Recession Effects

8/14/2019 Recession Effects

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March 5, 2009 IMPACT OF US RECESSION ON INDIA

V3 |GROUP NUMBER: 6 1

TABLE OF CONTENTS

Introduction ............................................................................................................................................................ 2

Impact of U.S. recession on different sectors of Indian Economy................................................................................. 2

1. Retail ................................................................................................................................................................. 32. IT ...................................................................................................................................................................... 3

3. Real Estate ........................................................................................................................................................ 4

Unitech Q2 net declines 12% as high borrowing cost hurts margins .......................................................... 4

DLF margin falls ........................................................................................................................................... 5

Impact of slowdown on the FDI policies for Real Estate ............................................................................. 6

4. Airline Sector.................................................................................................................................................. 7

5. Food .............................................................................................................................................................. 7

6. Railway .......................................................................................................................................................... 7

7. Banks ............................................................................................................................................................ 8

8. Telecom......................................................................................................................................................... 8

10. M&A & Marketing Consultants ........................................................................................................................ 9

11. Media and Entertainment ............................................................................................................................... 9

12. Automobile sector......................................................................................................................................... 9

Sector wise Analysis-Measures Taken................................................................................................................. 10

Real Estate ...................................................................................................................................................... 10

IT .................................................................................................................................................................... 10

Automobile....................................................................................................................................................... 11

Airline .............................................................................................................................................................. 11

Retail............................................................................................................................................................... 11

Changes in the parameters of the Economy ............................................................................................................ 11

Income level..................................................................................................................................................... 12

Employment ..................................................................................................................................................... 12

Inflation............................................................................................................................................................ 13

GDP................................................................................................................................................................ 14

Conclusion ........................................................................................................................................................... 15

References .......................................................................................................................................................... 15


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Introduction

India is of one the fastest growing economies in the world. It is the third largest economy in the world, in terms

of purchasing power. The Indian economy grew at a rate of 9.6% in 2006 and 9.2% in 2007. Though it has

performed remarkably well in the recent years because of the reforms made by the government, the hugeinflows of FDI, the flourishing capital markets, the boom in IT and ITES sector, it is facing a few hurdles at

present because of the mayhem going on in the largest economy in the world- The United States.

The subprime mortgage financial crisis, which has yet to be resolved, is the sharp rise in foreclosures in the

subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July

2007. Rising interest rates increased the monthly payments on newly popular adjustable rate mortgages and

property values suffered declines from the demise of the United States housing bubble, leaving homeowners

unable to meet financial commitments and lenders without a means to recoup their losses.

Dozens of mortgage lenders declare bankruptcy in a matter of weeks. The market is filled with concerns of a

major global credit crunch, which could affect all classes of borrowers. Central banks use emergency clauses to

inject liquidity into scared financial markets. The real estate markets plummet after years of record highs.

Foreclosure rates double year-over-year during the latter half of 2006 and in 2007.

The ripples of crumbling USA market can be witnessed all over the world. Whatever happens in America, its

impact can be felt way beyond the United States. The world has become a global village where different

countries depend on each other for mutual growth. Indian economy is no exception to this phenomenon.

Especially after the introduction of the New Economic Policy of 1991, Indian economy has integrated with the

other countries vis--vis trade and collaborations. The financial crisis in U.S. and the subsequent recession has

had its impact on India too.

Impact of U.S. recession on different sectors of Indian Economy

The current economic slowdown has the dominant Keynesian features. The crucial issue is not just the fact that

there is a demand contraction, but that this has been brought about by a market failure which fuels adverse

expectations on the part of both the producers and the consumers.

These adverse expectations lead to reduced production by producers anticipating lack of demand and

increased saving by the consumers anticipating lack of jobs. Overtime the action of both producers and

consumers further justify their expectations that then become self-fulfilling.


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1. Retail

Kishore Biyani owned Pantaloons retail store sales in January grew at the second slowest pace in four years

as consumers curbed spending and the retailers struggled to survive the downturn by offering discounts.

Pantaloons store sales in the value retailing segment climbed 4% in January after dropping 4% in December.

Lifestyles sales grew 12% after declining 14% in December.

