Effects of Global Recession on India’s GDP

The project signifies the rippling effect of Global downpour over India’s macroeconomic environment.

IMPORTS

GOVERNMENT SPENDINGS

INVESTMENTS

COSUMPTION

EXPORTS

GDP

2009

ICFAI BUSINESS SCHOOL

Submitted by:

GAGAN DEEP SINGH POONAM GUPTA PRIYANKA AGARWAL RAHUL CHANDALIA SHRUTI TOSHNIWAL

INDEX

Serial no.

Content Page no.

1 Acknowledgements 32 About the project 43 GDP 44 What is Recession, its causes, its beginning 65 Sectors Affected 76 Impact on INDIA 87 Social Impact 128 Current Scenario 139 Calculating GDP 1510 Related terms 1611 GNP 2112 Measures of Government to tackle Recession 2413 Conclusion 2514 Bibliography 26

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Acknowledgements

We wish to express our gratitude to all the people involved in the making of this report. Special thanks to www.rbi.org.in from where most of the relevant data was extracted

We are thankful to Prof. Joy Choudhary for lending us this opportunity to exercise our skills under the sun and learn how to select data from the masses and analyze its impact on our economy. Our sincere thanks to the administration for including such a thoughtful process into our curriculum.

It has been a pleasure for all of us to work in a team and all of us are thankful to each other for their cooperation.

:-

Rahul chandalia

Priyanka agarwal

Gagan deep singh

Poonam gupta

Shruti toshniwal

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Objective

To assess the effect of global meltdown over India’s gross domestic product.

Scope

Define Recession.

Its cause and Impact on India.

Whether Recession a crisis or not?

How government tackles it.

To analyze what GDP is actually.

What are its components?

How is GDP calculated?

What it depict?

Factors effecting GDP.

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About the project

GROSS DOMESTIC PRODUCT

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). It is also considered the sum of a value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.

That was more of a bookish definition of this gargantuan terminology used more often than not in the current volatile market.

Every other person is concerned about INDIA’s growth.

But what is this growth actually???

This growth depicts the growth in India’s Gross Domestic Product over the year.

But still the masses are not known of What are the factors on which GDP depends, How it is calculated, Who does it, When is this done, and What will the falling markets do to India’s GDP?

To unzip all these queries we would like to take the opportunity to bring forward a proposal to do a project report with this subject in focus.

Starting with recession& then carrying on to GDP, calculations & impacts on growth of various sectors

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What Is Recession?

A recession is a contraction phase of the Business cycle.

The official agency in charge of declaring that the economy is in a state of recession is the-National Bureau of Economic Research (NBER).

They define recession as a "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.

For this reason, the official designation of recession may not come until after we are in a recession for six months or even longer.

Some economists also suggest that a recession occurs when the natural growth rate in GDP is less than the average of 2%. Typically, a normal economic recession lasts for approximately 1 year. American newspapers often quote the rule of thumb that a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. This measure fails to register several official (NBER defined) US recessions.

What Causes Recession?

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 leas 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.

BEGINNING OF MELTDOWN – United States

The fear of a recession looms over the United States. And as the cliché 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 Crisis in the US

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The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value In February, 63,000 jobs were lost, a 5-year record. In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.

On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years

The defaults on sub-prime mortgages (home loan 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. Liquidity Crisis

In early July, depositors at the Los Angeles offices of Indy Mac Bank frantically lined up in the street to withdraw their money. On July 11, Indy Mac - the largest mortgage lender in the US – was seized by federal regulators. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

During the weekend of September13–14, Lehman Brothers declared bankruptcy after failing to find a buyer. Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure

The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual. The year 2008 as of September 17 has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007

Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals. The year also saw the ninth biggest bankruptcy with the failure of Indy Mac Bank

On September 29, Citigroup beat out Wells Fargo to acquire the ailing Wachovia's assets will pay $1 a share, or about $2.2 billion. In addition, the FDIC said that the agency would absorb the company's losses above $42 billion; in exchange they would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk

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IMPACT ON INDIA’s GDP

The current US financial crisis has been variously compared with the 1907 banking/credit crisis, the Great Depression and the dotcom bust. It’s been quite a roller-coaster ride for the world economy with financial services dominating the headlines world over – companies writing down losses, companies merging, acquiring, and going bust. The latest saga including Lehman, Merrill and AIG has unnerved the financial world and created serious concerns among their business partners, especially the Indian IT players.

