Recession In India

MACRO ECONOMICS

PROJECT REPORT OF MACRO ECONOMICS ON

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MACRO ECONOMICS

PROJECT REPORT

Impact of U.S. Recession on India - An Empirical Study

Group NO. 5 Cohort- Service Name:

Enrollment No.

Abhishek Kumar Singh Adarsh Kumar Alok Gaur Chetan Bhatia Kapil Gupta Kumar Ravi Rajat Jain Ridhima Sharma Shailly Garg

8609111 8609113 8609116 8609112 8609117 8609115 8609118 8609114 8609109

Subject: Business Environment Guide: Dr. Jitendra Kumar Mishra

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Signature

MACRO ECONOMICS

ACKNOWLEDGEMENT

We place our immense gratitude to the JBS Faculty in general to (Prof Jitender Mishra Learning Facilitator) in particular, with whose whole hearted coco-operation and support we we have been able to undertake this project on our own and complete the same successfully. We are also deeply indebted to them for providing us with an opportunity to undergo our project. We would also like to thank all those who helped us in completing this this project

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Table of Content Introduction .......................................................................................................... 5 Causes of Recession .............................................................................................. 6 Top Ten Countries with which the U.S. has a Trade Deficit ........................... 8 The market breaks down ..................................................................................... 9 Impact of US recession in India ........................................................................ 10 Impact on different sectors of Indian Economy .............................................. 11 India and US bilateral trade India and US bilateral trade ............................ 12 US Trade with India: 2008 ................................................................................ 13 View Of Former Foreign Minister Yashwant Sinha ...................................... 14 Implication .......................................................................................................... 15 Steps Taken by Govt. and RBI .......................................................................... 16

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INTRODUCTION RECESSION: RECESSION Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to severe depression. It is time to close shop completely. It is a total state of irrevocable economic failure. When a country is doing well all round its Gross Domestic Product (GDP) is on the rise. In a recession, the overall economic indicators reveal severe changes, which typically includes a sharp rise or fall in prices (inflation or deflation). If recession continues for an extended period of time, it is called a depression. Firms face closures when they go through recession and are not able to recover from losses. If, at this time, they are not able to sustain their prices and stocks then there is more trouble. Even when the recession period gets over, they will not be able to do well. If a business survives a recession period they should be able to survive a depression. . Financial institutions are overwhelmed with worried investors. Consultants are trying to clam down companies who have great risks at the stock exchanges. Panic buttons have been pressed and there are efforts to stop recession in its tracks. Forecasts are still showing that more losses will be felt in the coming weeks. In a country, which lives and thrives on credit bills and mortgage loans for just about everything, there is cause to get worried. Defaults will hit the consumers and companies equally. The stock exchanges have always been indicative of the recession. The individual investors are still safe. But the professionals have to bear the burden of recession. Americans already started to feel the heat when jobs were being outsourced to cheaper countries. The US economy is hurtling towards a recession. It has not yet turned into a depression. There is much debate over the causes of recession. Economists and monetarists rarely agree on which factors are responsible for economic decline. It is perhaps that there are several different factors, when experienced together, that cause tremendous economic decline. Mishandling of the money supply, weather conditions, war, and the inflation of import costs (perhaps the decrease in the forex value of a country currency) could all be contributing factor to a recession. These various factors are alarming to consider, as they seem to describe current conditions. Mishandling of the money supply is suspect, as facts and figures show an incredible deficit under the current presidency.

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CAUSES OF RECESSION 1. Subprime mortgage crisis:The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. These actions were designed to stimulate economic growth and inspire confidence in the financial markets. When USA house prices began to decline in 2006-07, mortgage delinquencies soared, and securities backed with subprime mortgages, widely held by financial firms, lost most of their value. Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine.

