IILM GURGAON ---------------------KEYNOTE ADDRESS 18 APRIL, 2009

IMPACT OF RECESSION ON INDIAN ECONOMY AND FUTURE TRENDS

PROF. DEEPAK TANDON

A QUICK LOOK AT FACTS

Worlds largest democracy Ethnically diverse 26% below poverty line Struggle for freedom

Price WP"# $ % & ' ( $00 )*eb 0 + .P"# 200$ ( $00 )/an 0 +

200 22,-! $'!

200! 2$!-' $%'

Bank Rate i- 0an1 2ate

Percent 6-00

Effective 2 -0'-200%

Rati ! .22 2- S42 %- 2epo 2ate '- 2everse 2epo 2ate 3- .ash 5ep 2atio 6- "nvestment 5ep 2atio .redit 5ep 2atio

Percent 3-00 2'-00 3-00 %-30 3-,, %$-, ,$-'2

)w-e-f-+ $,-0$-200 0!-$$-200! 0'-0%-200 0'-0%-200 2,-02-200 2,-02-200 2,-02-200

INDIA in +,-,
5-Year Period Average Percent Pe Annum 8 7 6 5 4 3 2 1 0 2005-10 2015-20 2025-30 2035-40 2045-50 Brazil China India Russia

In"ia #i.. $e t%e &r" Lar'e!t ec n () #it% t%e Fa!te!t rate f *r #t%

DEMO*RAP/IC AD0ANTA*E
6 7oungest Population in the World# 8ore than half of "ndias population is below 23 yrs age 6 6 6 9ver the ne:t 3 years; "ndia alone will account for more than $<'th of the increase in worlds wor1force 6 6 6 4east 9ld=>ge 5ependency rate in >sia 6 6 6 "mplications# & Strong .onsumption pattern to continue & 4ong term and Stable ?rowth & >vailability of S1illed 4abor *orce >ssured over 4ong @erm

RECESSION

> recession is a decline in a countryAs gross domestic product )?5P+ growth for two or more consecutive Buarters of a year- > recession is also preceded by several Buarters of slowing down-- "t is the contraction phase of a 0usiness cycle T%e I(1act! in In"ia are2 $- 2educed liBuidity in the "ndian economy 2- 2educed industrial output %- 2educed Cob opportunities '- Stoc1 8ar1et is lingering in the bottom 3- 2eal estate mar1et has started to ta1e a beating 6- "nflation has increased ,- ?5P has come down and the ?P5 forecast for the ne:t two Buarters are only averaging down

CAUSES OF RECESSION

3. CURRENCY CRISIS

2&. INFLATION

'-. NATIONAL 4 *O0ERNMENT DEBT

65. SPECULATION

!6. 7AR
$-

EFFECTS OF RECESSION
3. BANKRUPTCIES

2&. DEFLATION

'-. FORECLOSURES

65. REDUCED SALES

!6. STOCK MARKET CRAS/

$033. UNEMPLOYMENT

0efore; understanding D2ecessionE; we need to understand the mar1et economyF

A8 T7O STA*ES OF MARKET ECONOMY

A38 *r #in' Market Ec n ()

Starting Point ( Willingness to buy

Dec.inin' Market Ec n ()
Starting Point ( Gnwillingness to buy

B8 T7O FACTORS OF MARKET9 : DEMAND ; SUPPLY Pr "<cer wants his demand always to be %i'% C n!<(er wants his buying cost always to be . # >ctually; 5emand is the price at which consumer is rea") t $<) and producer is rea") t !e..9 Gsually; we thin1F 5emand ( Huantity 0ut; here 5emand ( PriceF @his is because; Price decides the Huantity of SalesF .ompetitive Price ( 8ore 5emandF "n competitive Price ( 4ess 5emandF

Producer Price .onsumer Price

/O7 TO COME OUT OF RECESSION=

"mportant Point# @oday; it is a mar1et Economy

ProducersF .an produce and sell at their prices

.onsumersF .an decide to buy or notF

*iscal Policies
)0y ?ovt-+

8onetary Policies
)0y 20"+

?overnment influences the economy by changing how it )?overnment+ spends and collects money

20" manipulates the available supply of money in the country

89IE@>27 P94".7 = 90/E.@"JES

T7IN OB>ECTI0ES

maintaining price stability ensuring availability of adequate credit to productive sectors of the economy to support growth

MONETARY POLICY: BASIC THRUST

En!<re a ( netar) an" intere!t rate envir n(ent ena$.in' c ntin<ati n f t%e 'r #t% ( (ent<( c n!i!tent #it% 1rice !ta$i.it) an" inf.ati n e?1ectati n! F c<! n cre"it @<a.it) an" financia. (arket c n"iti n! t !<11 rt e?1 rt an" inve!t(ent "e(an" in t%e ec n () T re!1 n" !#ift.) t ev .vin' '. $a. "eve. 1(ent!.

