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ECONOMICS PROJECT Impact of U.S Economy on Indian Economy

Impact of American Economy on Indian Economy

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in todays world of recession the economy on wich d biggest hammer drops is indian economy as by direct or indirect ways it is dependent on u.s economy ........

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Page 1: Impact of American Economy on Indian Economy

ECONOMICS PROJECT

Impact of U.S Economy on Indian Economy

Submitted by :-Yatin Singh Roll no. :-3207089 Sri venkateshwara college

Page 2: Impact of American Economy on Indian Economy

Impact of U.S Economy on Indian Economy

What is an economy

The economy is the realized social system of production, exchange, distribution, and consumption of goods and services of a country or other area. A given economy is the end result of a process that involves its technological evolution, civilization's history and social organization, as well as its geography, natural resource endowment, and ecology, among other factors. These factors give context, content, and set the conditions and parameters in which an economy functions. An economy does not have to be a specific size. An economy can mean the economy of a city (local economy), a country (national economy) or the world as a whole (international economy), provided that it is involved in the production of goods and services.

"The economy" is the term used to describe the system of making, distributing, and consuming material goods and services. The many facets of a country's economy include the spending habits of consumers, labor issues, employment patterns, the banking and financial industries, taxes, and the government regulation designed to help keep the economy running smoothly. There are two distinct branches of economics: macroeconomics and microeconomics. Macroeconomics is the study of the economic big picture, measuring broad trends in the economy, such as employment or inflation, as well as the way these trends interact. Microeconomics analyzes the economy on a smaller scale, focusing on individual consumers and companies.

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United States of AmericaOverview of economy

Strength of U.S economy

The United States has the largest, most technologically-advanced, and most diverse economy in the world. While the United States accounts for only about 4 percent of the world's population, its GDP is 26 percent of the world's total economic output. The American economy is a free-market, private enterprise system that has only limited government intervention in areas such as health care, transportation, and retirement. American companies are among the most productive and competitive in the world. In 1998, 9 of the 10 most profitable companies in the world were American (even the non-U.S. exception, Germany's Daimler-Chrysler, has a substantial part of its operations in the United States). The United States also has a clear edge over the rest of the world in many high-tech industries, including

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computers, medical care, aerospace, and military equipment.In the 1990s, the American economy experienced the second-longest period of growth in the nation's history. The economy grew at an average rate of 3-4 percent per year and unemployment fell below 5 percent. In addition, there were dramatic gains in the stock market and many of the nation's largest companies had record profits. This long period of growth ended in 2001, when the economy slowed dramatically following a crash in the high-technology sector.The United States has considerable natural resources. These resources include coal, copper, lead, phosphates, uranium, bauxite, gold, iron, mercury, nickel, silver, tungsten, zinc, petroleum, natural gas, and timber. It also has highly productive agricultural resources and is the world's largest food producer. The economy is bolstered by an excellent, though aging, infrastructure which makes the transport of goods relatively easy.Despite its impressive advantages, the American economy faces a number of problems. Most of the products and services of the nation are consumed internally, but the economy cannot produce enough goods to keep up with consumer demand. As a result, for several decades the United States has imported far more products than it exports. This trade deficit exists entirely in manufactured goods. The United States actually has trade surpluses in agriculture and services. When adjusted for the surpluses, the U.S. trade deficit in 2000 amounted to a record $447 billion. The United States has been able to sustain trade deficits year after year because foreign individuals and companies remain willing to invest in the United States. In 2000, there was $270 billion in new foreign investment in American companies and businesses.Another major problem for the American economy is growth of a 2-tier economy, with some Americans enjoying very high income levels while others remain in poverty. As the workplace becomes more technologically sophisticated, unskilled workers find themselves trapped in minimum wage or menial jobs. In 1999, despite the strong economic growth of the 1990s, 12.7 percent of Americans lived below the poverty line. There are other wage problems in the United States. Although the economy has grown substantially, most of the gains in income have gone to the top 20 percent of households. The top 10 percent of households earned 28.5 percent of the nation's wealth, while the bottom 10 percent accounted for only 1.5 percent. There is also a growing number of Americans who are not covered by medical insurance.. Together, services account for approximately 80 percent of the country's GDP. Manufacturing accounts for only 18 percent, while agriculture accounts for 2 percent. Financial services, health care, and information technology are among the fastest growing areas of the service sector. Although industry has declined steeply from its height in the 1950s, the American manufacturing sector remains strong. Two of the largest American corporations, General Electric and General Motors, have manufacturing and production as their base, although they have both diversified into the service sector as well. Meanwhile, despite continuing declines, agriculture remains strong in the United States. One of the main trends in the agricultural sector has been the erosion of the family farm and its replacement by the large corporate farm. This has made the sector more productive, although there has also been a decrease in the number of farmers and farm workers.Since the middle of the 20th century, the United States has aggressively pursued free and open trade. It helped found a number of international organizations whose purpose is to promote free trade, including the General Agreement on Tariffs and Trade (GATT), now known as the World Trade Organization (WTO). It has also engaged in free trade agreements with particular nations. The North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico is an example of this. One continuing problem for American companies engaged in foreign trade is that the United States is much more open to trade than many other nations. As a result, it is easy for foreign companies to sell their goods and services in the United States, but American firms often find it difficult to export their products to other

