melt down in india

8/8/2019 Melt Down in India

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Topic:- Melt down in India 2008-09

Term Paper

2009-2010

MGT-515

Submitted by:

Guided by:

Chandan kumar singh Miss Palwinder kaur

Section-RT-1902

Roll number A-27

Regd No-10903162

Lovely Professional university


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INDEX

Acknowledgement....3 Objective and AIM...3 Introduction..4 Impact of Melt down.11 Causes of Melt down.14 F

uture of Indian Economy18

Conclusion.22 Bibliography.23


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Acknowledgement

I provide full justice to this term paper which is prepared by visiting various web-

sites, magazines, articles etc.

An interesting part of this term paper is research methodology which is prepared

with the help of the Indian culture. It includes the future of the Indian economy

which is how survive the present world.

I would like to take an opportunity to thank all the people in collecting the

necessary information and making of the report. I am grateful to all of them for

their time and wisdom.

My project becomes a reality only due to cooperation of many people who had

helped me in completing this project. I sincerely extend my gratitude to Mis.

PALWINDER KAURwho has given me this precious opportunity to have an

know about ourIndian economic condition of strength or weakness of the India.

Objective:

Objective of this term paper is know about the present Indian global recession. The

present recession impact effected aprox all over the world. The hole economy of

the world facing the meltdown in present. TheIndian economy is also facing the

melt down situation.


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Meltdown in India 2008-2009

We are shining, we will be the 2nd

largest economy by 2020, we are the largest

pool of skilled man power on the earth, we are the emerging global IT superpower,

we are the outsourcing hub of the world, we offer one of the largest consumer

market across the world for MNCs, we boast of rich and varied heritage, we are

growing at the GDP rate of impressive 8-9% per annum and aiming for a glittering

double digit growth rate soon, we are India!

It seems that the above facts are in our favor; we are shining, but are we really? Or

our mindset of estimating standard of living of the population just by the glittering

GDP growth rates is a sign of our biased mentality? The other side of the story -

25% population still living below poverty line, most of the cities and villages

without even suitable condition for a healthy living, proper health care centers,

electricity, UNESCO is concerned about the child mortality rate in India, we are in

the top countries from below in the Human Development Index and still we

ignoring the reality or over shadowing the face of our countrys ugly face.We are definitely showing improvement in our condition from the standpoint of

economic growth, we are doing fairly well in terms of various developmental

indices; economy is at boom despite the global melt down affecting various

markets. Our strength is our own untapped rural and urban markets, people with

increased disposable income, higher literacy rates. Take example of Mumbai the

Indian dream city, we have one of the costliest office spaces of the world and in the

same city we have largest slum of Asian continent; Dharavi and many others like

Gowandi. We have industry barons; at the same time we have the people who die

of hunger, mal-nourished children who we claim to be the future of our country.

How we can claim of an all round development of the economy when those


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children do not have proper nourishment and health care in place, let alone the

educational facilities?

We are too much obsessed with our momentary success and we have forgotten the

real India, which lies in rural areas, which lies in the ignored areas of our great

cities and we are actually trying to isolate them from our comfortable standpoint on

the development. Our administration system though working hard to eliminate

illiteracy, providing proper nourishment and health care facilities to every Indian,

trying to provide the employment to everyone who needs it. We never forget to

blame our government for all the failures; we try to put the responsibility on others

shoulders, we keep on complaining about poor facilities, we only forget to act!

We complain about the crook politicians, but again we select the same lot of them

in every upcoming election. We do not go to fight on the political front ourselves,

those who think they are intellectuals and politics is a dirty game, need to rethink,

need to make a choice of always complaining or making things better- then only

the change will come. If we can think towards a rational plan of development we

should always try our hands in implementing it for the benefit of our country.


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The following chart illustrates the foreign funds inflow into the

Indian economy:

These inflows have been fuelling capacity expansion in Indian industry since 2001.

Think of the telecom industry and the capacity expansion by Airtel, Tata Indicom

and Reliance Mobile over the last five years; think of the RIL mega-refinery

projects; think of all the swank new malls and multiplexes that were built in your

metro over the last five years; think of all the SEZs that were proposed in 2007;and you will see what I mean here.


