but even then as compared to other countries Indian Auto companies will suffer less as their sales from exports is less.
Overall, exports are down. And this affects all industries with any export component, particularly textiles, jewellery and so on.

Hospitality, travel and tourism
Not only are travel budgets of companies being slashed, tourist flow from foreign countries is set to reduce. This will continue for at least 6-9 months. Hotels, as they face greater competition, will see their profitability affected as they slash rates and give discounts.
There will be an indirect impact on all industries. For example, FMCG (Fast Moving Consumer Goods) companies will be affected indirectly as consumer spending will reduce. High spenders are believed to be those from the IT sector and this will effect spending, particularly of luxury items.