TERM PAPER OF MANAGERIAL ECONOMICS

ON

IMPACT OF RECESSION ON SERVICE INDUSTRY

Submitted to Lovely Professional University

Submitted To: Submitted by:

Mr. Mohammad Abbas Neetu Singh

Reg no: 10905852

Roll no: A-09

SEC: RS 1904

ACKNOWLEDGEMENT

I take this opportunity to present my votes of thanks to all those guidepost who really acted as lightening pillars to enlighten our way throughout this project that has led to successful and satisfactory completion of this study.

We are really grateful to our Course instructor Mr.Mohammad Abbas for providing us with an opportunity to undertake this project in this university and providing us with all the facilities. I am very thankful to Mr.Mandeep Singh for his active support, valuable time and advice, whole-hearted guidance, sincere cooperation and pains-taking involvement during the study and in completing the assignment of preparing the said project within the time stipulated.

Lastly, We are thankful to all those, particularly the various friends , who have been instrumental in creating proper, healthy and conductive environment and including new and fresh innovative ideas for us during the project, their help, it would have been extremely difficult for us to prepare the project in a time bound framework.

Name NEETU SINGH

Reg.No 10905852

Roll no. RS1904A09

TABLE OF CONTENTS:

Introduction of Recession Predictors of recession Government responses Stock market & recessions: Identification of recession Causes of recession:

Impact of global recession on India Recession on IT sector Impact of Recession on Unemployment The Recession’s Impact on Outsourcing Strategies Impact of global recession on IT industry Refrences

Introduction of Recession:

A recession is when GDP growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline. For those reasons, many experts say the U.S. is actually in a recession now.

An economy passes through different phases of economic cycle, one of them is recession. It is observed when prices tend to increase, standard of living falls, unemployment rises and business stop expanding.

“Recession is:

o GDP is slowingo Expansion of business slowlyo Falling employment rateo Fall in housing prices.”

Another indicator of recession is GDP (gross domestic product) of a nation. Some economist believed that negative GDP growth for two consecutive quarters led to recession. However, it is said that recession starts – several quarters of slowing down in relation to positive.

Recession in a layman language means "A country (in this case) wherein buyers resist to buy, and where the sellers are keen to sell." So the whole balanced equation gets affected and supply becomes more then the demand.

Economic recession is defined as significant decline in the economic activity across a globe, lasting longer than few months. It can be seen in variables like GDP growth, industrial production, retail, real personal income & employment.

In economics a recession is a slowdown in economic activity & contraction of business cycle over a long period of time. Recession leads people loose their jobs, banks became bankrupt.

Predictors of recession:

1) Drop In the stock market, the beginning of recession.

2) The model “inverted yield curve” by economist Jonathan h.wright, uses yields on 10 year & 3 months treasury security as well as the fed’s overnight fund rate.

3) Unemployment rate changes within in 3 months.

4) Home prices were lowered down.

Government responses:

Economist believes that recession is due to inadequate aggregate demand in

the economy. Emphasize on more use of macro economic policies, at the time of recession. Strategies for an economy to come out of recession depending on which economic

school the policymaker follow. Monetarist emphasize on the more use of monetary policy. Keynesian economist favored increased government spending lead to economic

growth.

Stock market & recessions:

Stock market declines to lead to recession. In long run Siegel since 1948, stock market decline were lead by a stock market, by a lead time of 0 to 13

months, while 10 stock market declines of greater than 10% of the djia were not allowed by a recession.

Real-estate market was too affected by recession. Business cycle is unpredictable; seigel says that not possible to take advantage

of economic cycles for timing investment .even the national bureau of economic research (NBER) takes time to determine if a peak or trough has been occurred in the u.s.

Economic slowdown leads high yield stock such as fast moving consumer goods, pharmaceuticals & tobacco tends to hold up better.

‘Half –way rule’ is a term in which investors start discounting an economic recovery about halfway through a recession.

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Identification of recession:-

Economic static an Julius shish kin in 1975, New York Times article suggested several rules of thumbs for identifying a recession. In time, the other rules of thumb were forgotten & recession is defined as fall in G.D.P.(negative real economic growth).

In the United States the business cycle dating committee of the national bureau of economic research (NBER) is generally seen as the authority for dating US recessions.