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countries.

The American economy depends on a combination of natural resources, labor, and technology to produce and distribute goods and services. It is the world's largest and, in many ways, most efficient economy: Americans make up just 5% of the world's population but produce more than 20% of its economic output. According to the World Bank in World Development Indicators (September 2004), the U.S. total GDP in 2003, at $10.9 trillion was more than double the nearest competitor, Japan, which had a GDP of $4.3 trillion. Other leading economies in 2003, according to the World Bank data, included Germany ($2.4 trillion), the United Kingdom ($1.8 trillion), and France ($1.7 trillion).

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Indian Economy

India is the seventh largest and second most populous country in the world. India's economy is on the fulcrum of an ever increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves, a booming capital market and a rapidly expanding FDI inflows, India has emerged as the second fastest growing major economy in the world. The economy has been growing at an average growth rate of 8.8 per cent in the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6 per cent being the highest in the last 18 years. Significantly, the industrial and service sectors have been contributing a major part of this growth, suggesting the structural transformation underway in the Indian economy. For example, industrial and services sectors have logged in a 10.63 and 11.18 per cent growth rate in 2006-07 respectively, against 8.02 per and 11.01 cent in 2005-06. Similarly, manufacturing grew by 8.98 per cent and 12 per cent in 2005-06 and 2006-07 and transport,

Page 7: Impact of American Economy on Indian Economy

storage and communication recorded a growth of 14.65 and per cent 16.64 per cent, respectively. Another significant feature of the growth process has been the consistently increasing savings and investment rate. While the gross saving rate as a proportion of GDP has increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07, the investment rate-reflected as the gross capital formation as a proportion of GDP-has increased from 22.8 per cent in 2001-02 to 35.9 per cent in 2006-07. During April-December 2007-08, gross fixed capital formation has accelerated to 32.6 per cent of GDP, from 30.5 per cent of GDP in the corresponding period in 2006-07. The 2007-08 Fiscal Year The growth process continues apace. On the back of 9.6 per cent growth April-December 2006-07, GDP grew by 8.9 per cent during April-December 2007-08.

According to the third advance estimates of crop production by the agriculture ministry, food grain output grew by 4.6 per cent in 2007-08, nearly four times the average annual growth of 1.2 per cent between 1990 and 2007.

Overall industrial production grew by 8.3 per cent during 2007-08. Significantly, manufacturing sector grew at the rate of 8.7 per cent.

Services grew by 10.4 per cent in April-December 2007, on the back of 11.4 per cent during the corresponding period in 2006-07.

Manufacturing grew by 8.7 per cent during April-February 2007-08, on the back of 12.5 per cent growth during 2006-07.

Core infrastructure sector continued its growth rate recording 5.6 per cent growth in 2007-08.

While exports grew by 23.02 per cent during 2007-08, imports increased by 27.01 per cent in the same period.

Money Supply (M3) has grown by a robust 20.7 per cent growth (year-on-year) as of end-March 2008, compared to 21.5 per cent last year.

With such a robust growth rates, the revised estimates of the Central Statistical Organisation (CSO) expects the economy to grow by 9 per cent in 2007-08, higher than the earlier projection of 8.7 per cent. This is in tune with the high average real GDP growth of 8.7 per cent per annum during the five-year period, 2003-04 to 2007-08. Further, this would the third consecutive year, when the economy has grown by 9 per cent and above.

