Recession

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Recession

  1. 1. RECESSIONThe 2007–2012 global recession, sometimes referred to as the late-2000s recession, GreatRecession,[1] the Lesser Depression,[2] or the Long Recession,[3] is a marked global economicdecline that began in December 2007 and took a particularly sharp downward turn in September2008. The global recession affected the entire world economy, with higher detriment in somecountries than others. It is a major global recession characterized by various systemic imbalancesand was sparked by the outbreak of the 2007–2012 global financial crisis. The economic side effectsof the European sovereign debt crisis,[4] accompanied with slowing US[5] and Chinese growth [6]continues to provide obstacles to world economic growth.There are two senses of the word "recession": a less precise sense, referring broadly to "a period ofreduced economic activity",[7] and the academic sense used most often in economics, which isdefined operationally, referring specifically to the contraction phase of a business cycle, with two ormore consecutive quarters of negative GDP growth. If one analyses the event using the economics-academic definition of the word, the recession ended in the U.S. in June or July 2009.[8][9]However, in the broader, lay sense of the word, many people use the term to refer to the ongoinghardship (in the same way that the term "Great Depression" is also popularly used).[10] In the U.S.,for example, persistent high unemployment remains, along with low consumer confidence, thecontinuing decline in home values and increase in foreclosures and personal bankruptcies, anescalating federal debt crisis, inflation, and rising petroleum and food prices. In fact, a 2011 pollfound that more than half of all Americans think the U.S. is still in recession or even depression,despite official data that shows a historically modest recovery.[11]Shortly after the economic recovery began, many Fortune 500 corporations reported record profitsand many billionaires saw their net worths hit new highs.[12][13][14][15] The 2011 edition of theannual U.S. dollar billionaires ranking compiled by Forbes Magazine broke new records, both interms of the number of billionaires (1210) and their total wealth (US $4.5 trillion.)[16] The SundayTimes Rich List for 2012 showed that the UKs wealthiest were richer than they had ever been, witha combined fortune of £414 billion.[17] Impact of Recession on Indian EconomyIntroductionRecession are the result of reduction in the demand of products in the Global market.Recession can also be associated with falling prices known as deflection due to lack ofdemand of products. Again it could be the result of inflation or a combination of incriasing prices &segment economic growth in the west.
  2. 2. Almost everybody today seems to be discussing about the US Recessionary trend and itsimpact on emerging countries, more particularly Indian Economists, Industrialists and thecommon man on the streets seem to have been horrified by the very thought of recessionin India and that too due to US. Decreasing industrial production, inflation, decreasingjob opportunities, cost cutting, reducing purchasing power parity, etc. all are the aspectsdiscussed among them through every possible mode like articles, talks & walks andplaces like washrooms, canteens, etcBut to me the reality is very different! Yes......India will not be impacted largely by the US recession, simply because India is not whichit was in the 80s-90s.Although it will be immature on my part to say that India will notbe impacted by the US recession at all, but the truth is that it will not get impactedadversely in the magnitude of what everyone feels.What is a recession?A drastic slowing of the economy. Where gross national or domestic product has fallen intwo consecutive quarters. A recession would be indicated by a slowing of a nationsproduction, rising unemployment and falling interest rates, usually following a decline inthe demand for money. A popular distinction between recession and depression is:Recession is when your neighbors lose his job; depression is when you lose yours.What causes it?An economy which grows over a period of time tends to slow down the growth as a partof the normal economic cycle.A recession normally takes place when consumers lose confidence in the growth of theeconomy and spend less.This leads to a decreased demand for goods and services, which in turn leads to adecrease in production, lay-offs and a sharp rise in unemployment.Investors spend less as they fearstocks values will fall and thus stock markets fall...