Recession in IT Sector of India-Who knows IT is a boon or bane for Indiana one forecasted It would be under such recession an year before. Even a quarter before it happened no one can forecast this bitter truth. But from the last quarter of year companies were shown the down path. Employees were made to suffer. No job for bench guys. All employees who would usually look up for salary increase by this time was hit with a bid iron rod that there would be single digit percentage increase in salary. Oh my god says an employee who is closely related to me. Though they are out of total stress about salary increase the original state of employees of IT sector in India is "JOB CUTS”. Every one prays for no more job cuts in IT. If it happens no one can save Indian economy either. Every one ready to work for peanut now. Though all allowances has been cut, the employees who were adamant in previous years now flexible for shift timings, over timings anything that could be done to make their job safe.

The new forecast was the recession would be down by next quarter or so. Lets hope to hear a positive news all over since IT is becoming a backbone for INDIAN Economical development.

Towards the end of 2008, global recession became a reality. TheOutsourcing industry also geared up to face this most criticalChallenge and with it, a topic that has been discussed many timesalso saw a revival – Insourcing. Insourcing is the delegation of in houseBusiness functions to a specialized entity within theOrganization instead of seeking outside expertise. In this paper, welook at the merits and challenges of Insourcing versus Outsourcing.We also look at how companies must evaluate this opportunity in thelight of extremely challenging economic conditions.

IMPACT OF GLOBAL RECESSION ON INDIA:

RECESSIONS ARE the result of reduction in the demand of products in the global market. Recession can also be associated with falling prices known as deflation due to lack of demand of products. Again, it could be the result of inflation or a combination of increasing prices and stagnant economic growth in the west.

Recession in the West, specially the United States, is a very bad news for our country. Our companies in India have most outsourcing deals from the US. Even our exports to US have increased over the years. Exports for January have declined by 22 per cent. There is a decline in the employment market due to the recession in the West. There has been a significant drop in the new hiring which is a cause of great concern for us. Some companies have laid off their employees and there have been cut in promotions, compensation and perks of the employees. Companies in the private sector and government sector are hesitant to take up new projects. And they are working on existing projects only. Projections indicate that up to one crore persons could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled by Federation of Indian Export Organizations (FIEO), which says that it has carried out an intensive survey. The textile, garment and handicraft industry are worse effected. Together, they are going to lose four million jobs by April 2009, according to the FIEO survey. There has also been a decline in the tourist inflow lately. The real estate has also a problem of tight liquidity situations, where the developers are finding it hard to raise finances.

IT industries, financial sectors, real estate owners, car industry, investment banking and other industries as well are confronting heavy loss due to the fall down of global economy. Federation of Indian chambers of Commerce and Industry (FICCI) found that faced with the global recession, inventories industries like garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

Global economic meltdown has affected almost all countries. Strongest of American, European and Japanese companies are facing severe crisis of liquidity and credit. India is not insulated, either. However, India’s cautious approach towards reforms has saved it from possibly disastrous implications. The truth is, Indian economy is also facing a kind of slowdown. The prime reason being, world trade does not functions in isolation. All the economies are interlinked to each other and any major fluctuation in trade balance and economic conditions causes numerous problems for all other economies.

According to official data, industrial growth in august has plummeted to mere 1.3% compared to the same month in 2007. That definitely is cause of concern for policy makers and industries. This data also raised fear of low GDP growth of India. It is being suspected that, our country will face huge problems in achieving even 7.5% growth rate in this fiscal.

1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered since last ten years. April-august industrial growth rate is 4.9% which is also the lowest for the first five months of a financial year in 14-year period except 1998 and 2001. To

make matters worst, a member of the PM’s economic advisory council and director of the National Institute of Public Finance and Policy have confessed that India is going through industrial recession.

Several crucial sectors of Indian economy are likely to face serious problems in coming months. Foremost among them is real estate sector. The demand for houses have reduced significantly and property prices across India has registered 15-20% fall. Things are likely to get worst as another 20 percent drop in prices is quite possible in coming six months. The woes of real estate have spread to construction industry as well. Because of less demand for houses, construction companies are going to suffer big time. Financial services segment is also likely to be a major victim of economic slowdown because of less demand for credit and reduced liquidity in market.

