Project Report on
US Recession and its Impact on Indian Economy

Submitted to
Prof. V.P.Singh

Submitted By
Sona Nair 38 Shrenik Shah 54
MansiKinjawdekar 32

ParleTilakVidyalaya’s Institute of Management
Dixit Road, VileParle East,Mumbai-400057
Index

Sr.no
Table of Contents
Page no

1.
Introduction

2.
Factors affecting Recession

3.
Impact on Indian Economy

4.
Corrective Steps taken to check Recession

5.
Case Study-

6.
Conclusion

7.
Executive Summary

8.
Bibliography

INTRODUCTION
What is Recession?
A recession is a contraction phase of the business cycle. The official agency in charge of declaring that the economy is in a state of recession is the National Bureau of Economic Research (NBER). They define recession as a “A period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

This is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For this reason, the official designation of recession may not come until after we are in a recession for six months or even longer.

Some economists also suggest that a recession occurs when the natural growth rate in GDP is less than the average of 2%. Typically, a normal economic recession lasts for approximately 1 year. The newspapers in America often quote theThumbRulethat a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters.

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.
Recession is the result of reduction in the demand of products in the global market. Recession can also be associated with falling prices known as deflation due to lack of demand of products. Again, it could be the result of inflation or a combination of increasing prices and stagnant economic growth in the west.
Recession in the West, especially the United States, is a very bad news for our country. Our companies in India have most outsourcing deals from the US. Even our exports to US have increased over the years. Exports for January have declined by 22 per cent. There is a decline in the employment market due to the recession in the West. There has been a significant drop in the new hiring which is a cause of great concern for us. Some companies have laid-off their employees and there have been cut in promotions, compensation and perks of the employees. Companies in the private sector and government sector are hesitant to take up new projects. And they are working on existing projects only. Projections indicate that up to one crorepeople could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled by Federation of Indian Export Organizations (FIEO), which says that it has carried out an intensive survey. The textile, garment and handicraft industry are worse affected. Together, they are going to lose four million jobs by April 2009, according to the FIEO survey. There has also been a decline in the tourist inflow lately. The real estate has also a problem of tight liquidity situations, where the developers are finding industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy. Federation of Indian chambers of Commerce and Industry (FICCI) found that faced with the global recession, inventories industries like garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

The official designation of recession may not come until after we are in a recession for six months or even longer.

FACTORS AFFECTING RECESSION:
(A) Stages of Market Economy
• Growing Market Economy
• Declining Market Economy

(B) Two factors of Market:
• Demand
• Supply

(A) Stages Of Market Economy:
There are two stages of the market economy that is the Growing (upward) Market Economy and the second one is the Declining (Downward) Market Economy.

Growing Market Economy (Upward Market):

Declining Market Economy:

EFFECTS OF RECESSION:
As USA faced a visible recession in recently, it is evident that economists are in overdrive to review the fiscal statistics and give expert opinions. The stock markets had created a panic situation in the country. The biggest lenders were facing a cash crunch and for the first time they were also admitting it.

Most of the credit had gone into housing, car, security and insurance schemes. Americans who had invested in such schemes only had their stocks to offer as collaterals and were facing the brunt with embarrassing foreclosures. There was no sustainable development in major sectors like housing, medical, small scale business. The US economy had reached its peak and was slowly going downhill.
Jobs are being outsourced to other countries while Americans are themselves jobless. As Asian countries are getting more employment, even expatriates are returning home. India and China are major outsourcing backyards for the US. Cheap goods manufactured in China, Thailand and other poor countries have hitherto relied on the dollar power for sustainance. As the value of the dollar falls, the American dream is going bust for many. Whether it is the shoe maker or the food chain or cola giants or even real estate developers, the earning potential has been cut.
No one was buying second homes any more. The ones who had were selling them at lower rates. Whatever profits US economy had was being diverted as funds to Middle East either to fund real estate development in UAE or in defending the troops in Iraq. The oil prices, consumption of natural gas and abuse of environment had also to be blamed for the crisis that had engulfed the US economy. No one believed that US economy could ever collapse. Despite the fact that two other major super powers Russia and Germany went through tough times and are still trying to balance their economies.

The stock markets are a daily indicator to the investors to make themselves stronger, or take up some recession proof business till the storm passes. In 2007, home buyers in many states had been confronted with foreclosures. Credit bills and loans are unpaid. Financial institutions had started to move with recovery agents and consultants to get back their interests before they go bankrupt themselves.

Consumers who had been addicted to material wealth had neglected the environment and basic needs to save the place where they lived. Healthcare, insurance, skilled professionals had to be satisfied with lesser pay packets. Brokers were finding it hard to get buyers for resale apartments and homes. Americans living abroad were also in constant fear of the depreciating dollar. The American dream was turning into a night mare for migrants who were returning home.

EFFECTS OF THE US RECESSION ON 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 after effects 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.
The worries for exporters had grown as rupee strengthened further against the dollar. But experts noted that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper bringing down inflation. A recession could bring down oil prices to $70.
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%.

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 cited as follows:
• There was a dip in the employment market. There were already evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs. More than the downsizing itself, which may not involve large numbers, what this implied was a significant drop in new hiring -- and that would change the complexion of the job market.
• Many companies had laid off their staffs, the number of tourists inflow to India had come down, companies had cut down compensations and perks. Government and other private companies were reluctant in starting new ventures and starting new projects etc.
• Projects that were halfway to completion, or companies that were stuck with cash flow issues on businesses that were yet to reach break even, had run out of cash and become bankrupt.
• One of the casualties that time were the real estates, where building projects were half-done all over the country and in that tight liquidity situation developers found it difficult to raise finances.
• Consumers were also frozen in the sudden glare of the headlights. More expensive money meant that floating rate loans had begun to bite even more; even those not caught in such a pincer decided that purchases of durables and cars were not desperately urgent.