2. High Oil Prices:The rise in oil prices has become a very pressing issue. Certainly, nobody has to be reminded that crude was hovering just below $150 per barrel, while gasoline has surpassed $6 per gallon on average around the nation. The widely accepted explanation for oil prices' recent steep climb is strong demand. The global economy is firing on all cylinders, and that US and India have emerged as major consumers. In addition, supplies are tight; that the margin between what is produced and what is consumed on a daily basis has never been narrower; and furthermore, that major new discoveries of oil are few and far between. These explanations certainly sound plausible, and perhaps we can even attribute some portion of the price rise to them. A closer analysis, however, shows that they are not sufficient to explain the full extent of the increases. A new report released last month by the Senate Permanent Subcommittee on Investigations concludes that market speculation has played a role in the rise of oil and gas prices. It points a finger not only at commodity funds and hedge funds, but also at large institutional investors such as pension funds and mutual funds, which have become major participants in the energy markets over the past several years. The investigations, found that an estimated $75 billion has poured into regulated U.S. oil futures markets in the past few years. While this sounds like a lot (and it certainly is), the amount that has gone into nonregulated exchanges overseas is inestimable. The Commodity Futures Trading Commission oversees all futures trading on U.S. markets, and it's constantly monitoring the positions of large speculators. However, the CFTC (Commodity Futures Trading Commission) has no jurisdiction over exchanges that are outside the U.S. or in the murky over-the-counter market where billions of dollars of contracts are traded all the time.

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3. Inflation, the silent killer:Most likely, the prime cause has been the important role of productivity growth in developing countries, especially the large-sized countries like US and India. With Africa and Latin America now joining the development party, subdued world inflation is more likely than not. World inflation is broadly composed of three commodities: energy, agriculture and metals (both precious and other metals). In India only inflation rate touched to just below 13% in mid of 2008. A reasonable speculation is that this recent burst in prices has more to do with old-fashioned speculation than even older-fashioned fundamentals. In this regard, the recent hysteria pertaining to the Indian rupee is relevant. The normal inflation rate in developed countries 1% to 4% typically; developing countries 5% to 20% typically; national inflation rates vary widely in individual cases, from declining prices in Japan to hyperinflation in one Third World country (Zimbabwe), inflation rates have declined for most countries for the last several years, held in check by increasing international competition from several low wage countries (2005 est.) .In 2008, the prices of many commodities, notably oil and food, got so high to cause genuine economic damage, threatening stagflation and a reversal of globalization .In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. By July the price of oil reached as high as $147 a barrel although prices fell soon after.

4. Liquidity crisis:From late 2007 through September 2008, before the official October 3rd bailout, there was a series of smaller bank rescues that occurred which totaled almost $800 billion. In the summer of 2007, Countrywide Financial drew down $11 billion line of credit and then secured an additional $12 billion bailout in September. This may be considered the start of the crisis. In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed its sub prime mortgage business. In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recourse Treasury bill debt assets. In early July 2008, depositors at the Los Angeles offices of Indy Mac Bank frantically lined up in the street to withdraw their money. On July 11, Indy Mac, a spin-off of Countrywide, was seized by federal regulators - and called for a $32 billion bailout. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservator ship on September 7, 2008. On September 16 2008, news emerged that the Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual The year 2008, as of September 17, has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007. 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. The year also saw the ninth biggest bankruptcy with the failure of Indy Mac Bank. The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation.

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5. Large Trade Deficit Spells More Difficulties Ahead for US Economy:. Since December 2001, the monthly trade deficit has increased $37.6 billion, and petroleum products account for 47 percent of this increase. The growing U.S. appetite for low-cost consumer goods, capital goods, and industrial materials and components, especially from Asia, account for more than half of the growth of the trade deficit. This situation is likely to become worse in the months ahead. Crude oil prices, after falling in November, have been rising again, and the dollar has strengthened in recent months, making most imports cheaper. In 2005, business and political conditions in Europe weakened, and prospects for the Japanese economy improved only modestly; consequently, the dollar rose against industrial country currencies. The dollar remains as much as 40 percent overvalued against the Chinese Yuan and other Asia currencies. Together, higher oil prices and a strong dollar will push the trade deficit to new record highs, with the monthly trade deficit likely exceed $75 billion by mid 2007. High and rising trade deficits tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment. Worker productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP. Were the trade deficit cut in half, GDP would increase by nearly $300 billion, or about $2000 for every working American. Workers wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying good wages and offering decent benefits. Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of these jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