The festival season in India was seldom so gloomy for the share market. Investor wealth worth Rs. 250,000 crore was wiped out on the bourses on a single day, on 10 October. The Sensex fell by 1000 points before recovering some 200 points, an intra-day drop of some 800 points. The lachrymal wave washed away the festive mood.

At the first sign of stock market crash and FII funds stampede, the United Progressive Alliance (UPA) Government has once again permitted P-notes (participatory notes) paving the way for enhanced speculation. The present convulsion in the Indian bourses would look mild before any possible explosion in future as a result of this heightened speculation. Despite the government itself acknowledging that the P-notes were being abused/misused at the time of banning them, no safeguard has been put in place. Anyway, how can there be any safeguard within the realm of speculations? It is absurd.

Impact on Indian banks

“Indian banks are safe,” reassured Reserve Bank of India (RBI) Governor Subbarao repeatedly. Indian banks' exposure to international markets is relatively small at 6 percent of their total assets, the rating agency Crisil said, adding that even lenders with large international operations have less than 11 percent of their assets overseas. But a mini-version Indian bailout was in the making simultaneously in the first week of October with the government virtually shoring up two mutual funds and Life Insurance Corporation (LIC) coming to the urgent rescue of three more which landed into liquidity crisis in the backdrop of a steep crash in the stock markets.

At a time when the big names in Western banking industry are queuing up for bailouts, there may be a sudden leap in non-resident Indian (NRI) deposits in Indian banks as these funds would look for a safe haven back home. We can hence expect a big clamour from the NRI lobby for greater concessions for their deposits. Chidambaram would only be too willing to oblige. The RBI recently increased the credit cost on term borrowings (with more than 7-year maturity) to Libor+4.5% and even then the big Indian corporate names are finding it difficult to raise funds amidst the present turmoil. Indian borrowers will end up paying more for the foreign lenders and Indian banks might be forced to pay more for the NRIs – all in the backdrop of a creeping recession and falling rate of profits.Even when Chidambaram was preparing to pass some 66 reforms-related pending Bills in possibly the

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last session of the parliament and a committee had prepared a blueprint for major financial sector reforms, the US financial crisis fell like a bombshell. No doubt, the UPA ideologues would also use the global meltdown as a pretext to push the same risky reforms. In the years to come, as the new investment projects go under one after the other and investors and insurance companies and hedge funds go under trading in credit default swaps and all such devices, the financial crisis here in India might be the denouement rather than the beginning as in US. ICICI, the symbol of new breed of unscrupulous financial manipulators, is already in doldrums.

Increasing liquidity

The liquidity position is not comfortable, the banks and financial institutions might be slush with funds once again but with interest rates ruling high there is no pick up in the credit off take by SMEs (small and medium enterprises). As they are the main employment providers in the industrial sector, the employment in this sector has already taken a heavy toll. A deep and prolonged recession in the West might result in unemployment for millions of these workers.

The RBI hurried to cut Cash Reserve Ratio (CRR) by 150 basis points to 7.5 per cent, releasing more than $12 billion fresh liquidity into the Indian banking system.

The government has once again liberalized ECB (external commercial borrowings by corporate). While RBI might come forward to infuse liquidity liberally in the short-term, wait for the booming NPA figures in the medium and long term.

Exchange Rate: Rupee Depreciation

From unprecedented appreciation earlier a few months back, the rupee fell to record low — reaching Rs.49 per dollar at some point. The dollar is gaining vis-à-vis rupee because of the outflow of the FII funds and since the worst is yet to come in the US /global meltdown, a repeat of the East Asian crisis in India is very much a possibility. During the preceding period, if the rupee appreciated by around 18%, now it has depreciated by around 19% during this Jan-Sept.