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The FY 2008 inflow alone looks as follows:

The fact that the debt inflow was as high as 39% of the total tells us where the hit

is going to come from. With a global credit freeze in progress, it is clear this inflow

is going to dry up. We already are seeing the portfolio equity inflow turning into anoutflow in the last few weeks, pulling the Sensex below the psychological 10K

mark.

With these funds drying up, capacity build up will reduce. Combine this with a

liquidity squeeze imposed by Indian banks on retail borrowers (to counter

inflation) and you can see the demand also reducing. Reduced supply + reduced

demand > Reduced GDP growth.


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Service sector consists of

Trade, hotels, transport & communication

Financing, insurance, real estate & business services

Community, social & personal services


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GDP Growth is slowing down

GDP growth slowed down from 9.0% in 2007-08 to 6.7% in 2008-09

Growth slowed down to 5.8% in 2H 2008-09

Economy likely to have bottomed out and growth is likely to recover toAround 7% b th d f 2009 -10.

India is set to grow faster than other regions

Annual percentage change

Economies 2007 2006 CurrentProjection

Currentprojection

World 5.2 3.2 -1.3 1.9

Advanced Economices 2.7 0.9 -3.8 0.0

United States 2.0 1.1 -2.8 0.0

Euro Area 2.7 0.9 -4.2 -0.4

Japan 2.4 0.6 -6.2 0.5

U K 3.0 0.7 -4.1 0.4Emerging and developing country 8.3 6.1 1.6 4.0

Developing Asia 10.5 7.7 4.8 6.1

China 13.6 9.0 6.5 7.5

India 9.3 7.3 4.5 5.6

Brazil 5.7 5.1 -1.3 2.2

Mexico 3.3 1.3 -3.7 1.0


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Impact ofFinancial crisis

In 2008-09, there were large withdrawals of capital especially portfolioflows.

FDI remained strong despit the financial meltdown while foreign loansmoderated a bit.

As a result of capital outflows in 2008-09, the rupee has depreciatedby over 25% in that year till.

The recent recovery in capital inflows has lead to some reversal

with the rupee now trading at levels of Rs 47-47.5/US$.

Inflation rate: Moderating quickly

A sharp increase in inflation preceded the current moderation

Swings in commodity prices is driving inflation trends

Primary product prices food and non-food have started hardening

Could see a period of falling prices in the current year

Will lead to further easing of monetary policy and decline in lending rates


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Impact ofFinancial crisis

In 2008-09, there were large withdrawals of capital especially portfolioflows.

FDI remained strong despit the financial meltdown while foreign loansmoderated a bit.

As a result of capital outflows in 2008-09, the rupee has depreciatedby over 25% in that year till.

The recent recovery in capital inflows has lead to some reversalwith the rupee now trading at levels of Rs 47-47.5/US$.

Causes of the Present World Recession

The standard story of the present global recession and financial crisis emphasizes

the centrality of developments in the United Statesespecially the expansion andsubsequent collapse of the real estate and real estate financing bubble and itsimpact on an overleveraged US and global financial system. Others point more

broadly to persistently easy monetary policies, very low interest rates and interestrate spreads, and general disregard of growingrisks in the financial system as key causes. Some, especially among present andformer US officials, point to the global savings glut, particularly the partemanating from Chinas massive current account surpluses and reserveaccumulation, as a key underlying cause of present travails. All of theseexplanations harbor a degree of truth, especially the first two. However,to understand both the sudden sharp deepening of the global recession andfinancial crisis last autumn and the reasons to anticipate recovery, it is important to

look to a broader set of causes of present difficulties.While it seems like a distant memory, it is important to recall that from mid-2003through early 2008, the world economy enjoyed a boom of broad scope andexceptional vigor, with average annual growth of global GDP approaching 5

percent and with virtually all countries participating in the boom. As reflected in adeteriorating balance of real net exports, through the end of 2005, growth ofdomestic demand in the US economy in excess of US real GDP growth contributedto the boom in output in the rest of the world. The upsurge in residentialinvestment in the United States and the impact of increasinghousehold net worth from rising home and equity prices on US consumptioncontributed to this phenomenon. In 2006 residential investment turned downward,


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and growth of US domestic demand slowed. With the aid of a weakened dollar, USreal net exports began to improve. Indeed, from the end of 2005 through mid-2008,the improvement in US real net exports slightly more than offset a very largedecline in real residential investment. This kept US real GDP growing, albeit at areduced pace, despite a considerable slowdown in realdomestic demand growth. Thus, the rest of the world helped to cushion theslowdown in the United States.

