The fear of a recession looms over the United States.
And as the cliché goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown.
Weakening of the American economy is bad news, not just for India, but for the rest of the world too.
A Recession is a contraction phase of the business cycle. In Economics , the term recession generally describes the reduction of a country's Gross Domestic Product (GDP) for at least two quarters. National Bureau of Economic Research (NBER) is the official agency in charge of declaring that the economy is in a state of recession. They defines Recession as : “ 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”. What is Recession ?
Indian companies have major outsourcing deals from the US.
India's exports to the US have also grown substantially over the years.
For the first time in five years, India’s export growth has turned negative. Exports for October 2008 contracted by 15% on a year-on-year basis. This should not surprise as the Organization for Economic and Co-operation Development (OECD economies) accounted that over 40% of India’s export market have been slowing for months.
EFFECT OF RECESSION ON DIFFERENT SECTOR OF THE COUNTRY
Projections indicate that up to one crore persons could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled by Federation of Indian Export Organisations (FIEO), which says that it has carried out an intensive survey.
The textile, garment and handicraft industry are worse effected. Together, they have lost four million jobs by April 2009, according to the FIEO survey.
A survey of 125 companies by the commerce department in New Delhi has revealed that Indian companies lost the export worth rupees 1792 crores during Adjustment 2008 and were forced to layoff 65000 workers.
The data also raised fear of low GDP growth of India.
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.
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
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%.
There has been sharp decline in the exports of agricultural and allied products specifically to countries including the US and Europe during last two years. During April 2008-February 2009, the value of export declined from $1,682 million to $735 million to the United States.
There is a ban virtually on all foograins exports, rice and wheat are banned.
As for India we come in the category of the G-20 and it is noted that for these countries, including India, the IMF notes the contraction of the world economy and output of Food stuffs is likely to be between 0.5% and 1%.For the USA and the rest of the G-7, the contraction of the economy would be between 3.0 to 3.5 %, the IMF says.
Impact of a strong rupee on the Indian Economy
Appreciation of the rupees against the dollar would be giant sign towards its economic prosperity.
Dollar in comparison to the rupee has fallen from a rate of 48 Re . for 1$ to a rate which is expected by the RBI to range from 39.15 Re - 39.50 Re
There has been almost a 20% increase in the Indian rupee
There are 3 major and significant variables which will suffer the impact of a stronger rupee first. They are-
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 .
The Repo Rate has been cut by 50 bps to 5.5 % w.e.f. November 03, 2008.
The Statutory liquidity ratio (SLR) has been cut by 100 bps to 24.0 % w.e.f. November 08, 2008.
The CRR has been cut by 100 bps in two stages. First 50 bps cut w.e.f. October 25, 2008 and another 50 bps cut from November 08, 2008. The current CRR is thus 5.5. The Cash Reserve Ratio (CRR) has been further cut by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.
Current economic scenario - Impact of recession on India
Recession has grabbed almost all the organizations of the world.
Several people have lost jobs - facing the financial problems.
Government - doing best to come out of the problem.
Due to major crisis faced by US (sub prime mortgages prices, high unemployment rates and decline in dollar value, etc) low down the growth of the economy and GDP and as GDP growth rate fell to 2% and as recession set in.
In Sept 159000 jobs lost and there was 10.9% unemployment in US.
Lehman brothers being the largest bankcruky in US history makes 2008 a record year in terms of assets.
As a result India's export growth as turned negative and fall sharply.