These three segments account for almost one third of services GDP and because of their current and impending plight, attaining 7.5% GDP growth in this current year is quite improbable. Industrial slowdown will also affect transport services. Transport companies are likely to witness drastic fall in their business and profits. Global recession will also lead to less tourists coming to India. That will negatively affect tours and travels industry. Author - Mritunjai kumar, expert economist and prolific writer..

Causes of recession:

Every economist in this world believes that recession is something that can’t be avoided .in an economy there are period of high growth ,slow growth or no growth. For an economy to b e called as healthy it should have contraction as well as expansion. Economy can be said in recession only when GDP falls for two consecutive years.

The causes of economic recession is still a mystery but lot of theories are attached as what all cause economic recession. These are caused by such factors which have a wide impact on economy. examples-increase interest rates. but inflation actually continued to rise. And it was this combined with how easy it was to borrow money that caused our economy to spiral out of control to where we now sit in 2008. Most economists believe that we are currently heading towards a recession, not to mention that quite a few tend to think we are already there.

Recession is generally caused by the steps to control the money supply in the economy. In us people believe that it is due to federal reseve. Its basic responsibility is balance between money supply, intrest rates, inflation. if it is not balanced than economy is out of control.

RESSION ON IT SECTOR:

Recession in IT Sector of India-Who knows IT is a boon or bane for Indiana one forecasted It would be under such recession an year before. Even a quarter before it happened no one can forecast this bitter truth. But from the last quarter of year companies were shown the down path. Employees were made to suffer. No job for bench guys. All employees who would usually look up for salary increase by this time was hit with a bid iron rod that there would be single digit percentage increase in salary. Oh my god says an employee who is closely related to me. Though they are out of total stress about salary increase the original state of employees of IT sector in India is "JOB CUTS”. Every one prays for no more job cuts in IT. If it happens no one can save Indian economy either. Every one ready to work for peanut now. Though all allowances has been cut, the employees who were adamant in previous years now flexible for shift timings, over timings anything that could be done to make their job safe.

The new forecast was the recession would be down by next quarter or so. Let’s hope to hear a positive news all over since IT is becoming a backbone for INDIAN Economical development.

Impact of Recession on Unemployment:

The Center for Economic and Policy Research states that the looming recession will raise unemployment by about two to three percent depending on the severity of the recession. This means that there will be about three to five million unemployed Americans in case it happens.

On the other hand unemployment data doesn’t represent the educated workforce. For them, the truth is there are more available jobs than there are candidates and the unemployment rise affects mainly the low-skilled workers. At most, this is the unemployment impact of the perceived recession this year.

Companies differ to a certain degree on their outlook regarding the hiring of additional workers or streamlining their workforce. There are companies who think their concern is on the difficulty of looking for skilled workers who would help boost their efficiency. Others implement a freeze on hiring. There are even companies who have laid off some of their workers. These realities are also seen even during normal times but presently, these moves are made with extra caution and rigid analysis.

Companies which depend so much on banks for their operations and have problems meeting their obligations are the ones greatly affected by recession. As such they make drastic moves to save the business including cuts on their workforce. On the other hand, there are businesses which express optimistic outlooks and have not been affected by the looming recession. The Bay Area agencies for instance, expect that they will be steady while a nationwide survey states that 83 percent of agencies said their budgets have not been affected and they expect an increase in revenues this year.

It is therefore up to the agencies concerned to make careful analysis of the situation and make whatever appropriate action they would make with regards the status of their workforce. It is hard to make a general recommendation like to continue or stop hiring. It would also be very foolish to discourage people from applying for a job. The present predicament does not present a bright outlook for employment opportunities but the uncertainty teaches us to be prepared and as much as possible to be able to adjust. There are still job opportunities waiting for those who are qualified.

The Recession’s Impact on Outsourcing Strategies:

There is little doubt that the current economic situation has been the worst conditions for mostCorporations and employees. The International Labor Organization’s recent prediction is that inThe worst case scenario, close to 50 million jobs could be lost globally by the end of 20091Making this the most significant risk the world economy has faced in the last fifty years. TheHousing mortgage collapse in the US triggered such events that have led to the closure of 150Year old companies and the collapse of entire financial systems in countries such as Iceland.Predictably, companies are struggling to survive and cost has become the most critical factor.Companies have drastically cut down costs in all areas of business. Outsourcing too has notBeen spared, and many companies since have put a freeze on outsourcing initiatives orDramatically slowed down the process. The most common ways of maximizing savings include:

Impact of global recession on it industry:

The Indian IT industry managed to limit the impact of global recession last fiscal and maintain the growth momentum, albeit lower than

that in the boom times, says tech publisher Dataquest.