Causes of Economic Recession

Generally speaking, a recession is when there is a tightening of the economy,

usually for a certain period of time.

Given below are 10 signs that usually indicate that a recession is knocking.

The Rate Of Joblessness Assumes Disturbing Proportions.Usually, the rate of jobless people remains steady every month. But if there is a

constant, steep rise in that number, then this could be a sign of recession.

Large Companies Start Giving Depressing Profit Figures.When many companies across all sectors start giving out depressing sales and

profit figures, then alarm bells should start ringing.

Borrowers

Start Defaulting.

When borrowers are unable to pay back their loans on homes, vehicles,

businesses and credit cards, then this could be another indication of a falling

economy.

Prices Of Essential Commodities Shoots Up.When prices of food, fuel and other utilities shoot up - and the government

seems helpless to do anything - then it could be said that inflation is fanning the

flames of a possible recession.

Companies Stop Filling Vacancies.When companies decide to keep their job openings vacant instead of hiring new

staff, then this again is another sign that a recession has afflicted the economy.


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Many companies might also offer voluntary retirement programs in order to

reduce their workforces and cut expenses.

Prices Of Property And Stocks Come Down Drastically, ButNobody Buys Them.

When repossessed homes and stock prices come down in value, but nobody has

the funds to buy them, then it can be truly said that the economy has been hit by

a recession.

The Country's GDP Goes Down.When a country's GDP, or Gross Domestic Production, registers a continuous

downward fall, then this could be another sign that the economy is in recession.

Savings Are Used For Day-To-Day Expenses.When people start terminating their fixed-term deposits, such as CDs and

IRAs, and sell off other assets to meet their day-to-day expenses, then this

could indicate that a recession has started doing some serious financial damage.

You Start Worrying About All Of The Above.When you start feeling the pinch and start worrying about your own future on

the above points, then this will indicate that the recession has now reached your

door.

Impact on various sectors

The contagion is truly global in a globalised world. How can the high priests of

globalization in India expect to insulate the country from this all-pervasive crisis?!

Already the financial crunch is having its impact on the foreign institutional

investors (FII) hot money in India . Just wait for the impact on trade, foreign

direct investments (FDI), exchange rates, remittances, balance of payments (BOP),

foreign reserves and, above all, on the macro-economy in India. Goodbye to the

rosy stories of double-digit growth miracle, it is now an impending debacle that


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stares economic analysts in the face.

Automobiles examples

TATA Motors has announced a new work schedule of reduced days every week in

its truck manufacturing facility in Pune and Jamshedpur as loans are getting on the

truck buyers nerves. AshokLeyland is worse affected and has announced a pile -up

of a huge unsold inventory of 13,000 commercial vehicles. It has planned to

shutdown its commercial vehicle manufacturing operations for longer periods till

Dec '09.

In the car segment Mahindra Renault has reduced its production from 2500 cars a

day to 1000 cars at its Nashik (Mah) plant due to lack of demand. The offtake

reached a peak of 3068 units in March 2008, with 1531 in May,1464 in August and

now 1067 units in October.

In the two-wheeler segment Bajaj Auto announced the shutting down production of

bikes at Aurangabad(Mah) for two days in November '08. A decline of 34% ofsales was reported in October vis-a-vis Oct 2007.The total unsold inventories of

Bajaj Auto amount to 50,000 two wheelers.

The Immediate Impact on Indian Stock Markets

The festival season in India was seldom so gloomy for the share market. Investor

wealth worth Rs. 250, 000 crore (1 crore = 10 million) was wiped out on the

bourses on a single day, on 10 October. The Sensex fell by 1000 points before

recovering some 200 points, an intra-day drop of some 800 points. The lachrymal

wave washed away the festive mood.

At the first sign of stock market crash and FII funds stampede, the United

Progressive Alliance (UPA) Government has once again permitted P-notes


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(participatory notes) paving the way for enhanced speculation. The present

convulsion in the Indian bourses would look mild before any possible explosion in

future as a result of this heightened speculation. Despite the government itself

acknowledging that the P-notes were being abused/misused at the time of banning

them, no safeguard has been put in place. Anyway, how can there be any safeguard

within the realm of speculations? It is absurd.

