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Recent Recession
C.A. Dr. V.M.Govilkar
M.Com., LL.B., F.C.A., Ph.D.
Warning for years to come
• In an address at the London Business School, on
25TH June 2015 Mr. Raghuram Rajan warned that
the global economy was "slowly slipping" into the
Great Depression-like problems of the 1930s and
the central banks need to sit together and define
new "rules of the game" to find a better solution
to deal with it.
• Rajan also said it's a problem of collective action
and not a problem of industrial nations or
emerging markets.
IMF – World Economic Outlook July 2015
• Global growth is projected at 3.3 percent in 2015,
marginally lower than in 2014.
• In the first quarter of 2015, world growth—at 2.2
percent—fell some 0.8 percentage point short of the
forecasts in the April 2015 WEO.
• A setback to activity in the first quarter of 2015,
mostly in North America, has resulted in a small
downward revision to global growth.
• In emerging market economies, there is continued
growth slowdown.
• The distribution of risks to global economic activity is
still tilted to the downside.
Growth Projections by IMF
COUNTRY
World Output
U.S.
Euro Area
Japan
U.K.
Canada
Brazil
Russia
India
China
Source – IMF world Economic
2014
2015
3.4
2.4
0.8
0.1
2.9
2.4
0.1
0.6
7.3
7.4
3.3
2.5
1.7
0.8
2.4
1.5
-1.5
-3.4
7.5
6.8
Outlook April 2015
U.S. Economy
• GDP $17.41 trillion.
• Public debt $18.1 trillion i.e. 102% of GDP
• Absence of new jobs . Growth in jobs and wages
results from private-sector capital spending. (capex)
Compounded growth in capex has been about 2%
• US non-financial companies rated by Moody's held
$1.73 trillion in cash at the end of 2014, ($1.67
trillion – 2013)
Euro Zone
• The Eurozone's largest economy ,Germany, was
expected to grow by 1.8 percent, but the German
Economy Ministry slashed its forecast to 1.2 % .
• If Germany falters, the entire region could be sent
back into recession.
• PIGS economies
• Greece crisis
China's economic struggles
• The once-booming economy has slowed—it went from
10% GDP growth in 2010 to an estimated 6.8% this year.
It could get worse.
• Export led growth model.
• China is trying to address some of its growth problems
through monetary and fiscal stimulus. Devalued Yuan
three times in Aug.
• Stock Market crash, declining commodity prices.
• Sale of 33 tons of gold in July 2015
Rest of the world
• Unrest in Hong Kong,
• a Ukraine and Russian war,
• fighting in the Middle East and
• Ebola
It's clear that the global economy is on shaky
ground.
Remedy invented for 1930’s
• Fiscal Stimulus
• Delinking currency from stock of Gold
• Expansionary Monetary Policy
• ‘ Beggar – thy- neighbour’ Policy
Fiscal Policy as a tool
• World Bank’s Global Economic Prospects
released on 8-01-2015 argues that only
countries with adequate fiscal space can take
steps to counter the effects of a recession
• “Fiscal space would help ensure that fiscal
policy remains available as a counter cyclical
policy tool. A wider fiscal space would not
only increase the likelihood that fiscal stimulus
is a feasible policy option, but would also
improve its effectiveness.”
Same remedy followed till date
• Stimulus packages, bail out packages, rising deficit
• Quantitative easing
• Government borrowing rising - U.S., Greece
• Beggar -thy –neighbour
1947 IMF, Word Bank – loans and aids
1994 WTO Agreements – Dumping,
Subsidies, Patents , Investments etc.
India survived
1. Not ‘ Export Led Growth Model’ –
Share of India’s exports in world market is less
than 2% and share of export in GDP is 25% approx.
2 Huge domestic market which is untapped
3 Strong Regulatory bodies – RBI, SEBI, IRDA, CCI,
etc have been playing important role.
4.Less dependency on housing sector
http://www.isb.edu/ICREI/File/Ho...
5. MSMEs in India
• Indian MSME sector consists of approx. 45 mn
units
• Produces more than 6,000 products, ranging
from traditional to high-tech items
• High product diversification: 67% of its
produce is from manufacturing goods,
followed by 17% from services, and 16% from
repairs and maintenance
5. MSMEs in India ..
2
• Employs around 101 million people
• Accounts for 45% of the manufacturing output
• Contributes 8-9% to the country's GDP
• Accounts for 40% of the country's exports
•
Source: CARE ratings
The Impact
Impact of global economic slowdown would be
1. It could hurt exports
2. It might make people nervous enough to pull their
money out of the stock market,
3. It will discourage capital expenditure by private sector
4. Government tax revenue will fall and government
borrowings will grow.
Dos And Don’ts
• Ascertain the domestic needs and produce to
satisfy them . Do not produce only for exports.
• Primary and secondary sectors be given due
importance in framing policies.
• Let us understand that Monetary and Fiscal
policies are supplementary only.
• Over leveraging be avoided.
• Hedging be accepted but speculation discouraged.
Dos And Don’ts ( for individuals)
• Wait and watch ,do not be panic, do not make
any hurry.
• Do not commit large investments
• Do not commit for long period
• Do not get tempted for speculation
• Do not over trade
• Do not put all your eggs into one basket
• Do not expect the same margin as was earned so
far particularly in real estate.
Dos And Don’ts ……. 2
• Do not get tempted for over leveraging
• Strictly follow financial discipline
• Avoid socially, politically and financially risky
proposals
• Do not give up your business, stay on the pitch
• Produce for local consumption
• Be the final goods producer ( not ancillary)
• Branding of your products
THANK YOU
V M Govilkar
9422762444
[email protected]