"Export firms did better in recession-hit developed markets than those whose business is limited to the Indian market," Dataquest editor Prasanto K. Roy said.

Though the business of top 20 firms led by Indian IT bellwethers TCS, Infosys and Wipro, and multinationals such as HP and IBM, grew by an average 19 percent, seven of these posted single-digit revenue growth.

"Overall, the top 20 Indian software and hardware firms reported a combined revenue of Rs.183,621 crore (Rs.1.84 trillion/$39.52 billion) in 2009, compared to Rs.149,250 crore (Rs.1.49 trillion/$32.12 billion) in 2008," Roy said, citing findings of a survey.

Among the seven, four are multinational subsidiaries - Microsoft India, which grew a mere one percent year-on-year to Rs.32.98 billion (Rs.3,298 crore); HP India up two percent to Rs.157.63 billion (Rs.15,763 crore), Oracle three percent to Rs.59.62 billion (Rs.5,962 crore) and Cisco by four percent to Rs.60.84 billion (Rs.6,084 crore).

"One of the reasons for export-driven firms maintaining the growth is because of increasing IT outsourcing in a downturn to keep costs flexible. In the domestic market too, global firms such as IBM and Wipro fared very well," Roy averred.

Among the top 20 firms, eight firms grew fastest despite slowdown and negative sentiment in the market.

These include Mphasis, with revenues increasing 69 percent to Rs.31.73 billion (Rs.3,173 crore); HCL Infosystems, up 60 percent to Rs.80.89 billion (Rs.8,089 crore) and Cognizant Technologies, up 49 percent to Rs.94.10 billion (Rs.9,410 crore).

The IT bellwethers also posted healthy growth rates. TCS was up 22 percent to Rs.25,895 crore; Infosys, up 31 percent to Rs.20,392 crore, and Wipro up 41 percent to Rs.23,882 crore.

Multinationals such as SAP India grew 33 percent to Rs.4,320 crore, Dell India by 32 percent to Rs.4,266 crore, IBM India by 19 percent to Rs.12,048 crore and Accenture by 16 percent to Rs.4,400 crore.

With a decline of 18 percent in its growth, hardware firm Lenovo failed to make it to the top 20

Top Indian outsourcing cosNine trends for IT in 2009Cities that are IT hubs

club. Korean major Samsung also saw growth falling 40 percent to Rs,1,200 crore from Rs.2,014 crore.

Export revenues do not include that of business process outsourcing (BPO) services.

Scam-tainted Satyam Computer Services has been left out of the top 20, as its financial performance came under cloud following the Rs.78-billion (Rs.7,800-crore) accounting fraud by founder-chairman B. Ramalinga Raju.

The Dataquest survey findings are lower than the projections made by the IT industry's representative body -- National Association of Software and Services Companies (Nasscom) -- for 2009-10.

With the industry's annual growth rate dipping to 16-17 percent from about 30 percent in 2004-2008, the aggregate revenues was estimated to be $60 billion, including export revenue of $47 billion.

In view of the prevailing uncertainty, Nasscom has taken a two-year view to factor in the volatile environment and estimated that the IT industry would grow at 15 percent to achieve export revenue of $60-62 billion by 2010-11.

References:

:http://useconomy.about.com/od/grossdomesticproduct/f/Recession.htm

http://www.stopstupidstuff.com/recession/the-impact-of-recession-on-employment

http://www.merinews.com/article/impact-of-global-recession-on-india/15709750.shtm

http://blogs.livemint.com/blogs/career/Tholons%20Insourcing%20and%20Recession_Jan09.pdf

www.\recession\Article More investment in infrastructure sector to fight recession_ - PTI - The Press Trust of India Ltd_ High Beam Research - FREE trial.mht

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www.\recession\Bank of America Joins China as Buyer of Treasuries (Update2) - Bloomberg_com.mht

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http://economictimes.indiatimes.com/Infotech/ITeS/Indian-IT-industry-bucks-global-recession-to-sustain-growth/articleshow/4795095.cms