IMPACT OF RECESSION ON INDIAN ECONOMY AND FUTURE TRENDS

IILM GURGAON----------------------

KEYNOTE ADDRESS18 APRIL, 2009

IMPACT OF RECESSION ON INDIAN ECONOMY AND FUTURE TRENDS

PROF. DEEPAK TANDON

World’s largest democracy

Ethnically diverse

26% below poverty line

Struggle for freedom

A QUICK LOOK AT FACTS

Price 2009 2008

WPI: 1993 – 94 = 100 (Feb 09) 227.8 218.4

CPI: 2001 = 100 (Jan 09) 148 134

Bank Rate Percent Effective

i. Bank Rate 6.00 29.04.2003

Ratios Percent (w.e.f.)

1. CRR 5.00 17.01.2009

2. SLR 24.00 08.11.2008

3. Repo Rate 5.00 04.03.2009

4. Reverse Repo Rate 3.50 04.03.2009

5. Cash Dep Ratio 5.77 27.02.2009

6. Investment Dep Ratio 31.79 27.02.2009

Credit Dep Ratio 71.42 27.02.2009

INDIA in 2050

India will be the 3rd Largest economy

with the Fastest rate of Growth

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2005-10 2015-20 2025-30 2035-40 2045-50

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Brazil

China

India

Russia

• Youngest Population in the World: More than half of India’s population is below 25 yrs age

• Over the next 5 years, India alone will account for more than 1/4th of the increase in world’s workforce

• Least Old-Age Dependency rate in Asia

• Implications: – Strong Consumption pattern to continue– Long term and Stable Growth– Availability of Skilled Labor Force Assured over Long Term

DEMOGRAPHIC ADVANTAGE

WHAT IS RECESSION

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.. It is the contraction phase of a Business cycle

The Impacts in India are:

1. Reduced liquidity in the Indian economy

2. Reduced industrial output

3. Reduced job opportunities

4. Stock Market is lingering in the bottom

5. Real estate market has started to take a beating

6. Inflation has increased

7. GDP has come down and the GPD forecast for the next two quarters are only

averaging down

CAUSES OF RECESSION

1. CURRENCY CRISIS

2. INFLATION

3. NATIONAL / GOVERNMENT DEBT

4. SPECULATION

5. WAR

EFFECTS OF RECESSION

1. BANKRUPTCIES

2. DEFLATION

3. FORECLOSURES

4. REDUCED SALES

5. STOCK MARKET CRASH

6. UNEMPLOYMENT

Before, understanding “Recession”, we need to understand

the market economy;

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A] TWO STAGES OF MARKET ECONOMY

A2] DECLINING MARKET ECONOMY

A1] GROWING MARKET ECONOMY

A1] Growing Market Economy

Starting Point = Willingness to buy

Starting Point = Unwillingness to buy

Declining Market Economy

Producer wants his demand always to be high Consumer wants his buying cost always to be low

Actually, Demand is the price at which consumer is ready to buy andproducer is ready to sell;

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer Price

Consumer Price

Usually, we think; Demand = QuantityBut, here Demand = Price; This is because, Price decides the Quantity of Sales;Competitive Price = More Demand;In competitive Price = Less Demand;

HOW TO COME OUT OF RECESSION?

It is unhealthy for any nation to be in Recession;So, Government will take certain countermeasures

to eliminate or reduce the Effect of recession for turnaround;

Important Point: Today, it is a market Economy

Producers;Can produce and sell at their prices

Consumers;Can decide to

buy or not;

GOVERNMENT HAS 2 PLANS

Government influences the economy by changing how

it (Government) spends and collects money

Fiscal Policies(By Govt.)

Monetary Policies(By RBI)

RBI manipulates the available supply of

money in the country

MONETARY POLICY - OBJECTIVES

TWIN OBJECTIVES

“maintaining price stability”

“ensuring availability of adequate credit to productive sectors

of the economy to support growth”

Ensure a monetary and interest rate environment enabling

continuation of the growth momentum consistent with price

stability and inflation expectations

Focus on credit quality and financial market conditions to support export and

investment demand in the economy

To respond swiftly to evolving global developments.

MONETARY POLICY: BASIC THRUST

MONETARY POLICY – INSTRUMENTS

•Administered interest rates

•Reserve requirements

•Selective credit control

Direct Instruments Indirect Instruments

• Open Market Operations: Reserve Bank controls money supply by buying and selling government securities, or other instruments

• Market Stabilisation Scheme (MSS) – Government of India dated securities/Treasury Bills are being issued to absorb enduring surplus liquidity.