  3. 3. Background of the Global Financial Crisis;-What is it all about?It all began with the one and all American dream, that every American should have ahome. Regardless of who you are and what you do, if you are an American, you shouldhave something called a home. Real Estate business was in a boom, and financial agentsthought that there wasn’t a better time to give away loans. The Household sector wasgiven a boost with increased monetary supply by commercial financial companies, andpeople were given loans regardless of the credit rating they received. It was neverexpected that the boom in the Real Estate business would come to such an abrupt end,and the prices would reach all time low. The US economy being a capitalist driveneconomy didn’t bother to indulge itself in the policies pursued by the then prominentfinancial giants. Gradually these financial giants in this business started feeling the heatas “sub-prime” clients started defaulting in their repayment of loans. The propertieswhich were mortgaged by the clients weren’t even covering the principal amount of theloan, leave alone the interest commitments. The credit offered to the people inindiscriminate fashion, achieving short term goals and ignoring warnings from leadingeconomists about long term sustainability of the policy, backfired completely andcompanies like Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Mae’s “badassets” reached magnanimous proportions. An acute credit shortage was experienced inthe economy, and simultaneous negative effects started occurring. The credit crunchmeant that borrowing interest rates shot up in the market, companies slowed down theirinvestment policies, production declined, lay offs increased, consumption decreased andthe whole economy followed the downward spiral. The unemployment rate in the USreached an all time high of 6.1% and industrial growth saw its largest decline in the pastthree years and fell to 1.1%. The US governments realized the... Introduction:There has been constant fluctuation in the exchange rate of US Dollar (USD) versus the
  4. 4. Indian Rupee (INR) in the last few months. From the year high of Rs. 51.88/$ in April‘09 it has declined to Rs. 46.99/$ in the first week of November ’09. A lot is beingdebated about the impact this fluctuation on the Indian Economy. We shall take anoverview of Forex - Inflow and Outflow, mainly in conjunction with the Dollar Tradeand the effect of USD-INR Exchange rates.The Forex rates are determined by market forces and are based on demand & supply ofthese currencies. If supply exceeds the demand, the value of the currency depreciates, asis the case with US Dollar against the Indian Rupee (INR), since there is a huge inflow offoreign capital into India in USD.Impact on Indian Economy:The main Inflow and Outflow can be categorized as follows:Main USD Inflow:1. Export earnings:2. IT Sector Earnings3. NRI Remittances4. Foreign Direct Investments (FDI)5. Portfolio Investment6. Loans from other governments, IMF, World Bank, etc7. External Commercial Borrowings (ECB)THE RECESSIONIndia is facing the position of recession as globalization showing its negative scenario. Asit was started in US and now its touching the boundary of India also. Recession is aphase in which rupee depreciate, cash crunches, money market slowdown, inflationcomes. All in all its become difficult to bring money from the pocket of an individual.As we know price of the steel, iron goes up, we would like to postpone our purchasingbut if we wont spend, how producer could makes his bread. If the producer startsreducing the price of the commodity with such belief that customer buy the product in all
  5. 5. case. This will bring only when he starts cutting its cost of production. Cost cuttingmeans reduction in variable cost. As price of steel, iron, equipments, machinery, aretouching sky, only way to reduce the cost is the reduction in employees. Hence peoplefear of their job security.In fear of the job security, people are generally shifting their purchasing.All of them either producer, investor, customer, employee posing each other to createrecessionNegative Aspect of Recession on Indian EconomyAs recession have various negative effects on Indian economy. The capital market wasfacing the downfall, liquidity is dropping down, an individual dont have money to spend,producers are increasing their price, but to cope with market they are creatingdeployment.Positive effect of recession on Indian economyThe recession in US led to decrease in demand... Economic Slowdown/Recession of 2008The recentslowdown (2008) in the North American macroeconomic environment alsofollows the same trends as its predecessors. Typically an economic slowdown is definedas an economy which has• Declining aggregate demand• Contracting employment/rising unemployment• Sharp fall in business confidence & profits including a reduction in investment spending• Reduced inventory levels and heavy discounting,• Falling demand for imports• Increased government borrowing• Lower central banks interest rates.