8onetary Policy & "nstruments

Direct Instruments Indirect Instruments
6Open Market Operations:
Reserve Bank controls money supply by buying and selling government securities, or other instruments 6Market Stabilisation Scheme (MSS) Government of India dated securities/Treasury Bills are being issued to absorb enduring surplus liquidity. 6Liquidity Adjustment Facility (LAF) 6Repo uctions and uctions, 6Reverse Repo 6Cash Reser e Ratio (CRR) !inimum amount that

LAF has emer!ed as the tool "or both liquiditbyanmkas nmau!stekme enatsacnasdh arelseorvaes a si!nalin! de ise "or interest rate in the o erni!ht market#

commercial

c nc.<!i n!

K"n *eb=0 ; "ndiaAs e:ports declined by 2$-,% )y=o=y+; while imports declined at a faster pace of 2%-%% )y=o=y+; resulting in shrin1ing of trade deficit to GSL '- bn-

K@he current account deficit amounted to GSL $'-6 bn during H% *70 ; the highest Buarterly deficit since $ 0-

K@he capital account balance turned negative during H% *70 for the first time since H$ *7 -

K"ndiaAs total e:ternal debt stoc1 increased by 2-!% to GSL 2%0- bn at the end of 5ec= 0! over end Sep=0!K@he ratio of foreign e:change reserves to total e:ternal debt as at end 5ec=0! stands at $$0- %K"ndiaAs real effective e:change rate )2EE2+ remains undervalued at '-0 )as on $ =*eb=0 +-

FINANCIAL YEAR +,,6

INFLATION 2 9ne of the biggest concerns for the "ndian Economy !ee(! t %ave $een tack.e"; certainly in the medium term- @he inf.ati n for the wee1=ended 8arch 20; 200 came in as 5.5-A@he Prime 8inister must be than1ing his stars or his calculations; and if the current trend continues ; and it should; by the time the 200 4o1 Sabha elections campaigning starts; inflation would no longer be an issue and many middle class families might actually be than1ing the government @hough the e?1 rt! have declined from L$%-,' billion in September to B33.- $i..i n in N ve($er +,,C; the i(1 rt! "ec.ine" fr ( B+D.&C $i..i n t B+3.-5 $i..i n in the corresponding period; mainly on the account of the fall in crude prices- @he crude bill has dropped from around L billion to L,-23 billion in Iovember 200!>s a result the Tra"e Deficit %a! narr #e" t B3,.,5 $i..i n in Iovember compared with L$0-3' billion in 9ctober and L$0-63 billion in September 200!- @he total trade deficit for the period A1ri.: N ve($er +,,C !t " at BCD.&D $i..i n "n short; though recession has hit our e:ports; the fall in the import bill more than ma1es up for the effect of the recession- Even in the recession; the e?1 rt! in the ei'%t ( nt%! en"e" Iov- %0 rose $ -' percent from a year earlier to B336.& $i..i n- .ertainly not bad by any stretch of imagination considering the global recession-

FINANCIAL YEAR +,,6

@he total i(1 rt $i.. for the >pril=Iovember 200! period stood at B+,&.ED $i..i n of which 9il imports were valued at L,'-$$' billion- .onsidering that crude trade well over L$00<barrel for around si: months of this eight=month period; and that crude in not e:pected to go bac1 those highs anytime soon; the crude import bill for the coming year should be significantly lower- Even if crude trades at an average price of around ,0 dollars< barrel in 200 ; we should e:pect around %3='0% drop in the crude import bill-

8ost analysts e:pect crude to trade around the 60 dollar<barrel mar1 in 200 - 4ets be a little generous and assume crude to trade at an average for ,3 dollars< barrel through 200 ; that is where it was for most of 9ctober = Iovember 200! period- @he yearly crude import bill for 200 should stand in the region of L!0=!3 billion- @he non=crude import should stand around L200 billion giving a total import bill of around L2!0 billion- @he government of "ndia has a L200 billion per annum e:port target- @his should confine the trade deficit to around BC, $i..i n for the entire year 200 - "f my rough calculations; and " must add unBualified calculations; are correct; we would have managed to tame the monster and the recession should get all credit for it-

In"ian tra"e !cenari Marc% +,,6 Fn t affect a! *reat a! *. $a. Deve. 1e" C <ntrie!

