The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis.According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies like India. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this ‘Great Recession' of 2008-09 will be the worst global recession since the 1930s.
Meaning Of 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. An economy, which grows over a period of time, tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. 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. Investors spend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk aversion,deleveraging and frozen money markets and reduced investor interest adversely affect capital and financial flows,import-export and overall GDP of an economy. This is exactly what happened in US and as a result of contagion effect spread all over the world due to high integration in the global economy.
Impact On Indian Economy
In India, the impact of the crisis has been deeper than what was estimated by our policy makers although it is less severe than in other emerging market economies. The extent of impact has been restricted due to several reasons such as-
• Indian financial sector particularly our banks have no
direct exposure to tainted assets and its off-balance sheet activities have been limited. The credit derivatives market is in an embryonic stage and there are restrictions on investments by residents in such products issued abroad.
• India's growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period.
• India's comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.
• Headline inflation, as measured by the wholesale price index (WPI), has declined sharply.Consumer price inflation too has begun to moderate.
• Rural demand continues to be robust due to mandated ]agricultural lending and social safety-net programmes.
• India's merchandise exports are around 15 per cent of GDP,which is relatively modest.
Despite these mitigating factors, India too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world.Today, India is certainly more integrated into the world economy than ten years ago at the time of the Asian crisis as the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP has increased from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08. Although Indian banks have very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed financial institutions yet Indian economy is experiencing the knock-on effects of the global crisis, through the monetary,financial and real channels - all of which are coming on top of the already expected cyclical moderation in growth.
I. Stock Market
The economy and the stock market are closely related as the buoyancy of the economy gets reflected in the stock market. Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Corporate performance of most of the companies remained subdued, and the impact of
moderation in demand was visible in the substantial deceleration during the current fiscal year. Corporate profitability also exhibited negative growth in the last three successive quarters of the year. Indian stock market has tumbled down mainly because of 'the substitution effect' of:
• Drying up of overseas financing for Indian banks and Indian corporates;
• Constraints in raising funds in a bearish domestic capital market; and
• Decline in the internal accruals of the corporates.
Thus, the combined effect of the reversal of portfolio equity flows, the reduced availability of international capital both debt and equity and the perceived increase in the price of equity with lower equity valuations has led to the bearish influence on stock market.
II. Forex Market
In India, the current economic crisis was largely insulated by the reversal of foreign institutional investment (FII),external commercial borrowings (ECB) and trade credit. Its spillovers became visible in September-October 2008 withoverseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. The annual average exchange rate during 2008-09 worked out to Rs.45.99 per US dollar compared to Rs.40.26 per USD in 2007-08 which is the biggest annual loss for the rupee since 1991 crisis. Moreover, there is reduction in the capital account receipts in 2008-09 with total net capital flows falling from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008.Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee reflects the combined impact of the global credit crunch and the deleveraging process underway in Indian forex market.
III. Money Market
The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by the Reserve Bank of India.According to the Report submitted by the Committee for Financial Sector Assessment (CFSA), set up jointly by the Government and the RBI, our financial system is essentially sound and resilient, and that systemic stability is by and large robust and there are no significant vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to slowdown as Reserve Bank has pointed out. But given the strength of the banks' balance sheets, that rise is not likely to pose any systemic risks, as it might in many advanced countries.Nevertheless, the call money rate went over 20 per cent immediately after the Lehman Brothers' collapse and banks' borrowing from the RBI under daily liquidity adjustment facility overshot Rs. 50,000 crore on several occasions during September-October 2008 under tight liquidity situation.
IV. Slowing Gdp
In the past 5 years, the economy has grown at an average rate o8-9 per cent.Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well.
But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced. Even before the global confidence dived, the economy was slowing. According to the revised estimate released by the CSO (May 29, 2009) for the overall growth of GDP at factor cost at constant prices in 2008-09 was 6.7 per cent as against the 7 per cent projection in the midyear review of the Economy presented in the Parliament on December 23, 2008. The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent in 2008-09 nevertheless represents a deceleration from high growth of 9 per cent and 9.7 per cent in 2007-08 and 2006-07 respectively. (Table 1) The RBI annual policy statement 2009 presented on July 28, 2009 projects GDP growth at 6 per cent in 2009-10 in 2009-10.
V. Strain On Balance Of Payments
The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs of strain in the capital and current accounts, due to the global crisis.During the first three quarters of 2008-09 (April-December 2008), the current account deficit (CAD) was US $ 36.5 billion as against US $ 15.5 billion for the corresponding period in 2007-08.
VI. Reduction In Import-Export
During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year. For the first time in seven years, exports have declined in absolute terms in October 2008.