The effects of this recession on India may be quite distinct from those of the past. Here are some areas which could have helped India come out of Recession faster:-
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 was 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. Since Fortune 500 companies slashed their IT budgets, Indian firms were adversely affected. Instead of looking at the scenario as a threat, the sector could 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.
For US firms, who have long looked at China as a better investment destination, this may be a good time to look at India as well. After all, 350 million people with purchasing power cannot be ignored. This is not a sales pitch for India, but only a gentle suggestion to US corporations

IMPACT OF US RECESSION ON INDIAN ECONOMY
"Indian economy is insulated from the crisis… The global financial crisis will not affect us much," [Indian Finance Minister Palaniappan]Chidambaram said, at first. Chidambaram went on in this vein until both he and his boss [Prime Minister] Manmohan [Singh] had to reluctantly admit that no developing economy could possibly remain immune to the global crisis. Still, it was projected primarily as a financial crisis or at best a precursor to a mild recession. But no financial crisis is ever a mere crisis of the world of high finance alone. Just as the gloom on the trading floors soon spread to the shopfloors in the factories, financial turbulence is just a symptom of the turmoil in the real economy.
"The contagion is truly global in a globalised world. How can the high priests of globalisation in India expect to insulate the country from this all-pervasive crisis?" In a global crisis of such historic proportion where the total bailout packages by all countries work out to some 3 trillion dollars but where there is still uncertainty whether the system can be salvaged, it is stupid to pretend that India would be immune to the systemic crisis. A finance minister’s (FM) job is not to give false hopes. Panic at the stock markets cannot be prevented for long with pep words from the FM. Till October 14, the Bush administration alone has announced bailout packages to the tune of over $ 990 billion apart from injecting fresh investment worth $ 200 billion in banks and private financial institutions to shore up their financial position.
The contagion is truly global in a globalised world. How can the high priests of globalisation in India expect to insulate the country from this all-pervasive crisis?! Already the financial crunch is having its impact on the foreign institutional investors’ (FII) hot money in India . Just wait for the impact on trade, foreign direct investments (FDI), exchange rates, remittances, balance of payments (BOP), forex reserves and, above all, on the macro-economy in India. Goodbye to the rosy stories of double-digit ‘growth miracle’, it is now an impending debacle that stares economic analysts in the face.
The possible social impact is mindboggling. The new middle class in India is witnessing its first financial meltdown and a possible deep recession. The information technology – business process outsourcing (IT-BPO) myth would soon be blown. The possible BPO gains could hardly make up for the IT sector losses inflicted by recessionary economies in the developed world. Anyway, if the job losses are already running into lakhs (100,000s) in the US , one can well imaginehow much political pressure will build up there against outsourcing. If such leading names like Morgan Stanley, Merrill Lynch, JP Morgan, Goldman Sachs and Lehman Brothers start biting dust and their brightest kids are given unceremonious marching orders, Indian B-school products are surely in for a bad patch. Pre-election political pressure may have forced Jet Airways to take back its decision to terminate 1900 employees, but the job scenario in the so-called high-growth high-wage sectors has already turned gloomy.
All booms in India , based primarily on foreign money, will soon go bust. The recession-ridden US consumer/industry can hardly sustain the growth miracles of China and India . The surpluses of the Indian bourgeoisie would find a greener pastures in greater and greater acquisitions abroad than investing anew in a dwindling economy at home. Didn’t the Swiss bankers’ association point out a few months back that Indians were holding $1.4 trillion in Swiss banks? A sum about 40% larger than the gross domestic product (GDP)! The only breed that will thrive is the breed of speculators — in stock markets, currency trade and possibly in the real estate, gold and art pieces where the desperate wealth would flow.
In US, if it was first the speculative housing market bubble/subprime and then the financial bubble, in India it has just begun with the stock market bubble and possibly the real estate bubble. When it extends to the investment bubble (what with the special economic zones (SEZs) and other fabulous concessions, the telecom bubble, the IT-BPO bubble and so on), all claims of India having weathered the storm would wither. India perhaps might go under late and might take longer than the rest of the world to come out. All over the world there are 77 tax havens like St. Kitts and Cayman Islands . But in India there are 580 SEZs!
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.
The whole of Asia would be hit by a recession as it depends on the US economy. Even though domestic demand and diversification of trade in the Asian region will partly counter any drop in the US demand, one simply can't escape a downturn in the world's largest economy. The US economy accounts for 30 per cent of the world's GDP.
Says SudipBandyopadhyay, director and CEO, Reliance Money: "In the globalised world, complete decoupling is impossible. But India may remain relatively less affected by adverse global events." In fact, many small and medium companies have already started developing trade ties with China and European countries to ward off big losses.
Manish Sonthalia, head, equity, MotilalOswal Securities, says if the US economy contracts much more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent by the IMF-will contract, and India would be no exception.
The only silver lining is that the recession will happen slowly, probably in six months or so. As of now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments will suffer losses because of their trade link. Certain sections of commodities could face sharp impact due to the volatile nature of these sectors. C.J. George, managing director, Geojit Financial Services, says profits of lots of re-export firms may be affected. Countries like China import commodities from India do some value-addition and then export them to the US.
The IT sector will be the worst hit as 75 per cent of its revenues come from the US. Low demand for services may force most Indian Fortune 500 companies to slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies from ITeS and BPO, automotive components will be affected.
During a full recession, US companies in health care, financial services and all consumers demand driven firms are likely to cut down on their spending. Among other sectors, manufacturing and financial institutions are moderately vulnerable. If the service sector takes a serious hit, India may have to revise its GDP to about 8 to 8.5 per cent or even less.
LokendraTomar, senior vice-president, Integreon, a BPO firm, says the US recession is likely to have a dual impact on the outsourcing industry. Appreciating rupee along with poor performance of US companies (law firms, investment banks and media houses) will affect the bottom line of the outsourcing industry. Small BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to survive.
According to Dharmakirti Joshi, director and principal economist of CRISIL, along and severe recession will seriously affect the portfolio and fixed investment flows. Corporates will also suffer from volatility in foreign exchange rates. The export sector will have to devise new strategies to enhance productivity.
Internal structure of the economic depression inIndia:
Share Market:
• More people have sold the shares in the Indian share market than they bought in the recent weeks.
• Foreign investors have pulled out from stock markets leading to heavy losses in stocks and mutual funds
• Stock broking houses are laying-off people.
• Because of such uncertainty many people have started saving money in banks rather than investing.
The festival season in India was seldom so gloomy for the share market. Investor wealth worth Rs. 250, 000 crore (1 crore = 10 million) was wiped out on the bourses on a single day, on 10 October. The Sensex fell by 1000 points before recovering some 200 points, an intra-day drop of some 800 points. The lachrymal wave washed away the festive mood.
At the first sign of stock market crash and FII funds stampede, the United Progressive Alliance (UPA) Government has once again permitted P-notes (participatory notes) paving the way for enhanced speculation. The present convulsion in the Indian bourses would look mild before any possible explosion in future as a result of this heightened speculation. Despite the government itself acknowledging that the P-notes were being abused/misused at the time of banning them, no safeguard has been put in place. Anyway, how can there be any safeguard within the realm of speculations? It is absurd.

