CONCEPT – economic recession

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 CONCEPT – economic recession

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• The dynamics of it: When the government imposes higher interest rates, the cost of money rises, thus lowering consumer and government borrowing. Consumer confidence declines, lowering the demand for goods and services. Furthermore, the financing of business operation becomes harder through borrowing, and firms have to lay off their workforce, thus increasing unemployment.
• It arrives: Normally, a recession follows the downward phase of an economy, with stagnation or decline in the investment, reduction of income, and increase of unemployment. From the downward phase, the economy either enters a recession, or it resumes to the expansion phase. It depends on policies followed by the government.
• An example: The subprime mortgage crisis of 2008 was a major economic recessions after the crash of 1929. The bursting of the real estate bubble in the summer of 2006 originally led to the bankruptcy of a large number of floating rate mortgages, and then moved to the market of corporate subordinated bonds issued to finance securitized mortgages. The outcome was a wave of collapses, mergers, and nationalizations after September 2008.
• Dynamics of 2008 crisis: Through securitization, commercial and savings banks were moving their mortgage liabilities to the balance sheets of intermediary financial institutions. For instance, a mortgage of $1,200 was replaced by an equivalent amount provided by the intermediary financial institution and the bank was using the money to issue new mortgages, which in turn were also moved to the balance sheet of the intermediary financial institution and so on. In that way, the liabilities to equity ratio increased exponentially to 50 over 1 as opposed to 9 over 1, which is the norm for the banks. Furthermore, the intermediary financial institutions were financing corporate bonds issued by investment banks that managed to convince the bond rating agencies to rate with AAA and AA corporate subordinated bonds that had securitized loans as collateral. To protect against bond default, institutional investors bought credit default swaps (CDs) issued by the AIG insurance company.
• INDIAN CASE 2019

1. A synchronised global slowdown is here (IMF report), probably triggered by trade slowdown.
2. World Bank estimate for trade growth is 1.2% only, so it's anaemic. Globalisation will ensure all get affected!
3. US-China trade war is spilling over for others.
4. Indian economy is affected through not just global trade, but also capital inflows.
5. The 2018 NBFC crisis affected credit flow to capital goods. That demand is down, car sales are down, real estate is in trouble.
6. We need fiscal stimulus now, not fiscal consolidation. Public investment is the key.
7. Cash in hands of poor will instantly help. Corporate tax cut is a medium term solution.
8. West is flat, while East is dynamic today. RCEP can be good for India, as India may get integrated into east-Asian value chains.
9. Sadly, till date, Indian industry hasn't made use of various agreements (preferential market access, etc.). Our large domestic market was too lucrative. A weaker rupee is needed for exports.
10. Our trade policies need to be consistent. With onions, we put the MEP (minimum export price norm) when prices shot up, so that local prices are contained. It is avoidable, via better reserves management.
11. In pharma and auto sectors, India is very competitive. But India chose to stay out of RCEP in 2019.

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