Recession for Layman- An Indian Perspective

What is recession? How did it happen?How will it affect India and the Gulf?What are the opportunities?

In simple terms, an economy is said to be in recession, when the GDP of a country begins to fall for 2 or more quarters. This fall in GDP continues for many more months, slowing down the economy with it. The GDP is the total cost of all goods and services produced in the country in a year.

What causes recession?
•Recession is a normal business cycle
•An economy naturally expands for 6-10 years and then go in for a recession for about 6 months to 2 years. It is correction process, when consumers/investors realize they are buying at rates beyond its true value
•This loss of confidence, makes buyers/investors to sell off their assets or abstain from buying new
•This act of not buying or selling off, is followed by everybody, and the prices of goods, commodities, land and stocks fall rapidly
•The time for investors or buyers to feel that the economy has reached its bottom, and can now invest or buy, is when the boom (recovery) starts. The period from the start of negative sentiments to positive sentiments is the period of Recession. Historically it has ranged from 6 months to average 2 years

The history of global economic crisis
- During 1930-1939: The Great Depression
- During 1982-83: US Recession due to over production
- In 1990s: US Recession with collapse of junk bonds
- During 1997-1999: Asian Financial Crisis
- In 2001: US Recession- Dot Com bubble burst
- In 2008: US Recession- Mortgages crash

The history of economic crisis in India
- During 1972-1974: Steep rise in global oil prices, when inflation reached 20% in India
- During 1997-99: Asian Financial Crisis, it slowed down India growth from 7% in 1994 to 4.5% in 1997
- In 2008: US Recession- Mortgages crash

Reason for this recession
What caused recession in USA?
•Due to heavy competition in Home Loans, banks in USA began to give loans to people with poor credit worthiness (that is without considering if they can repay the loan) or unstable income.
•These banks came into trouble, when these people where unable to pay back the loan. The banks became at loss and some of them might close down, taking with them the savings of many depositors.
•Now, when the loan was easy to get for anyone, people started to invest in real estate. The construction industry boomed.
•When the people failed to pay back the loans, the banks, real estate and the construction industry collapsed. This along with rising oil prices created problems.
•And this trend began to affect other sectors of the economy as well.
•Since most countries around the world, like India and GCC countries have economic connections with US, the slow down there will affect them as well.

The impact of recession in India- negative aspects
According to the Assocham Business Barometer survey of 250 CEOs:
–About 80% projected GDP growth for 2008-09 at 7.1 per cent from the earlier 7.6 per cent, with strong waves of negative economic sentiment.
–Over 80% of CEOs said manufacturing sector, which has witnessed a negative growth of 1.2 per cent in October, would take double hit from the rapid slackening of domestic demand and heavy shrinkage in new export orders.
–Services sector which recorded an average growth rate of 10.7 per cent in last three years is expected to deteriorate to below 9 per cent growth rate mark

According to FICCI (Federation of Indian Chamber of Commerce & Industries):
–A state of uncertainty is gripping over many services sectors, including financial services, software, outsourcing, civil aviation and real estate, due to the global financial crisis, credit crunch and higher interest rates during the recent months, according to a survey by the Federation of Indian Chambers of Commerce and Industry.

According to McKinsey:
–The country will run out of capital to support economic expansion.
–Sectors like textiles, metals and mining, automotive, cement, real estate, media, IT need working capital to fund projects underway.
–The economy is under stress with growing bank non-performing loans and job losses in sectors like textiles.
–The firm said operating margins in almost all sector have reduced and will fall further over the next two years.
–Increased cost of debt will erode the profitability more and interest coverage
–Pressure on the real sector likely over next two years will have negative consequences for the broader economy
–According to McKinsey projection, even in steady state, infrastructure financing would face a deficit of $150 billion and it can increase sharply in current scenario.
–Along with a deficit in the infrastructure sector, fall in corporate savings and foreign inflows can also result in a potential shortfall of $200 billion of the total savings and investment.

The impact of recession in India- positive aspects

Strong banking system
- The Indian financial system has the potential to survive due to the stringent regulatory framework, and other factors like,
–Limited exposure to US-mortgage backed securities.
–The central bank's regulations ensured that the Indian financial system has a leverage of 13:1 (while the US investment banks' leverage is 30:1)
–The dominant role that government-owned banks play in the Indian banking sector. These banks hold financial assets worth 77.2 per cent.
–All banks, irrespective of ownership, need to invest over 32 per cent of their deposits with RBI or invest in sovereign bonds.
–Reserve requirements set by RBI are among the highest in the world. This ensures that RBI and the banking system have enough muscle to support the economy when there is a slowdown or liquidity crisis. And also that banks have limited credit risk and the balance sheets have significant liquidity.