The home segment has also picked up in January. The store growth in mobile, furniture and electronics had

also declined till December, but a bit of sales picking up has been noticed in January.

Pantaloons gross margin declined by 31 basis points in the second quarter ended December 2008 while its net

profit margin fell by 38 basis points to 2.2% (as per the report on February 6 th by an analyst with First Global

Research)

2. IT

Majority of the customers for the Indian IT companies are U.S. and the European countries and Japan to some

extent. Now with the recession hitting US and the European sector has lead to less demand from these

countries. Companies had been taking various cost cutting measures including severe job cuts. Because of this

lack of demand and people not willing to spend more, Indian companies started losing the overseas projects.

The major cost for the IT companies is the overhead cost. There is no manufacturing cost for them and asubstantial amount of money goes into maintaining the human capital. Hence these companies started axing

the employees to cut down on costs. Its then when the concept of virtual benches has come into play.

Recent news showed that Indian IT sector would grow 30-40% next year. And on the other side to survive in

current slowdown, industries have to decrease the cost and for that they will resort to customized IT solutions

that will further boost up the software solution demand.

India is fast becoming a hot destination for outsourced e-publishing work. As per a Confederation of Indian

Industry (CII) report, the industry is growing at an annual rate of 35 per cent and India's outsourcing

opportunities in the value-added and core services such as copy editing, project management, indexing, media

services and content deployment will help make the publishing BPO industry worth US$ 1.46 billion by 2010.

Staffers on the bench and trainees at Bangalore based Sasken Communication Technologies will work only for

3days a week and draw at least 60% of the salary during the current January March quarter. The company,

as of now, has stopped recruiting.


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Increasing cost pressures have forced the company to make bench staffers sit at home for two working days

every week and cut up to 40% of their salaries affecting mostly their variable pay component. The same rule

applies for trainees recruited last year. This has impacted the staffers in the benches that constitute 25% of the

total headcount. Its clients like Nortel and Motorola have projected a difficult outlook for the next six months.

3. Real Estate

One of the hardest hit sectors would be the real estate sector in India. The government monetary policy has still

not succeeded as per its expectations. Speculation is typical in this sector. And from this speculation comes the

expectations. The reasons for the monetary not to succeed are as follows:

1. The fixed housing loan has been reduced to 7.75% by ABN AMRO, while the others have reduced itto an average of 8.0% - 8.50%. We understand that the same has to come down to 5.0 6.0% to

attract new borrowers, considering the fact that the repo and reverse repo rates have been slashed to

5.0% and 3.50% respectively by RBI.

2. RBI periodically announces measures to reduce interest rates and this fuel the expectations of furtherrate cuts and discourages investments in all fixed assets including real estate.

3. Developers are obviously caught in the speculation trap having mopped up most of their own propertiesin the past on the assumption of a speculative gain in the future. While they have so far expected the

government to bail them out, this is unlikely to happen and one can expect substantial property pricereductions in the next one-year.

The real estate sector has so far relied on the upper income domestic demand and the external demand. This is

unlikely to revive in the near future. Hence a combination of lower home loan rates and significant drop in the

prices can energize the real estate market on a substantial basis.

Unitech Q2 net declines 12% as high borrowing cost hurts margins

Hit by tight liquidity in the market and high borrowing costs, real estate company Unitech Ltd has reported an

over 12 per cent year-on-year slump in its consolidated net profit for the second-quarter ended September

2008, to Rs 358.92 crore.

The companys net sales were down nearly by 3% to Rs 983.09 crore. The drop in net profit is on account of

liquidity squeeze in the market, which has increased the cost of funds. The interest outflow has been higher and

there has been a drop in margins, Mr Sanjay Chandra, Managing Director, Unitech Ltd, said.


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With sluggish demand in the luxury-housing segment, the company has re-oriented its product portfolio towards

mid-income housing segment (Rs 40-70 Lakhs). Given the focus on the affordable housing segment, the

company has been able to generate good volumes by putting in place innovative marketing strategies and that

is reflecting in the overall revenue, Mr Chandra said. Unitech is amongst the frontline real estate companies,

which posted a disappointing set of numbers for the just-ended quarter.

