Shikha Sota

Falli

ng In

tere

st ra

tes

• The world economy grew 5.2% in 2007

• Powered by growth in China (11%), India (9%) and Russia (8%).

• The BRIC countries had been posting 7%-10% grow rates for years.

• Property and stock market booms

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World Economy

Falli

ng In

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st ra

tes

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2007 2007 2007 2008F 2009F 2008F 2009F

Brazil 191.6 1,314.2 180.1 5.2 3.5 5.7 5.1

Russia 141.6 1,291.0 445.2 7.0 5.5 14.0 12.0

India 1,123.3 1,171.0 249.6 7.9 6.9 7.9 6.7

China 1,320.0 3,280.1 1531.3 9.7 9.3 6.4 4.3

ASEAN 567.4* 1073.9* 368.8* 5.4 5.4 9.4 6.9

*2006 available data

Sources: IMF World Economic Outlook (Oct 2008); World Bank Key Development Data & Statistics

ADB Asian Development Outlook 2008 Update (September 2008); www.aseansec.org

Real GDP Growth InflationBRICAPopulation (in Millions)

GDP Value (in current

prices,US$B)

Foreign Exchange

Reserves (US$B)

BRIC: Emerging nations of growth

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What difference a year makes?

Falli

ng In

tere

st ra

tes

• Contraction phase of business cycle

• When real GDP growth is negative for two or more consecutive quarters.

• Visible in real income, employment, industrial production, and wholesale-retail sales.

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Recession

Falli

ng In

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st ra

tes

• Sub prime crises

• Insufficient transparency

• Inadequate regulation

• Creation of complex instruments.

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Inflation

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Causes

Falli

ng In

tere

st ra

tes

• Financial term used to identify borrowers who don’t qualify for a ‘prime’ loan.

• Subprime borrower: whose credit score is below 620

• Pays higher interest rate and higher fees for a loan.

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Stock market crash

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Subprime

Falli

ng In

tere

st ra

tes

• US government wanted to give everyone the opportunity to own his or her own home, even those who weren’t creditworthy.

• Mandated that banks make loans to subprime borrowers through the Community Reinvestment Act (CRA).

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Background

Falli

ng In

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st ra

tes

• Financial institution needed to get those loans off their books by selling them to someone else.

• Sold them to Fannie Mae and Freddie Mac

• Fannie Mae and Freddie Mac sold them as bonds

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Background

Falli

ng In

tere

st ra

tes

• Securitized mortgages ended up in banks and financial institutions around the world.

• No one really knew how much subprime exposure they had.

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Background

Falli

ng In

tere

st ra

tes

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US economy : No end to financial turmoil

Falli

ng In

tere

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tes

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Low confidence level

Falli

ng In

tere

st ra

tes

• Consumer spending - major driver of the US economy

• Consumers had cut borrowing & spending

• Consumer confidence reached all time low

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Inflation

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Consumer bail out

Falli

ng In

tere

st ra

tes

Sub prime

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Unemployment

Falli

ng In

tere

st ra

tes

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1 Citigroup 73,000

2 Bank Of America 35,000

3 General Motors 34,000

4 Hewlett-Packard 25000

5 Lehman Brothers 23000

6 At & T 17000

7 Express Delivery Company DHL 15000

8 Starbucks 12000

9 Chrysler 12000

10 Wells Fargo 11000

11 Dow Chemical 11000 (Source: Business world)

Falli

ng In

tere

st ra

tes

Sub prime

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Inflation

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Mass retrenchment

Rising Oil prices

Falli

ng In

tere

st ra

tes

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Inflation

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Mass retrenchment

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Declining dollar

Falli

ng In

tere

st ra

tes

Sub prime

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Stock market

crashed

Falli

ng In

tere

st ra

tes

• Fear of recession looms over the world

• Whenever the US sneezes, the world catches a cold.

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Inflation

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Mass retrenchment

Recession

Falli

ng In

tere

st ra

tes

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Growth rate of major economies

0.0

1.0

2.0

3.0

4.02002

2003

2004

2005

2006

2007

2008F

2009F

US Euro Area Japan

F – forecastsSource: World Economic Outlook, IMF, Oct 2008

Falli

ng In

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tes

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The largest mortgage lender in the US - was seized by federal

regulators.