  6. 6. ArtiCle :GlOBAl reCeSSiON & it’SIMPACT ON INDIAN ECONOMYAbstract : This paper explains that there is serious imbalance in the world economy and this could haveinternational effects. This paper analyzes the seriousness of this impeding adverse situationespecially for developing countries and discusses weather as a consequences of this, a globalrecession is inevitable .this paper explorers global current account imbalance and evaluatesdifferent views on the causes and consequences of the imbalance.Finally,the paper discuss thevarious macroeconomic polices and shocks that might remedy the imbalances.1.Introduction- India got freedom in 1947 and started Economic Planning since 1951-1952. Due to GreenRevolution in 1966-67 and the production of food grains increased in the country and consequentlyIndia became self-reliant in food grains in 1976-77.the country adopted LPG (Liberalization,Privatization, Globalization) Policy in 1991 due to financial crisis as a result all of this GDP of 9%could be achieved in 2007-08. However, in 2008 due to the recession in America AmericanEconomy totally collapsed and it had positive and negative effect on Indian Economy. There for it isnecessary to study recession, recession characterized, causes, effect, suggestion etc… Almost everybody today seems to be discussing about the US Recessionary trend and itsimpact on emerging countries, more particularly India Economists, Industrialists and the commonman on the streets seem to have been horrified by the very thought of recession in India and thattoo due to US. Decreasing industrial production, inflation, decreasing job opportunities, cost cutting,
  7. 7. reducing purchasing power parity, et al are the aspects discussed among them through everypossible mode like articles, talks & walks and places like washrooms, canteens, etc .But to me the reality is very different!Yes...... India will not be impacted largely by the US recession, simply because India is not which it wasin the 80s-90s.Although it will be immature on my part to say that India will not be impacted bythe US recession at all, but the truth is that it will not get impacted adversely in the magnitude ofwhat everyone feels. In economics, a recession is a general slowdown in economic activity over a sustained periodof time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP),employment, investment spending, capacity utilization, household incomes and business profits allfall during recessions.2.What is meant by Recession? The definition of a recession is negative economic growth for two consecutive quarters. Thismeans a fall in Real GDP, -lower National income and lower National Output. However, it is worthnothing some people talk of a recession, even when growth is very low. A period of general economic decline; typically defined as a decline in GDP for two or moreconsecutive quarters. A recession is typically accompanied by a drop in the stock market, anincrease in unemployment, and a decline in the housing market. A recession is generally consideredless severe than a depression, and if a recession continues long enough it is often then classified as adepression. There is no one obvious cause of a recession, although overall blame generally falls onthe federal leadership, often either the President himself, the head of the Federal Reserve, or theentire administration.
  8. 8. 3.A recession characterized by?1) Rising unemployment (often unemployment is a delayed factor) i.e. it takes time forunemployment to rise, but, even when the economy is recovering, it takes time for unemploymentto fall.2) Rising Government Borrowing. A recession is bad news for thegovernment budget. A recession leads to lower tax revenues (lower income tax and corporation taxrevenues) and higher government spending on unemployment benefits. The UK is forecast toborrow £60 billion; a recession could make this borrowing even worse in 2009. This borrowingmeans higher taxes and higher interest payments in the future.3) Falling Share Prices. Generally a recession leads to lower profitability and lower dividends.Therefore, shares are less attractive. Note share prices often fall in anticipation of a recession. e.g.the recent falls in share prices are largely because the market expects a recession soon. During theactual recession, share prices often increase in anticipation of the economy recovering. Note also,falling share prices dont always mean a recession, falling share prices can occur for many otherreasons.4) Lower Inflation. Typically a recession reduces demand and wage inflation. This should result ina lower inflation rate. However, this recession is complicated because of rising oil prices. Therefore,the forthcoming recession may actually occur simultaneously with higher inflation - a term knownas stagflation. But, a recession will definitely reduce demand pull inflation pressures andencourages price wars on the high street as firms seek to retain consumers.
