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Friday, June 22, 2012

Recessions in India

I have been in my profession for last 16 yrs since 1996 when i started out as fresher out of my esteemed campus. This as i count is the fourth cycle of recession since then. Incidentally, this time span can be drawn parallel to opening of Indian economy after 1991. Each recession had varied factors leading to varied, varied experiences and varied response by various entities involved.

Let us start by definition and cause of recession.

Recession is defined as significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.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.Though, I do not have direct experience for time span between 91-96, as I was cocooned in distant campus, experts may fill in with some more insight to that time span. Though as per IMF study period from 91-93 was also termed as recession but that can be attributed to past closed economy effect spilling over post 91 eras. Also any study prior to 91 is not relevant today as our economy was shielded from worldwide trends.

As per IMF definition first recession was in 97-98. This recession rightly was involved in core sector as new economy sector was fledgling and with Y2k Indian IT story just had no stopping. But the volumes were just about getting up there in order to create any impact. Cong govt was replaced by not so strong Devegaouda and IK Gujral governments (Surprisingly PC was in charge then as well). The demand for core goods dropped. There was real estate correction in Mumbai, Auto and ancillaries demand dropped. I remember all small PCMC Telco dependant suppliers faced shutdowns. And finally there was great Asian crisis impacting finance sector and banks. The great Asian meltdown reminds me of black Monday back then sensex dropped for record %. All this while US was ruled by Clinton and economy was booming which benefitted Indian IT and new economy was grown which took out entire economy out of recession in 99 or so. Also Indian politics was stable with BJP government supporting telecom and other disinvestment reforms. Tata indica project revived PCMC belt by the end of millennium.

Then came the great rally of dotcom boom. The markets were bullish with stories of hotmail, junglee, mergers and acquisitions. Portals were coming up. STPI scheme helped mushroom the IT sector. Every builder, seth and panwala registered an IT company of his own. Companies retrained Y2k engineers to Java and anyone knowing J of Java went to US. Remember Job markets then.

And then came the bust, suddenly. Dot com valuations were busted. Then came 9/11, anthrax, sars, afghan and war. Thus every sector was touched be it banking, airlines, manufacturing. IT companies and evry sector struggled. The same engineers who went to US came back and struggled for jobs. I remember plights of freshers out in those years. Its all about being born in right year, as Malcomn Gladwell says in Outliers.

It took late 2003 buoyed by ITES story arising out of second wave of IT, recovery of US economy that revived market. India started looking beyond US for new opportunities. Thankfully Indian govt was stable all round while modernizing core sectors, stress on infrastructure: port, golden quadrilateral. Economy flourished and 'India shining',' feel good' factor ads which had some strange connotation in Indian politics were screened in media. Thanks to the strange ways of indian politics, then came UPA1 govt supported by left in 2004. Though Left policies dreaded by stock market were kept at bay shrewdly by team of MMS-Pranav-PC and Sonia. For some unknown reasons, the same team now in 2012, flounders to keep abreast and manage economy.

And here i have to mention days in Jan 2008 when sensex touched 20000. The economy boosted by presence of MMS continued to rally till mid 2008 when we had US subprime crisis hitting our financial sector. This time it was the finance sector that was impacted first and effects felt all around. IT sector was impacted by US situation and politics of Obama against outsourcing. Realty sector was hampered by financial lending crisis. There was correction in prises. UPA 1 did well to manage financial policies and kept the global meltdown at bay. Key decisions like nuclear deal, monetary reforms were made. Banking sector fundamentals shared from much maligned pre-liberalization era helped us.

Then came UPA2 without left clutches in 2009. Market was optimist now that reforms will be pushed. US market started recovering slowly. It took 2010 for US economy to look upwards. It impacted new economy and job market again went up. Realty started doing good, markets  but inflation also started going north same time.

This time the up circle was short lived (which normally is 4-6 years). By 2012, thanks mainly to Eurozone crisis, arab iran crisis impacting oil, japan earthquake, china slowdown, we had a bad recession set in. India this time floundered due to lack of policy making and political will. The policy freeze has reduced foreign investor confidence and thus rupee weakened. Inflation doesn’t allow RBI to cut interest rates. International oil and falling rupee has created BOP crisis like that of pre91. Are we back to pre91 days? Thus cycle has been completed and recession cycles amidst were mere storms in tea cups. This sounds ominous but we are headed towards Depression. Last time liberalization bailed us out thanks to PV Narsimharao's political will (not MMS who is wrongfully credited). This time what will bail us out? Monsoon also seems depressing till now. Does it call for new elections or war?

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