Impact on Indian banks
“Indian banks are safe,” reassured Reserve Bank of India (RBI) Governor Subbarao repeatedly. Indian banks' exposure to international markets is relatively small at 6 percent of their total assets, the rating agency Crisil said, adding that even lenders with large international operations have less than 11 percent of their assets overseas. But a mini-version Indian bailout was in the making simultaneously in the first week of October with the government virtually shoring up two mutual funds and Life Insurance Corporation (LIC) coming to the urgent rescue of three more which landed into liquidity crisis in the backdrop of a steep crash in the stock markets.
At a time when the big names in Western banking industry are queuing up for bailouts, there may be a sudden leap in non-resident Indian (NRI) deposits in Indian banks as these funds would look for a safe haven back home. We can hence expect a big clamour from the NRI lobby for greater concessions for their deposits. Chidambaram would only be too willing to oblige. The RBI recently increased the credit cost on term borrowings (with more than 7-year maturity) to Libor+4.5% and even then the big Indian corporate names are finding it difficult to raise funds amidst the present turmoil. Indian borrowers will end up paying more for the foreign lenders and Indian banks might be forced to pay more for the NRIs – all in the backdrop of a creeping recession and falling rate of profits.
Even when Chidambaram was preparing to pass some 66 reforms-related pending Bills in possibly the last session of the parliament and a committee had prepared a blueprint for major financial sector reforms, the US financial crisis fell like a bombshell. No doubt, the UPA ideologues would also use the global meltdown as a pretext to push the same risky reforms. In the years to come, as the new investment projects go under one after the other and investors and insurance companies and hedge funds go under trading in credit default swaps and all such devices, the financial crisis here in India might be the denouement rather than the beginning as in US. ICICI, the symbol of new breed of unscrupulous financial manipulators, is already in doldrums.

Increasing liquidity
Liquidity position in India is comfortable, said RBI Governor Subbarao after a slew of measures. But he avoided hinting at any possible reduction in prime lending rates. The liquidity position may be comfortable, the banks and financial institutions might be slush with funds once again but with interest rates ruling high there is no pick up in the credit offtake by SMEs (small and medium enterprises). As they are the main employment providers in the industrial sector, the employment in this sector has already taken a heavy toll. A deep and prolonged recession in the West might result in unemployment for millions of these workers.

The RBI hurried to cut Cash Reserve Ratio (CRR) by 150 basis points to 7.5 per cent, releasing more than $12 billion fresh liquidity into the Indian banking system. But if mere money supply alone can drive the economy and industrial growth forward uninterruptedly, then no economy will ever face any recession and there cannot be a meltdown of this nature. However, amidst all-round alarmism and panic reactions, confidence building itself has become the main plank of economic policy!

