The fear of a recession looms over the United States.

And as the cliche goes,

whenever the US sneezes, the world catches a cold. This is evident from the
way the Indian markets crashed taking a cue from a probable recession in the
US and a global economic slowdown.
Weakening of the American economy is bad news, not just for India, but for
the rest of the world too.
So what is a recession?
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 is also preceded
by several quarters of slowing down.
What causes it?
An economy which grows over a period of time tends to slow down the
growth as a part of the normal economic cycle. An economy typically expands
for 6-10 years and tends to go into a recession for about six months to 2 years.
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.
Stock markets & recession
The economy and the stock market are closely related. The stock markets
reflect the buoyancy of the economy. In the US, a recession is yet to be
declared by the Bureau of Economic Analysis, but investors are a worried lot.
The Indian stock markets also crashed due to a slowdown in the US economy.
The Sensex crashed by nearly 13 per cent in just two trading sessions in
January. The markets bounced back after the US Fed cut interest rates.
However, stock prices are now at a low ebb in India with little cheer coming to
investors.
Current crisis in the US
The defaults on sub-prime mortgages (homeloan defaults) have led to a major
crisis in the US. Sub-prime is a high risk debt offered to people with poor
credit worthiness or unstable incomes. Major banks have landed in trouble
after people could not pay back loans .
The housing market soared on the back of easy availability of loans. The realty
sector boomed but could not sustain the momentum for long, and it collapsed
under the gargantuan weight of crippling loan defaults. Foreclosures spread
like wildfire putting the US economy on shaky ground. This, coupled with
rising oil prices at $100 a barrel, slowed down the growth of the economy.
How to fight recession
Tax cuts are the first step that a government fighting recessionary trends or a
full-fledged recession proposes to do. In the current case, the Bush
government has proposed a $150-billion bailout package in tax cuts.
The government also hikes its spending to create more jobs and boost the
manufacturing and services sectors and to prop up the economy. The
government also takes steps to help the private sector come out of the crisis.
Past recessions
The US economy has suffered 10 recessions since the end of World War II. The
Great Depression in the United was an economic slowdown, from 1930 to
1939. It was a decade of high unemployment, low profits, low prices of goods,
and high poverty.
The trade market was brought to a standstill, which consequently affected the
world markets in the 1930s. Industries that suffered the most included
agriculture, mining, and logging.
In 1937, the American economy unexpectedly fell, lasting through most of
1938. Production declined sharply, as did profits and employment.
Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.
The US saw a recession during 1982-83 due to a tight monetary policy to
control inflation and sharp correction to overproduction of the previous
decade. This was followed by Black Monday in October 1987, when a stock
market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent
affecting the lives of millions of Americans.
The early 1990s saw a collapse of junk bonds and a financial crisis.
The US saw one of its biggest recessions in 2001, ending ten years of growth,
the longest expansion on record.
From March to November 2001, employment dropped by almost 1.7 million.
In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second
quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak
in the fourth quarter of 2000.
The dot-com burst hit the US economy and many developing countries as well.
The economy also suffered after the 9/11 attacks. In 2001, investors' wealth
dwindled as technology stock prices crashed.
Impact of a US recession on India
A slowdown in the US economy is bad news for India.
Indian companies have major outsourcing deals from the US. India's exports
to the US have also grown substantially over the years. The India economy is
likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal
year. Indian companies with big tickets deals in the US would see their profit
margins shrinking.
The worries for exporters will grow as rupee strengthens further against the
dollar. But experts note that the long-term prospects for India are stable. A
weak dollar could bring more foreign money to Indian markets. Oil may get
cheaper brining down inflation. A recession could bring down oil prices to
$70.
Between January 2001 and December 2002, the Dow Jones Industrial Average
went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall
from the record highs reached is taken, the DJIA was down 30 per cent in
December 2002 from the highs it hit in January 2000. In contrast, the Sensex
was down 45 per cent.
The whole of Asia would be hit by a recession as it depends on the US
economy. Asia is yet to totally decouple itself (or be independent) from the
rest of the world, say experts.

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 Organisations (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.

How to tackle the global slump?

“Our economy is shrinking, unemployment rolls are growing, businesses and

families can’t get credit and small businesses can’t secure the loans they need
to create jobs and get their products to market,” Obama said.

“With the stakes this high, we cannot afford to get trapped in the same old
partisan gridlock.
India
India's economy benefited from recent high economic growth which declined
greatly due to the global economic crisis. Economic growth in India during
FY2008-09 stood at 6.7%.The global crisis had less impact of India because
exports account for only 15% of India's GDP, less than half the levels of major
Asian economic powers such as China and Japan. However, unlike other major
Asian economies, India's government finances were in poor shape and as a
consequence, it was not able to enact large-scale economic stimulus packages.
Despite this, from June 2008 to June 2009, industrial production in India grew
by 7.1%.
Though he ended up being wrong, the former Indian Finance Minister P.
Chidambaram once boasted that he expected India's economy to "bounce
back" to 9% during FY2009.  India's Prime Minister Manmohan Singh said
that the government will take measures to ensure that the economic growth
bounces back to 9%. The Asian Development Bank predicted India to recover
from weakening momentum in 4-6 quarters. At the G20 Summit, India called
for coordinated global fiscal stimulus to mitigate the severity of the global
credit crunch.India said that it would inject US$4.5 billion into the financial
system to help exporters. Some analysts pointed that India's growing trade
with other Asian countries, especially China, will help reduce the negative
impact of the crisis. Analysts also said that India's high domestic demand and
large infrastructure projects will act as a buffer reducing the impact of the
global downturn on its economy. Economists argued that India's financial
system is relatively insulated and its banks do not have significant exposure to
subprime mortgage. In an editorial, the New York Times praised the strong
regulations placed on the Indian banking system by the Reserve Bank of India.
In May 2009, India reported an economic growth rate of 5.8%, beating most
forecasts. In second quarter of 2009 the Indian economy grew by 7.9% and
gave indications that the Indian economy would scale a growth rate of 7% or
above in 2009 and 8-9% in 2010.
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..