DLF margin falls

Indias largest real estate company DLF Ltd posted a four per cent drop in its net profit for July -September

quarter at Rs 1,935.35 crore, as change in product mix towards the mid-income housing compressed margins.

DLF saw EBITDA margin at 61 per cent during in the quarter ended September 2008, compared with 71 per

cent in the year-ago period, owing to larger contribution from the low margin, mid-income housing projects.

Mr Rajiv Singh, Vice-Chairman, DLF Ltd, said, In the Q2 FY08, the m id-income housing for us was almost

negligible, but this time it has contributed significantly to the bottom-line.

The Delhi-headquartered developer - which sells a large portion of its commercial assets to DLF Assets Ltd

(DAL), a company promoted by DLF Chairman Mr K P Singh - said that during the second quarter, sale to DAL

contributed 47 per cent to net profit.

DAL owes DLF close to Rs 4,800 crore at the end of the September 2008. DLF expects DAL to repay close to

Rs 5,000 crore through a mix of debt and equity by the end of the current fiscal. DLFs net staff strength came

down by 10 per cent at the end of the quarter to 3,500 employees, but the company attributed this to voluntary

attrition. Close to 350 people chose to leave us but that was natural a ttrition and did not involve lay-offs.

Generally, people re-look at their options after increments, Mr Rajiv Singh said, adding the company continued

to hire in areas of specialised skill sets such as mall management.

The finance cost for the company also continued to rise, and the last deal concluded by DLF came with 16 per

cent borrowing cost, compared to 12 per cent a year ago.

DLFs debt currently stands at Rs 14,000 crore. Of this, over Rs 4,000 crore is on account of new initiatives

such as hotels, Rs 10,000 crore is on account of real estate, and a large portion of that would be liquidated

through DAL, Mr Singh said.


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During the second quarter, as much as 64 million sq ft was under construction, after delivering 2 million sq ft of

built-up space in commercial office and home segments. DLF said it plans to launch more residential projects in

New Delhi, Gurgaon, Hyderabad, Bangalore, Indore and Panchkula.

Impact of slowdown on the FDI policies for Real Estate

The country has so far not allowed any FDI in multi-brand retail due to strident political opposition, particularly of

the Left, to the entry of multinational retail giants in India, who in their opinion, could ruin livelihood security of

small traders and a large number of persons employed with traditional form of retail business.

However, as fears of foreign fund flows into India diminishing in the next few months are becoming real, the

government has begun to seriously think in terms of revisiting its policy on FDI in the retail sector. This, if

allowed, will open up floodgates of new capital, as foreign retail majors are too keen to foray into Indias retailsector.

While, infusion of 100 per cent FDI in cash and carry (B2B) retail is currently permitted; only 51 per cent FDI is

allowed in single brand retail. No FDI is, however, permitted in case of multi-rand retail.

While, the likes of Metro AG (Germany) and Shoprite (South Africa) have already taken advantage of 100 per

cent FDI in cash and carry business and likes of Carrefour (France) and Tesco (UK) have announced their

intention to do so, single brand retailers like Marks & Spencer (UK) and Vision Express (Netherlands) have

been forced to accept partnerships with local business houses for entry into single brand retail. Given the

choice, many of them would have liked to go on their own.

Multi brand retail giants like Wal-Mart, Carrefour, and Tesco, on the other hand, due to current FDI policy, have

been compelled to either take franchise route or provide technical (back-end) services. Some have even

chosen to wait until the policy is completely changed to meet their requirements.

Although, no major policy decisions are expected, as the general elections are due in the next six months, the

government is believed to be considering relaxation in FDI norms for both single and multi-brand retail.

Kamal Nath, the union minister of commerce and industries, at a recent trade conference in Paris, had

announced that the government is seriously considering permitting up to 100 per cent FDI (as against 51 per

cent at present) in single brand retail, specifically in the area of luxury retail. The official line so far has been to

consider allowing 100 per cent FDI in single brand retail in the segments that do not adversely affect local

employment.

It is also believed that, despite pronouncements to the contrary, the commerce ministry has mooted a proposal


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that seeks to allow up to 49 per cent (as against Zero per cent at present) FDI in multi-brand retail.