The government has once again liberalized ECB (external commercial borrowings by corporates). It is a different matter that in the light of the meltdown nobody would bother to take a second look at dollar bonds issued by Indian banks despite all their backing by the Indian government and hence they are abandoning the idea raising external funds/borrowings. While RBI might come forward to infuse liquidity liberally in the short-term, wait for the booming NPA figures in the medium and long term.
Exchange Rate: Rupee Depreciation:
When the western economies are going into a tailspin one after the other, the appreciation of dollar and euro looks somewhat paradoxical. From unprecedented appreciation earlier a few months back, the rupee fell to record low — reaching Rs.49 per dollar at some point. The dollar is gaining vis-à-vis rupee because of the outflow of the FII funds and since the worst is yet to come in the US /global meltdown, a repeat of the East Asian crisis in India is very much a possibility. During the preceding period, if the rupee appreciated by around 18%, now it has depreciated by around 19% during this Jan-Sept.
The exporters who were crying earlier are happy but it is now the turn of importers to come to grief. Not many people know or remember that manufacturing imports had overtaken total domestic manufacturing production in the domestic organised industrial sector this year. Apart from cost escalation and consequent reduction in profit margins, just wait for the impact of the rupee depreciation on inflation. The confident prediction of possible fall in inflation rate to single digit by January sounds hollow in the backdrop of this as well as the cut in CRR rates and other measures by the RBI aimed at increasing the liquidity.
Impact on Trade
The trade deficit is reaching alarming proportions. If exports are growing, imports are growing even more. Thanks to workers’ remittances, NRI deposits, FII investments and so on, the current account deficit at around $10 billion doesn’t look so threatening. But for some reasons if the remittances dry up and FIIs funds take flight, it will be a repetition of 1991 after a few years if forex reserves get depleted and trade deficits keep increasing at the present rate. Even as the country’s exports and imports registered a substantial growth of 35.1 per cent and 37.7 per cent in dollar terms, respectively, during the first five months of the current fiscal (April to August), the trade deficit during the period has shot up. The trade deficit was around $14 billion for a single month of August 2008, a record level. Even Goldman Sachs’ prediction that India ’sforex reserves would decline to $271 billion by year end from $310 billion in March 2008 looks a very conservative estimate.

Unprecedentedly high forex reserves were becoming a burden. As most of these funds were in dollars, the government had parked most of them in US treasury bonds or invested them in securities and bonds in foreign banks. With the meltdown and consequent poor returns following rate reduction, these treasury investments have taken a beating. Thegovernment had its fingers burnt with the earlier dollar depreciation. A part of these funds could have been used to clear some of the external borrowings. Now with the recovery of the dollar, repayment costs in rupee terms have also shot up. A golden opportunity was missed. The government was toying with the idea of establishing a wealth fund/SPV (Special Purpose Vehicle) with these reserves to finance private parties taking up infrastructure projects through PPP. But, despite all the hype, the PPP has been a total flop so far.

The Deflating Growth Bubble
And what about the growth story? Well, the ratio of savings and investment to the GDP reportedly remains high at 35 per cent. So far so good. Still, there is a slowdown in the Indian economy. The core sector growth is down to less than 4 per cent. All vital productive sectors are on a slowdown. With such a structural background, if and when the Indian economy slips into a recession, the recession will be protracted and there will be no a quick revival. Crude oil prices have declined to $80 a barrel. The monsoon has been good in most parts of the country. For a couple of years it is not difficult to continue with the growth story. But infusion of liquidity, i.e., increasing the velocity of circulation alone in other words, can hardly sustain production. The basic structural flaws are bound to come back to the fore and haunt.
The problem might be made to look minor — as that of liquidity — at present but if there is a severe constraint in demand then no amount of infusion of money into the system and supply side magic would be able to save it. And given the fiscal scenario, the government would not be able to go for any fresh neo-Keynesian binge either, leave alone any major corporate bailout as in the US . Pay commissions and loan waivers might sustain aggregate demand for a couple of years but signs of slowdown are already on the wall. Despite repeated promptings of Chidambaram, the bankers are not ready to reduce even the home loan rates and not just the prime lending rate for the businesses. After all, they are hardnosed businessmen and they will continue to be top executives in their banks while Chidambaram and his party might go out of power.
The 11th Plan estimates that to maintain an average annual growth rate of 9%, the investment in infrastructure would have to rise from Rs. 259, 839 crore in 2007-08 to Rs. 574,096 crore in 2011-12 at constant 2006-07 prices, aggregating to Rs. 2,011,521 crore over five years. In the terminal year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in 2006-07. The Plan document itself says that the government cannot manage this much money and a substantial part of it has to come from the private sector. PPP is supposed to pave the way. But what is the record so far? The Government of India's Committee on Infrastructure which monitors PPPs notes that 244 PPP projects are on-going and another 76 are in the pipeline in the country. The total capital outlay in the on-going projects amount to a minor fraction of the total projection by the Planning Commission. To finance infrastructure projects, the GOI established an India Infrastructure Finance Company Limited (IIFCL), a wholly Government-owned company to provide long term finance for infrastructure projects. According to the IIFCL website, it would provide loans upto 20 per cent of the project cost and projects "awarded to a private sector company ... [a company established] through Public Private Partnership (PPP) shall have overriding priority". And how big is this IIFCL? The GOI has successfully persuaded the World Bank to give it a loan of a meagre Rs.2700 crore to finance projects worth Rs. 2,011,521 crore! Making bogus projections to justify pro-private sector policy changes is the thriving industry in India . In such a situation, can any sizable fund flow into the risky infrastructure sector of a developing country amidst tottering private banks and investment funds?
Many approved SEZs are in doldrums as they are not getting any units and this whole thing is a massive real estate speculation of gigantic proportions. Even though the real estate speculation in India is taking a different trajectory and is not as reckless as credit instruments without any backing by collaterals as in the US subprime, the real estate bubble centeringaround SEZs landgrab is no less serious. Despite RBI’s reservations, the banks were competing to lend to SEZ promoters and even the nationalized public sector banks accumulating huge NPAs would be lined up for private takeover. SEZs might finally achieve what Narasimham’s two reports could not achieve. If millions of home loan borrowers are defaulters, the banks can take back their houses. Even they can takeover the SEZs. But if they themselves go deep into the red irretrievably, they themselves would be taken over. Companies incurring loss too would be taken over by stronger sharks. After a wave of takeovers, if the economy doesn’t revive, this would only amount to taking over the losses. A massive collapse in asset prices is the ultimate eventuality.