2ecession in developed economies crimped demand for "ndian goods and e:port growth slowed to ,-% percent in >pril=*ebruary to L$36-6 billion from a year earlier; sharply lower from close to 20 percent seen in 200,<0!- *inal figures for 200!<0 e:ports is seen touching a lower revised annual target of L$,0 billion and may remain flat at that level in 200 <$0; he said-

@he demand for "ndian goods in 4atin >merica and South=east >sia remains MBuite highM; but it needs to pic1 up in G-S- and Europe; which consume about %3 percent of "ndian e:ports

?rowth of less than , percent - Nigh borrowing costs and followed by the global crisis slowed >siaAs third largest economy last year; and analysts forecast less than 6 percent e:pansion in the current year to 8arch 20$0-

.ontraction in demand at home and abroad has cut "ndiaAs factory output and e:ports sharply since 9ctober-

"ndiaAs industrial output contracted $-2 percent in *ebruary from a year earlier and e:ports were down more than a fifth-

CAUSES
3. SUB PRIME LENDIN* CRISIS 2%D. TI*/TENIN* OF LIQUIDITY 365. RISIN* OIL PRICES !3,. CAPITAL FLI*/T IN EMER*IN* MARKETS

EFFECTS
3. DIFFICULTY IN BORRO7IN* 2%'-. UNEMPLOYMENT 6,!6. FAILIN* PROFITABILITY $0$$$23&. FALLIN* STOCK MARKET $'$3$635. DECLINE IN CUSTOMER CONFIDENCE

Tra"e .i$era.iHati n2 re"<cti n in tariff!

De!1ite a !ec<.ar re"<cti n in 1eak tariff!I t%e ta? t

*DP rati

i! !ti.. !% #in' an <1#ar" tren"

?overnment is focused on improving the business and investment environment N .icen!in' re@<ire"I e?ce1t in five !ect r! 3,,A FDI 1er(itte" in (an<fact<rin' Fe?ce1t at (ic ener')G 3,,A FDI 1er(itte" in ( !t !ervice !ect r! Inve!t(ent!I "ivi"en"!I fee! are free.) re1atria$.e F rei'n inve!t(ent! a.. #e" in ca1ita. (arket!

"ndia in the emerging order = aim

BPLR which is at $,-23% to be 3+A

L #erin' of the domestic intere!t rate! to ma1e retail ban1ing more attractive S#a11in' of the local currency with respect to the foreign currency E.0 norms liberaliOed to inf<!e .i@<i"it) Uncertaint) in the stoc1 mar1et 2esource ( $i.iHati n .redit growth to be pushed up by planned a.. cati n in various sectorsF S8E 0an1ing= Profitability; Ba!e. II implementation; financial inc.<!i n; >@8 and P9S in villages

8ulti faceted growth in 33t% five )ear 1.an-

Ke) c nce1t! an" "eve. 1(ent!

3. 0>IP 2>@E $$$$2+. .22 &. S42 D. 2EP9 2>@E -. 2EJE2SE 2EP9 2>@E

89IE@>27 P94".7

STATE OF 7ORLD ECONOMY

World economy e:pected to slow down from 3% in 0, and %-,% in 0! to Cust 0-3% in 0 @he world economy is in Qprecarious territory = 9utput in advanced economies will contract in 200 > deep financial crisis and volatile commodity prices have led to fast deteriorating global growth
WorldEconomic Outlook, January28, 2009 nternational !onetary"und

# 5 $ % 2 & 0

'0% '0$ '05 '0# '0( '08 '09

STATE OF 7ORLD ECONOMY2 SCENE 3

*DP *r #t% Rate! $) C <ntr)4Re'i n +,,Unite" State! f A(erica E<r 1e Part FGerm !", #r !$e, I% &" ' S( )!G >a1an R<!!ia CIS C%ina ASEAN J D FI!*+!e,) , M & ",) , %-e P-)&)(()!e, ' T- )& !*G +.3.3.6 E.D E.E 3,.D -.3 +,,E +.6 +.C +.D 5.D 3,.3 33.3 -.5 +,,5 +.+ +.E +.3 C.3 6.E 33.D E.& +,,C ,.3.D 3.D E.C 5.D 6.& -.C +,,6 ,.E 3.+ 3.E.& 5., 6.E.,