Per Capita Income Along this significant acceleration in the growth rate of Indian economy, India's per capita income has increased at a rapid pace, exceeding an earlier forecast made by Goldman Sachs BRIC report which estimated India's per capita to touch US$ 800 by 2010 and US$ 1149 by 2015. Per capita income has increased from US$ 460 in 2000-01 to almost double to US$ 797 by the end of 2006-07. In 2007-08, India's per capita income is estimated to be over US$ 825.07, according to the advance estimates of the Central Statistical Organisation (CSO). Further, India's per capita income is expected to increase to US$ 2000 by 2016-17 and US$ 4000 by 2025. This growth rate will, consequently, propel India into the middle-income category.

Some Highlights Reflecting the favourable prospect of growth rate of Indian economy, the orders received Indian companies have increased by a whopping 68.6 per cent to US$ 32.48 billion during January-October 2007 compared to US$ 19.26 billion in the same period last year.

India is among the five countries sharing 50 per cent of the world production (or

Page 8: Impact of American Economy on Indian Economy

GDP). FDI inflows have jumped by almost three times to US$ 15.7 billion in 2006-07 as

against US$ 5.5 billion in 2005-06. The aggregate income of the top 500 companies rose by 28.4 per cent in 2006-07 to

total US$ 469.51 billion. India's National Stock Exchange (NSE) ranks first in the stock futures and second in

index futures trade in the world. Twenty Indian firms have made it to the list of Boston Consulting Group's 100 New

Global Challenger Giants list. According to a study by the McKinsey Global Institute (MGI), India's consumer

market will be the world's fifth largest (from twelfth) in the world by 2025. The number of companies incorporated has increased at an annual average of 55,000

companies in the last two years to 865,000, from 712,000 companies at the end of 2005.

Four Indians and seven Indian microfinance companies make it to the Forbes list of Top10 world's wealthiest CEOs World's Top 50 Microfinance Institutions, respectively.

India has the most number of private equity (PE) funds operating amongst the BRIC markets.

Why Indian Economy future is in hand of American Economy

Factors

1. The effect of military expenditure

Most economic models have shown that military spending by the United States Government has diverted resources from productive uses such as consumption and investment, which has ultimately slowed growth and reduced employment. Estimates project that by 2017 the Iraq War and War in Afghanistan will have cost the U.S. budget between $1.7 trillion and $2.7 trillion. Interest on money borrowed to pay those costs could alone add a further $816 billion to that bottom line. Nobel Prize-winning economist Joseph E. Stiglitz even says that estimating all economic and social costs might push the U.S. war bill up toward $5 trillion by 2017. This figure includes the cost to the U.S. economy of global oil prices that have quadrupled since 2003, an increase blamed partly on the Iraq war.

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2. GDP

International gross domestic product (GDP), top 10 countries, 2003 World $49,000,000,000,000 Adapted from "Rank Order GDP," in Rank Order GDP, CIA World Fact Book1 United States $10,400,000,000,000 2 China $5,700,000,000,000 3 Japan $3,550,000,000,000 4 India $2,660,000,000,000 5 Germany $2,184,000,000,000 6 France $1,540,000,000,000 7 United Kingdom $1,520,000,000,000 8 Italy $1,438,000,000,000 9 Russia $1,350,000,000,000 10 Brazil $1,340,000,000,000

United state of America’s GDP growth

Page 10: Impact of American Economy on Indian Economy

statistics

GDP (PPP) (IMF) (US$Billions)

13.8

GDP (PPP) (CIA) (US$Billions)

13.8

GDP Growth (IMF) (%) 2.2%

GDP Growth (CIA) (%) 2.2%

GDP Per Capita (PPP) (IMF) (US$)

45,845

GDP Per Capita (PPP) (CIA) (US$)

45,800

GDP by Sector (%)Agriculture: 0.9%Services: 78.5%Industry: 20.5%

Inflation (%) 2.9%

Population Below the Poverty Line (%)

12.0%

Labour Force (Millions) 153.1

Labour Force by Occupation (%)

Farming, forestry and fishing: 0.6%Manufacturing, extraction, transportation and crafts: 22.6%Managerial, professional and technical: 35.5%Sales and office: 24.8%Other Services: 16.5%

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Unemployment (%) 4.6%

Main Industries

Leading indsutrial power in the world, highly diversified andtechnologically advanced; petroleum, steel ,motor vehicles,aerospace, telecommunications, chemicals, electronics,food processing, consumer goods, lumber, mining.