TOP TEN COUNTRIES WITH WHICH U.S. HAS A TRADE DEFICIT Deficit in Millions ($U.S)

Deficit in Millions ($U.S)

Country Name

Year (2006)

Year (2008)

China Japan Canada Mexico Saudi Arabia Germany Ireland Venezuela Nigeria Italy

-27,956.65 -6,046.85 -5,956.50 -4,804.47 -4,069.64 -3,368.14 -2,795.35 -2,660.30 -2,631.80 -1,756.64

-223,395.84 -62,426.73 -68,513.41 -56,781.12 -39,797.27 -36,812.72 -18,858.10 -36,298.91 -31,422.79 -17,712.29

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THE MARKET BREAKS DOWN The big problem now is that speculation has gotten so out of hand that it is distorting the very mechanism by which the market allocates supply. For example, a commodity that is in tight supply will normally exhibit a spot price that's higher than futures prices, since consumers are willing to pay up to obtain supplies that have suddenly become scarce. In turn, higher spot prices act as an inducement to producers or inventory-holders to sell their inventories into the market now, rather than hold them and realize a lower price at some future point. Selling inventory into the marketplace alleviates the shortage. On the other hand oil is exactly the opposite. Despite all the talk of supply tightness and a concomitant 700% run-up in the price over the past seven years, it seems speculators are buying oil and holding it for the purposes of financial gain, in such huge quantities that it precludes the normal price relationship from occurring. With the price curve as it is, an incentive is created to hold oil in inventory rather than sell it into the marketplace, and this creates a vicious circle: the more oil held in inventory, the more spot prices remain weak relative to futures, and the more investors want to hold it in inventory. The bottom line is that supplies are held off the market exactly at a time when they should be brought on. The price of oil had hovered close to the $150-a-barrel level. US inventories are now at a three-year low. This is prompting some analysts to call for the Energy Department to stop putting oil into the nation's Strategic Petroleum Reserve (SPR) so the oil instead can be used in the marketplace .

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IMPACT OF US RECESSION IN INDIA INDIA Indian industry recorded negative growth for the first time in 15 years, falling to 0.4 per cent in October as against 12.2 per cent expansion a year ago as the impact of the global economic downturn deepened in the country. The fall is partly due to a dip of over 12 per cent in India's exports. Policy makers said the fall was bigger than expected even as they exuded confidence that the December 7 stimulus package would arrest any further decline. Industrial output had last fallen in April 1993.Manufacturing, comprising around 80 per cent of the Index of Industrial Production, clocked a negative 1.2 per cent growth in the month from a whopping 13.8 per cent a year ago. In fact, output in two of the four sectors that make up the index -- intermediate goods and consumer goods contracted to 3.7 per cent and 2.3 per cent, respectively, from a growth of 13.9 per cent and 13.7 per cent, respectively. Within consumer durable goods, both segments -- consumer durables and consumer nondurables -- shrank by three per cent and two per cent, respectively. Of the total 17 industries, captured in the IIP figure, as many as 10 recorded a negative growth and could have a similar bearing on economic growth, given the fact that industry accounts for 29.4 per cent of GDP. India's foreign exchange reserves fell to $245.857 billion as on Dec. 5, from $247.686 billion a week earlier. Foreign currency assets, expressed in dollar terms, included the effect of appreciation or depreciation of other currencies held in its reserves such as the euro, pound sterling and yen. Reserves have declined sharply in recent weeks mostly due to the central bank's dollar selling intervention in the currency markets to shore up a falling rupee. More than half of India’s services and merchandise exports go to the US. Countries like India, China and Japan, which have been registering steady growth in exports, especially to the US, are likely to be affected by the slowdown in the US economy. Experts predict that eventually US businesses would either reduce outsourcing or withhold expansion plans. Consequently, BPOs, financial services and other software exports contributing to about 2% of India’s GDP are likely to be affected along with another 7% constituting service exports, which are vulnerable to the US economy swings. Despite significant Asian growth and India’s strategy to focus on non-US markets for exports, a slowdown in the US is expected to influence almost all economies worldwide. However there has been a significant and positive change in the way India has been managing its external sector with respect to changes in the global scenario. Appropriate exchange rate methods and good external debt management are some of the positive traits of the Indian economy. New policies and mature governance has helped India face numerous global crises and yet maintain an enviable growth rate.