Impact on Trade

The trade deficit is reaching alarming proportions. If exports are growing, imports are growing even more. Thanks to workers’ remittances, NRI deposits, FII investments and so on, the current account deficit at around $10 billion doesn’t look so threatening. But for some reasons if the remittances dry up and FIIs funds take flight, it will be a repetition of 1991 after a few years if forex reserves get depleted and trade deficits keep increasing at the present rate. Even as the country’s exports and imports registered a substantial growth of 35.1 per cent and 37.7 per cent in dollar terms, respectively, during the first five months of the current fiscal (April to August), the trade deficit during the period has shot up. The trade deficit was around $14 billion for a single month of August 2008, a record level. Even Goldman Sachs’ prediction that India’s forex reserves would decline to $271 billion by year end from $310 billion in March 2008 looks a very conservative estimate.

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An Indian Recession?

It might be just a slowdown in India till now. But a recession cannot be ruled out in the medium term. Chidambaram is claiming 7.5 - 8% growth this year. ADB has predicted 7% growth. Many rating agencies estimate industrial growth between 6.5% and 5.2% from around 11-12% in 2006-07. It is hoped that agriculture would be the saving grace this year thanks to a good monsoon. But just recall that Chidambaram was boasting about a possible 10% growth early this year after the budget and the situation has changed!

The Deflating Growth Bubble

The ratio of savings and investment to the GDP reportedly remains high at 35 per cent. Still, there is a slowdown in the Indian economy. The core sector growth is down to less than 4 per cent. All vital productive sectors are on a slowdown. With such a structural background, if and when the Indian economy slips into a recession, the recession will be protracted and there will be no a quick revival. Crude oil prices have declined to $50 a barrel.

The 11th Plan estimates that to maintain an average annual growth rate of 9%, the investment in infrastructure would have to rise from Rs. 259, 839 crore in 2007-08 to Rs. 574,096 crore in 2011-12 at constant 2006-07 prices, aggregating to Rs. 2,011,521 crore over five years. In the terminal year, this works out to be 9 per cent of the GDP, up from 5 per cent of the GDP in 2006-07. The Plan document itself says that the government cannot manage this much money and a substantial part of it has to come from the private sector.

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Social Impact

"Suicides after market crash is an urban trend" … screamed the headlines in a pink paper. Beneath that was the sob story of an entire family committing suicide after heavy loss in the stock market. "Whether it is a seemingly well-to-do US-resident of Indian origin wiping out his entire family or middle-aged brother-sister duo killing their parents and then committing suicide, the financial crisis has hit everyone, and has hit them hard. But the scorched middle class investors take their entire families along and that is the level of urban investing middle class insecurity. The middle class boom might be glamorous but the depression in incomes and losses in the markets are far more agonizing. Pink slips are painful indeed and job losses are not limited to the West alone. Those who are hoping that jobs in the West would shift across to the cheaper shores of the India are missing.The Indian BPO sector derives 40 per cent of its revenues from the financial sector of the developed countries and exactly as they mushroomed fast they will wilt with the same speed. IT-BPO sector in India accounts for 5.5% of the GDP but 30% of exports and a very high share of service sector employment in cities like Bangalore. Take the case of garments and textiles. Hardly a few months back, tens of thousands of workers, mostly women, were out of jobs in Chennai and Bangalore and towns like Tiruppur and Karur. The villain was the rupee appreciation, leading to some 18% reduction in incomes in rupee terms. After the loot by layers and layers of intermediaries, the factory producer was left with nothing and hence closed down the unit. Now dollar has appreciated, smile returned to the faces of garment owners but the smile soon vanished. The current exchange rate offers handsome returns but the orders are drying up due to impending recession. No margin then…no orders now! No jobs in both the scenarios.The impact on the working class by means of wage compression and workloads, illegal retrenchment and worsening of job security and working conditions etc., would be onerous. Already this has started happening. For reasons of space, we are not elaborating. But we can only say there will be many more NOIDAs.The employment in organized industrial sector – both public and private – was 8.98 million in 1997 but it was down to 7.62 million by 2005, i.e., precisely during the growth miracle if we leave out the disastrous year of 2001-02 for the industry when the growth was very low. If the growth miracle turns into a debacle what will happen to organized sector employment? Formal sector will be informalised and permanent workers will be booted out. Bailouts for the bankrupt and boot-out for the workers. The same logic of capital! Total blackout of the possible social impact of the meltdown and almost virtual absence of any discourse on safety measures/nets is one of the characteristic features of the current crisis of capital, across the globe as well as in India.