"ndia

6.,

6.5

6.+

5.6

C.,

*DP *r #t% Rate! $) C <ntr)4Re'i n +,,Unite" State! f A(erica E<r 1e Part FGerm !", #r !$e, I% &" ' S( )!G >a1an R<!!ia CIS C%ina ASEAN J D FI!*+!e,) , M & ",) , %-e P-)&)(()!e, ' T- )& !*G +.3.3.6 E.D E.E 3,.D -.3

+,,E +.6 +.C +.D 5.D C.+ 33.E -.5

+,,5 +., +., +.3 C.3 C.E 33.6 E.&

+,,C ,.E 3.& ,.5 E.E 5.+ 6.5 -.-

+,,6 ,.3 ,.+ ,.-.-.5 6.& D.6

"ndia

6.,

6.C

6.&

5.6

E.6

*DP *r #t% Rate! $) C <ntr)4Re'i n +,,Unite" State! f A(erica E<r 1e Part FGerm !", #r !$e, I% &" ' S( )!G >a1an R<!!ia CIS C%ina ASEAN J D FI!*+!e,) , M & ",) , %-e P-)&)(()!e, ' T- )& !*G +.3.3.6 E.D E.E 3,.D -.3

+,,E +.C +.C +.D 5.D C.+ 33.E -.5

+,,5 +., +.E +.3 C.3 C.E 33.6 E.&

+,,C 3.D 3.+ ,.E.E E.6 6.5 -.D

+,,6 :,.5 :,.:,.+ -.&.+ C.D.+

"ndia

9)0

9)8

9)%

()8

#)%

*DP *r #t% Rate! $) C <ntr)4Re'i n +,,Unite" State! f A(erica E<r 1e Part FGerm !", #r !$e, I% &" ' S( )!G >a1an R<!!ia CIS C%ina ASEAN J D FI!*+!e,) , M & ",) , %-e P-)&)(()!e, ' T- )& !*G +.3.3.6 E.D E.E 3,.D -.3

+,,E +.C +.C +.D 5.D C.+ 33.E -.5

+,,5 +., +.E +.3 C.3 C.E 33.6 E.&

+,,C 3.D 3.+ ,.E.E E.6 6.5 -.D

+,,6 :3.E :+., :+.E : ,.5 : ,.D E.5 +.5

"ndia

6.,

6.C

6.&

5.C

-.3

SUR0I0AL STRATE*IES
3. RE E0ALUATE YOUR ENTIRE PRICIN* STRUCTURE

2&. T/INK STRATE*ICALLY

'-. *O BAR*AIN /UNTIN*

65. CONSIDER STRATE*IC IN0ESTMENTS

!6. MONITOR YOUR CAS/ FLO7S

$033. EN*A*E YOUR EMPLOYEES IN T/E PROCESS

$23&. TALK TO YOUR BANKI IN0ESTORSI AND OT/ER SOURCES OF CAPITAL

ADAPT TO RECESSION
3. PRO>ECT CAS/ FLO7 IN AD0ANCE AND MONITOR BUD*ET

2&. PRESSURISE DEBTORS TO PAY UP

'-. RE0IE7 O0ER/EADS AND IMPRO0E COST EFFICIENCY

65. REDUCE STOCK LE0ELS

!6. KEEP UP TO DATE 7IT/ LATEST FINANCIAL INFORMATION

$033. A**RESI0ELY SEEK NE7 BUSINESSES

$23&. BE OPEN TO NE7 IDEAS AND ACCEPT

S7OT ANALYSIS
3. A0OID TAKIN* BAD BUSINESS 2&. SUR0I0AL IS MORE IMPORTANT T/AN SIKE '-. OPERATE IN .LEAN AND MEAN/ MODE 65. LOOK FOR TALENTED UNEMPLOYED PEOPLE !6. MARKETIN* ASSUMES FURT/ER IMPORTANCE $033. A**RESI0ELY PURSUE DEBTORS FOR PAYMENTS $2-

REMEDIAL MEASURES
M nt%.) f reca!t! f r 7PII CPII IIP *r #t%I Bank Cre"itI 3-:63 "a):T:Bi..! )ie."I 3, )ear *:!ec )ie."I an" E?c%an'e rate

$-

S (e ear.) !i'n! f !ta$i.it) e(er'e in t%e ec n ()

T%e 7PI inf.ati n e?1ecte" t t <c% !<$:Her .eve. in A1r:,6

T%e RBI e?1ecte" t ea!e it! ( netar) !tance f<rt%er.

R<1ee e?1ecte" t a11reciate (ar'ina..)

.Things will change with hard work & time ... But there will be pain initially.E

TH !" #$%