Recession & Financial Crisis In India


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Recession & Financial Crisis In India

  1. 1. Recession & Financial crisis in India Prepared By: Mahesh L Samala Manager - Finance PANORAMIC UNIVERSAL LTD
  2. 2. What is recession ???
  3. 3. Before, understanding “Recession”, we need to understand the market economy A] TWO STAGES OF MARKET ECONOMY - Growing Market Economy - Declining Market Economy B] TWO FACTORS OF MARKET - DEMAND & SUPPLY
  4. 4. Growing Market Economy
  5. 5. Starting Point = Willingness to buy
  6. 6. Declining Market Economy
  7. 7. Starting Point = Unwillingness to buy
  8. 8. B] TWO FACTORS OF MARKET - DEMAND & SUPPLY <ul><li>Producer wants his demand always to be high </li></ul><ul><li>Consumer wants his buying cost always to be low </li></ul>Actually, Demand is the price at which consumer is ready to buy and producer is ready to sell; Producer Price Consumer Price Therefore; Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand; In competitive Price = Less Demand; Usually, we think; Demand = Quantity
  9. 9. What is Recession???
  10. 10. What Is Recession? <ul><li>A Recession is a contraction phase of the business cycle. </li></ul><ul><li>National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. </li></ul><ul><li>NBER define recession as : </li></ul><ul><li>“ Significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. </li></ul><ul><li>For this reason, the official designation of recession may not come until after we are in a recession for six months or longer. </li></ul>
  12. 12. What Causes Recession ? <ul><li>An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. </li></ul><ul><li>A recession normally takes place when consumers loose confidence in the growth of the economy and spend less. </li></ul><ul><li>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. </li></ul><ul><li>Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. </li></ul>
  13. 13. Business Cycle Business Cycle What goes up; Has to come Down… Growing economy has to come down if the production rate of goods & services was more than the actual consumption
  14. 14. Why Recession Happens? [1] Over Production [2] Low Confidence Level
  15. 15. [1] Over Production 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 Supply > Demand
  16. 16. [2] Low Confidence Level LOW CONFIDENCE LEVEL [A] Word of Mouth [B] Assignable Cause Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming down, Companies bankruptcy, etc Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market; Consumers start saving money instead of spending money; This is a downward spiral in the economy. [A] Word of Mouth Producers do not stock materials; they reduce their productions, gets into the cost reduction activities, worried about the profitability, etc…
  17. 17. [2] Low Confidence Level Bad Incidences Happening Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India etc… [B] Assignable Cause Series of such incidences leading into a kind of War
  18. 18. Terrorists’ Attack on 11 th September in US Created fear in people People cancelled their travel plans Airlines & Hotel Industries badly hit Resulted in low occupancy rates Airline & Hotel Industries offered discounts, gift coupons, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started “ Cost Reduction” activities CONTINUED IN NEXT SLIDE
  19. 19. i] Reduce No. of flights ii] Lay off people iii] Salary reduction to “ Not laid off people” In flight meals reduced Low or No income to spend and buy goods They became careful due to the fear of loss of job Meals supplying company got the hit Catering company now, lays off people Demand for other goods come down Started saving money instead of spending Demand for other goods come down Airline & Hotel Industries started “ Cost Reduction” activities
  20. 20. <ul><li>So, you can see how the hit on Airline and Hotel </li></ul><ul><li>industries can affect “Un-related” industries </li></ul><ul><li>in the end. </li></ul><ul><li>One industry can hit many other industries </li></ul><ul><li>when the confidence level of millions of </li></ul><ul><li>consumers & producers drastically comes down </li></ul>
  21. 21. How to Know Recession? <ul><li>People buying less stuff </li></ul><ul><li>Decrease in factory production </li></ul><ul><li>Growing unemployment </li></ul><ul><li>Slump in personal income </li></ul><ul><li>An unhealthy stock market </li></ul>
  22. 22. History of Recession July 1980 - November 1982 2 years total July 1990- March 1991 8 months March 2001- November 2001 8 months December 2007- Current 16 months as of April 2009
  23. 24. USA Recession <ul><li>U.S.A – Consumption based Economy. </li></ul><ul><li>2/3 rd economic activity i.e. GDP – comes from consumers. </li></ul><ul><li>Credit - free flowing for U.S consumers </li></ul>
