A recession is a decline in a country's Gross Domestic Product (GDP) growth for two or more consecutive quarters of a year. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

Impact on Indian Economy: The impact of the crisis is deeper than estimated by our policy makers although it is less severe than in other emerging market economies. Further, the Indian banking system is one of the least affected in the whole world and has been praised by many of the economists and financial experts. The banks were saved from this downturn because of the financial policies which were very well formulated that acted as an insulator for the Indian banks. The extent of impact has been restricted due to several reasons such as-

Ø       Indian financial sector particularly our banks have no direct exposure to tainted assets and its off-balance sheet activities have been limited. The credit derivatives market is in nascent stage and there are restrictions on investments by residents in such products issued abroad.

Ø       India’s growth process has been largely Domestic Demand Driven and its reliance on foreign savings has remained around 1.5 per cent in recent period.

Ø       India’s comfortable Foreign Exchange Reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.

Ø       Rural demand continues to be robust due to mandated agricultural lending and social safety & Rural Employment Generated programs.

Ø       India’s Merchandise Exports are around 15 per cent of GDP, which is relatively modest.

Despite these mitigating factors, India too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world. Indian economy is experiencing the following incidental effects of the Global Crisis.

Slowing Gross Domestic Product: In the past 5 years, the economy has grown at an average rate of 8-9 per cent. Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well. But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced and now it is projected at 6 per cent for 2009-10. Hence, the slowdown in Indian economy is evident from the low GDP growth with deceleration in the industrial activity, particularly in the manufacturing and infrastructure sectors and moderation in the services sector mainly in the construction, transport and communication, trade, hotels and restaurants.

Reduction in Employment: The recession is likely to have a dual impact on the outsourcing industry. Appreciating rupee along with poor performance of US companies  will affect the bottom line of the BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to survive.

Taxation: The economic slowdown has severely dented the Center’s tax collections with indirect taxes bearing the brunt. The tax-GDP ratio registered a steady increase from 8.97 per cent to 12.56 per cent between 2000-01 and 2007-08. But this trend has been reversed as the tax-GDP ratio has fallen to 10.95 per cent during current fiscal year mainly on account of reduction in Customs and Excise Tax due to effect of economic slowdown.

Reduction in Exports: The growth in exports was robust till August 2008, however, export growth evinced a sharp dip and remained negative till the end of the financial year on account of major outsourcing deals with US companies, which were effected in the crisis. 

Forex Market: The current economic crisis was largely insulated by the reversal of foreign institutional investment (FII), external commercial borrowings (ECB) and trade credit. Its spillovers became visible in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs.40.36 per USD in March 2008 to Rs.51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. However, now it is recovered and hovering around Rs.46.00.

Money Market: The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by the Reserve Bank of India. NPAs of banks may indeed rise due to slowdown but given the strength of the banks’ balance sheets, that rise is not likely to pose any systemic risks.

Stock Market: Indian stock market crashed from the high of 20000 to a low of around 8000 points during the year 2008-2009. Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was visible in the substantial deceleration during the said years. Corporate profitability also exhibited negative growth, which has led to the bearish trend in the stock market. Recession has effected the investments made by Foreign Institutional Investors (FIIs) in the Indian Stock Market as FIIs started disinvesting to meet their commitments abroad. This is putting lot of pressure on domestic financial system, which has led to liquidity crunch in all major sectors of the country.

Recession – Business Opportunities:

a) Realty Sector: The worst hit industry in India and abroad is Realty Sector. It is a time to introspect for everybody. There have been things to learn, relearn and unlearn for all the concerned viz., End Users, Investors and Developers. Recession brings the much needed discipline to people’s way of life, while for corporate across various sectors, there are many positive ripple effects - for instance it allows people to analyze and identify their core competencies. End Users are more cautious and looking for value for their investment and Lenders are exercising prudence while selecting the borrowers. Developers have started focusing attention on affordable and mass housing with attracting plans. More cautious spending and greater saving by consumers, more prudence by lenders, shift in focus from premium to lower and mid-end segment of housing by developers, is exactly what our economy needed for its long-term health and recession is having the desired impact. The End User is going to be benefited as the supply chain started addressing the real demand in market - affordable housing.

b) Innovation: The consumption of basic requirements such as Food, Shelter, Clothing, Water, Electricity and Health etc., is always going to stay the same even in the recession, which forces the consumers to look for cost effective alternatives. Hence the providers of the basic needs are required to focus their attention to offer them at affordable cost. Recession is an opportunity to produce cost effective / innovative products and services to the consumers.

c) Mobile & Internet Users: India has over 550 million cell phone subscribers, which is next to China. It provides ample opportunity to the entrepreneurs / technocrats to build viable business models on present and prospective Mobile/Internet Users. India's Internet infrastructure is a revolution. India has over 70 million internet users and expected to increase to 200 million in the next 5 years. This means that even the individuals from India's remotest regions can now showcase and offer their businesses to customers based anywhere globally.

d) Financial Discipline: The crisis has opened the eyes of the Individuals, Corporate and Governments and made them to focus their attention on need of Savings & Investments, which was completely ignored in the past. Now they realized the importance of savings and financial discipline, which definitely paves the way for better future. The concept of “Spend – Earn – Save – Repay”, which is prevalent in the present consumerism era, need to under go a change into “Earn – Save – Spend”.

 “Necessity is the Mother of Invention”. Thus, the present crisis definitely will be an enabling factor to come up with innovative ways to handle the problems for survival, which is need of the hour.