  9. 9. 5. Falling investment. Investment is much more volatile than economic growth. Even aslowdown in the growth rate (economy expanding at a slower rate) can lead to a significant fall in.4.What causes it?An economy which grows over a period of time tends to slow down the growth as a part of thenormal economic cycle.A recession normally takes place when consumers lose confidence in the growth of the economyand spend less.This leads to a decreased demand for goods and services, which in turn leads to a decrease inproduction, lay-offs and a sharp rise in unemployment.Investors spend less as they fear stocks values will fall and thus stock markets fall on negativesentiment5.Past RecessionThe US economy has suffered 10 recessions since the end of World War II. The Great Depression inthe United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment,low profits, low prices of goods, and high poverty.The trade market was brought to a standstill, which consequently affected the world markets in the1930s. Industries that suffered the most included agriculture, mining, and logging.In 1937, the American economy unexpectedly fell, lasting through most of 1938. Productiondeclined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in1937 to 19.0 per cent in 1938.
  10. 10. The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharpcorrection to overproduction of the previous decade. This was followed by Black Monday inOctober 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6per cent affecting the lives of millions of Americans.The early 1990s saw a collapse of junk bonds and a financial crisis.The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansionon record.From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91recessions, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.The dot-com burst hit the US economy and many developing countries as well. The economy alsosuffered after the 9/11 attacks. In 2001, investors wealth dwindled as technology stock pricescrashed.6.US RECESSION AND ITS EFFECT ON INDIAN ECONOMY The old saying “History doesn’t always repeat itself, but often rhymes”, is based more on factthan fiction. It’s been a lot of time we hear of “Recession” going on in US market. Everyone is talkingabout recession. We cling to newspapers, television news channels, and financial reports only todiscover “what next” in recession. It would be naïve to imagine that a recession in the United Stateswould have no impact on India. The United States accounts for one-fourth of the world GDP. Thefears of a US recession led to panic in the Indian stock market.The effect on the recession 2008 on India was quite distinct from those ofthe past. Here are some worth following:
  11. 11. 1) In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of IndianIT firms derive 75% or more of their revenues from the United States--a classic case of having putall eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could beadversely affected. Instead of looking at the scenario as a threat, the sector would do well to focuson product innovation (as opposed to merely providing services). If this is done,2) During the 2008-2009, the growth in exports was robust till August 2008.however, inSeptember 2008, export growth evinced a sharp dip and turned negative in October 2008 andremained negative till the end of the financial year, for the first time in seven years, exports havedeclined in absolute terms in October 2008.A decelerating export growth has implications for India, even though our economy is far moredomestically driven than those of the East Asia. Still, the contribution of merchandise exports toGDP has risen steadily over the past six years — from about 10% of GDP in 2002-03, to nearly 17%by 2007-08. If one includes service exports, the ratio goes up further. Therefore, any downturn inthe global economy will hurt India. There also seems to be a positive correlation between growth inexports and the country’s GDP. For instance, when between 1996 and 2002 the average growth ratein exports was less than 10%, the GDP growth also averaged below 6%.A slowdown in export growth also has other implications for the economy. Close to 50% of India’sexports — textiles, garments, gems and jewellery, leather and so on — originate from the labor-intensive small- and medium-enterprises.A sharp fall in export growth could mean job losses in this sector. This would necessitategovernment intervention. A silver lining here, however, is the global slowdown will also lower costof imports significantly, thereby easing pressures on the balance of payment.The impact of oil and other commodity prices, halving over the past few months, will reflect in theimport data for the second half of 2008-09. Oil import bill, earlier projected to cross $100 billion in2008-09 with prices surging to $140 per barrel, could easily shrink by about $20 billion. The fall inimports may exceed the decline in exports in the latter half of 2008-09. This would also help softenthe current account deficit.