  24. 25. USA Recession Result Overconsumption/ Extravagant spending by the consumer Thus, For years prices of homes in US kept rising
  25. 27. <ul><li>Felt a need to Preserve capital. Therefore </li></ul><ul><li>- Started tightening credit , </li></ul><ul><li>- Started restricting lending to the U.S consumer </li></ul><ul><li>and businesses. </li></ul><ul><li>Since then, </li></ul><ul><li>- Loans became difficult to come by banks, </li></ul><ul><li>- Bank cut Credit card limits. </li></ul><ul><li>- U.S. consumer significantly reduce spending. </li></ul>USA Recession
  26. 28. <ul><li>Reduced spending meant - reduced activity for most businesses and consumers. </li></ul><ul><li>businesses started to layoff workers </li></ul><ul><li>(firing people as there was no work). </li></ul>USA Recession
  27. 29. Because of layoff Unemployment started to rise which resulted in further reduction in spending by consumer. USA Recession
  28. 30. Rising oil prices at $100 a barrel
  29. 31. Oil Prices from 3-30-1984 to 6-2-2008 Dollar per Barrel
  30. 32. <ul><li>Dollar value Declined </li></ul><ul><li>Stock market crashed </li></ul>USA Recession
  31. 33. <ul><li>All this slowed down the growth of economy. </li></ul><ul><li>GDP growth rate fell to 2%. </li></ul><ul><li>All this put together has driven the U.S. economy in recession. </li></ul>USA Recession
  32. 34. GDP Growth Rate Growth rate of Real GDP Volume
  33. 35. GDP Growth Rate Estimates
  34. 36. <ul><li>In early July, depositors at Los Angeles offices of Indy Mac Bank lined up in the street to withdraw their money. </li></ul><ul><li>On July 11,Indy Mac - the largest mortgage lender in the US - was seized by federal regulators. </li></ul>USA Recession
  35. 37. <ul><li>During the weekend of September 14-15, Lehman Brothers declared bankruptcy after failing to find buyers. </li></ul>USA Recession
  36. 38. USA Recession Bank of America agreed to purchase Merrill Lynch , & consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure.
  37. 39. USA Recession Another bank failure occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual
  38. 40. <ul><li>The year 2008, has seen 81 public corporations file for bankruptcy in the United States. </li></ul><ul><li>Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals. </li></ul><ul><li>The year also saw the ninth biggest bankruptcy with the failure of Indy Mac Bank. </li></ul><ul><li>Other Famous who got bankrupt were, fannies mae & Freddie Mac, aig, bearstearns etc. </li></ul>USA Recession
  39. 41. Impact of Global Recession on India
  40. 42. Impact on India <ul><li>A slowdown in the US economy is bad news for India because: </li></ul><ul><li>Indian companies have major outsourcing deals from the US. </li></ul><ul><li>India's exports to the US have also grown substantially over the years. </li></ul><ul><li>Indian companies with big tickets deals in the US are seeing their profit margins shrinking. </li></ul>
  41. 43. Anatomy of the economic depression in India <ul><li>Share Market: </li></ul><ul><li>M ore people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. </li></ul><ul><li>Foreign investors have pulled out from stock markets leading to heavy losses in stocks and mutual funds. </li></ul><ul><li>Stock broking houses are laying-off people. </li></ul><ul><li>Because of such uncertainty many people have started saving money in banks rather than investing. </li></ul>
  42. 44. <ul><li>IT and Real Estate Sector: </li></ul><ul><li>The key challenges faced by the industry now are inflation and the psychological impact of the US crisis, leading the companies to hit the panic button. </li></ul><ul><li>Bonuses, perks, lavish parties, and many other benefits are missing as companies look to cut cost. </li></ul><ul><li>India's IT export growth is also slowering down </li></ul><ul><li>One of the casualties this time are real estate, where building projects are half-done all over the country and in this tight liquidity situation developers find it difficult to raise finances. </li></ul>Anatomy of the economic depression in India
  43. 45. <ul><li>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. </li></ul>Anatomy of the economic depression in India
  44. 46. <ul><li>Layoffs and Unemployment: </li></ul><ul><li>Hundreds of workers have lost jobs in diamond jewellery, textiles and leather industry. </li></ul><ul><li>Companies in IT industry have stopped hiring and projected lower manpower need. </li></ul><ul><li>Firms attached to the capital market are laying off people and large companies are putting their future expansion plans on hold. </li></ul>Anatomy of the economic depression in India
  45. 47. <ul><li>Industrial sector: </li></ul><ul><li>Government and other private companies are reluctant in starting new ventures and starting new projects. </li></ul><ul><li>Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. </li></ul><ul><li>Car, bike & truck sales down </li></ul><ul><li>Steel plants are cutting production </li></ul><ul><li>Hospitality and airlines are hit by poor demand  </li></ul>Anatomy of the economic depression in India