• Liquidity Adjustment Facility (LAF)• Repo Auctions and• Reverse Repo Auctions,

• Cash Reserve Ratio (CRR)Minimum amount that commercial banks must keep as cash reserves

LAF has emerged as the tool for both liquidity management and also as a signaling devise for interest rate in the overnight

market.

CONCLUSIONS

*In Feb-09, India's exports declined by 21.7% (y-o-y), while imports declined at a faster

pace of 23.3% (y-o-y), resulting in shrinking of trade deficit to US$ 4.9 bn.

*The current account deficit amounted to US$ 14.6 bn during Q3 FY09, the highest

quarterly deficit since 1990.

*The capital account balance turned negative during Q3 FY09 for the first time since Q1

FY99.

*India's total external debt stock increased by 2.8% to US$ 230.9 bn at the end of Dec-

08 over end Sep-08.

*The ratio of foreign exchange reserves to total external debt as at end Dec-08 stands at

110.9 %.

*India's real effective exchange rate (REER) remains undervalued at 94.0 (as on 19-Feb-

09).

FINANCIAL YEAR 2009

INFLATION :

One of the biggest concerns for the Indian Economy seems to have been tackled,

certainly in the medium term. The inflation for the week-ended March 20, 2009 came in as 7.75%.

The Prime Minister must be thanking his stars or his calculations, and if the current trend continues ,

and it should, by the time the 2009 Lok Sabha elections campaigning starts, inflation would no longer

be an issue and many middle class families might actually be thanking the government.

• Though the exports have declined from $13.74 billion in September to $11.5 billion in November 2008, the imports declined from $24.38 billion to $21.57 billion in the corresponding period, mainly on the account of the fall in crude prices. The crude bill has dropped from around $9 billion to $7.25 billion in November 2008.

• As a result the Trade Deficit has narrowed to $10.07 billion in November compared with $10.54 billion in October and $10.65 billion in September 2008. The total trade deficit for the period April-November 2008 stood at $84.34 billion

• In short, though recession has hit our exports, the fall in the import bill more than makes up for the effect of the recession. Even in the recession, the exports in the eight months ended Nov. 30 rose 19.4 percent from a year earlier to $119.3 billion. Certainly not bad by any stretch of imagination considering the global recession.

FINANCIAL YEAR 2009

• The total import bill for the April-November 2008 period stood at $203.64 billion of which Oil imports

were valued at $74.114 billion. Considering that crude trade well over $100/barrel for around six months

of this eight-month period, and that crude in not expected to go back those highs anytime soon, the crude

import bill for the coming year should be significantly lower. Even if crude trades at an average price of

around 70 dollars/ barrel in 2009, we should expect around 35-40% drop in the crude import bill.

• Most analysts expect crude to trade around the 60 dollar/barrel mark in 2009. Lets be a little generous and

assume crude to trade at an average for 75 dollars/ barrel through 2009, that is where it was for most of

October - November 2008 period. The yearly crude import bill for 2009 should stand in the region of $80-

85 billion. The non-crude import should stand around $200 billion giving a total import bill of around

$280 billion. The government of India has a $200 billion per annum export target. This should confine the

trade deficit to around $80 billion for the entire year 2009. If my rough calculations, and I must add

unqualified calculations, are correct, we would have managed to tame the monster and the recession

should get all credit for it.

INDIAN TRADE SCENARIO

MARCH 2009 (NOT AFFECT AS GREAT AS GLOBAL DEVELOPED COUNTRIES)

Recession in developed economies crimped demand for Indian goods and export growth slowed to 7.3

percent in April-February to $156.6 billion from a year earlier, sharply lower from close to 20 percent seen

in 2007/08. Final figures for 2008/09 exports is seen touching a lower revised annual target of $170 billion

and may remain flat at that level in 2009/10, he said.

The demand for Indian goods in Latin America and South-east Asia remains "quite high", but it needs to

pick up in U.S. and Europe, which consume about 35 percent of Indian exports

Growth of less than 7 percent . High borrowing costs and followed by the global crisis slowed Asia's third

largest economy last year, and analysts forecast less than 6 percent expansion in the current year to March

2010.

Contraction in demand at home and abroad has cut India's factory output and exports sharply since

October.

India's industrial output contracted 1.2 percent in February from a year earlier and exports were down

more than a fifth.