  12. 12. 3) Employment is worst affected during any financial crisis. So is true with the current globalmeltdown. This recession has adversely affected the service industry of Indian mainly the BPO KPO,IT Companies etc.According to a sample survey by the commerce ministry 109,513 people lost theirjobs between August and October 2008, in export related companies in several sectors primarilytextiles, leather, engineering, gems and jewelry, handicraft and food processing. Economic Survey ofIndia gives alarming bell about the on-going effects of the global slowdown on employment and haspressed upon the government the urgency of the major response, especially in the unorganizedsector.4. The manufacturing sector has to ramp up scale economies, and improve productivity andoperational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possibleUS recession. The demand for appliances, consumer electronics, apparel, and a host of products ishuge and can be exploited to advantage by adopting appropriate pricing strategies. Althoughunlikely, a prolonged recession might see the emergence of new regional groupings--India, China,and Korea?5) The tourism sector was affected. Now is the time to aggressively promote health tourism.Given the availability of talented professionals, and with a distinct cost advantage, India can be thedestination of choice for health tourism.6) Recession AgricultureIndian agriculture has not impacted by global economy crises, except some export oriented crops.About 60-65% of India’s population and workforce depend on agriculture. Country’s agriculturesector will save the India from the huge impact of the global economic recession. Right nowagriculture is the key for Indian growth is this difficult time. Agriculture is an absolute necessary,producing the basic human needs food and clothing and exciting reason is Bio fuels .An Investmentin agriculture is considered as a conservation and tangible Investment with consistent returns.Agriculture is the best solutions to maintain economic growth this year. Even in down marketsagriculture companies performed very well in 2008 and will do the same in 2009. I wish that theagriculture sector will continue to provide support to our economy.7. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing forgovernment intervention and rate cuts. What is conveniently forgotten in this debate is that astronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indiancentral bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing
  13. 13. liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would alsohelp in competing globally when the recession is over.7.How to tackle the global slump?“Our economy is shrinking, unemployment rolls are growing, businesses and families can’t getcredit and small businesses can’t secure the loans they need to create jobs and get their products tomarket,” Obama said.“With the stakes this high, we cannot afford to get trapped in the same old partisan gridlock.”The following measures can be adopted to tackle the recession:Tax cuts are generally the first step any government takes during slump.Government should hike its spending to create more jobs and boost the manufacturing sectors inthe country.Government should try to increase the export against the initial export.The way out for builders is to reduce the unrealistic prices of property to bring back the buyers intothe market. And thus raise finances for the incomplete projects that they are developing.The falling rupees against the dollar will bring a boost in the export industry. Though the buyers inthe west might become scarce.The oil prices decline will also have a positive impact on the importers.8.CONCLUSIONS
  14. 14. In summary, at the macro-level, a recession in the US may bring down GDP growth, but not bymuch. At the micro-level, specific sectors could be affected. Innovation now may prove to be theengine for growth when the next boom occurs.For US firms, who have long looked at China as a better investment destination, this may be a goodtime to look at India as well. After all, 350 million people with purchasing power cannot be ignored.This is not a sales pitch for India, but only a gentle suggestion to US corporationsv REFERENCES1. Global Recession and Its Impact on Indian Financial Markets; NidhiChoudhari Manager Bank ofIndia, Kolkata.Article.2. www.scribd.com3. www.dipity.com4. Yojna Monthly 2008-20095. www.merinews.com6. DainikPudhari7. DainikSakal
  15. 15. Effects of Recession in US, on IndianEconomyby SHREYANSH MARDIA on JUNE 20, 2008“When Uncle Sam sneezes, the world catches a cold”This is an oft quoted saying when it comes to the dominance of the US. This saying is also justifiedwhen it comes to the world economy and other economic matters. The US existed as a soleeconomic power throughout the 80’s and the 90’s. The US is also the biggest consumer in the wholeworld. It is also the largest economy in the world. As such, US influence on all economic mattersaround the world is substantial.The US economy boasts of being the largest and the most technologically advanced economy in theworld, with a per capita GDP of 46,000 $. The US GDP is 13.86 million$ with a growth rate of 2%.The US also has an unemployment rate of 4.7% and only 12% of the population lives