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IMPACT ON DIFFERENT SECTORS OF INDIAN ECONOMY The United States accounts second largest economy of the world from GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US $450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi. History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA (Dow Jones Industrial Average) went down by 23%, while the Indian Index fell by 15%.Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States 1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS (California Public Employees' Retirement System) is likely to shift an additional US $24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored. 2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well. 3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea. 4. The tourism sector could be 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 the destination of choice for health tourism. 5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum. (Conti…..) Page 11 of 17

MACRO ECONOMICS 6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over. In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine 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 good time to look at India as well. After all, 350 million people with purchasing power cannot be ignored.

INDIA AND US BILATERAL TRADE Indo-US bilateral trade has been upbeat, except for the nuclear deal that is facing a stormy period. According to the Indian Finance Minister, USA will not go through the impending recession. Even if it does, it is not likely to impact India. Having said that, in the last week of January 2008, the actually story seems to be different. But trade and commerce, is affected. Investors are aggrieved at the trading activity coming to a grinding halt frequently in the last three months. Indian exports to the US are less than earlier and dependence is less as it is also exporting to rich European nations, China and Japan. Asian markets have also felt the slump when Dow Jones hit the low notes. How much can India withstand the impact? In the first place, the crisis of US recession is looming on its policies in the Middle East and home turf. There is no immediate concern for Indians. The jobs are not being threatened as yet. BPOs are still working 24 X 7 and jobs are being generated in other sectors. Real estate has more or less stabilized in many cities and small towns. Infrastructure activity has not slowed down either. The software professionals are returning home and Indian students prefer to study in Australia, New Zealand and Britain. Since US is one of the major super powers, a recession–mild or deeper will have eventual global consequences? USA may cut their capital investments into the country if they have to control recession at their end. The year 2008 has not started on a good note for the US economy. Till the stocks don’t climb upwards chances are that investors will loose more money. Despite world recession and India’s optimistic outlook, the results will not show at least in the next two years. The rupee may have appreciated against the shrinking dollar. But Indians are enjoying the new found material wealth and flaunting it. The reigns have to be tighter at the US end till the economy becomes buoyant. India can get affected by the BPO units becoming less aggressive. The American food chains that have opened up will be impacted. There could be down sizing on staff and advertising. The equity market will see a slide in a few months, if things go out of control. Consultants across the world are hoping that they will be able to keep their clients upbeat in the face of recession. The prolonged recession is likely to result in further weakening of the dollar. Page 12 of 17