CURRENT GLOBAL RECESSION

CAUSES

1. SUB PRIME LENDING CRISIS

2. TIGHTENING OF LIQUIDITY

3. RISING OIL PRICES

4. CAPITAL FLIGHT IN EMERGING MARKETS

EFFECTS

1. DIFFICULTY IN BORROWING

2. UNEMPLOYMENT

3. FAILING PROFITABILITY

4. FALLING STOCK MARKET

5. DECLINE IN CUSTOMER CONFIDENCE

TRADE LIBERALIZATION: REDUCTION IN TARIFFS

Despite a secular reduction in peak tariffs,

the tax to GDP ratio is still showing an upward trend

Government is focused on improving the business and investment environment

No licensing required, except in five sectors

100% FDI permitted in manufacturing (except atomic energy)

100% FDI permitted in most service sectors

Investments, dividends, fees are freely repatriable

Foreign investments allowed in capital markets

INDIA IN THE EMERGING ORDER - AIM

BPLR which is at 17.25% to be 12%

Lowering of the domestic interest rates to make retail banking more attractive

Swapping of the local currency with respect to the foreign currency

ECB norms liberalized to infuse liquidity

Uncertainty in the stock market

Resource mobilization

Credit growth to be pushed up by planned allocation in various sectors; SME

Banking- Profitability, Basel II implementation, financial inclusion, ATM and POS in villages

Multi faceted growth in 11th five year plan.

KEY CONCEPTS AND DEVELOPMENTS

1. BANK RATE

2. CRR

3. SLR

4. REPO RATE

5. REVERSE REPO RATE

Bank Rate is the rate at which central bank of the country (in

India it is RBI) allows finance to commercial banks. Bank Rate

is a tool, which central bank uses for short-term purposes. Any

upward revision in Bank Rate by central bank is an indication

that banks should also increase deposit rates as well as Prime

Lending Rate. This any revision in the Bank rate indicates could

mean more or less interest on your deposits and also an increase

or decrease in your EMI

: Bank Rate 6.00% w.e.f. 29/04/2003 :

All scheduled commercial banks are required to maintain a fortnightly minimum

average daily cash reserve equivalent with RBI. This is 3% of its Net Demand and

Time Liabilities (NDTL) outstanding as on the Friday of the previous week. But the

apex bank is empowered to vary this ratio between 3 and 15 per cent. RBI uses

CRR either to drain excess liquidity or to release funds needed for the economy

from time to time. Increase in CRR means that banks have less funds available and

money is sucked out of circulation. Thus we can say that this serves duel purposes

i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also

enables RBI to control liquidity in the system, and thereby, inflation by tying the

hands of the banks in lending money

CRR: 6.00% (w.e.f. 25/10/2008); 5.50% (w.e.f. 8/11/2008);

w.e.f. 11/10/2008 (decreased from 9.00%. Announced in three phases of 0.50%; 1% and 1%)

Every bank is required to maintain at the close of business every

day, a minimum proportion of their Net Demand and Time

Liabilities as liquid assets in the form of cash, gold and un-

encumbered approved securities. The ratio of liquid assets to

demand and time liabilities is known as Statutory Liquidity

Ratio (SLR). Present SLR is 25%. RBI is empowered to increase

this ratio up to 40%. An increase in SLR also restrict the bank’s

leverage position to pump more money into the economy.

:Statutory Liquidity Ratio (SLR)24%(w.e.f. 08/11/2008)reduced from 25% which was

continuing since. 22/10/1997 :

It is the rate at which the RBI lends shot-term money to the banks. When

the repo rate increases borrowing from RBI becomes more expensive.

Therefore, we can say that in case, RBI wants to make it more expensive

for the banks to borrow money, it increases the repo rate; similarly, if it

wants to make it cheaper for banks to borrow money, it reduces the repo

rate

: Repo Rate under LAF7 .50% w.e.f. 3/11/2008 (decreased from 8.00) :

It is the rate is the rate at which banks park their short-term excess liquidity

with the RBI. The RBI uses this tool when it feels there is too much money

floating in the banking system. An increase in the reverse repo rate means

that the RBI will borrow money from the banks at a higher rate of interest.

As a result, banks would prefer to keep their money with the RBI

Thus, we can conclude that Repo Rate signifies the rate at which liquidity

is injected in the banking system by RBI, whereas Reverse repo rate

signifies the rate at which the central bank absorbs liquidity from the banks.