Although, this will require a lot of political courage on part of the government, if both proposals of the commerce

ministry are accepted, the country can expect to receive a large inflow of FDI in the retail sector from MNC

retailers, as modern retail is growing at 40 per cent or more every year.

4. Airline Sector

The failure of various banks in United States of America brought worst condition in the economy of United

States of America as well as effect had been seen all over the world which resulted in the global economic

slowdown. Every type of business started to face slowdown in the net income. The airline sector of India also

caught in this slowdown. The leading airline flights services started to layoffs their employees to bear the loss of

this worldwide economic slowdown. The effect of worldwide economic slowdown can be seen in almost every

type of business. There had a decline in passenger demand with an 8.40% year on year drop in January

2009. There has been a sharp reduction in capacity at 5.60%. The Load Factor sank to 72.60%. People want to

save more money to sail through the turbulent times thus reducing the number of airline travelers (both

international and domestic). The same has been coupled by the terror attacks in India, which actually led the

demand to go down substantially.

5. Food

No one can survive without basic food materials like milk, vegetables and drinking water. Food processing

companies will not be affected much and rather will earn profits by increasing the prices. These are the

products that satisfy the basic needs and we as a common man cannot produce by ourselves.

According to MFPI, the food processing industry in India was seeing growth even as the world was facing

economic recession. According to the minister, the industry is presently growing at 14 per cent against 6-7 per

cent growth in 2003-04.The Indian food market is estimated at over US$ 182 billion, and accounts for about two

thirds of the total Indian retail market. Further, the retail food sector in India is likely to grow from around US$ 70billion in 2008 to US$ 150 billion by 2025

6. Railway

As the aviation sector has been affected much badly and resulting in sharp rise in the air ticket rates the

frequent travellers will prefer railways to cut the cost of travelling and this will result in increased traffic in

railways and long queues at railway booking counters. The freight traffic of Indian Railways has continued to

grow in the last few months, albeit at slow pace, indicating only marginal impact of the global recession on the

Indian economy.


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The Railways registered 13.87% growth in revenue to Rs 57,863.90 crore in the first nine months ended

December 31, 2008. While total earnings from freight increased by 14.53% at Rs 39,085.22 crore during the

period, passenger revenue earnings were up 11.81% at Rs 16,242.44 crore. The Railways have enhanced

freight revenue by increasing its axle loading, improving customer services and adopting an innovative pricing

strategy.

7. Banks

As seen in the private sector much of the job cuts due to global slowdown, its the PSU sector Banks that

gained much confidence due to job safety and security. More and more people are likely to turn towards

government institutions, particularly banks in the quest for safety and security.

A report "Opportunities in Indian Banking Sector", by market research company, RNCOS, forecasts that theIndian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till

2011.

8. Telecom

People will not stop to communicate with each other due to global crises rather it has been seen that it will

increase much particularly with mobile communication. With cheap cell phones available in the Indian market

and cheaper call rates, the sector has become the necessity and primary need of everyday life.

Telecom sector, according to industry estimates, year 2008 started with a subscriber base of 228 million and

will likely to end with a subscriber base of 332 million - a full century! The Telecom industry expects to add at

least another 90 million subscribers in 2009 despite of recession. The Indian telecommunications industry is

one of the fastest growing in the world and India is projected to become the second largest telecom market

globally by 2010.

9. Luxury products

The high and affluent class of society will not be affected much by this global crisis even if their worth is reduced

significantly. They will not change their life style and will not stop spending on luxurious goods. So luxurious

product market will not be affected and in fact to maintain the lifestyle those affluent will spend more for it.

Luxury carmakers are pouring in to woo the nouveau riche (Audi, BMW are the most recent entrants).

According to recent research on luxury trends, the number of families with annual incomes of more than

$230,000 will have more than doubled from 20,000 in 2002 to 53,000 by the end of 2005 and will grow to

140,000 by 2010.