Global Economy

11 July, 08

Falli

ng In

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tes

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Global Economy

14 Sep. 08

•Investment Bank Lehman brothers files for Bankruptcy protection on 15 September 2008•Merrill Lynch & co. inc. to be taken over by Bank of America.

14 Sep. 08

Falli

ng In

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st ra

tes

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Global Economy

18 Sep, 08

20 Sep. 08

Falli

ng In

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tes

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Global Economy

21 Sep, 08

22 Sep. 08

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tes

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Global Economy

25 Sep, 08

29 Sep. 08

Falli

ng In

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tes

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Global Economy

1 Oct. 08

8 Oct. 08

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ng In

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tes

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Global Economy

10 Oct, 08

13 Oct. 08

Falli

ng In

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tes

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Steps take by US Government

Falli

ng In

tere

st ra

tes

• March 11, 2008: The Federal Reserve announces a rescue package to provide up to $200 Billion in loans to banks and investment houses.

• March 16, 2008: the Fed provides a $29 Billion loan to JP Morgan Chase & Co. as part of its purchase of investment bank Bear Stearns.

Sub prime

Stock market crash

Inflation

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Mass retrenchment

US bail out plan

Falli

ng In

tere

st ra

tes

• July 30, 2008: President Bush signs a housing bill including $300 Billion in new loan authority for the government to back cheaper mortgages for troubled home-owners.

• Sept. 07, 2008: The Treasury takes over mortgage giants Fannie Mae and Freddie Mac, pledging up to $200 Billion to back their assets.

Sub prime

Stock market crash

Inflation

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US bail out plan

Falli

ng In

tere

st ra

tes

• Sept. 16, 2008: The Fed injects $85 Billion into the falling American International Group, one of the world’s largest Insurance companies.

• Sept. 16, 2008: The Fed pumps up $70 Billion more into the nation’s financial system to help ease credit stresses.

• Oct. 03, 2008: President Bush signs$700 Billion Economic Bail-out package.

Sub prime

Stock market crash

Inflation

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US bail out plan

Falli

ng In

tere

st ra

tes

• Oct.07, 2008: The Fed says it will start buying unsecured short-term debt from companies, and says up to $1.3 trillion of the debt may qualify for the program.

• Oct.08,2008: The Fed agrees to lend AIG $37.8 billion more bringing total to about $123 billion.

Sub prime

Stock market crash

Inflation

Dow

nturn

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

US bail out plan

Falli

ng In

tere

st ra

tes

• Oct. 14, 2008: The FDIC says it will provide up to a total of $1.4 trillion in loans between banks.

• Nov.10, 2008: The Treasury and The Fed replace the two loans provided to AIG with a $150 billion aid package that includes an infusion of $40 billion from the government’s bailout fund.

Sub prime

Stock market crash

Inflation

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Bail outRe

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

US bail out plan

Falli

ng In

tere

st ra

tes

• Nov.23, 2008: The Treasury says it will invest $20 billion in Citigroup Inc., on top of $25 billion provided on Oct. 14.

• Dec.19, 2008: President Bush signs $17.4 billion auto industry bail-out package for General motor and Chrysler LLC.

• Jan. 05, 2009: Auto industry bail-out rejected by US Senate.

Sub prime

Stock market crash

Inflation

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Bail outRe

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

US bail out plan

Falli

ng In

tere

st ra

tes

• Jan.16, 2009: The Bank of America will receive $20 billion in fresh US government aid and $118 billion worth of guarantees against bad assets. The emergency funding will help the troubled bank to absorb the losses it incurred when it bought Merrill Lynch.

• March 01, 2009: The U.S Government commits another $30 billion to AIG as the embattled insurer prepares to report the biggest loss in history and struggles to sell asset

Sub prime

Stock market crash

Inflation

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Bail outRe

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

US bail out plan

Falli

ng In

tere

st ra

tes

• Fewer exports to US

• Growth likely to slow down

• Indonesia, Malaysia, Taiwan, and South Korea to have same impact

Sub prime

Stock market crash

Inflation

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

China

Falli

ng In

tere

st ra

tes

• Fewer exports to America

• Prices of commodity fell by 20 to 30 percent

Sub prime

Stock market crash

Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Latin America

Falli

ng In

tere

st ra

tes

• Exports to the United States represent about a quarter of each country’s GDP

• Have to bear brunt of slowdown

Sub prime

Stock market crash

Inflation

Dow

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Mexico & Canada

Falli

ng In

tere

st ra

tes

• Fewer exports to US

• Lower sales & profits

• Bankruptcies

Sub prime

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Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Europe

Falli

ng In

tere

st ra

tes

• Growth mostly driven by external demand

• Domestic consumption weak

Sub prime

Stock market crash

Inflation

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Japan

Falli

ng In

tere

st ra

tes

• More job losses to continue.