Sources: CIA World Factbook, IMF

GDP

economic indicators 2003 2004 2005 2006 2007

GDP (US$Billions) 10,961 11,686 12,434 13,195 13,484

GDP Growth (%) 3.1% 4.4% 3.2% 3.2% 2.2%

GDP Per Capita (US$) 37,685 39,811 41,969 44,118 45,845

GDP Per Capita (PPP) (US$)

37,685 39,811 41,969 44,118 45,845

Inflation (%) 2.3% 2.5% 3.2% 2.5% 2.9%

India’s GDP growth

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ITEMS 1990-91

1991-92

1998-99

1999-2000

2000-01

2001-02

Growth rates (per cent):

GDP at constant factor cost 5.6 1.3 6.5 6.1P 4.0Q

5.4 A

GDP at constant factor cost 8.2 0.6 4.1 6.7 5 2.3 c

Electricity 7.8 8.5 6.5 7.3 4 2.7 c

Agricultural production 3.8 -2 7.6 -0.9 -6.6P

6.9 P

Foodgrains production 3.1 -4.5 5.9 3 -6.6P

6.8 P

Exports (BOP in terms of US $) 9 -1.1 -3.9 9.5 19.6 0.6 b

Imports (BOP in terms of US $) 14.4 -24.5

-7.1 16.5 7 0.3 b

Food grains production (Million tones)

176.4

168.4

203.6

209.8 195.9P

209.2 P

Electricity generated (million KWH) 264.3

287 448.5

480.7 499.6

383.2 c

Average exchange rate (Rs./US$) 17.94

24.65

42.07

43.33 45.68

47.49 d

Growth rate of money supply (M3) 15.1 19.3 19.4 14.6 16.7 11.2

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e

Average rate of inflation (per cent)

In terms of WPI 12.1 13.6 5.9 3.3 7.1 4.4 f

In terms of CPI 13.6 13.9 13.1 3.4 3.7 4.2 g

GDP (PPP)

$3.305 trillion (2008 est.)[1]

GDP growth

9% (2007)

GDP per capita

$2,600 (PPP)

GDP by sector

agriculture: 17.8%, industry: 29.4%, services: 52.8% (2007 est.)

Inflation (CPI)

6.4% (CPI) (2007 est.)

Labour force

516.4 million (2007 est.)

Labour force

by occupati

on

agriculture: 60%, industry: 12%, services: 28% (2003)

Unemployment

7.2% (2007 est.)

Main industri

es

textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software, services

External

Exports $163 billion[3] (Financial Year 2007-2008)

Export goods

petroleum products, textile goods, gems and jewelry, engineering goods, chemicals, leather manufactures

Main export

partnersUS 15% , the People's Republic of China 8.7%, UAE 8.7%, UK 4.4% (2007)

Imports $230.5 billion f.o.b. (2007 est.)

Import goods

crude oil, machinery, gems, fertilizer, chemicals

Main import

partners

the People's Republic of China 10.6%, US 7.8%, Germany 4.4%, Singapore 4.4%

Page 14: Impact of American Economy on Indian Economy

3.Trade

Though, the trade between the United States and India is relatively small, it has risen sharply over the years. In terms of India's major trading partner, USA continues to lead. However, India's share in US trade is 24th in US export and eighteenth in US imports. The two countries have been making efforts to strengthen institutional structure of bilateral economic relations. Signing of "India-US Economic Dialogue" by Indian PM AB Vajpayee and US President Bill Clinton in 2003, aims at deepening the Indo-American partnership through regular dialogue and engagement.

India's sizable population and growing middle and higher income class makes India a potentially large market for U.S. goods and services. According to the figure from government sources, U.S. exports to and imports from India in 2003, totalled US $5.0 billion and US $13.1 billion, respectively.

India's main exports to US are precious stones, metals (worked diamonds & gold jewellery), Woven apparel, Knit apparel, miscellaneous textile article, Fish and seafood (frozen shrimp), Textile floor coverings, Iron/steel products, Organic chemicals and Machinery (taps, valves, transmission shafts, gears, pistons, etc)

India imports sophisticated machinery (computers and components, gas turbines, telecom, etc), Electrical machinery (recording/sound media), Medical and surgical equipment/instruments, Aircraft, spacecraft (small aircraft), Precious stones, metals (diamonds, not mounted or set), jewellery, Organic chemicals, Plastic, Cotton and cotton waste and Wood pulp, etc.