VII. Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO,It companies etc. According to a sample survey by the commerce ministry 109,513 people lost their jobs between August an October 2008, in exportrelated companies in several sectors, primarily textiles, leather, engineering,gems and jewelry handicraft and food processing. Economic Survey of India gives alarming bell about the on-going effects of the global slowdown on employment and has pressed upon the government the urgency of the major response, especially in the unorganized sector.
Response To The Crisis
The future trajectory of the economic meltdown is not yet clear. However, the Government and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and restore confidence in Indian financial markets.The Government introduced stimulus package while the Reserve Bank shifted its policy stance from monetary tightening in response to the elevated inflationary pressures in the first half of 2008-09 to monetary easing in response to easing inflationary pressures and moderation of growth engendered by the crisis. The fiscal and monetary response to the crisis has been discussed in the following points
I. Fiscal Response
The Government launched three fiscal stimulus packages between December 2008 and February 2009. These stimulus packages came on top of an already announced expanded safety-net programme for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission report, all of which added to stimulating demand.The challenge for fiscal policy is to balance immediate support for the economy with the need to get back on track on the medium term fiscal consolidation process. The fiscal stimulus packages and other measures have led to sharp increase in the revenue and fiscal deficits which, in the face of slowing private investment, have cushioned the pace of economic activity.The borrowing programme of the government has already expanded rapidly in an orderly manner by the Reserve Bank of India which would spur investment demand in the domestic market. So while the government will continue to support liquidity in the economy, it will have to ensure that as economic growth gathers momentum,the excess liquidity is rolled back in an orderly manner. In India monetary transmission has had a differential impact across different segments of the financial market. While the transmission has been faster in the money and bond markets, it has been relatively muted in the credit market on account of several structural rigidities. In order to address these issues, the government has to effectively and carefully take up the following steps -
• Enhance coordination and harmonization of the regulatory apparatus internationally, given the global scope of the recent crises with increased crossborder financial integration;
• Introduction of countercyclical prudential regulatory policy;
• Design regulation and supervision of financial companies for non-deposit taking financial entities having the potential to cause systematic instability, as evident in the current crisis;
• Supervision and management of liquidity risk and greater transparency in the financial sector to improve better risk assessment by the customers and investors;
II. Monetary Response
The RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity through interest rate management, risk management and
credit management which is described in detail under the following heads:-
1. Interest Rate Management
In order to deal with the liquidity crunch and the virtual freezing of international credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their deposit and lending rates. The major changes in the interest rate policy of RBI are given below-
• Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in August 2008 to 5 per cent in January 2009
• Reduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points from 9.0 percent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years) in order to improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum.
• In order to make parking of funds with RBI unattractive for banks,the reverse repo rate (RBI's borrowing rate) was reduced by 275 points which currently stands at 3.25 per cent.
2. Risk Management
There has been a sustained demand from various quarters for exercising regulatory forbearance in regard to extant prudential regulations applicable to the banking sector. As a part of counter-cyclical package,RBI has already made several changes to the current prudential norms for robust risk in restructured products and standard assets such as-
• Implementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks except RRBs which would promote closer cooperation, information sharing and coordination of policies among sector wise regulators,especially in the context of financial conglomerates.
• Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II.
• Counter-cyclical adjustment of provisioning norms for all types of standard assets (except in case of direct advances to agriculture and small and medium enterprises which continue to beat 0.25 per cent)
• Reduction in the risk weights for claims on unrated corporate and commercial real estate to 100 per cent;
• Reduction in the provisioning requirement for all standard assets to 0.40 per cent;
• Improve and converge financial reporting standards for off balance sheet vehicles;
• Develop guidance on valuations when markets are no longer active, establishing an expert advisory panel in 2008.
• Market participants and securities regulators will expand the information provided about securitised products and their underlying assets.
• Permitting housing loans to be restructured even if the revised payment period exceeds ten years;
• Making the restructured commercial real estate exposures eligible for special treatment if restructured before June 30, 2009.Hence, RBI has ensured perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent.
There was a noticeable decline in the credit demand during 2008-09 which is indicative of slowing economic activity- a major challenge for the banks to ensure healthy flow of credit to the productive sectors of the economy. The reduced funding demand on the banks should enable them to reduce the interest rates on deposit and thereby reduce the overall cost of funds. Although deposit rates are declining and effective lending rates are falling, there is clearly more space to cut rates given declining inflation. In order to facilitate demand for credit in the economy the Reserve Bank has taken certain steps such as-
• Opening a special repo window under the liquidity adjustment facility for banks for on-lending to the non-banking financial companies, housing finance companies and mutual funds.