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Current Scenario

The current crisis parallels the 2001-2002 bust especially for India’s IT (export) sector. Approximately 61% of the Indian IT sector’s revenues are from US clients. If you just take the top five India players who account for 46% of the IT industry’s revenues, the revenue contribution from US clients is approximately 58%. About 30% of the industry revenues are estimated to be from financial services. In addition, from a qualitative standpoint, the tentacles of the financial sector business are quite well-entrenched and have significant structural impact as well.

The size and maturity of the IT industry today are far ahead of the 2001 days, and the current model has signs of “irreversibility” and long-term competitive advantage. While GE invented the industry along with India’s biggest IT outsourcing firms, the US financial services and insurance sector (BFSI) was one of the earliest adopters of the outsourcing trend in a big way.

The US BFSI players created large outsourcing chunks, made Indian IT players learn from their experience, negotiated aggressively on pricing, pushed for service level commitments, and rewarded with more work to all who excelled in taking on their challenges. Between 1999 and 2008, the share of US financial services revenue as a % of total revenues for the Top 3 Indian players thus went up from 25% to 38%.

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In the minds of the BFSI US players, Indian companies were flexible, delivered good quality (resources), and gave a key lever in managing their SG&A and time to market by freeing up more critical IT resources. They were essentially partners in taking some of the fixed costs out of their SG&A. Partnering in the operating business areas was still far away and is a tad far even today. It is ironic that this crisis would have had a worse impact, if Indian firms had partnered with the financial services entities much more closely, tying up their invoices with the clients’ business outcomes.

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Calculating GDP

GDP (Gross domestic product)

GDP is the market value of all final goods and services produced within the border of a country in a given time period. This definition contains four parts: 1. Market value2. Final goods and services3. Within the border of a country4. In a given period of time

1. Market value:

To measure total production we must add together the production of all final goods and services produced in a country. Since we cannot add tons to units to meters to gallons, it is necessary to convert all output to the same unit of measurement. Conversion is to calculate the market value (market price) of each good and service and then add them together. Thus, market value means valuing production according to market price.

Market value of a good = (Price of the good) (Quantity of the good) = P*Q

Example: Suppose a country produces only three final goods. Quantities and prices of these goods for two different years are given in the table below:

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Using market value allows us to add goods and services produced together, and to compare the GDP of one year to that of another. We can see here that GDP increases in 2004. This means the economy has grown from 2003 to 2004.

2. Final Goods and Services:

To calculate GDP we measure the value of the aggregate production of goods and services. However, we count only the value the final goods and services produced. We do not count intermediate goods. A final good (or service), is the good that does not require any further processing in the market and is available for immediate consumption or use. The bread bought by a consumer is a final good but the flour bought by the baker is not. Some goods can be intermediate goods in some situations and final goods in other situations. For example, eggs may be used as a final good or an intermediate good. Excluding intermediate goods and services when calculating GDP avoids double counting.

Produced within the border of a country: Only goods and services that are produced within the border of a country counted as part of that country’s GDP, irrespective of who produces them.

Examples:

1. The income received by a Bahraini worker working in Dubai is part of UAE’s GDP.

2. The market value of the product provided by a Malaysian company working in Bahrain is part of Bahrain’s GDP.

3. Profits generated by a U. S. bank in Bahrain are included in Bahrain’s GDP

4. In a given time period:

GDP includes only goods and services that are newly produced within the current year.

Example: Suppose a house newly built in 2003 but sold in 2004. The market price of the house counted in the GDP of 2003 not in the GDP of 2004.

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GDP AND Related terms

GDP-Definition

Definition: GDP is Gross domestic product. For a region, the GDP is "the market value of all the goods and services produced by labor and property located in" the region, usually a country. It equals GNP minus the net inflow of labor and property incomes from abroad.

Definition of Aggregate Demand

Definition: Aggregate demand is the sum of all demand in an economy. This can be computed by adding the expenditure on consumer goods and services, investment, and not exports (total exports minus total imports).

Definition of Aggregate Supply

Definition: Aggregate supply is the total value of the goods and services produced in a country, plus the value of imported goods less the value of exports.

Definition of Average Propensity to Consume

Definition: The average propensity to consume is the proportion of income the average family spends on goods and services.