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10. M&A & Marketing Consultants

As in the current business slow down survival will be the main focus, the marketing and management

consultants will be called for to reduce the costs and to show the ways to survive and stay in market. Others

may join hands to fight with this situation together will call for the Marketing & M&A consultants. In a boomingmarket there are growth strategies and M&A opportunities to advise on. When businesses are cutting back,

consultancies will be right there to help clients decide where to wield the axe.

According to Ministry of Commerce and Industry's estimation, the current size of consulting industry in India is

about Rs.10, 000/- crore including exports and is expected to grow further at a CAGR of approx. 25% in next

few years

11. Media and Entertainment

In current bad times, where people are losing jobs and getting enough time to watch TV, they will seek

entertainment at home and hence advertising revenues will increase for the commercial channels. Also

businesses like production of religious texts and religious materials, religious channels will do well. The TRP of

religious channels will increase compare to the other entertaining/commercial channels.

According to a report published by the Federation of Indian Chambers of Commerce and Industry (FICCI), the

Indian M&E industry is expected to grow at a compound annual growth rate (CAGR) of 18 per cent to reachUS$ 23.81 billion by 2012. According to the PWC report, the television industry was worth US$ 5.48 billion in

2007, recording a growth of 18 per cent over 2006. It is further likely to grow by 22 per cent over the next five

years and be worth US$ 12.34 billion by 2012.

12. Automobile sector

The main reason for the automotive prices to shoot up has been the cost of production to go up. When the

slowdown actually started the inflation had been above 12%. As a result the value of money had fallen and the

consumers had to pay more for a commodity. The import duty and the raw material costs had gone up

substantially apart from the substantial increase in the sales tax, registration, transportation, insurance, octroi or

any other tax structures. The prices of steel and tyres (one of the major components in manufacturing a car)

had been touching the skies. And these hikes in costs had been passed on to the customer.

Another reason would be the fuel prices that touched $180/barrel. The effect of it had been felt in the Indian

market when people had to pay approximately INR 56 per liter of petrol. This also discouraged individuals to

buy new vehicles and also discouraged the commercial vehicle owners as their profit margin was thinning and

their operating costs were going up.


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On one hand due to economic slowdown people want to save more money with them to ensure they can sail

through these difficult times. On the other hand the automotive costs had been shooting up. These reasons put

together had brought the sales of the automotive down and the automobile market had been badly hit because

there had been severe slack in consumer demand.

Hindustan Motors has cut the salaries of its managers and executives by 10 12.5% to tide over the slump in

demand for its passenger cars and auto component businesses. The salaries had been cut since November

2008 on CTC basis. For the workers, net salaries have been reduced by Rs. 400 per month, which took effect

from January this year (Sources: Business Standard, Dt. 23.02.2009)

Japanese car major Honda will continue to cut its India output by over 45% for the next six months in order to

prevent inventory build-up amidst the on-going slowdown in the domestic market. It is also mulling to increase

the prices of its products.

Sector wise Analysis-Measures Taken

Real Estate

A few real estate companies have started taking innovative steps like one company in Mumbai have started

offering houses on a buy back guarantee in three years time period, which means, if the customer is not

satisfied with the house he can sell the same to the seller at the same price in which he has bought after 3 yrs.

This can reinstate the consumer faith and in turn can boost the demand.

The real estate giants should project their focus on low cost houses (probably less than 20 Lakhs) so as to

address the middle class. This is also expected to increase the overall demand for the housing sector, because

now we have seen a drastic downturn in demand for the same.

IT

Some of the IT majors have started shifting their focus from the US and European clients towards the south East Asian clients, like Singapore, Malaysia, and Bangkok etc. Singapore has promised to be a great

destination for the Indian IT products and services. Hence the IT industry would be able to cope up with the

present slowdown in the economy and will have enough orders flowing in. This will not only help them to cope

up with the slowdown, but also give them an opportunity to explore new markets and generate new and bigger

client base. This will reduce the dependency on the US and the European customers and hence will help these

companies to insulate themselves from this sort of financial crisis.


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Automobile

Now with the various tax cuts and the prices of steel coming down, the price of automotive has to be brought

down. Even the cost of fuel has come down to quite an extent. Hence the automotive sector has to come up

with good amount of price cuts coupled with more fuel-efficient vehicles. We understand that can be a good

incentive for the consumers to start buying the automobiles again.