• Output will continue to fall through the end of 2009.

• Recession could last 30 months into the end of 2010.

Sub prime

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How long?

Falli

ng In

tere

st ra

tes

Sub prime

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Effect of recession on India

Falli

ng In

tere

st ra

tes

• Fall in GDP• An unhealthy stock market• Falling rupee• Growing Unemployment• Fall in production• Declining personal Income

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Indicators for recession in India

Falli

ng In

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st ra

tes

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Declining GDP

Source: World economic outlook, Oct 2008 IMF

Falli

ng In

tere

st ra

tes

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Share market

Falli

ng In

tere

st ra

tes

• Crashes below the psychological mark of 10K

• Sensex on Oct 17, 2008 – 9,975

• Sensex Journey10K – 21K 493 days21K – 10K 193 days

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Stock market crash

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Mass retrenchment

Share market

Falli

ng In

tere

st ra

tes

• Foreign & domestic investors have pulled out from stock market.

• Stock broking houses are laying-off people.

• People have started saving money.

Sub prime

Stock market crash

Inflation

Dow

nturn

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Share market

Falli

ng In

tere

st ra

tes

• Inflation and the psychological impact of the US crisis, leading the companies to hit the panic button.

• IT and financial sectors, real estate owners, auto Industry, i-banking are confronting heavy loss due to the fall down of global economy.

Sub prime

Stock market crash

Inflation

Dow

nturn

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Bail outRe

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Bad News for India

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

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Bail outRe

cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Industrial sector

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Industrial sector

•Companies out of cash

•Car, bike & truck sales down

•Steel plants also cutting production

Falli

ng In

tere

st ra

tes

Industries like garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

Sub prime

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FICCI

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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lips

Mass retrenchment

Export Industry

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Export Industry

• Indian export industry in Oct 2008 fell by 12% as compared to Oct 2007

• Exports by value– In 2007 - $14.6 billion– In 2008 - $12.8 billion

Falli

ng In

tere

st ra

tes

• 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.

Sub prime

Stock market crash

Inflation

Dow

nturn

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Export industry

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Falli

ng In

tere

st ra

tes

• Significant drop in new hiring

• Companies has laid off their staffs and cut down compensations

• Companies in IT industry have stopped hiring and projected lower manpower need.

Sub prime

Stock market crash

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Layoffs & Unemployment

Falli

ng In

tere

st ra

tes

• Firms attached to the capital market are laying off people.

• Large companies are putting their future expansion plans on hold.

• Nearly one crore persons could lose their jobs in the correct fiscal ending March.

Source: Federation of Indian Export Organizations

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Layoffs & Unemployment

Falli

ng In

tere

st ra

tes

Following report shows anecdotal evidence of downsizing in the IT and financial and many other fields.

Sub prime

Stock market crash

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Layoffs & Unemployment

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Liquidity Crunch

Falli

ng In

tere

st ra

tes

• Companies are reluctant in starting new ventures and starting new projects etc.

• Projects are halfway to completion as companies are stuck with cash flow issues

• In real estate -building projects are and developers find it difficult to raise finances.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

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ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Liquidity Crunch

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Export Industry

• Indian export industry in Oct 2008 fell by 12% as compared to Oct 2007

• Exports by value– In 2007 - $14.6 billion– In 2008 - $12.8 billion

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

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cess

ion

DepressionMillions homelessProfits dow

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Mass retrenchment

Information Technology

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

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lips

Mass retrenchment

Information Technology

• Confronting heavy losses due to the fall down of global economy.

• Dependent on large western companies.

• Western companies are decreasing their IT budget and investment.

Falli

ng In

tere

st ra

tes

• Tech companies in US & elsewhere are laying off in thousands

• Indian engineers are facing wage cuts and layoffs.