Social Impact
"Suicides after market crash is an urban trend" … screamed the headlines in a pink paper. Beneath that was the sob story of an entire family committing suicide after heavy loss in the stock market. "Whether it is a seemingly well-to-do US-resident of Indian origin wiping out his entire family or middle-aged brother-sister duo killing their parents and then committing suicide, the financial crisis has hit everyone, and has hit them hard", the report added. At least, the desperate farmers go alone leaving their family members in the lurch. But the scorched middle class investors take their entire families along and that is the level of urban investing middle class insecurity. This explains the golden age for gold as investment in yellow metal is considered safer. Just think of the hundreds of new scrips by companies with ambitious investment plans counting on these investible surpluses of the middle classes and also the market opportunities opened up by their wealth. All these plans for new scrips will be scrapped. The middle class boom might be glamorous but the depression in incomes and losses in the markets are far more agonizing. Pink slips are painful indeed and joblosses are not limited to the West alone. Those who are hoping that jobs in the West would shift across to the cheaper shores of the India are missing the point that domestic job losses due to recession in the West as well as a slowdown in India would far outweigh such outsourcing gains. Even the real estate boom is going bust in Bangalore , the Indian El Dorado.
The Indian BPO sector derives 40 per cent of its revenues from the financial sector of the developed countries and exactly as they mushroomed fast they will wilt with the same speed. IT-BPO sector in India accounts for 5.5% of the GDP but 30% of exports and a very high share of service sector employment in cities like Bangalore . El Dorado is poised to turn into a hell!
Take the case of garments and textiles. Hardly a few months back, tens of thousands of workers, mostly women, were out of jobs in Chennai and Bangalore and towns like Tiruppur and Karur. The villain was the rupee appreciation, leading to some 18% reduction in incomes in rupee terms. After the loot by layers and layers of intermediaries, the factory producer was left with nothing and hence closed down the unit. Now dollar has appreciated, smile returned to the faces of garment owners but the smile soon vanished. The current exchange rate offers handsome returns but the orders are drying up due to impending recession. No margin then…no orders now! No jobs in both the scenarios.
The impact on the working class by means of wage compression and workloads, illegal retrenchment and worsening of job security and working conditions etc., would be onerous. Already this has started happening. For reasons of space, we are not elaborating. But we can only say there will be many more NOIDAs.
The employment in organised industrial sector – both public and private – was 8.98 million in 1997 but it was down to 7.62 million by 2005, i.e., precisely during the growth miracle if we leave out the disastrous year of 2001-02 for the industry when the growth was very low. If the growth miracle turns into a debacle what will happen to organised sector employment? Formal sector will be informalised and permanent workers will be booted out.
Bailouts for the bankrupt and boot-out for the workers. The same logic of capital! Total blackout of the possible social impact of the meltdown and almost virtual absence of any discourse on safety measures/nets is one of the characteristic features of the current crisis of capital, across the globe as well as in India.

REAL ESTATE
The global recession has dominant Keynesian features. The crucial issue is not just the fact that there is a demand contraction but that this has been brought about by a market failure which fuels adverse expectations on the part of both producers and consumers.

These adverse expectations lead to reduced production by producers anticipating lack of demand and increased savings by consumers anticipating lack of jobs. Over time, actions of both producers and consumers further justify their expectations which then become self-fulfilling.

In the absence of government intervention (which fills in the missing demand) it is not clear when and how such expectations get reversed. In the 1930s, it took a whole decade to reverse such expectations and even then only because of government intervention.
The crucial role of expectations is also clear from the fact that monetary policy has successfully driven interest rates to near zero levels in most OECD countries and yet there is still no sign of demand recovery.
In India too the RBI has tried valiantly to drive interest rates down. Yet the impact seems limited. Over the period September to December last year the RBI pumped in almost all the liquidity it had sucked out of the system in the preceding 12 months.
The PLRs of banks have barely fallen and the new funds have only found their way into the market for government’s T-Bills. Bank holdings of T-Bills are way above the legal requirements. In other words, banks would rather hold government notes promising about 3% to 3.5% return rather than lend to investors at even reduced rates of 7% to 8%.
A strange situation where the government pumps money into the system only to see it finding its way back to them via funding of government debt. Expectations are adverse indeed.
This is particularly important in the real estate sector which is now going through very rough times. The importance of the real estate sector in India cannot be understated given the strong forward and backward linkages that it generates.
The sector has demand implications for intermediate inputs like steel, cement, etc., while keeping afloat the whole construction industry including transport and other intermediate labour services. Given its importance for the economy it is worthwhile to see how adverse expectations are playing a role in this sector and what the possible solutions are.
It should be noted that the role of expectations is particularly important in sectors where speculative activity is greatest. Speculation is typical of the real estate sector in India. A simple test is to compare the purchase price of a property (commercial or residential) with its rental rate.
Casual empiricism indicates that the rental on a residential 2BHK property in a major metro like Delhi is around Rs 1,20,000 per annum. The purchase price of a similar property was around `50,00,000 last year. However, the return on a fixed deposit of ` 50,00,000 at around 10% per annum would be almost five times the rental. The difference is the return to speculation.
The banking sector has still not reduced interest rates sufficiently. Today, bank rates are still around 10-11% on a long-term housing loan.
This must come down to around 6-7% to attract new borrowers. Second, as the RBI periodically announces measures to reduce interest rates this fuels expectations of further cuts and discourages investment in all fixed assets including real estate.
Third, developers are obviously caught in the speculation trap having mopped up most of their own properties in the past on the assumption of a speculative gain in the future. While they have so far expected the government to bail them out, this is unlikely to happen and one can expect substantial property price reductions in the next one year.
The real estate sector has so far relied mainly on upper income domestic demand and external demand. This is unlikely to revive in the near future. For the mass domestic market the ‘Indian dream’ of owning one’s own home is unlikely to be realised at current prices. Only a combination of much lower home loan rates and a significant drop in prices can energise the real estate market on a sustainable basis.
AUTOMOBILE

Indian car industry is one of the most promising car industries across the globe. It has gradually strengthened its foothold in the international arena as well. The country is dealing with many car manufacturers, dealers, and associations in various different countries including U.S. From some countries, India imports cars and car components and to some India exports. With this, the global recession is obvious to have its impact on the Indian car industry.
Though India has witnessed a growing customer base, it has not inoculated them from the global crisis. The crippling liquidity and high interest rates have slowed down the vehicle demand. However, the falldown started in July with a decline of 1.9% and thereafter the industry saw a major slowdown in October 2008.