MACRO ECONOMICS

US TRADE WITH INDIA: 2008 All Figures are in Millions $US. Month

Exports

Imports

Balance

January 2008

1,078.4

2,306.7

-1,228.3

February 2008

1,505.5

2,118.5

-613.0

March 2008

1,644.7

2,254.7

-610.0

April 2008

1,105.3

2,125.8

-1,020.4

May 2008

1,493.5

2,190.3

-696.8

June 2008

2,047.3

1,869.2

178.1

July 2008

1,986.6

2,069.7

-83.1

August 2008

1,864.4

2,210.6

-346.2

September 2008

2,032.8

2,398.5

-365.7

October 2008

1,640.5

2,452.4

-811.8

16,399.1

21,996.3

-5,597.2

TOTAL

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VIEWS VIEWS OF FORMER FOREIGN MINISTER YASHWANT SINHA INDIA is currently facing two different kinds of crisis on the economic front. The first is self-inflicted, and the second of the world by the US, The origins of the first crisis lie in the manner in which the government tackled the problem of inflation. Along with the Reserve Bank of India, it took a number of steps to tighten liquidity, force financial institutions to raise interest rates and not only make credit unavailable but also very expensive. The government was already running a huge fiscal deficit, which though not reflected fully in the budget, had already sucked a lot of liquidity out of the system. these steps were avoidable; that the rising prices of the demand-inelastic essential commodities would not respond to monetary measures and that these steps would have an adverse impact on growth. Thus, by its mistaken policies the government made matters worse. Money became scarce, it became unaffordable, it had an impact on demand, both consumer and investment, and the economy, as predicted, slowed down. If the government had not panicked, if it had anticipated the subsequent developments, India would have been in a much better position today to face the global meltdown. The financial crisis in the US has multiplied our problems, as it has caught us off guard. The prime minister is clearly wrong when he claims that the government had anticipated this crisis and provided for it in the current year’s budget. The FM had dismissed this problem only in exactly two sentences in his budget speech and ended by saying that “the consequences for developing countries are also not yet clear”. Even in the economic outlook report for 2008-09 released in July this year, the Economic Advisory Council to the PM felt that the main global shocks for India would come from the sharp increase in the prices of primary goods, particularly of crude petroleum and food. The turbulence in the international financial markets was considered to be just one among the many factors impacting on the Indian economy. Under-pricing of risk is inherent in the modern financial system. But, clearly the system has to be properly regulated and closely supervised. The US failed miserably to do so. The rating agencies failed too. International financial institutions like the IMF also failed to anticipate the crisis. No one knows even today the extent of the risk involved, where the risk is lodged and who owns the risk. Clearly, we have not yet seen the bottom. The worst is yet to come. The result is that liquidity has vanished from the system globally. The consumer does not want to borrow and buy. He wants to save whatever he has. The financial institutions are getting increasingly saddled with non-performing assets. Even if they have the money, they are reluctant to lend. Nobody is keen to make fresh investments. Lay-offs have become the order of the day. The same is happening in India.

Reference: THE ECONOMIC TIMES

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IMPLICATION It is time to focus on how to generate the demand. Govt. should reconstruct Roads, irrigation projects, housing, health and education in the rural areas should receive our highest priority. Highways, power plants, transportation systems, railway tracks, ports and airports should be our next target. Quality higher and technical educational institutions and institutions imparting skills must be set up on a large scale. Our cities must be revitalized with most modern civic amenities. All this could be done through vigorous publicprivate partnership. All economically viable schemes could be funded through the market with only seed capital from the government. The government could help the others through interest rate subvention and viability gap funding. In this way, we could make our limited resources go far. Housing has been a driver of our economy. Home loans must be made cheaper and the income-tax concession on interest paid on home loans should be raised to at least Rs 2, 50,000 per year from the present Rs 1, 50,000 fixed by me many years ago. The global meltdown has come as a great boon for the government, for it has given it a place to hide. The government has successfully convinced the people that all the present economic ills are because of the global crisis. But, the moment of truth will have to be faced sooner than later, because things will only get worse in future Further more recession is not only effected Indian economy but also world sector. Many industries have to suffer a lot due to this in term of trade and domestic demand. Above figure shows the fact. Mainly manufacturing firms and industries are suffering from this on the other hand service firm are not much effective because of outsourcing business, but aviation industries suffer a lot. In short US recession effect bad on Indian economy