• Extending a special refinance facility, which banks can access without any collateral
• Unwinding the Market Stabilization Scheme (MSS) securities, in order to manage liquidity
• Accelerating Government's borrowing programme
• Upward adjustment of the interest rate ceilings on the foreign currency non-resident (banks) and non-resident (external) rupee account deposits • Relaxing the external commercial borrowings (ECB) regime
• Allowing the NBFCs and HFCs access to foreign borrowing • Allowing corporates to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets
• Instituting a rupee-dollar swap facility for banks with overseas branches to give them comfort in managing their short-term funding requirements.
• Extending flow of credit to sectors which are coming under pressure include extending the period of pre-shipment and postshipment credit for exports
• Expanding the refinance facility for exports
• Expanding the lendable resources available to the Small Industries Development Bank of India, the National Housing Bank and the Export-Import Bank of India Future Outlook For India To sum up we can say that the global financial recession which started off as a sub-prime crisis of USA has brought all nations including India into its fold. The GDP growth rate which was around nine per cent over the last four years has slowed since the last quarter of 2008 owing to deceleration in employment,export-import, tax-GDP ratio,reduction in capital inflows and significant outflows due to economic slowdown.
The demand for bank credit is also slackening despite comfortable liquidity in the system. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence leading to the crash of Indian stock market and volatility in forex market. Nevertheless, a sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure, buoyancy of foreign exchange reserves have helped Indian economy to remain largely immune from the contagious effect of global meltdown. Indian financial markets are capable of withstanding the global shock, perhaps somewhat bruised but definitely not battered. India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis. In other words, the fundamentals of our economy continue to be strong and robust. The global economic environment continues to remain uncertain, although the rate of contraction in economic activities and the extent of pressures on financial systems eased in the first quarter of 2009-10. Yet, it is not possible to clearly see the path of the crisis and its resolution over the coming months. In this sense, India is not unique as almost every country, whether or not directly affected, has to manage the current economic crisis under uncertainty. I would like to conclude the paper in the words of Dr. Rakesh Mohan, former Deputy Governor of RBI,
“As the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply. Yet there will be a period of painful adjustment which is inevitable.”
Recession and the U.S.A
In us,a boom in the housing sector was driving the economy to a new level.a combination of low interest rates and easy credit conditions where it became quite easy for people to take home loans.as more and more people took home loans,the demand for property increased and fuelled the home prices further.as there was enough money to lend to potential borrowers,the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions.as a result many people with low income nad bad credit history or those who come under the ninja(no income,no job,no assets) category were given housing loans in disregard to all principles of financial prudence.as the home prices started declining in the u.s.a,sub-prime borrowers found themselves in a messy situation.their house prices were decreasing and the loan interest on these houses was soaring.as they could not manage a second mortgage on their home,it became very difficult for them to pay higher interest rate.as a result many of them opted to default on their home loans and vacated the house.and in turn the lending companies found themselves in a situation where loan amount exceeded the total cost of the house,and they had to write off losses on these loans.so recession actually started with these lossess and as a result many big banks were affected by these lossess, and it affected india because heavy lossess suffered by many international banks affected the operation of banks in india.And with this the share market is falling everyday,value of rupee is weakening against dollars,banks are facing severe crash crunches resulting in shortage of liquidity in the market.
How recession affected the whole world
2. dependency of developing countries on demand generated from high spendingcountries like the u.s and eurozone has increased.at the same time the process of bankruptcy,heavy losses,huge lay offs of people started in the u.s,this has resulted in slow down of overall demand in the market of the u.s.a and vanishing of money from the world market.Thus slowdown processhas gripped the whole world slowly and steadily,and the process is still going on.Indirect impact was so huge that share market in china and india shaded almost 50% of their value.
Countries affected by recession
The United States economy is only halfway through a recession that started in December 2007 and will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout all of 2009 for a cumulative output loss of 5%.
Survey of 2008 will reveal a very weak fourth quarter with GDP growth contracting about -6% in the wake of a sharp fall in personal consumption and private domestic investment.
The real GDP growth contraction playing out through the year is as follows: first quarter 2009: -5%; second quarter 2009: -4%; third quarter 2009: -2.5%; fourth quarter 2009: -1%--adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.
This forecast is much worse than the current consensus forecast seeing a growth recovery in the second half of 2009; I also predict significantly weak growth recovery--well below potential--in 2010. canada entered recession at the end of 2008, and the outlook for 2009 is likely to be worse, with the economy contracting by an estimated 1.5% to 2% for the year.