Business Analysts reported that Indian car market had recorded a continuous growth of about 17.2% over the last few years but this year the recession has brought the growth to about 7-8%. Be it Tata Motors or Maruti Suzuki or even Mercedes-Benz, the car market has gone down to a tremendously negative terrain.

Tata has reported that its profit fell from 34.1 percent to 3.47 billion rupees because of the slower growth in the industrial production. Further, the company has also recorded a 20% decline in the sales as compared to last year. And with its Nano making a big impact before the downturn as such, but after the downturn may hold a bleak future for the world's cheapest car, because the consumer spending has gone very low.

Even Maruti Suzuki reported a 7% decline in sales due to rising cost of the materials and a falling rupee value. Even Mahindra & Mahindra, the India's largest SUV and tractor manufacturer, is not immunized, showing profit fall of 20.6%.

Banks and car financers have disbursed the approved loan because of the cash crunch. Payments from the OEMs (Original Equipment Manufacturer) have also been delayed and in most cases banks have deferred or disbursed the approved loan. OEMs take this loan from banks and financers for establishments, capacity expansions, or even for the requirement of high-end equipments for car designing and production.

In addition, the uncertain exchange rate and a sudden increase in dollar value against Indian Rupee have contributed to the slowdown. Increasing dollar value has raised the landed cost of imported machine tools and even raw materials required for production by about 14%. Alloy and steel prices have also not shown any reduction in their prices and this high price has actually forced the car manufacturers to hike the car prices. To make the matter worse, it is believed that steel manufacturers across the country are looking for re-imposition of custom duty on steel. Increased cost of raw materials directly affects the cost of the car rolled out, eventually tagging a particular car model with a higher price tag.

The conclusion is that the present global recession has hit very hard on the Indian car industry.

JOBS
However, there is certainly a deep recession as far as jobs for the highly educated are concerned. Ironically, this may be the first time in India’s history when it is more difficult for the professional graduates to find employment or appropriate employment, compared to the less educated millions. The present job recession has also hit the aspiration level of the Indian youth. The myth of IT and the glamour if private jobs are all history now. Now in an age of pink slips and mounting recession, the Indian Youth is once again looking in public sectors for jobs. Once shunned for its non -glam image and boredom, the youngsters today are choosing security of the government jobs over money in corporate sectors. The global financial meltdown and the serious job cut in the private sectors are making youth nervous, jittery about the present private office scenario.
And finally, a trickle has already begun of professionals of Indian origin returning to India as job opportunities dry up in the US and other developed economies. What should the newly graduating (and their parents) do? They have to start with the acceptance of this new ground reality that merely a professional degree even if it is from a top-10 or a top-25 institute is not enough to guarantee them a job of their choice. It is important for those who are in the job market today to understand that India’s economy is spread across India and not confined to the top eight or nine cities only. Hence, jobs are also spread across the entire urban and even rural India and, therefore, the employees must be willing to work from there.
Fiscal, monetary policies help India dodge recession, ’sprint’
Fiscal and monetary policies have helped India in dodging the recession and sustaining the economy. India named as a ’sprinter’, the downward trend in the country’s industrial output seemed to have ended, with a pick-up likely due to new infrastructure development.
Investor confidence in India had certainly improved, as reflected in the rapid increase in net capital inflows in the stock market during recent months. Sherman Chan, an economist, said in a note on the recovery of the Asia-Pacific region that amid increased sightings of green shoots, the bottom of the global downturn is now in sight China, India and Indonesia & have dodged recession and maintained strong growth despite the global turmoil.
TELECOM
The financial crisis that engulfed the world last year is now playing out in full proportions. This has spread to each industry and telecom industry is no exception. The impact of the recession in the western world and economic slowdown in the emerging countries is being felt in a big way by all the players in the ecosystem. It can be predicted that 2009-2010 will mark a very difficult and crucial period for the entire industry. This post is to analyze the impact of the crisis on each of the players and what can they do to minimize the impact

In many emerging markets across Asia and Africa, the operators are small and dependant on the foreign capital to expand. The operators are constrained not only by the capital for investment but also by the lack of working capital. Lack of new investments is having an adverse impact on network coverage expansion. 3G auctions planned in many countries have also been shelved for fear of non-participation by large operators. Investments in new technologies like LTE and WiMax are likely to be scaled down and I would not be surprised if many proposed installations of WiMaxare permanently after reviewing the business plans in light of current crisis. International long distance carriers are likely to see sharp fall in the traffic, due to lower IT spending and lower cross-country investments, which is unlikely to be compensated by the increase in traffic due to travel restrictions across the companies. The operators may resort to tariff reduction in a bid to increase the minutes of usage (MoU) but this would restrict their ability to offer flat data prices or other innovative data models. I foresee consolidation happening amongst carriers as the weaker ones bow out of the industry.