  46. 48. <ul><li>Banking Sector: </li></ul><ul><li>Indian banks are facing through a tough time of liquidity crunch. Lehman Brothers had invested a great amount in the stocks of Indian banks that have invested in derivatives. </li></ul><ul><li>A sudden fall in the economy directly affected Lehman and Merill, eventually forcing them to file a bankruptcy. </li></ul><ul><li>Falling down of Lehman had a great impact on the leading international bank, ICICI Bank, a bank that had invested in Lehman’s bonds. This meltdown even have covered the Axis Bank but not to a great extent. </li></ul>Anatomy of the economic depression in India
  47. 49. <ul><li>Banking Sector: </li></ul><ul><li>Lehman Brothers had signed a partnership with some of the real estate companies like Peninsula Land Ltd and DLF Assets. These have also suffered a heavy loss. </li></ul><ul><li>With all this, the Indian Sensex swung violently downward, mainly because of the foreign companies pulling out credits to meet high inflations. </li></ul><ul><li>Central banks have worked to improve liquidity but are charging higher credits. The interest rates have drastically increased from 11.5% to nearly about 16%. </li></ul>Anatomy of the economic depression in India
  48. 50. Current economic scenario <ul><li>Recession has grabbed almost all the organisations of the world. </li></ul><ul><li>Several people have lost jobs - facing the financial problems. </li></ul><ul><li>Banks are providing business loans at low rate. </li></ul><ul><li>Reserve bank of India (RBI) has decreased the rate of interest. </li></ul><ul><li>SBI and ICICI are also providing different types of loans at a low rate of interest. </li></ul><ul><li>Organisations are cutting cost to stand in the market. </li></ul><ul><li>But nowadays the condition of real state is still worse because of recession. </li></ul><ul><li>Government - doing best to come out of the problem. </li></ul><ul><li>Government - providing money packages to organisations. </li></ul>
  49. 51. Corrective Steps to check Recession
  50. 52. <ul><li>Government does not have direct control on Producers’ & the Consumers’ </li></ul><ul><li>behavior; But, they can influence millions of Producers & Consumers with </li></ul><ul><li>Government’s policies </li></ul>Government has 2 plans Fiscal Policies (By Govt.) Monetary Policies (By RBI) Government influences the economy by changing how it (Government) spends and collects money RBI manipulates the available supply of money in the country
  51. 53. Government influences the economy by changing how it (Government) spends and collects money 1] Tax cuts for businesses or for individuals More money available for spending Demand picks up Market can recover 2] More Spending by Govt. to create jobs Individuals get salary and spend money 3] Automatic fiscal policy; Unemployment Insurance Some income to unemployed people to spend Fiscal Policies
  52. 54. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover Government manipulates the available supply of money in the country Monetary Policies What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called “Reserves”; RBI sets certain ratio of this reserves and it is called “Reserve Ratio”
  53. 55. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover 2] Lower the interest rates Individuals take more loan Government manipulates the available supply of money in the country Monetary Policies
  54. 56. How to come out of recession? 1] Reduce reserve ratio More money available for bank to give loans Demand picks up; Market can recover 3] Use its own reserved money to buy Govt. bonds It becomes an income to Govt. to inject money into the market Government manipulates the available supply of money in the country Monetary Policies 2] Lower the interest rates Individuals take more loan
  55. 57. Corrective Steps <ul><li>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. </li></ul><ul><li>This will mean drawing down the dollar reserves which is important at this hour. </li></ul><ul><li>In the IT sector, there should be correction in salary offerings rather than job cutting. </li></ul><ul><li>Public should spend wisely and save more. </li></ul>
  56. 58. Corrective Steps <ul><li>Taxes including excise duty and custom duty should be reduced to lighten the adverse effect of economic crunch on various industries. </li></ul><ul><li>In real estate the builders should drop prices, so as to bring buyers back into the market. </li></ul><ul><li>Also, the government should try and improve liquidity , while CRR and SLR must be cut further. </li></ul><ul><li>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 . </li></ul>
  58. 60. THANK YOU