Impact on Indian banks

Indian banks are safe, reassured Reserve Bank ofIndia (RBI) Governor

Subbarao repeatedly. Indian banks' exposure to international markets is relatively

small at 6 percent of their total assets, the rating agency Crisis said, adding that

even lenders with large international operations have less than 11 percent of their

assets overseas. But a mini-version Indian bailout was in the making

simultaneously in the first week of October with the government virtually shoring

up two mutual funds and Life Insurance Corporation (LIC) coming to the urgent

rescue of three more which landed into liquidity crisis in the backdrop of a steep

crash in the stock markets.

At a time when the big names in Western banking industry are queuing up

for bailouts, there may be a sudden leap in non-resident Indian (NRI) deposits in

Indian banks as these funds would look for a safe haven back home. We can hence

expect a big clamour from the NRI lobby for greater concessions for their deposits.

Chidambaram would only be too willing to oblige. The RBI recently increased thecredit cost on term borrowings (with more than 7-year maturity) to Libor+4.5%

and even then the big Indian corporate names are finding it difficult to raise funds

amidst the present turmoil. Indian borrowers will end up paying more for the

foreign lenders and Indian banks might be forced to pay more for the NRIs all in


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the backdrop of a creeping recession and falling rate of profits.

Exchange Rate: Rupee Depreciation

When the western economies are going into a tailspin one after the other, theappreciation of dollar and euro looks somewhat paradoxical. From unprecedented

appreciation earlier a few months back, the rupee fell to record low reaching

Rs.49 per dollar at some point. The dollar is gaining vis--vis rupee because of the

outflow of the FII funds and since the worst is yet to come in the US /global

meltdown, a repeat of the East Asian crisis in India is very much a possibility.

During the preceding period, if the rupee appreciated by around 18%, now it has

depreciated by around 19% during this Jan-Sept.

The exporters who were crying earlier are happy but it is now the turn of

importers to come to grief. Not many people know or remember that

manufacturing imports had overtaken total domestic manufacturing production in

the domestic organised industrial sector this year. Apart from cost escalation and

consequent reduction in profit margins, just wait for the impact of the rupee

depreciation on inflation. The confident prediction of possible fall in inflation rate

to single digit by January sounds hollow in the backdrop of this as well as the cut

in CRR rates and other measures by the RBI aimed at increasing the liquidity.

Impact on Trade

The trade deficit is reaching alarming proportions. If exports are growing, imports

are growing even more. Thanks to workers remittances, NRI deposits, FII

investments and so on, the current account deficit at around $10 billion doesnt

look so threatening. But for some reasons if the remittances dry up and FIIs funds


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take flight, it will be a repetition of 1991 after a few years if forex reserves get

depleted and trade deficits keep increasing at the present rate. Even as the

countrys exports and imports registered a substantial growth of 35.1 per cent and

37.7 per cent in dollar terms, respectively, during the first five months of the

current fiscal (April to August), the trade deficit during the period has shot up. The

trade deficit was around $14 billion for a single month of August 2008, a record

level. Even Goldman Sachs prediction that India s forex reserves would decline

to $271 billion by year end from $310 billion in March 2008 looks a very

conservative estimate.

Social Impact

"Suicides after market crash is an urban trend" screamed the headlines in a pink

paper. Beneath that was the sob story of an entire family committing suicide after

heavy loss in the stock market. "Whether it is a seemingly well-to-do US-resident

ofIndian origin wiping out his entire family or middle-aged brother-sister duo

killing their parents and then committing suicide, the financial crisis has hit

everyone, and has hit them hard", the report added. At least, the desperate farmers

go alone leaving their family members in the lurch. But the scorched middle class

investors take their entire families along and that is the level of urban investing

middle class insecurity. This explains the golden age for gold as investment in

yellow metal is considered safer. Just think of the hundreds of new scrips by

companies with ambitious investment plans counting on these investible surpluses

of the middle classes and also the market opportunities opened up by their wealth.All these plans for new scrips will be scrapped. The middle class boom might be

glamorous but the depression in incomes and losses in the markets are far more

agonizing. Pink slips are painful indeed and joblosses are not limited to the West

alone. Those who are hoping that jobs in the West would shift across to the


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cheaper shores of the India are missing the point that domestic job losses due to

recession in the West as well as a slowdown in India would far outweigh such

outsourcing gains. Even the real estate boom is going bust in Bangalore , the

Indian El Dorado.