The operators would do well by concentrating on cost reduction initiatives. They may follow the initiatives of the Indian operators by adopting light-asset operation models, putting greater pressure on equipment vendors to adopt new models like managed service and capacity service. The carriers would do well by actively engaging in all kinds of infrastructure sharing opportunities. The cash rich operators may look for new M&A opportunities and cash strapped carriers will do well by limiting the handset subsidies. It is estimated that the industry spends over $50 billion in handset subsidies alone.

At least in the next three years, the traditional CAPEX will experience a CAGR of -3% to -4%, which forebodes a turning point for industry transformation. When revenue from voice services and traditional CAPEX cannot cover operators’ total cost of ownership (TCO), new services and new investment will become new opportunities and breakthrough points. New information consumption models, mobile broadband, and Internet applications will become the highlights of growth. This is the right time to evolve new business models to increase services consumption. Enhanced service consumption would ultimately benefit the carriers when the things start to improve. Operators can present mobile broadband as a viable alternative to fixed internet

Handset Vendors: Handset vendors were the first ones in the ecosystem to feel the pinch of the economic crisis. The replacement cycles lengthened which resulted in the lower replacement volumes and overall demand for new phones. At the same time, the device vendors witnessed heavy down-trading of devices by consumers leading to lower ASPs. The operators in the developed economies started to reduce the subsidy which also had an adverse impact on the value of the market size. The consumers on their part started to go for lower value contracts when their contracts were up for renewal and that lead to further erosion of device ASPs. Various device vendors and industry analysts have estimated the demand to be lower in 2009 by 5-10% over 2008.

Handset vendors need to focus on the costs and supply chain. Vendors may need to shift their high cost manufacturing units to locations where the cost of production is lower. New cross currency dynamics may also play a part in optimizing costs. They also need to rationalize the number of models to have better utilization of marketing monies. The emerging markets like India, China, Nigeria, etc. have been adding record subscriber additions which to a large extent are compensating the device vendors for loss of replacement volumes. The handset vendors should focus on value for money models and can learn from their experiences in emerging markets. I mean they can launch highly successful models of the developing countries in the developed markets and thereby increasing their market share as well as lower the cost of the model due to economies of scale. The handset vendors may also need to take a relook at their business models, partly due to the fact that carriers across the world are reducing subsidies and partly to emerge as end to end solutions player (e.g. RIM, Apple). The lower margins in the devices can be off-set with some of the services revenues if the solution is easy to use and relevant to consumer needs.

Equipment Vendors: The equipments vendors would be under pressure due to reduced investment by operators. However, if they focus on the managed services, they can get additional recurring revenue streams that would make up for the lower spending on network. The equipment vendors should wear the consulting cap and develop a provocative point of view on critical issues (like mobile broadband) that would entice the customers into spending. The vendors should try to develop new business models based on revenue share rather than fixed costs where the payments are linked to the benefits that the customer gets from the solution.

Content and Application (C&A) Providers: In one of my previous posts, I had predicted that the mobile entertainment would increase in times of recession. I got many responses from the readers both for and against the argument. I still stand by it that if the content is really good and affordable, it could be the cheapest source of information and entertainment in such times. If there are applications that help in job search or skill enhancement, they are bound to find favor amongst consumers. Relevance and pricing would be the key. However, lack of available funding to finance the development of new applications, and faster migration to ad-funded services - would have an impact on revenue growth.

C&A providers need to take a hard look at their business models and need to incorporate new ways of reducing cost of ownership for the consumers. C&A providers can look at sachet model to offer content at affordable price-points or they can offer unlimited access to content for a fixed fee. With the launch of new application stores by Nokia, Samsung, Microsoft, etc. the content providers should focus on the new application stores to compensate for any loss on the operator portal. The economic downturn will push operators to release their grasp on the mobile content industry and open-up mobile Internet. This would be a great opportunity for the content providers to increase their revenue share and offer content at affordable price.

In summary, it is clear from the above discussion that each of the players of the ecosystem would need to take a relook at their business models. The winners would be decided on the basis of the innovation that they can bring to their business models. The survival of organizations would not depend on how fit they are but how responsive are they to change
INFORMATION TECHNOLOGY SECTOR:

As 2008 ended, predictions of where the world economy is heading turned dire. The World Bank projected world output to grow by a mere 0.9% in 2009 (as compared with 2.5% in 2008 and a high of 4% in 2006) and world trade to contract by a significant 2.1% (compared to positive rates of growth of 6.2% in 2008 and a high of 9.8% in 2006). The overall impact of the global financial crisis has been felt in Asia / Pacific in terms of the local stock exchanges and currency exchange rates and lower GDP growth forecasts for 2009.
Impact on exchange rates
• Currency exchange rates have been affected, but on a more-isolated basis. Australia, China, New
Zealand and Singapore are experiencing drops in their currency against the U.S. dollar
• In addition, India has seen its currency increase substantially and later fall against the U.S. dollar
• As a result, there is an assumption that there will be some impact on IT spending across Asia / Pacific due to the increase in the cost tied to the technology spending

The global outlook is bleak and recovery is still far. The current global financial turmoil has hit almost all the economies around the world deeper than anticipated. Industries globally are impacted by the slowdown. The turmoil is taking a toll on the global IT industry – one of the leading contributors to the global GDP, led by uncertainties in the demand environment in both new and existing businesses. Hence, there appears to be a reason to fear that the crisis will swamp emerging markets and other developing countries, cutting into the considerable
The current global economic slowdown has made it a roller-coaster ride for the world economics.