India and US (United States)

Both India and the United States (US) play a significant role in shaping the global economy. While US is the world's largest economy, India is the second, fastest growing major economy. The complementarities between them draw the two countries to leverage the opportunities available from each other to form a robust economic relationship. The US is India’s largest export destination and also one of the leading foreign investors in India. Further, with the Indian economy estimated to grow to 90 per cent of the US economy by 2050, the growing Indo-US relationship will be a decisive force shaping the contours of the world economy in the 21st century. In a move to further improve economic relations, both the countries had two rounds of exploratory talks in the first half of 2008 on the proposed Bilateral Investment Treaty, and decided to start formal negotiations soon. India also plans to sign a Bilateral Aviation Safety Agreement with the USA to boost ties and encourage US Aviation Companies to invest in India. US was the partner country at the ‘India Aviation 2008’, held in October this year in

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Hyderabad.

Trade and economic cooperation is a significant factor for the strengthening of India-US relations, which is apparent in the increasing bilateral trade volume. Bilateral trade between India and US amounted to US$ 33.9 billion in 2007-08. US exports aircraft and aviation machinery, other machinery, optical and medical instruments, precious stones and metals, and organic chemicals to India. India is one of the most important export destinations for the US and 2007 saw an astonishing growth rate of 75 per cent in its exports to India. In the first half of 2008, it was still a strong 26 per cent. 2008 has seen an increase in export of fertilisers from the US. India mostly exports gems and jewellery, organic chemicals and engineering goods and textiles to the US. India’s IT, ITES services exports, research and development (R&D) and Engineering services exports to the US amounted to around US$ 24 billion in 2007. India’s merchandise exports to the US grew at 10.05 per cent, going up to US$ 24.02 billion in 2007 from US$ 21.83 billion in 2006. US exports of merchandise to India grew to US$ 17.59 billion in 2007, up from US$ 10.06 billion in 2006, increasing by 74.94 per cent. During 2007-08, merchandise exports from India to US went up by 9.81 per cent to reach US$ 20.7 billion against US$ 18.8 billion in 2006-07. Merchandise exports from US to India grew by 12.57 per cent to reach US$ 13.2 billion in 2007-08 against US$ 11.7 billion in 2006-07. In the period between Jan-August 2008, India's Merchandise exports to the US amounted to US$ 17.14 billion, an increase of 9.47 per cent from 2007. US exports to India totalled US$ 12.72 billion at an increase of 21.8 per cent.

US Investments in India

India's rapidly expanding economy along with a booming consumer market and easy availability of skilled personnel have been instrumental in attracting several American companies to invest in India. The overall foreign direct investment (FDI) equity flow into India from the US during April 2000-June 2008 was US$ 5.4 billion. In fact, the US Consul General, Aileen Crowe Nandi has said "India is emerging as the most favoured destination for overseas investment and an important trading partner for the US.” After companies like Microsoft, Intel, IBM, Hewlett-Packard, Dell, Citigroup, J.P. Morgan and Morgan Stanley, Yahoo and Google, many other US companies are also planning to enter the Indian market with big investments.

The Wyndham Group of US will be partnering with Bangalore-based Royal Orchid Hotels to open 10 Ramada hotels across the country.

Merck & Co aims to become the largest pharmaceutical company in the Indian vaccines market by 2013.

After buying a 100 per cent stake in OCM Ltd for US$ 35 million, W.L. Ross & Co is planning to invest in SpiceJet.

Coca Cola India plans to invest US$ 250 million in India for equipment purchases, brand promotion and marketing, over the next three years. The company has already invested over US$ 1 billion in India.

The American aerospace industry will be investing in the development of infrastructure in India's aviation, after selling aircraft and components to India.

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GE Healthcare is planning to invest US$ 200 million in India’s rural markets for diagnostics and disease monitoring equipments such as magnetic resonance imaging (MRI), ultrasound, computed tomography (CT scanners),and X-rays.

Texas Chicken, the chicken fast-food brand of the US-based Church's Chicken, is planning to enter the fast-food market in India.

Indian Investments in US

Indian investments in the US have been growing significantly since 2002, by around 75 per cent per year. Investments in 2006 were estimated at around US$ 2 billion and rose sharply in 2007 to touch US$ 13 billion. In 2007-08 alone, an estimated US$ 10.25 billion was invested by Indian companies in the US. Consequently, going by industry estimates, an additional 65,000 jobs were created in the US. In 2008, investments were in excess of US$ 8 billion as on May 2008. Investments by Indian companies in US span across diverse industrial sectors such as steel, airlines, pharmaceuticals, auto parts, healthcare, hotels, chemicals and information technology. Following major deals like Hindalco’s US$ 3.33 billion acquisition of Novelis, and Tata Chemicals Limited's (TCL) acquisition of General Industrial Products for US$ 1 billion, some of the significant acquisitions of India Inc have been:

Tata Consultancy Services (TCS) acquired the back-office operations of Citigroup for US$ 505 million to become the second-largest BPO player globally, after IBM. Moreover, becoming the first global bank to outsource its entire banking process, Citi has also signed an agreement with TCS to provide process outsourcing services worth US$ 2.5 billion over the next nine and a half years.