Definition of average propensity to save

Definition: The average propensity to save is the proportion of income the average family saves (does not spend on consumption).

Definition of basis points

Definition: A basis point is one-hundredth of a percentage point. Used in the context of interest rates.

Expenditure Approach:

In this approach the expenditures on all final goods and services made by all sectors of the economy are added to calculate GDP. Expenditures are divided into 4 different categories: Consumption, Investment, GovernmentPurchases, and Net Exports over a period of time.

GDP can be computed as the sum of total expenditures of consumption, investment, government purchase of goods and services, and net exporting over a period of time. If GDP denoted by Y then, GDP = aggregate expenditure =

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Y= C + I + G + X - M= C + I + G + NX

Consumption Expenditure (C) Firms sell and households buy consumers’ goods and services in the goods markets. The total payments for these goods and services are called consumption expenditure. Consumption expenditure (C) includes expenditures spent on goods and services produced inside the country and the rest of the world. Buildings and houses are not included in the consumption expenditure. They are part of the investment. Purchased of stocks and bonds are not part of consumption expenditure.

Investment (I)

Investment (also called gross private domestic investment) (I) as used in macroeconomics refers to the purchase of new capital and the increase in inventories.

Thus, investment includes:

a. Firms buy from each other new capital goods such as machines, tools, equipments and buildings in the goods markets. These new capital goods are used to produce other goods and services. b. Some of what firms produce is not sold but is added to inventory (can be considered as if the firm is buying from itself).

b. Inventories include a firm’s stock of unsold goods, goods in process and raw materials. So, goods that are produced this year, kept as inventories, and then sold to consumers next year are counted in this year’s GDP. Inventory investment is the amount by which inventories increase during the period (inventory investment = the increase in inventory).

c. Purchases of all new residential buildings are also part of investment. Both capital goods and inventory investment are treated as final goods and included in the GDP. Note - Investment does not include stocks or bonds or other financial assets. These assets only involve transfers of ownership - no physical asset is directly created because of these assets Example: Goods that are produced this year, stored in inventories, and then sold to consumers next year count in this year’s GDP Example: If a Bahraini firm buys new machines from Japan, Bahrain’s investment would increase.

Government Purchase (G)

Government buys goods and services from firms. This is the government purchase (or government expenditure) (G). Government purchase (G) may include roads and bridges, purchase of military equipment, purchase of furniture for offices, etc. Government collects taxes and uses tax revenue to pay for its purchase.Net tax = tax paid to government - transfer payments - interest payments on government debt. Transfer payments are cash transfers from government to households such as social security, unemployment compensation, and to firms such as subsidies. Transfer payments are government expenditures that are not related to current production so they are not included in G. They do not represent purchase of final goods or services.

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Rest of the World:

Countries trade with each other. Country sells goods and services to the rest of the world. This is called the value of exports (X). (Exports are added because they are produced domestically but not measured as part of C, I, and G)Country buys goods and services from the rest of the world. This is called the value of imports (M). (Imports subtracted because they are typically included in C, I, G, but they are not domestic production) Total adjustment results in adding net export (NX) NX = Exports - Imports = X - MIf NX > 0 trade surplusIf NX < 0 trade deficit Example: If a Bahraini firm buys new machines from Japan, Bahrain’s net export would decrease.

INCOME APPROACH:

Since total value of a product is equal to the amount of income generated by its production, GDP can be also calculated by adding all the income generated in the production of GDP. Income approach to calculate GDP sums compensation of employees, rental income, net interest, corporate profits, proprietors' income, depreciation, and indirect taxes and subtract subsidies. The income approach determines the cost of production, and then adjusts it to equal the market value of production.

The following types of income are used to calculate GDP.

1. Compensation of employees. It is the labor Income, which includes all wages, salaries, and benefits paid to labor, plus social security contributions.

2. Rent for the use of land. It is the income earned by the owners of land, and any other rented resources.

3. Net interest for the use of the capital. It is the income earned by the owners of machines and equipments. The interest the domestic owners of the capital receive - the interest they pay

4. Corporate profit (or retained earnings). It is what is left to the firm after all payments. It includes both of profits distributed as dividend plus undistributed profits.