UPLIFTMENT MEASURESBYGOVERNMENT

To lift the economy out of the meltdown the Government announced a package of

Rs 35,000 crores in the first instance on December 7, 2008. The main areas to

benefit were the following:

(a) HousingA refinance facility of Rs 4000 crores was provided to the National

Housing Bank. Following this, public sector banks announced to provide small

home loans seekers loans at reduced rates to step up demand in retail housing

sector.

(i) Loans up to Rs 5 lakhs: Maximum interest rate fixed at 8.5 per cent.

(ii) Loans from Rs 5-20 lakhs: Maximum interest rate at 9.25 per cent.

(iii) No processing charges to be levied on borrowers.

(iv) No penalty to be charged in case of pre-payment.

(v)F

ree life insurance cover for the entire outstanding amount.

This means a borrower can get a loan up to 90 per cent of the value of the house.

The government hopes to disburse Rs 15,000 to 20,000 crores under the new

package.


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The housing package is the core of the governments new fiscal policy. It will give

a fillip to other sectors such as steel, cement, brick kilns etc. Besides, the small and

medium industries (SMEs) too get a boost by manufacturing all kinds of fittings

and furnishings.

The success of the housing package will, however, depend on the State

governments efforts to free up surplus land so that land prices come down and the

cost of housing becomes reasonable.

(b) TextilesDue to declining orders from the worlds largest market the United

States, the textile sector has been seriously affected. An allocation of Rs 1400crores has been made to clear the entire backlog in the Technology Upgradation

Fund (TUF) scheme.

The Apparel Export Promotion Council (AEPC) Chairman, however, said: It is a

disappointing package. The allocation of Rs. 1,400 crores has been pending for

many years and thus, it is the payment of arrears only. There is nothing new in it. It

would have been much better if more concrete measures have been taken to reverse

the downturn in the exports of readymade garments and avoid further job losses in

the textile sector.

(c) InfrastructureThe government has been proclaiming that infrastructure is

the engine of growth. To boost the infrastructure, the India Infrastructure Finance

Company Ltd. (IIFCL) has been authorised to raise Rs 14,000 crores through tax-

free bonds. These funds will be used to finance infrastructure, more especially

highways and ports. It may be mentioned that refinance refers to the replacement

of an existing debt obligation with a debt obligation bearing better terms, meaning

thereby at lower rates or a changed repayment schedule. The IIFCL will be


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permitted to raise further resources by the issue of such bonds so that a public-

private partnership (PPP) programme of Rs 1,00,000 crores in the highway sector

is promoted.

(d) ExportsExports which accounted for 22 per cent of the GDP are expected to

fall by 12 per cent. The governments fiscal package provides an interest rate

subsidy of two per cent on exports for the labourintensive sectors such as textiles,

handicrafts, leather, gems and jewellery, but the Federation ofIndian Export

Organization (FIEO) felt the measures are not enough as they will not make the

exports price-competitive and, therefore, will not boost exports. G.K. Pillai, the

Commerce Secretary, has estimated a loss of 1.5 million jobs in the export sector

alone during 2008-09 on account of the $15 billion decline in the expected exports.

(e) Small and Medium Enterprises (SMEs)The government has announced a

guarantee cover of 50 per cent for loans between Rs 50 lakhs to Rs 1 crore for

SMEs. The lockin period for loans covered under the existing schemes will be

reduced from 24 months to 18 months to encourage banks to cover more loans

under the scheme. Besides, the government will instruct state-owned companies to

ensure prompt payment of bills of SMEs so that they do not suffer on account of

delay in the payment of their bills.

CON

CLU

SION

Meltdown in India was mainly due to global recession as GDP growth rate

declined from 9.2% to 6.2%stock market crashed and lowered from 21000 to 7250

one of the main factor for this was pulling of FIIs .Service sector was one of the


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most affected sector .IT &BPO sector was also very much affected because

maximum portion of its revenue comes from foreign operation. Export was

declined due to decrease in demand. However India is recovering from this

meltdown ,as GDP growth rate has been increased and now it is 7.9% .FMCG

sector has witnessed a growth of 22.2%in 2nd

quarter of 2009.automobile sector has

witnessed growth of 15.75% .All these indicates that meltdown is about to be

finished.

REFERENCES

www.knowthis.comwww.google.comwww.businessplan.orgwww.scribid.comwww.echeat.comwww.wikipedia.comwww.answers.com

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