• Infosys last year was the worst-performing stock on the benchmark Sensex stock index.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Information Technology

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Banking sector

Falli

ng In

tere

st ra

tes

• Tough time – liquidity crunch

• ICICI Bank, a bank that had invested in Lehman’s bonds has also suffered

• Strong fundamental base following closed banking culture.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Banking sector

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Corrective steps

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Corrective steps

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Fiscal policy

Tax cuts for business/Individuals

Tax cuts for business/Individuals

More spending by govt. to create jobs

More spending by govt. to create jobs

Automatic Fiscal policy

Automatic Fiscal policy

Money available for spending

Money available for spending

Individuals get salary and spend money

Individuals get salary and spend money

Income to unemployed

Income to unemployed

Demand picks up; Market can recover

Demand picks up; Market can recover

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Monetary policy

More money

available for banks to give loans

Falli

ng In

tere

st ra

tes

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Measures taken by government and RBI

Falli

ng In

tere

st ra

tes

• Additional planned expenditure of Rs.20,000 crores for the current year.

• 4% cut in CENVAT

• Refinance facility of Rs. 4000 crore for the National Housing Bank.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

1st stimulus package

Falli

ng In

tere

st ra

tes

• Refinance facility of Rs. 7000crores for SIDBI to support incremental lending to MSME’s.

• Elimination of import duty on NAPTHA

• Elimination of export duty on IRON ORE FINES

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

1st stimulus package

Falli

ng In

tere

st ra

tes

• Additional funds of Rs.1100crores to ensure full refund of Terminal Excise Duty/CST.

• Additional allocation of Rs.350crores for export incentive schemes.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

1st stimulus package1st stimulus package

Falli

ng In

tere

st ra

tes

• Exporters will be allowed refund of service tax on foreign agent commissions up to 10%.

• IIFCL has been authorized to raise Rs. 10,000crore through tax free bonds.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

1st stimulus package1st stimulus package

Falli

ng In

tere

st ra

tes

• Repo rate reduced from 6.5% to 5.5%

• Reverse Repo rate also reduced from 5 to 4%

• CRR reduced from 5.5% to 5%

• Further liberalization of policy on ECB’s

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

2nd stimulus package

2nd stimulus package

Falli

ng In

tere

st ra

tes

• Credit targets of public sector banks are being revised.

• EXIM Bank has obtained a Rs.5000 crore line of credit from RBI and will provide pre and post-shipment credit to Indian exporters at competitive rates.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

2nd stimulus package

2nd stimulus package

Falli

ng In

tere

st ra

tes

• Several other measures to support exports, housing, micro, small and medium enterprises (MSME’S) and the textile sectors.

• FII investment in corporate bonds would be increased from $6 Billion to $15 Billion

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

2nd stimulus package

2nd stimulus package

Falli

ng In

tere

st ra

tes

• Service tax rate reduced by 2%

• Central excise rate reduced by 2%

• 4% excise duty cut to be valid beyond 31st march 2009

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

3rd stimulus package3rd stimulus package

Falli

ng In

tere

st ra

tes

• Custom duty exemption on Naphtha to be valid beyond 31st march 2009

• Excise duty on bulk cement slashed by 2%

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

3rd stimulus package3rd stimulus package

Falli

ng In

tere

st ra

tes

• Special package of Rs.325 crores for Leather and Textile sectors.

• Procedure for claiming duty drawback refund and refund of terminal excise duty further simplified.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

4th stimulus package

4th stimulus package

Falli

ng In

tere

st ra

tes

• Public sector banks to give working capital demand loans up to 20% of the existing fund based limits.

• Borrowing rate for micro industries stands reduced by 100 basis points.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Other measures

Other measures

Falli

ng In

tere

st ra

tes

• RBI needs to neutralise the outflow of FII money by unwinding the market stabilisation securities .

• State governments must be aided.

• In the IT sector, there should be correction in salary offerings rather than job cutting.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Corrective Measures

Falli

ng In

tere

st ra

tes

• Indian Companies have to adopt a multi-pronged strategy like diversification of the export markets.

• Public should spend wisely and save more.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Corrective Measures

Falli

ng In

tere

st ra

tes

• Checking the limit of foreign players.

• In real estate the builders should drop prices, so as to bring buyers back into the market.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

Corrective Measures

Falli

ng In

tere

st ra

tes

• Indian economy – not in recession stage

• Slow down stage

• GDP growth rate down, but still expected to be 6% in India.

Sub prime

Stock market crash

Inflation

Dow

nturn

Economic disasterEmergency loans

Bail outRe

cess

ion

DepressionMillions homelessProfits dow

nPi

nk s

lips

Mass retrenchment

WOW!!