Export exposure
-Indian exports to the US is just over 3% of GDP. India has a healthy trade surplus with the United States.

Confidence factor
–According to a study, around 42 per cent of people feel that 2009 will be better than 2008. India has been ranked as the seventh most optimistic nation along with Russia, according to study by global market information group TNS and Gallup International.
–Citi retained its forecast for India's economic growth in fiscal 2009 and 2010 on "positive coordinated measures" by the central bank and the finance ministry.

Lowering inflation
–The crude prices started easing and hovered near $38 a barrel at the year end, while global commodity prices took a more than 50 per cent dip, providing relief to both government and consumers.
–Steel prices have almost halved from the peak of $1,200 per tonne earlier this year.

Some sectors that did well from April –November 2008
According to survey by FICCI, a few services that have seen a high growth of 10% to 20% in April-November 2008 are (Figures in bracket refer to growth in year-ago period )
•Railway revenue earning passenger traffic 12.2 per cent (14 per cent)
•Revenue earning railway freight traffic 15.7 per cent (14 per cent)
•Housing finance 12 per cent (12 per cent),•Entertainment & media industry 10 per cent (16 per cent)
•IT/software/software services 15 per cent (33 per cent)
•Organized retail trade 15 per cent (30 per cent).

Impact of recession in India on different sectors
Ad Industry, Aviation, B-Schools, BPO, Business Consulting, Event Management, Exports, HR & Recruitment, Infrastructure Related, IT/ITES, Jewellery Exports, Leather, Legal Consulting, Real Estate, Retail & Transport

Opportunities in recession
We can divide them in 3 categories: Red, Yellow & Green

The Scenario
Red: The industries in Red are going to have problems in getting revenues and capital during this recession. These business, if it can survive liquidity problems, will continue to do good, as it did before the recession, after 1 or 2 years.
Yellow: The industries in Yellow are going to have a mixed opportunity. Various situations will dictate how they fare in their market.
Green: The industries in Green are those who are going to do well, in this recession. These business will not typically need fund, unless they are planning for expansions or increasing their marketing to exploit the opportunity.

Tips for Promoters
Red: If a businessman is interested in getting into this business, by setting up his own firm, then he should start it by planning his time and finances properly. If the setup period (construction etc) takes 1-2 years, then it is ideal to start now. As he can commence operation when recession is over. Constructing now, also gets him construction expenses at lower cost.
Yellow: If a businessman is interested in getting into this business, by setting up his own firm, then he should start it by planning his time and finances properly. If the setup period (construction etc) takes 1-2 years, then it is ideal to start now. But has to study how this business will perform, after the recession is over.
Green: If the setup period is less, say can be done in few months, then it is worthy of entering these industry. But not recommended. As by the time, the new business builds up a reputation, the boom caused by general recession to this business will be over, and the financials may not be that promising, after the recession. But some industries or firms, will continue to perform well, so it depends on case to case basis.

Tips for Investors
Red: If an investor is planning to invest in this business from scratch, then above tip is relevant for him. But if he wants to be part of an established player in this industry, then also this is a good time. Most of these firms will need extra cash to meet their working expenses and debts. By investing in, to keep them survive the recession, helps you enter these companies without paying much premium or goodwill.
Yellow: If an investor is planning to invest in this business from scratch, then above tip is relevant for him. But if he wants to be part of an established player in this industry, then also this is a good time. Most of these firms will need extra cash to meet their working expenses and debts. By investing in, to keep them survive the recession, helps you enter these companies without paying much premium or goodwill.
Green: If an investor is planning to invest in this business from scratch, then above tip is relevant for him. But if he wants to be part of an established player in this industry, then this is a bad time. As the firm will request premiums and good will.

Impact of recession in the Gulf
•The recession due to flight of capital has started affecting the Gulf region, and is expected to affect the job market seriously
•The Indian expatriates who contribute to the bulk of work force in Gulf countries is expected to have a hard time. Hundreds of employees have already lost their jobs in construction, real estate and financial sector.
•About 80% of the construction workers in GCC are Indians, and with the construction sector hit the hardest, their future is in the dark
•Dubai had been the hotspot of development for the past many years, and it stood as the largest market for speculative buying of some of the world’s most prestigious projects. Needless to say, with the recession, Dubai is hit the hardest among other GCC cities
•Banks in the region are reviewing credit policies and loans have become harder
•Banks have setup higher salary ceiling to approve personal loans and easy credit on credit card is no longer easy. This is quite opposite to the situation in past where credit cards were easily given to anyone
•In way of remittance, Kerala alone was expected to receive Rs. 42,000 crores this fiscal year, but the situations do not look that promising anymore
•The Gulf economy is expected to have tougher times ahead

Reference

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