Reference: THE ECONOMIC TIMES

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STEPS TAKEN BY GOVT. AND RBI The central bank even cut its benchmark repo rate by 150 basis points (bps) to 7.5% on October 19 in an attempt to get some of that money moving out of the bank vaults. Still no go. The RBI recently turned up the thermostat once more, this time to prod banks to start lending at reduced interest rates. It cut its benchmark repo and reverse rate by 100 bps. But, again, there’s hardly any movement. The banks are still carting their surplus cash over to the RBI and dumping it there for safekeeping, for even as a low a return as 5%. Take a look at the money being tipped over at the RBI window. For the first five days of the month, till the RBI cut the rates, banks plunked Rs 243,310 crore with the Reserve Bank, for a return of only 6%. Over the next three working days, banks again deposited Rs 84,635 crore with the central bank, for a return of just 5%. The total — for just eight days — works out to over Rs 327,000 crore. In effect, this means banks are still wary of lending to corporate, despite the sea of liquidity and rate cuts unleashed by the central bank. This also then conveys how banks are still uncertain about the future and that they are doubtful about the ability of their corporate clients to pay up in time. HERE’S an example a public sector unit was able to issue five-year bonds to banks with a coupon of 9.33%. Around the same time, one of the Top five India Inc companies also borrowed three year money, but at 10.10%. Clearly, banks are willing to take a risk on the government, even if it is a subsumed sovereign guarantee, but not on even AAA-rated private companies. Banks have not forgotten the nightmares of the early 1990s, when bank NPAs ruled around 10-14%. This time, despite the prodding from the government and the central bank, they are unwilling to stick their necks out. The RBI has allowed banks to restructure loans a euphemism for looking the other way when a loan turns bad that might in ordinary times have been called for stricter treatment. But, the banks are still not biting. The problem also seems to be in the system’s liquidity absorption capacity. Whatever steps the government takes at the moment such as, providing cheap cash to corporate through a variety of refinance windows — not only are banks reluctant to lend, even corporate are loath to load up their balance sheets with fresh debt. Many of them are drawing down their existing credit lines with banks emboldened somewhat by the new restructuring space to finish existing projects but are unwilling to bet on new projects. With aggregate demand having fallen, India Inc is also contending with reduced top line and bottom line projections. In such a scenario, they may not be in a mood to pile up additional debt. Therefore, the key to the current economic impasse might lie on the demand side. The government has tried addressing the issue by spending on infrastructure and by cutting taxes to boost demand. These are also not without their associated problems. Any investment in infrastructure will yield results only after a long lag, and the nature of improved technology does not allow for the higher employment generation that one saw a few years ago. Plus, to get an infrastructure project started is also time-consuming financial closure in these days of clammy credit markets is a tough call. Some economists say that the production orientation of the economy has changed in favor of expensive consumer products, a sector that might be slow off the blocks in reviving. In such a situation, reviving demand for wage goods might just do the trick. Even this hypothesis needs to be tested. The occasion might present itself soon — with experts forecasting a better-than-average winter crop, the government should facilitate hassle-free movement of the harvest to the markets and consumables to centers where the ensuing agricultural income can be spent. This may sound simplistic, but sorting the physical, infrastructural infirmities could be one of the first achievable steps on the long road to recovery.

Reference: THE ECONIMIC TIMES Page 16 of 17

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BIBLIOGRAPHY Ø http://www.commodityonline.com/hottopics/US-Recession.html Ø http://www.fibre2fashion.com/industry-article/9/877/impact-of-recession-in-americaneconomy-on-india1.asp

Ø http://www.indiadaily.com/editorial/09-12f-04.asp Ø http://www.economywatch.com/world_economy/usa/indo-usa-trade-relation.html Ø http://www.thehindubusinessline.com/2008/12/31/stories/2008123151300500.htm Ø http://profit.ndtv.com/2008/11/01005242/IndoUS-trade-relations-What.html Ø http://www.thestandard.com/news/2008/03/20/five-reasons-why-recession-good-time-startcompany Ø http://forum.lowyat.net/topic/610764

PRINT MEDIA The Economist Times The Hindu The Times of India

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