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5. Proprietor’s income. It is the income of self employed small business such as private doctor’s clinics, Attorney’s office, mini marts, small farms and so on. Proprietors' income might be a mix of incomes from labor, capital and land.

Adding the five components result in national income or net domestic income at factor cost (NDI).Net Domestic Income (NDI) = compensation of employees + rental income + net interest + corporate profit + proprietor's income. Factor cost is the cost of factors of production used to produce final goods and services. To calculate GDP using market value we must add net indirect tax (NIT) and depreciationGDP = NDI + Net indirect tax (NIT) + Depreciation (D) Net indirect tax = indirect tax - subsidies Indirect tax is a tax paid by consumers when they buy goods and services. Because of indirect taxes consumers pay more for the goods and services than producers receive market price > factor cost. (Direct tax is tax on income.) Subsidy is a payment made by a government to a producer. Because of subsidies consumers pay less for some goods and services than producers receive factor cost > market price Depreciation is the decrease in the capital stock because of the wearing out of machines and equipments (is the consumption of the capital). It is treated as a cost of production and is subtracted in calculation NDI. So it must be added back to get the GDP.

Points to remember while calculating India GDP

Calculating India GDP has to be done cautiously pertaining to the diversity of the Indian Economy.

There are different sectors contributing to the GDP in India such as agriculture, textile, manufacturing, information technology, telecommunication, petroleum, etc.

The different sectors contributing to the India GDP are classified into three segments, such as primary or agriculture sector, secondary sector or manufacturing sector, and tertiary or service sector.

With the introduction of the digital era, Indian economy has huge scopes in the future to become one of the leading economies in the world. India has become one of the most favored destinations for outsourcing activities .India at present is one of the biggest exporter of highly skilled labor to different countries. The new sectors such as pharmaceuticals, nanotechnology, biotechnology telecommunication, aviation, manufacturing, shipbuilding, and tourism would experience very high rate of growth

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GROSS NATIONAL PRODUCT (GNP)

GNP is the market value of all final goods and services newly produced by the citizens (nationals) of a country whether they are inside or outside the country in a given period time.

GDP allocates product (income) according to the location of the owners of factors of production regardless of who produce it whether they are nationals or foreigners. GNP allocates product (income) according to the nationality of the owners of the factor whether they are inside the country or abroad.

Example: The income of an Indian working in Bahrain is part of Bahrain's GDP as well as India's GNP Exercise: Suppose Toyota owns a plant in Bahrain to produce Camry's using Bahraini workers. How to count the product of this plant in the GDP and GNP of Bahrain and Japan? o With GDP, Bahrain gets all of it, because the plant and the workers are all located in Bahraino With GNP, the capital share goes to Japan and the labor share goes to Bahrain

NOMINAL GDP vs. REAL GDP:

Nominal GDP is the value of final goods and services produced in a given year valued at current prices (Prices that prevailed that same year.)

Real GDP is the value of GDP measured at constant (base year) prices. Real GDP is a measure of a country's actual production. We use constant prices to remove the effects of inflation. Thus, the first step to calculate real GDP is to choose a base year

To understand the difference between nominal and real GDP, consider the following example: Example: Suppose a country produces and consumes two final goods. Quantities and prices of each good for three different years are given in the table below.

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Suppose 2002 is the base year.

Nominal GDP in 2001 = (P1 in 2001) (Q1 in 2001) + (P2 in 2001) (Q2 in 2001) = ($15) (2500) + ($20) (600) = 49500

Nominal GDP in 2002 = (P1 in 2002) (Q1 in 2002) + (P2 in 2002) (Q2 in 2002) = ($20) (2300) + ($27) (500) = 59500

Nominal GDP in 2003 = (P1 in 2003) (Q1 in 2003) + (P2 in 2003) (Q2 in 2003) = ($23) (2800) + ($30) (700) = 85400

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An Indian Recession?

It might be just a slowdown in India till now. But a recession cannot be ruled out in the medium term. Chidambaram is claiming 7.5 - 8% growth this year. ADB has predicted 7% growth. Many rating agencies estimate industrial growth between 6.5% and 5.2% from around 11-12% in 2006-07. It is hoped that agriculture would be the saving grace this year thanks to a good monsoon. But just recall that Chidambaram was boasting about a possible 10% growth early this year after the budget and the situation has changed!

