What is Recession?

• Recession is the economy shrinking for two consecutive

quarters (=6 months) with decrease in the GDP.
or
• “significant decline in economic activity lasting more than
a few months, which is normally visible in -
• Real GDP,
• Real income,
• Employment,
• Industrial production,
• Wholesale-retail sales”.
 What is GDP?
• Gross Domestic Product - Value of all the reported
goods and services produced by the people
operating in the country.
• GDP = MONEY VALUE OF {C + I + G + (X – M)}
• C = Consumables,
• I = Gross Investments,
• G = Government Spending,
• X = Exports,
• M = Imports
• Note - GDP is a good indicator of
economy
 Why Recession happens?
• OVERPRODUCTION - PSEUDO DEMAND

• Actual need was not there

• Wrong projections companies produced more.

• A situation in which the supply exceeds the nation’s

ability to consume what has been produced.
 Contd….
• LOW CONFIDENCE LEVEL - Word of mouth

• Low Confidence Level of Millions of consumers

and producers after they hear many job cuts,

• Due to which demand coming down,

• Leads to Companies’ bankruptcy, etc

• Assignable Cause - Bad Incidences Happening

Terrorist Attack in US
Mumbai Attacked in India

Taliban occupy Swat

 Causes of Recession
• Currency crises  Frequent change in international
currency rate.

• Energy crisis  Usually refers to the shortage of oil

and additionally to electricity or other natural
resources of energy.

• War  Ruins the country property. Refers and relate

to economy.
• Under consumption  Insufficient consumer
demand relative to the amount produced

• Overproduction  Excess of production over

consumption.

• Financial crisis  Some financial institutions or

assets suddenly lose a large part of their value
 Effects of Recessions
• Credit crunches  Banks may suddenly stop
or slow lending activity.

• Bankruptcies  Bankruptcy typically involves

concealment of assets, concealment or destruction of
documents, conflicts of interest, fraud claims and false
statements or declarations.

• Deflation  Persistent decrease in the general

price level of goods and services.
• Foreclosures  Legal and professional
proceeding in which a lien holder, usually a lender,
obtains a court order of redemption.

• Unemployment  When a person is available

to work and currently seeking work, but the person is
without work.
 List of major Recession
Recession Recession Time Taken
Name Year Cause & Impact

Great 1929–1939 10 years Stock markets crashed worldwide, and a banking

Depression collapse took place in the United States. This sparked
a global down turn including a second more minor
recession in US.
1937 Oil 1973–1975 2 years Due to the Vietnam war lead to stagflation in the US
Recession

Early 1980’s 1980–1982 2 years Iran, which exported oil at inconsistent intervals and
Recession at a lower volume forcing prices to go up.

Early 1990’s 1990–1991 1 year Industrial production and manufacturing trade sales
Recession decreased in early 1991.

Early 2000’s 2001–2003 2 years The collapse of the dot-com bubble, the September
Recession 11 attacks & accounting scandals contributed to a
relatively mild contraction in the N America economy
 Effects of Recessions on India Economy

• Availability of Global Liquidity for India in times of

Financial Crisis

• Decreased consumer demand affecting exports

• The Financial Crisis and the Indian IT Industry

• The Financial Crisis and India‘s Financial Markets

 Availability of Global Liquidity for India in
times of Financial Crisis
• The main source of Indian prosperity had been Foreign
Direct Investment (FDI).

• American and European companies were bringing in truck-

loads of dollars and Euros to get a piece of pie of Indian
prosperity.

• Less inflow of foreign investment will lead to a dilution of the

element of GDP driven growth.

• India is in no position to ever return this money because it

has used the same in subsidizing the petroleum products
and building low quality infrastructure.
 Decreased consumer demand affecting
exports
• Consumer demand has plummeted drastically in
developed economies, leading to a reduced demand
for Indian goods and services, thus affecting Indian
exports.

• Export oriented units are the worst hit; thus impacting

employment

• Trade gap has been widening due to the reduced

exports, leading to pressure on the rupee exchange
rate
 The Financial Crisis and Indian I.T.
Industry
• In India, IT companies, with nearly half of their
revenues coming from financial and banking service
segments, are close monitors of the financial crisis
across the world.
• The IT giants which had Lehman Brothers and Merrill
Lynch (ML) as their clients are Tata Consultancy
Services (TCS), Wipro, Satyam, and Infosys
Technologies.
• HCL escaped the loss to a great extent because
neither Lehman Brothers nor ML was its client.
 Impact on Financial Markets:
•  
The outflow of foreign institutional investment from the
equity market has been the most immediate effect of
the crisis on India.

• Foreign Institutional Investors (FIIs) have been major

sellers in Indian markets as they need to retrench
assets in order to cover losses in their home countries,
thus being forced to seek havens of safety in an
uncertain environment.