Asia / Pacific is experiencing a deferred impact due to the “domino effect of the current crisis. With the expectations of a sluggish GDP Growth and consequent reduction in IT spending, countries /markets with stronger domestic demand.
India being one of the world’s fastest –growing tech markets, thriving mainly on exports is also experiencing the tremors of the global economic crisis.IT spending as a percentage of revenue normally varies from 3.5% in manufacturing companies, 5-6% in global retail chains to about 9.5% in the banking industry. These could see marginal decline as companies will tend to hold spends on IT deployments.
The slowing US economy has seen 70% of the firms negotiating lower rates with suppliers and nearly 60% cutting back on contractors .With budgets squeezed ,just over 40% of the companies plan to increase their use of offshore vendors.
The IT services and outsourcing market is currently undergoing a structural transformation that will have a profound effect on how IT service providers will have to conduct their business.
Customers have started to reduce project scope and /or postpone new development .However they are also trying to move more work to lower cost offsite locations ,which could increase IT budgets towards tangible cost saving measures.
The impact is likely to be higher for discretionary outsourcing expenditures rather than for critical, on-going Application Development and Maintenance
(ADM) services. Indian IT companies3 which are focused more on providing basic ADM services, and with long term outsourcing contracts, could exhibit more stable earnings in this environment. Furthermore, whilst discretionary expenditures are being reduced, ongoing projects will likely continue, at least in the near term, especially those which are in the more advanced stages of progress. Fitch expects IT services companies to report marginally positive revenue growth (in dollar terms) over 2009.
With decisions on IT budgets being deferred and sales cycles having elongated from 3-6 months to 6-9months, companies are seeing a significant drop in client additions. Moreover, the number of targeted large deals has more or less dried up. According to TPI4, mega deals have fallen to levels lower than those seen in 2001.
This clearly indicates the adverse effect that the US recession is likely to have on the Indian IT sector. The industry has been constantly seeking to diversify its markets to offset its reliance on the US, which remains the largest outlet for India’s software sector.
The impact has been more severe in the case of theBanking, Financial Services and Insurance (BFSI), which accounts for around 40% of the industry’s export revenues, and in retail and certain manufacturing sectors. Other verticals like telecom and automobile are also likely to have a delayed budget process and budget cuts. However, the industry focus is likely to shift to areas such as manufacturing, healthcare, retail and utilities. Healthcare industry is likely to witness increased IT investments due to increased focus on public health. Other industries that will see growth include telecom, retail and utilities.
Some vendors who have a greater exposure to BFSI segment will be more impacted when compared to their counterparts with less significant exposure (table on next page). The effect of this crisis would be more evident in the coming quarters. The overall revenue impact on the IT and ITES industry, as a result of the BFSI meltdown, could be anywhere between $750 million and $1 billion.

Companies BFSI share
%

Exposure of BFSI (in USD million)

Key BFSI client

Jan-Mar 2008 Apr-Jun 2008 Change (%)

Cognizant
46 314.2 314.2 7.46 American Express, Citigroup, Credit Suisse, JP Morgan, Metlife

Infosys 34 387.1 398.5 2.94 ABN Amro, Bank of America, JP Morgan, Washington Mutuals, UBS

TCS 42 664.4 648.2 -2.44 AIG, American Express, Bank of America, Citigroup, Deutsch Bank, Fortis, JP Morgan, Merill Lynch

Wipro 25 256.8 271.1 5.57 Credit Suisse,Lehman Brothers, UBS

*As a percentage of total revenue; BFSI contribution sourced from company reports ,BFSI clients from equity analysts.

• Infosys - The revenues from BFSI that were at 37% in June 2003 have stayed more or less unchanged as a percentage of total revenues. In the December 2007 quarter, Infosys got close to 37% of its revenues from BFSI. This slipped to 34% of revenues in the March 2008 quarter. In the quarter ending December 2008, BFSI showed a sequential growth of 4% in volume.

• Wipro - India’s third-biggest software exporter, and Cognizant, ranked sixth, have seen revenue from the key Banking, Financial Services and Insurance (BFSI) vertical rise by about a fifth between Oct-Dec 2007 and July-Sept 2008 .

• April-June 2008, Cognizant recorded the highest growth from financial services vertical among the offshore peers. This was mainly due to the type of financial services clients in the portfolio and the multiple operating levels (table above) .

• Tata Consultancy Services, for example, earned 42% of its revenue in the second quarter of CY 2008 from the BFSI

CORRECTIVE STEPS TAKEN TO CHECK RECESSION
 RBI needs to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened.
 This will mean drawing down the dollar reserves which is important at this hour.
 In the IT sector, there should be correction in salary offerings rather than job cutting.
 Public should spend wisely and save more.
 Taxes including excise duty and custom duty should be reduced to lighten the adverse effect of economic crunch on various industries.
 In real estate the builders should drop prices, so as to bring buyers back into the market.
 Also, the government should try and improve liquidity, while CRR and SLR must be cut further.
 Indian Companies have to adopt a multi-pronged strategy, which includes diversification of the export markets, improving internal efficiencies to maintain cost competitiveness in a tight export market situation.
 Government - providing money packages to organisations.
 If I talk about India, here the situation is still satisfactory if compare it with other countries of the world.
 Reserve bank of India (RBI) has decreased the rate of interest.
 SBI and ICICI are also providing different types of loans at a low rate of interest.
 Organisations are cutting cost to stand in the market.
 The real state is doing good business and slowly recovering the same.

CONCLUSION
• At the heart of the problem lie questions of liquidity and confidence on the part of the US.
• What the RBI needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened.
• This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time.
• If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high.
• Also it could be seen that the Indian economy should not depend upon any particular economy rather diversify the sources of exports.
• The other sectors like Tourism Industry and the Hospitality Industry should be more catered to, thereby
•