True, there is a boom in FDI this year. The total FDI between April and August this fiscal stood at $14.6 billion. A record figure. Average monthly FDI inflow is above $2 billion whereas a few years back that was the annual figure. Kamal Nath was confidently asserting that the target of $35 billion for this year would be achieved. But a closer look reveals that a sizable chunk of this FDI going into mining loot, services, financial services in particular, entertainment industry including luxury hotels and so on and also on mergers and acquisitions (M&As) not mainly to fresh investments in the core productive sectors alone. The long-term sustainability of such a pattern of FDI flow is anybody’s guess. Especially in the midst of the global liquidity crunch. Inflows into already committed projects might give a false impression and it remains to be seen how long this boom will continue. To sustain it, Chidambaram is bound to come up with a slew of fresh liberalization measures. FDI caps in insurance, banking and financial services are already being hiked. There might be 100% FDI in single-brand retail. There will be more and more sellouts to attract foreign capital. Chidambaram keeps repeating ad nauseam that India like China , will continue high growth despite recession in the developed countries.

Well, if high growth is to be driven primarily by foreign capital assisted by government landgrab, tax waivers, assured returns guarantees for infrastructure investments and fabulous BOT terms and so on, in short, by making the whole of India into a tax haven, the structural distortions this Manmohan gamble would lead to is mindboggling. Leaving a handful of big business houses and Indian MNCs, nothing Indian would be left in the “Indian” economy and even the Indian MNCs have started looking outward. India Inc spent $26 billion in mergers and acquisitions abroad this year. The global meltdown would, if anything, only accelerate this trend and the scarce capital resources would be channelized for overseas spending. If this is the story of overseas M&As by “Indian” companies, M&As in India by foreign companies is even more breathtaking. In power sector alone, the merger and acquisitions worked out to $5 billion out of a total M&A value of $55 billion in the infrastructure sector alone. This is the secret behind the high FDI. But overseas M&A is not a rosy path. Tata’s teamed up with AIG which was one of the first to go under. TCS, Infosys and WIPRO…all were on an acquisition spree abroad but at home they are the leading ones in issuing pink slips. The nation would soon realize the real cost of the N-deal. N-deal was also a sort of bailout for the US industry.

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How the Government Tackles Recession?

Tax cuts are the first step that a government fighting recessionary trends or a fully fledged recession proposes to do. 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. In the current case, the Bush government has proposed a bailout

Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion to $1 trillion U.S. dollars. President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. The crisis continued when the United States House of Representatives rejected the bill.

The bill was eventually passed by the Senate and the House but the stock market continued to fall nevertheless Impact 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 Indian companies with big tickets deals in the US are seeing their profit margins shrinking.

More people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. One danger meanwhile is of a dip in the employment market. There is already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs.

More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring -- and that will change the complexion of the job market. Many companies has laid off their staffs, the number of tourists inflow to India has come down, companies have cut down compensations and perks etc, government and other private companies are reluctant in starting new ventures and starting new projects etc. Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break- even, will run out of cash. one of the casualties this time could be real estate, where building projects are half-done all over the country and in this tight liquidity situation developers find it difficult to raise finances. The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening. Consumers are also frozen in this sudden glare of the headlights. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent. At the heart of the problem lie questions of liquidity and confidence.

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Conclusion

What the RBI needs to do, as events unfold

Stimulus packages have been announced

Two packages have been delivered but condition of the market is not so well as investors had lost the fidelity in companies.

To neutralize the outflow of FII money by unwinding the market stabilization securities that it had used to sterilize the inflows when they happened. This will mean drawing down the dollar reserve, but that is the logical thing to do at such a time.

If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high. Meanwhile, there is an upside to be Considered as well. The falling rupee (against the dollar, more than against other currencies) will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general (stocks, real estate, employment among others) will all have an element of sanity restored.

And for importers, the oil price fall (and the general fall in commodity prices) will neutralize the impact of the dollar's decline against the rupee.

Provision of adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level.

In line with the above, to continue with the present stance of preference for a soft and flexible interest rate environment within the framework of macroeconomic stability.

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Bibliography

www.google.com

www.financialtimes.com

www.rbi.org.in

www.blogspot.com

The Economic Times

Business World

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