This document discusses the recession and its impact on the Indian economy. It begins by defining recession as a period of declining economic activity and demand. It then examines the characteristics of recessions, including reducing sales and profits, increasing unemployment, less new investment, and lower government revenue. The document analyzes the causes of the US recession in depth, tracing it back to the rise of mortgage-backed securities and the shadow banking system. It notes India is less affected than other countries but still sees impacts such as weaker exports, reduced FDI and FII, and a dull job market. However, it also argues the recession may benefit India by reducing westernization and questioning derivatives.

1. Recession & its Impact
on Indian Economy
-B.V.Raghunandan, SVS College,
Bantwal
SDM College of Management,
Mangalore.
February 26, 2009

2. Recession: What it
Means
An economic situation of
continuously declining demand
resulting in dwindling business and
industrial confidence

3. Characteristics of
Recession
• Reducing Sales and
profits
• Increasing
Unemployment
• Hesitation of New
Investment
• Reducing Government
Revenue
• Gold replacing Dollar
as Reserve Currency
• Risk free
Investments
• Larger Holding of
Cash by
Institutions
• Lesser FII
• Basic
Commodities
• Expectation of
Intervention by
Government

4. Role of Government
•
•
•
•
Passive upto 1929-32
Keynesian Economics
WTO against any Government Role
In 2009, no voice of discontent
about Government Intervention
• Nationalisation which was a dirty
word in Liberalisation has become
very much relevant even in the USA

5. Genesis of A Recession
• Consequence of a Hyper Industrial
Activity
• Very High Level of Speculation
• Huge Turnover in Derivatives
• Real Estate Boom and the
Speculation
• Central Bank’s Efforts in
Contraction of Credit

6. US Recession
• Collateralised Debt Obligations
(CDOs): Started in 1970s by
packaging mortgages and selling
them as CDOs
• Mortgage Backed Securities(MBSs):
In 1983, Larry Fink of First Boston
Corporation pioneers MBSs by
dividing mortgages on the basis of
Risk. Interest varied with Risk.
Toxic Debt gave highest Rate of
Interest

7. US Recession …(contd)
• 1990s- Supreme success of MBSs put a lot
of money with Banks & Mortgage Houses
• Lenders lower interest rates to 100% subprime mortgages. Rising house prices gave
a false sense of security in case of
defaulters
• Credit Default Swaps (CDSs): In 1997,
Blythe Masters of JP Morgan Chase
invented CDS, whereby the buyer paid a
premium to seller to protect the buyer
against default

8. US Recession….contd
• Shadow Banking System: Swaps
cover mortgages, business loans,
credit card debt and student loans
• Transactions through e-mails by
speculators, insurance companies,
hedge funds and pension funds
worldwide
• 2000-03-Alan Greenspan cut Federal
Fund Rates from 6% to 1%

9. US Recession….contd
• 2004: Government Sponsored
lenders Fannie Mae, Ginnie Mae and
Freddie Mac have mortgages that
are hugely sub-prime
• 2005: Housing Boom-80% of lending
is in Shadow Banking
• 2006: Housing Markets begin to
collapse
• 2007-08: Banks start failing
worldwide

11. Recession Then & Now
• Government's Determination for
Intervention
• International Financial Bodies
Determination to Help
• Central Banks’ Close Monitoring
• Huge Funds Waiting for Deployment
• Third World Countries Less Affected
by Recession

12. India & Recession
• Export Oriented Units getting
Affected
• Reduced FDI & FII Activity
• Lesser Revenue to the Government
• Lesser Foreign Exchange Reserves
• Dull Organised Markets
• Lackluster Employment Markets
• RBI’s Close Watch

13. Beneficial Impact on India
• Stoppage of the Mad Spree of
Westernisation
• Recognition of a Bigger Role to
Government
• Questioning the Utility of Derivatives
• Domestic Industries are being Explored
by Export Oriented Units
• Lop sided Development is getting
Corrected
• Managerial Remuneration is being
Revisited

14. An Agenda for
Management Students
• Be an Entrepreneur
• Follow Blue Ocean Strategy
• Develop a Socially Relevant
Business
• Consider CSR to be far more
important than profit or Efficiency
• Join Government Departments
connected directly with Business &
Industry

15. THANK YOU