Also as the interest rates are likely to come down with the government injecting more and more money into the

system, the automobile companies need to sit with various banks and financial institutions to work out the loan

facilities so that the consumers can be encouraged to avail loans to finance their vehicles.

Airline

In India we need to implement Flight Efficiency Plan (FEP), which has been implemented in Europe to fight the

recession. This is expected to generate annual savings of 4, 70,000 tonnes of fuel, and 1.55 million tonnes of

CO2 globally.

Apart from making the airlines more fuel and CO2 efficient, government might take a few measures to help the

airline industry by reducing the parking, domestic landing charges and the cargo landing fees. This will help the

airlines sector to resurrect and in turn the Indian economy.

Retail

Taking the current market scenario into consideration, cutting down the insignificant marketing and advertising

budgets will reduce the financial burden on the retailing industry. Innovative marketing and effective advertising

might be a brilliant move for the present day market trends. The industry needs to touch upon more customers

and drive them down to the retail points at a low cost. Low investment and high returns are made possible

through technology enabled marketing services. The retail industry should realize that it would be at a fair

advantage of including technology enabled marketing services to unfold the immense retailing opportunities and

to survive these difficult times.

Changes in the parameters of the Economy

The economic slowdown, during the second quarter vis--vis the first quarter of 2008-09, was primarily driven

by a moderation of consumption growth and widening of trade deficit, offset partially by acceleration in

investment demand. On the other hand, the government consumption expenditure accelerated during the same

period.

The Indian economy experienced a cyclical moderation in growth accompanied by high inflation in the first halfof 2008-09. There is now distinct evidence of further slowdown as a consequence of the global downturn. The


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knock-on effects of the global financial crisis, economic slowdown, and falling commodity prices are affecting

the Indian economy in several ways. Capital flow reversals intensified in September and October 2008 though

they have stabilised since then; international credit channels continue to be constrained; capital market

valuations remain low; industrial production growth has slackened; export growth has turned negative during

October-November 2008; and overall business sentiment has deteriorated. It has caused changes in various

parameters of economy. Some of the parameters are:

Income level

During recession, the cash flow in the business organizations will register a decreasing trend. As a result, the

income of the persons will be stagnant without any increments and promotions. Cumulatively the national

income level will register a downward trend. Net profits decelerated during the first quarter and declined

marginally during the second quarter of 2008-09 as against sizeable increases in the corresponding quarters of2007-08. Reflecting increase in interest payments coupled with deceleration in gross profits, interest burden

(measured as interest to gross profits) increased during the second quarter of 2008-09.

Item

2007-

08

Q1 Q2 Q3 Q4 Q1 Q2

Sales

Other income

Expenditure

Depreciation

provision

Gross profits

Interest payments

Profits after tax

18.3

46.2

18.4

14.8

22.8

28.8

26.2

19.2

106.7

18.0

18.1

31.9

4.4

33.9

16.0

45.2

15.3

15.8

22.5

18.4

22.7

18.0

70.2

18.9

17.9

20.4

45.7

29.4

20.6

28.5

23.3

15.4

16.8

35.8

14.1

29.3

-8.4

33.5

15.3

11.9

58.1

6.9

31.8

0.6

37.5

16.5

8.7

85.3

-2.6

Employment

During recession, unemployment rate rises by about 5% to 10% from a full employment level. This is because

of the decreased economic and corporate turnover. The income stagnated employees will migrate towards

higher income opportunities. The national employment level will register a downward trend. The unemployment

rate surged to a five-year high of 5.4 per cent and payrolls showed a loss of 415,000 jobs, the worst one-month


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performance in 21 years. The head of world's second largest headhunting firm says there will be 5-10 per cent

job cuts across sectors.

US credit card and banking giant American Express confirmed that the company would cut jobs in India. The

reengineering plan includes: reducing staffing levels and compensation expenses, cutting operating costs and

scaling back investment spending. The company has taken on its books a restructuring charge of approximately

$370 to $440 million pre-tax (approximately $240 to $290 million after-tax) in the fourth quarter. The charge is

primarily associated with severance and other costs related to the elimination of approximately 7,000 jobs or

about 10 percent of the company's worldwide workforce.

