Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

Article :GLOBAL RECESSION & ITS IMPACT ON INDIAN ECONOMY Author :Mr.Sandeep Krishnat Raval[N.D.Patil Night College, Sangli] Dr.P.S.Kamble[Shivaji University,Klhapur] Abstract : This paper explains that there is serious imbalance in the world economy and this could have international effects. This paper analyzes the seriousness of this impeding adverse situation especially for developing countries and discusses weather as a consequences of this, a global recession is inevitable .this paper explorers global current account imbalance and evaluates different views on the causes and consequences of the imbalance.Finally,the paper discuss the various macroeconomic polices and shocks that might remedy the imbalances.

1.Introduction-

India got freedom in 1947 and started Economic Planning since 1951-1952. Due to Green Revolution in 1966-67 and the production of food grains increased in the country and consequently India became self-reliant in food grains in 197677.the country adopted LPG (Liberalization, Privatization, Globalization) Policy in 1991 due to financial crisis as a result all of this GDP of 9% could be achieved in 2007-08. However, in 2008 due to the recession in America American Economy totally collapsed and it had positive and negative effect on Indian Economy. There for it is necessary to study recession, recession characterized, causes, effect, suggestion etc Almost everybody today seems to be discussing about the US Recessionary trend and its impact on emerging countries, more particularly India 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, et al are the aspects discussed among

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

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. In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. 2.What is meant by Recession? The definition of a recession is negative economic growth for two consecutive quarters. This means a fall in Real GDP, -lower National income and lower National Output. However, it is worth nothing some people talk of a recession, even when growth is very low. 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.

3.A recession characterized by?

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

1) Rising unemployment (often unemployment is a delayed factor) i.e. it takes time for unemployment to rise, but, even when the economy is recovering, it takes time for unemployment to fall. 2) Rising Government Borrowing. A recession is bad news for the

government budget. A recession leads to lower tax revenues (lower income tax and corporation tax revenues) and higher government spending on unemployment benefits. The UK is forecast to borrow 60 billion; a recession could make this borrowing even worse in 2009. This borrowing means higher taxes and higher interest payments in the future. 3) Falling Share Prices. Generally a recession leads to lower profitability and lower dividends. Therefore, shares are less attractive. Note share prices often fall in anticipation of a recession. e.g. the recent falls in share prices are largely because the market expects a recession soon. During the actual recession, share prices often increase in anticipation of the economy recovering. Note also, falling share prices don't always mean a recession, falling share prices can occur for many other reasons. 4) Lower Inflation. Typically a recession reduces demand and wage inflation. This should result in a lower inflation rate. However, this recession is complicated because of rising oil prices. Therefore, the forthcoming recession may actually occur simultaneously with higher inflation - a term known as stagflation. But, a recession will definitely reduce demand pull inflation pressures and encourages price wars on the high street as firms seek to retain consumers. 5. Falling investment. Investment is much more volatile than economic growth. Even a slowdown in the growth rate (economy expanding at a slower rate) can lead to a significant fall in. 4.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.

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment 5.Past Recession The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty. The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938. The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans. The early 1990s saw a collapse of junk bonds and a financial crisis. The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record. From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recessions, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000. The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

6.US RECESSION AND ITS EFFECT ON INDIAN ECONOMY

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

The old saying History doesnt always repeat itself, but often rhymes, is based more on fact than fiction. Its been a lot of time we hear of Recession going on in US market. Everyone is talking about recession. We cling to newspapers, television news channels, and financial reports only to discover what next in recession. It would be nave 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. The fears of a US recession led to panic in the Indian stock market. The effect on the recession 2008 on India was quite distinct from those of the past. Here are some worth following: 1) 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, 2) During the 2008-2009, the growth in exports was robust till August 2008.however, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year, for the first time in seven years, exports have declined in absolute terms in October 2008. A decelerating export growth has implications for India, even though our economy is far more domestically driven than those of the East Asia. Still, the contribution of merchandise exports to GDP has risen steadily over the past six years from about 10% of GDP in 2002-03, to nearly 17% by 2007-08. If one includes service exports, the ratio goes up further. Therefore, any downturn in the global economy will hurt India. There also seems to be a positive correlation between growth in exports and the countrys GDP. For instance, when between 1996 and 2002 the average growth rate in exports was less than 10%, the GDP growth also averaged below 6%. A slowdown in export growth also has other implications for the economy. Close to 50% of Indias exports textiles, garments, gems and jewellery, leather and so on originate from the labor-intensive small- and medium-enterprises.

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

A sharp fall in export growth could mean job losses in this sector. This would necessitate government intervention. A silver lining here, however, is the global slowdown will also lower cost of imports significantly, thereby easing pressures on the balance of payment. The impact of oil and other commodity prices, halving over the past few months, will reflect in the import data for the second half of 2008-09. Oil import bill, earlier projected to cross $100 billion in 2008-09 with prices surging to $140 per barrel, could easily shrink by about $20 billion. The fall in imports may exceed the decline in exports in the latter half of 2008-09. This would also help soften the current account deficit. 3) Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of Indian mainly the BPO KPO, IT Companies etc.According to a sample survey by the commerce ministry 109,513 people lost their jobs between August and October 2008, in export related companies in several sectors primarily textiles, leather, engineering, gems and jewelry, handicraft and food processing. Economic Survey of India gives alarming bell about the on-going effects of the global slowdown on employment and has pressed upon the government the urgency of the major response, especially in the unorganized sector. 4. 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? 5) The tourism sector was 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. 6) Recession Agriculture

Indian agriculture has not impacted by global economy crises, except some export oriented crops. About 60-65% of Indias population and workforce depend on agriculture. Countrys agriculture sector will save the India from the huge impact of the global economic recession. Right now agriculture is the key for Indian

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

growth is this difficult time. Agriculture is an absolute necessary, producing the basic human needs food and clothing and exciting reason is Bio fuels .An Investment in agriculture is considered as a conservation and tangible Investment with consistent returns. Agriculture is the best solutions to maintain economic growth this year. Even in down markets agriculture companies performed very well in 2008 and will do the same in 2009. I wish that the agriculture sector will continue to provide support to our economy. 7. 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. 7.How to tackle the global slump? Our economy is shrinking, unemployment rolls are growing, businesses and families cant get credit and small businesses cant secure the loans they need to create jobs and get their products to market, Obama said. With the stakes this high, we cannot afford to get trapped in the same old partisan gridlock.

The following measures can be adopted to tackle the recession:

Tax cuts are generally the first step any government takes during slump. Government should hike its spending to create more jobs and boost the manufacturing sectors in the country.

Government should try to increase the export against the initial export. The way out for builders is to reduce the unrealistic prices of property to bring back the buyers into the market. And thus raise finances for the incomplete projects that they are developing.

Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ]

Economics

ISSN:-2230-7850

The falling rupees against the dollar will bring a boost in the export industry. Though the buyers in the west might become scarce.

The oil prices decline will also have a positive impact on the importers.

8.CONCLUSIONS 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 REFERENCES 1. Global Recession and Its Impact on Indian Financial Markets; Nidhi Choudhari Manager Bank of India, Kolkata.Article. 2. www.scribd.com 3. www.dipity.com 4. Yojna Monthly 2008-2009 5. www.merinews.com 6. Dainik Pudhari 7. Dainik Sakal