below thepoverty line. All of these statistics point to a large though sluggishly-growing economy.The future however is uncertain and the danger of an economic recession looms over the largesteconomy of the world. Indications are already there and analysts are falling over each other todecide whether, there is a possibility of a recession now and whether it can be averted, if it can &what and how far reaching will be its impact. This is the million dollar question which doesn’t haveany conclusive defined answers as yet.This paper endeavors to find out the impact of a US recession on India and the consequences ofsuch a recession. India all around the world is seen as a global economic superpower. The IndianEconomy is one of the top six fastest growing economies all around the world. The Indian economyis also very well known for its extensive resources of trained, skilled and efficient human capital.India is also gifted with large quantities of natural resources which helps make India, a very
  16. 16. powerful economy. According to the latest analysis, the Indian economy is growing at a healthy rateof more than 9% p.a. which is another big positive for the Indian economy.India and US share a rich and flourishing nexus of trade and commerce. Indian exports to the USexceed the Indian imports by a large margin. So in such a scenario what happens if the US economygoes down? Will the Indian economy suffer a similar downslide? What will be the affect of a weakdollar on world trade and especially the Indian economy? Will the Indian economy be able to comeout unscathed? These are some of the pertinent questions plaguing the economists today which weseek to answer in the course of the paper.1. The Reasons and Causes of a US recession.With the advent of the 21st century, one thing has become extremely clear- The US is no longer thesole economic power in the world. The European Union is exerting and building its economic powerand the value and the significance of the dollar is already showing signs of faltering in front of themight of the Euro. Further Asia on the basis of the combined economic strength of the two fastestgrowing economies has also become a giant economic power. The OPEC countries have alreadyshowed inclination towards trading in Euros which seriously undermines the monopoly whichdollar exerted over international trade.There are also serious indications that the US economy will be facing a situation of a recession inthe near future, probably in the current year itself. There are certain reason which have led to thiseconomic downturn, of which some of the most important and the most damaging are.-
  17. 17. · The biggest factor leading to this recession is the decrease in the consumer expenditure on goodsin America which has resulted because of the sharp fall in the consumer disposable income. Therise in fuel prices and the already present inflation has reduced, rather almost nullified the effect ofany gains in income which have occurred. Adding to this mix, the problem of rising interest ratesand lack of credit, it is safe to say that the consumers will now face the pinch. The rise in pricesbeing more than the rise in income, the consumers are forced to reduce their expense on goodswhich lead to lesser income movement in the economy and leads to a negative multiplier effectwhich cripples the economy and its allied structures as well.· The American Economy is plagued by a problem which is known in economic circles as theproblem of sub-prime mortgage fiasco. In the US, there had been an increase in credit consumptionsince 2000, as there was an increase in the consumer expense on autos and housing purchases bythe consumer. With the rapidly decreasing consumer disposable income, as has been stated above,houses became more and more unaffordable which led to increasing number of houses becomingunsold which led to a dip in the housing prices and thus the bubble burst and suddenly with theburden of loans mounting and consumer spending decreasing, people are trying to sell of theirproperties before they lose their equity or the bank repossess it. This has led to an unprecedentedincrease in the supply of housing, which has dropped the prices further.This has a primary effect on the loaned, but its ramifications and secondary effects have other farreaching consequences too. Basically if there is an over-supply of houses, then the construction ofnew houses will be adversely affected, which will lead to lowering of the level of economic activityin the economy and also increased unemployment which will lead to further credit and will lead toa vicious cycle which will drag the economy down unless attended to at the earliest.· Another factor effecting negatively not only the American economy but economies all around theworld is the rising prices of crude oil. On 2nd January 2008, the price of crude oil per barrel for thefirst time crossed $100 a barrel. This has lead to an increase in the cost of energy, an essential pre-requisite when it comes to production and has thus eaten into the producers profits, thus forcingthem to either cut the wages or reduce employment which again leads to increase in unemploymentrate of the country. This again leads to a downward cycle which ends only in a state of depression.