Inflation

During recession, the inflation will be nil or even register a downward trend. The reason is due to less supply of

commodities combined with less purchasing power of the domestic population. The less demand = reduced

supply condition, will offset each other. In India, inflation measured as year-on year variation in the wholesale

price index (WPI), declined sharply from an intra-year peak of 12.9 per cent on August 2, 2008 to 5.6 per cent

as on January 10, 2009. Headline inflation, as measured by year-on-year variations in the wholesale price index

(WPI), fell by more than half from its intra-year peak of 12.91 per cent on August 2, 2008 to 5.60 per cent by

January 10, 2009. While prices of primary articles and manufactured products increased, fuel prices declined. In

terms of relative contribution to decelerating headline inflation between August 2, 2008 and January 10, 2009,

petroleum and basic metals (combined weight of 13.2 per cent in WPI) together accounted for 79.4 per cent,

followed by oilseeds, edible oils & oil cakes (16.4 per cent). Clearly, the fall in commodity prices reflecting

global trends has been the key driver of the sharp fall in WPI inflation although effective management of

domestic demand too has contributed to this moderation.

Annual Inflation Rate (%)

Wholesale Price Index (WPI) January 12, 2008 January 10, 2009

(Y-o-y) (Y-o-y)

WPI - All Commodits 4.36 5.60

WPI - Primary Articles 4.49 11.64

WPI - Fuel Group 3.69 -1.32

WPI - Manufactured Products 4.57 5.90

WPI - Excluding Fuel 4.55 7.53


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WPI - Excluding Food and Fuel 5.21 6.52

GDP

According to Morgan Stanley, Recession may pull down India's GDP by 3%. During recessionary times, there is

severe credit & fund crunch, businesses will like to optimize whatever available resources they have. India's

current fiscal deficit situation is not comfortable. According to advance estimates of national income released by

the government recently, the economic growth rate during 2008-09 is expected to moderate to 7.1 per cent from

9 per cent in the previous fiscal. According to the estimates released by the Central Statistical Organisation

(CSO) in November 2008, real GDP growth during the second quarter of 2008-09 was lower at 7.6 per cent as

compared with 9.3 per cent in the corresponding period of 2007-08.

During the first two quarters of 2008-09, despite high top-line growth, operating margins of the private corporate

sector were eroded by higher input costs and significant drop in other income. In light of the subsequent

slowdown, industrial investment plans are slowing down, although ongoing investment projects appear to be

continuing. The erosion in pricing power of corporate was reflected in rising inventories as a proportion to sales.

While the downside risk to corporate profitability has increased, this may at least be partly offset by falling input

prices and a gradual reduction in borrowing costs.

Real GDP Growth (%)

First Half Year

(April-September)

Sector 2007-08 2008-09

Agriculture 4.5 2.9

Industry 9.1 5.0

Services 10.6 9.9

Overall 9.3 7.8


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Conclusion

But India is fortunate as compared to a few other countries of the world.

Many factors are responsible for relatively less negative impact on Indian economy. The slow pace of financial

reforms taking place in India, the cautious approach towards permitting foreign investments in the Indian

business sectors, numerous bureaucratic hurdles and regulatory constraints have turned out to be

advantageous for India. India has always been criticized for its slow speed in economic growth but in hindsight

its that very turtle speed has proved to be a blessing in disguise. Indian financial system has very littleexposure to foreign assets and their derivative products and thats the prime reason India wont be as adversely

affected as other major countries.

Revival of world economy will take a long time. Though India will be affected in certain aspects like, lowinvestments by foreign companies, Indias cautious approach towards integrating with world economy has paid

off and now even more caution would be taken in de-regularization of the financial sector considering conditions

of market based economies. Another impact would be seen in financial reforms taking place in India. More

regulations are expected to come into force so that India does not have to face similar worst conditions as faced

by ASEAN counties in 1997-98 crisis and recession of 2008.

ReferencesRbi.org.in

Business Standard

Economic times

Times of India

Iata.org

Livemint.com

Retailindustry.about.comBlogs.siliconindia.com

Documents

Recession Effects