: Reverse Repo Rate 6.00 % w.e.f. 25/07/2006 :

MONETARY POLICY

CURRENT STATE OF INDIA’S POLITICAL ECONOMY

STATE OF WORLD ECONOMY

• World economy expected to slow down from 5% in ’07 and 3.7% in ’08 to just 0.5% in ’09

• The world economy is in ‘precarious’ territory - Output in advanced economies will contract in 2009

• A deep financial crisis and volatile commodity prices have led to fast deteriorating global growth

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World Economic Outlook, January 28, 2009

International Monetary Fund

STATE OF WORLD ECONOMY: SCENE 1

GDP Growth Rates by Country/Region 2005 2006 2007 2008 2009

United States of America 2.5 2.9 2.2 0.5 0.6

Europe Part (Germany, France, Italy & Spain)

1.5 2.8 2.6 1.4 1.2

Japan 1.9 2.4 2.1 1.4 1.5

Russia 6.4 7.4 8.1 6.8 6.3

CIS 6.6 10.1 9.6 7.4 7.0

China 10.4 11.1 11.4 9.3 9.5

ASEAN + 4 (Indonesia, Malaysia, the Philippines & Thailand)

5.1 5.7 6.3 5.8 6.0

India 9.0 9.7 9.2 7.9 8.0

Source:

World Economic Outlook – IMF, April 2008



United States of America 2.5 2.9 2.0 0.6 0.1


1.5 2.8 2.0 1.3 0.2

Japan 1.9 2.4 2.1 0.7 0.5

Russia 6.4 7.4 8.1 6.6 5.5

CIS 6.6 8.2 8.6 7.2 5.7

China 10.4 11.6 11.9 9.7 9.3


5.1 5.7 6.3 5.5 4.9

India 9.0 9.8 9.3 7.9 6.9

Source:

World Economic Outlook – IMF, October 08, 2008



United States of America 2.5 2.8 2.0 1.4 -0.7


1.5 2.8 2.6 1.2 -0.5

Japan 1.9 2.4 2.1 0.5 -0.2

Russia 6.4 7.4 8.1 6.6 5.5

CIS 6.6 8.2 8.6 6.9 3.2

China 10.4 11.6 11.9 9.7 8.5


5.1 5.7 6.3 5.4 4.2

India 9.0 9.8 9.3 7.8 6.3

Source:

World Economic Outlook – IMF, November 06, 2008



United States of America 2.5 2.8 2.0 1.4 -1.6


1.5 2.8 2.6 1.2 -2.0

Japan 1.9 2.4 2.1 0.5 -2.6

Russia 6.4 7.4 8.1 6.6 - 0.7

CIS 6.6 8.2 8.6 6.9 - 0.4

China 10.4 11.6 11.9 9.7 6.7


5.1 5.7 6.3 5.4 2.7

India 9.0 9.8 9.3 7.8 5.1

Source:

World Economic Outlook – IMF, January 28, 2009

DEAL WITH CURRENT RECESSION

SURVIVAL STRATEGIES

1. RE EVALUATE YOUR ENTIRE PRICING STRUCTURE

2. THINK STRATEGICALLY

3. GO BARGAIN HUNTING

4. CONSIDER STRATEGIC INVESTMENTS

5. MONITOR YOUR CASH FLOWS

6. ENGAGE YOUR EMPLOYEES IN THE PROCESS

7. TALK TO YOUR BANK, INVESTORS, AND OTHER SOURCES OF CAPITAL

ADAPT TO RECESSION

1. PROJECT CASH FLOW IN ADVANCE AND MONITOR BUDGET

2. PRESSURISE DEBTORS TO PAY UP

3. REVIEW OVERHEADS AND IMPROVE COST EFFICIENCY

4. REDUCE STOCK LEVELS

5. KEEP UP TO DATE WITH LATEST FINANCIAL INFORMATION

6. AGGRESIVELY SEEK NEW BUSINESSES

7. BE OPEN TO NEW IDEAS AND ACCEPT

SWOT ANALYSIS

1. AVOID TAKING BAD BUSINESS

2. SURVIVAL IS MORE IMPORTANT THAN SIZE

3. OPERATE IN “LEAN AND MEAN” MODE

4. LOOK FOR TALENTED UNEMPLOYED PEOPLE

5. MARKETING ASSUMES FURTHER IMPORTANCE

6. AGGRESIVELY PURSUE DEBTORS FOR PAYMENTS

REMEDIAL MEASURES

• Monthly forecasts for WPI, CPI, IIP Growth, Bank Credit, 15-91 day-T-Bills yield, 10 year

G-sec yield, and Exchange rate

• Some early signs of stability emerge in the economy

• The WPI inflation expected to touch sub-zero level in Apr-09

• The RBI expected to ease its monetary stance further.

• Rupee expected to appreciate marginally

“THINGS WILL CHANGE WITH HARD WORK & TIME ... BUT THERE WILL BE PAIN INITIALLY.”

THANK YOU

IMPACT OF RECESSION ON INDIAN ECONOMY AND FUTURE TRENDS

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