  18. 18. 2. Impact of a strong rupee on the Indian Economy.Indian economy is among the fastest growing economies of the world. The appreciation of therupees against the dollar would be another giant sign towards its economic prosperity. The Dollarin comparison to the rupee has fallen from a rate of 48 Re. for 1$ to a rate which is expected by theRBI to range from 39.15 Re - 39.50 Re. There has been almost a 20% increase in the Indian rupee.The appreciation of the rupees will help the economy in many ways. The dollar has been thepopular medium of foreign exchange for a long time. Most of the payment for the export or importis made through dollar.This development has a significant bearing on the Indian Economy. This is because, the dollarthough comparatively weak is still strong and is still used as, an in demand currency for all forms offoreign trade and commerce. Moreover most of the countries have accumulated their reserves inthe form of dollars, which further adds to its strength. There are 3 major and significant variableswhich will suffer the impact of a stronger rupee first. They are-· In respect of Exporters- The exporters in India, in a case of depreciating dollar will have a lesserincome than before. The price of an export goods cannot be said to be unit elastic to the exchangerate because as the dollar depreciates, if the exporters increase their prices so as to receive thesame income in rupees as they did before, the demand of their commodities will fall and lead togreater losses. As such in the case of a depreciating dollar, exporters will have to bear the loss as acut in margins which in some cases will also lead to loss. This will lead to an adverse effect onIndia’s economy and lead to a long term loss to India’s growth.· In respect to Importers- India imports generally Petroleum products, capital goods, fertilizers,chemicals, pulp and uncut stones. The importers in the case of a stronger rupee will now have topay less for the same commodity. As such the imports to India will increase in quantity andimporters will gain increased profits which will lead to economic growth in the country.· In respect of FDI- FDI or Federal Direct Investment, is the investment by foreign nationals in acountry’s industries. In case of weakening of US$, there will be lesser funds in terms of rupees,invested by the US citizens and thus the FDI from US as such will be effected adversely. Howeverwith the US industries in turmoil, India will become a very attractive destination for all investment,
  19. 19. within the US and without. Therefore the impact of a weak US dollar on FDI as such will be suitablycompensated by the increase in FDI from other sources.The following figures and statistics help elucidate the impact of a US recession on the economy.- US trade with India (2007) (In US$ million)MONTH EXPORTS IMPORTS BALANCEJanuary 1031.6 1999.0 -967.4February 898.1 1700.6 -802.5March 958.5 2131.6 -1173.1April 773.1 1980.2 -1207.1May 1522.2 1995.0 -472.7June 1,091.8 1,901.5 -809.7July 2,356.2 1,782.3 573.9August 1,816.1 2,172.1 -356.0September 1,624.9 1,910.4 -285.4OctoberNovemberDecemberTotal 12,072.6 17,572.6 -5,500.0SOURCE: US CENSUS BUREAUIt can be clearly seen in the table above, that the exports to the US exceed the imports by asubstantial amount. As such, in a purely economic sense, exports to the US are much more essentialfor the economy and for the livelihood of all involved. Thus it can be said that the loss which Indianeconomy will face through the loss in exports will far out-weight the gain for the importers.3. The Impact of a Possible US recession on the Indian Economy.
  20. 20. It has been already said in the Introduction to this paper that the US is a powerful economy. The USis the largest economy of the world and it is also the biggest consumer in the world. As such manycountries in the world export their products to the US and their economies are as such centered onthe US economy.A US recession if it occurs will thus completely offset such economies. The effect of a US recessionwill devastate their economies and as such render them economically backward. There are manycountries such as which depend upon the US for such trade.Examining such an affect on the continent of Asia, some noteworthy points can be deduced. Indiaand China are the main force behind economic development in Asia. However the impact of a USrecession on both of these will be very different. China is an economy which thrives on exportinglow-cost, high-quality goods to the US market. A recession in the US and a weakening dollar willadversely and substantially affect the Chinese economy.However the impact on India will be lesser in comparison to other smaller countries. This isbecause India unlike other Asian Countries possesses a strong and well establshed domesticmarket. The Indian factors such as those of a strong internal demand, a richer population, anexploding middle class, increased employment along with the increasing basket of services whichIndia has to offer will cushion the impact of the shockwaves which will spread, once a recessionoccurs in the US economy.However, India’s neighbors and the other small Asian States will be badly affected by such arecession. Even China, which is another growing economy, will suffer the impact, assuming thatthey do not devalue the yuan again. As such the trade ratio of India with other countries will also beaffected, courtesy a US recession. Thus a US recession will have a sizable impact, directly andindirectly on the Indian Economy. However the adverse impact on India will not be as much as thaton other countries. Some of the industries which will be worse affected in the light of such arecession will be the BPO industry for one and also the export industry.