In 2009, Latin American countries will face a significant slowdown in economic growth. A combination of negative external shocks will slow down regional GDP growth to 0.8% in 2009. Under my scenario, all countries in the region will experience significant deceleration of economic activity in 2009.
Countries like Argentina and Mexico to shift into negative growth territory on a year-over-year basis. For the region as a whole, recovery will likely begin between the first and second quarters of 2010.
The latest cyclical upswing in the Eurozone was largely driven by a temporary but powerful boost to domestic investment from disappearing risk premia in the aftermath of the adoption of the single currency and by external demand from a buoyant world economy.
Both demand sources fizzled out by the second half of 2008, leaving the Eurozone as a whole and its largest members exposed to diverging deleveraging patterns in the face of suboptimal EMU-wide automatic fiscal stabilizer mechanisms.
The latest record-low readings of leading and sentiment indicators point to a severe recession ahead in 2009 that shapes up to be worse than the 1992-93 crisis. For the Eurozone, I expect a below-consensus contraction in real GDP of around -2.5%, with negative growth in each of the four quarters of the year.
The United Kingdom economy is poised to shrink in 2009. Our forecast of a -2.3% growth in real GDP is below consensus as we do not expect a recovery in the second half of the year. Despite the relative resilience of consumer spending, investment should continue to collapse and the housing sector has yet to reach a bottom.
The Nordics, whose growth has outpaced other developed economies in recent years, are poised for much slower growth in 2009 and most likely an outright recession in most of the countries in this region.
After growing faster than the world for the past decade as convergence occurs, Eastern Europe is set to slow abruptly in 2009. Countries with the largest current-account deficits--notably Estonia, Latvia, Lithuania, Romania, Bulgaria--are the most exposed to sharp corrections. Estonia and Latvia are already in the midst of sharp recessions, and Latvia turned to the IMF for help in December to avert crisis. The risk of an outright financial crisis is high in a number of countries in this region.
The combination of global credit headwinds and lower oil prices have dampened growth prospects in the Commonwealth of Independent States (CIS) (ex-Russia) with growth expected to slow to about 2% in 2009, with Ukraine and Kazakhstan being hardest hit by the crisis. With oil prices remaining well below half of the 2008 level, we expect Russian output to contract by 2.5% to 3% in 2009 as manufacturing contracts and Russia's inflow-fueled consumption slows sharply.
Given its reliance on exports and capital flows to fuel growth, Asia faces a gloomy 2009 amid a G-7 recession. We expect Asia's, excluding Japan, growth to slow down sharply to 3.8% in 2009. Hong Kong, Singapore and Taiwan will remain in recession through the first half of 2009, which might extend into third quarter 2009 while the ASiAN economies will slow significantly from the 2004-07 growth trends.
We believe will experience a hard landing in 2009, with growth unlikely to exceed 5%, a sharp slowdown from the 10% average of the last five years. The reversal of capital flows and high credit cost will pull down indias growth significantly, to around 5% in 2009 from an estimated 6% in 2008.
Japan's domestic demand continues to be an unreliable growth driver, and its export machine--the growth engine of recent years--is stalling, given the global contraction and a stronger yen. Consequently, we foresee real GDP growth contracting 2.5% in 2009 after almost flat growth for 2008 as a whole.
Australia's recession will likely end in 2009 after starting in fourth quarter 2008. Average annual GDP growth in 2009 will be flat to sluggish (0% to 1%) after registering an estimated 1.6% in 2008. New Zealand may have a tougher time than Australia during the global recession, with GDP expected to contract 1% in 2009 after growing around 1% in 2008.
Given that the global recession will reduce demand for Middle East and North Africa's resource and non-resource exports, and the global liquidity crunch will reduce capital inflows, growth is expected to slow to an average of 3% in 2009 from almost 6% in 2008.
Gulf Cooperation Council (GCC) countries will witness a significant dip in their hydrocarbon receipts, terms of trade and current account surplus positions in 2009. Average real GDP growth in the GCC may slow to 2.5% in 2009. Israel's growth is expected to slow significantly in 2009 to around 1% and we would not rule out a contraction.
Sub-Saharan Africa's growth will slow to around 3.5% in 2009 from an average pace of 5% over the last decade as the reduction in global demand will reduce exports and capital inflows, including development assistance. Growth in South Africa in 2009 is set to slow to around 1% with several quarters of negative growth as mining output contracts.
Commodity prices, which already fell sharply in the second half of 2008, will face further price pressure in 2009. I estimate an average West Texas Intermediate (WTI) oil price of $30 to $40 a barrel in 2009, as the fall in demand continues to outstrip supply cuts and production delays.