The Canadian subsidiary of Essar Steel Holdings Ltd is increasing its production to 4 million tonnes (mt) by March 2009 with an investment of 170 million Canadian dollars as capital expenditure, in an effort to entrench itself in the North American market.

Reliance Industries USA has bought a polyester manufacturing facility in North Carolina for about US$ 12.2 million from Unifi Kinston and plans to invest US$ 215 million in that company.

GMR Infrastructure has bought a 50 per cent equity stake in the US-based power utility, InterGen, for US$ 1.1 billion.

Ranbaxy Fine Chemicals (RFCL) has acquired the US-based speciality chemicals firm, Mallinckrodt Baker, in a US$ 340 million deal.

What's a recession? How will US slowdown hit India

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The fear of a recession looms over the United States. And as the cliche 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.

So what is a recession? A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

What causes it? 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 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.

Stock markets & recession The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy. The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in India with little cheer coming to investors. Analysts in India tried to make the point that the Indian economy didn't change overnight, so there is no reason for this panic. This is true, but if the United States suffers through a crippling recession then India will take a beating due to decreased investment in the country. When a company is trudging through a rough patch due to a bad economy, the first thing that they usually do is cut their research and development.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan 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

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economy.

How to fight recession Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts. 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.

Past recessions The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty. The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938. The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans. The early 1990s saw a collapse of junk bonds and a financial crisis. The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record. From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000. The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

Impact of a US recession 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. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring

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down oil prices to $70. Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent. The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.

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. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70. Between January 2001 and December 2002, the Dow Jones Industrial Average went down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000. In contrast, the Sensex was down 45 per cent. The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.

Stock markets & recession The economy and the stock market are closely related. The stock markets reflect the buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the US economy. The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in India with little cheer coming to investors.

Majority of BPO/KPO/IT business of India is from US.besides, the majority of FIIs investing ( or playing) in Indian stock markets are USA.

A lot of Indians working in US send money back home ( India) .

For everything-like Pizza ,burger, multiplex, malls ,clothing etc we blindly follow Americans.

Any slowdown in US economy will effect them and hence will effect we Indians and our Indian companies.

Even if the slowdown of US economy may not effect us directly, it does have psychological impact on us.

To conclude, if one is dependant on only one person for all its needs, any effect on the 2nd one is blound to effect the first one. Its time to get out of the USA umbrella which is leaking now....

Page 20: Impact of American Economy on Indian Economy

'Risk of a US recession high, India to be hit' BS Reporter in Mumbai

Stephen S Roach, chairman of Morgan Stanley Asia, warned that Asia and India will be hit hard due to a likely recession in the US in 2008, saying "if US sneezes, Asia will catch a cold." Predicting a significant correction in emerging market equities, which would also not spare the fast rising Indian stock markets, Roach, who is regarded as one of the Wall Street's most influential economists, said he did not believe in the global de-coupling theories. "The risk of a recession in the US in 2008 is high and rising. If the US goes into recession, you are going to feel it in Asia, you are going to feel it in India," he said.

Page 21: Impact of American Economy on Indian Economy

‘We need a balanced economy to pull us through global recession’And from hands of U.S economy

With the ongoing economic meltdown, we are passing through a very exciting and challenging phase. The need of the hour is to dwell on the existing capitalist and socialist models and draw out a new model suiting the financial needs and requirements of our country. And none other than academicians, scholars and students of economics and management can perform this job better. This was said by Finance Minister of Punjab, Manpreet Singh Badal we are “living through the middle of a storm”, necessitating us to chalk out a programme for an early recovery from the economic recession. Quoting various social and political leaders, Badal said the spirit of discipline and nationhood, coupled with a sense of dignity needed to be rekindled for the overall progress of the country. While presiding over the seminar, Vice-Chancellor Jaspal Singh said that a new model based on the principle of “socialisation of benefits, giving out enough to meet the basic needs of all and barest minimum for the few greedy” needs to be devised. He advocated the cause of a ‘balanced economy’ rather than a mixed economy. Home Secretary Jarnail Singh said, “When you reform the markets, you are able to increase the growth rate but at the cost of poverty.” He suggested the implementation of strong regulations to monitor the functioning of companies.

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