  21. 21. Another practical ramification of a US recession, will be the forex reserves of all countries aroundthe world. Most of the countries all around the world maintain their reserves in dollars. Due to a USrecession, there will be widespread devaluation of dollar as a currency and it will lead to themeltdown of US dollar. This will thus lead to an evaporation of a country’s forex reserves leading tohuge and substantial losses. The countries at present are waiting with bated breath as even if one ofthe countries shifts its reserves to any other currency, there will be a huge drop in the dollars priceswhich will lead to a selling spree leading to a fall in dollar prices and loss to all countries around theworld4. Conclusion.This paper sought to identify and examine the effect of a US recession on the Indian Economy. Forthis purpose the factors responsible and the indicators of US recession were analyzed. There aremainly 3 main factors which are mainly responsible for the recession in the US. They are-· Decrease in Consumer Expenditure.· Sub-prime mortgage fiasco.· Increase in energy prices.The depreciation in the value of dollar is a natural consequence of recession. Such a recession willadversely affect the exporters and favor the importers. However as has been analyzed, the quantumof Indian exports to the US far exceeds the imports. Thus for the greater gain and good of the Indiabusinesses, it is safe to say that a US recession will be unfavorable to the Indian trade.
  22. 22. Further, it can also be said that, a US recession though not having any major direct impact on theIndian economy, will adversely affect the economy in many other ways. The Indian economy isshielded in part from an impending recession as India has a well established and growing domesticmarket and a booming economy to offset any direct impact of recession. However, a US recessionwill hamper the economic development of other countries and thus adversely affect India’s tradeover a long period.Another important point is that, the Indian forex reserves which presently stand at a figure of276,250 million dollars will be instantly evaporated in case of a US recession and a depreciatingdollar.It can be thus concluded that the impact of a US recession on the Indian economy thoughcomparatively minimal will have a substantial affect on India’s future prospects and growthopportunities and thus reduce the rate of growth.ARTICLE BY : SHREYANSH MARDIA & KARTHIK MUDALIARBibliographyArticles, Websites and Reports:ü B.V Krishna Murthy <http://harvardbusinessonline.hbsp.harvard.edu/hbsp/index.jsp;jsessionid=UDBCSAXXXXP4YAKRGWDSELQBKE0YIISW?_requestid=205128>ü Indo-US Economic Relations < http://www.indianembassy.org/index.asp >ü < http://rbi.org.in/home.aspx >ü US- Indo Economy, The Wall Street Journal < http://www.livemint.com/Lounge.aspx >ü Mike Mofatt,Why A Shrinking Trade Deficit will Drive Down US Dollar < www.about.com>ü Will US slowdown impact India< http://economictimes.indiatimes.com >ü Appreciation of Indian Ruppee and its Impact < www. Citehr.com>ü Owen F Humapge, Monetary Policy and Dollar Depreciation < http://clevelandfed.org/index.cfm >ü AmolAgarwal , < http://mostlyeconomics.wordpress.com/>
  23. 23. ü Economics and Finance, Fedral Bank Of NewYork,< www.newyorkfed.org>ü FDI in India and US, < http://www.economywatch.com/index1.jsp >ü Mark Sniderman, Economy In Perspectiveü R. Swaminathan,< http://www.financialexpress.com >ü <http://www.unctad.org/Templates/Startpage.asp?intItemID=2068&lang=1>Facts stated from he CIA fact bookConsumer disposable income is basically the money which a consumer is ready to spend afterdeducting expenditure on essential commodities.“Real income, which is how much are people earning from their work in terms of wages, and how doesthat increase in wages relate to the rise in inflation. We have got two reports that seem to corroborateeach other that say that real earnings — that is, wages — have not been keeping up with inflationlately. That means that household purchasing power has been eroding”.-Bernard Bouhmol, The Secret of Economic Indicators <taken from-http://www.wallstreetreporter.com/page.php?page=featured&id=27627>

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