Recession casts shadow on economy, says study

Notes that Kerala is more vulnerable to external shock

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Recession may hit job opportunities

Further cut in oil prices may have negative impact

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Reduction in oil price and sustained low-level reduced investments in Gulf countries can have a negative impact on the job opportunities as well as the income of Non-Resident Keralites (NoRKs).

According to a study conducted by the Centre for Development Studies (CDS) on the impact of the economic recession in the State, Kerala is more vulnerable to any external shock, including the slowdown since it is integrated with the rest of the world.

In spite of the liquidity concerns about the banking sector of Saudi Arabia, United Arab Emirates (UAE) and Qatar, the economies of the seven Gulf countries, where majority of the NoRKs are located, continue to remain unaffected owing to the steps taken for improving the liquidity position.

But further reduction in oil price and investments can have a negative impact on the job opportunities and their income., the study says.

About 32,000 people employed in the coir industry are likely to lose jobs owing to 20 per cent decline in coir exports. The job loss in the cashew sector has been estimated at around 18,000 due to 15 per cent fall in exports and imports becoming costlier. Marine exports may go down by 25 to 30 per cent to all major destinations except South East Asia. In the short run, a one-third fall in exports can lead to a loss of 20,000 jobs in the sector.

Handloom units have reported 20 per cent dip in sales. A short-term reduction in export by 15 to 20 per cent is expected in handloom goods and that may further increase if the recession prolongs. The value and quantity of pepper export have come down by 50 per cent between September 2008 and the same month last year. The price of rubber has registered a 40 per decline due to the fall in demand from the tyre industry.

The major software export companies are yet to feel the pinch of the crisis but IT and ITES companies at the national level expect 50 per cent reduction in growth rate. The companies in the State have not yet got a full exposure to the crisis due to their relatively lesser engagement with financial services.

Being a consumer State, Kerala can benefit from the reduction in prices of oil, steel, cement and such others as it will also reflect in the cost of manufactured goods too. The growth rate of the State’s economy may decrease by 2 to 3 per cent and it can also lead to an increase in revenue deficit, the study says.

Maruti may cut production if demand remains sluggish

Maruti Suzuki said on Wednesday it may consider production cut if the market does not improve.

The company, which has been negotiating contract manufacturing deal for its A-Star model with Nissan, also expects to start exports for the Japanese car maker by around February-March next year.

Maruti Suzuki India managing director Shinzo Nakanishi said that across the world there has been a slowdown in demand, including China, India and other BRIC countries.

"I hope not but if we are obliged then we will do it," he told reporters here when asked if the company would go for a production cut.

On the company's planned export of the A-Star for Nissan, an agreement on the volume has not been signed as yet but shipment to Europe is "expected by about February-March next year," he said.

"Our focus is on the network stocks. If the network stock is overflowing, then the company would take appropriate measure," he added.

In the April-November period, the company's sales growth witnessed a negative growth of three per cent compared with the corresponding period last year.

Severe pressure on balance of payments

It seems mystifying that exports fall even with a weakening rupee

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The fall in merchandise exports in October is just one of the several pressure points. It is unfortunate that neither a lower petroleum import bill nor a depreciating rupee are positives for exporters at this juncture.

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The fall in India’s merchandise exports in October is one of several developments that point to increasing stress on the country’s external economy. It is for the first time in seven years that monthly exports have contracted.

However, for all its eye-catching headline appeal, it is not the sharp decline in a particular month that is the principal cause for worry. Although exports in the first seven months have grown by 23 per cent in dollar terms, the deceleration since September is equally disturbing.

Falling exports

October exports at $12.82 billion were more than 12.1 per cent below the performance a year ago ($14.58 billion). It is little consolation that in rupee terms these grew by 8.2 per cent during the month.

The important point is that exports measured in dollars fell at a time when the rupee was depreciating sharply. In September, the rupee was 44 to a dollar. By November, it was down to 50 and is now trading around that level. In normal times, a strengthening dollar (or a weaker rupee) is good for exports: it improves the competitiveness of Indian exporters.

The opposite — a rupee appreciation as was experienced last year — hurts them. Indeed, exporters had then lobbied and won some concessions from the government by way of partial compensation. Not all exporters stand to gain automatically from a cheaper rupee however. Export receivables are often sold forward at the then prevailing exchange rate applicable to forward contracts. Even so, it seems mystifying that India’s exports have witnessed a fall at a time of rapid decline in the rupee’s value.

One reason is that our closest competitors have also aligned their currencies with the dollar in such a way that they do not lose out. A second reason is that a substantial portion of exports depend on imported inputs. A dearer rupee obviously inflates their manufacturing costs.

The third and the most fundamental reason is of course the global slowdown. Practically all countries including those relying on exports to a greater degree than India have seen falling exports. This has been an inevitable consequence of the global slowdown. Recently, the U.S. was officially declared to be in recession, a tag which nearly all countries in the Euro zone as well as Britain and Japan already have.

The IMF, the World Bank and others expect the developed economies to contract during 2009. Developing countries in comparison will fare better but far below their recent sterling performance. Weak demand from the developed world will become even weaker as the recession spreads and deepens. Various countries are therefore trying to boost domestic demand through tax rebates, large public sector spending and a variety of unprecedented monetary measures.

Imports too suffer

The growth in imports too has been modest in October. Compared to last year they grew by 10.6 per cent in dollar terms. The petroleum import bill has naturally been lower and will drop even further reflecting the downtrend in crude prices. The cost of India’s crude basket peaked at $142 a barrel on July 3 but has been coming down. (Somewhat belatedly the government reduced the retail prices of petrol and diesel by Rs. 5 and Rs. 2 a litre, respectively, on December 5).

Lower global oil prices augur well for inflation management. The RBI estimates that inflation could well go down below 7 per cent, the monetary policy’s target for March 2009. But on the negative side, the fall in global oil prices is due to lower demand, a consequence of the slowdown. Non-oil imports grew by just 5.5 per cent, partly due to lower commodity prices. But inasmuch as fewer capital goods and consumables are being imported, a lower non-oil import bill is a cause for worry as it corroborates the ongoing slowdown in industrial activity.

Widening trade deficit

The trade deficit has gone up to $73 billion during April-October 2008 from $46 billion during the corresponding period last year. What makes this development particularly worrying is that capital inflows are reversing themselves sharply. Also, invisible earnings — inward remittances and earnings from software — will also be affected by the global slowdown. The IT industry’s sterling performance over the post few years cannot possibly be repeated.

The U.S. has been its main focus and much of its earnings have come from the banking and financial sector, worst hit by the ongoing economic crisis. The widening current account deficit is such that it might put pressure on the balance of payments for the first time in several years. Conventional remedies to bridge the deficit such as boosting exports are themselves hostage to the deteriorating global situation.

IMF chief warns of bigger economic crisis in 2009

International Monetary Fund (IMF) chief Dominique Strauss-Kahn said a lack of fiscal stimulus by governments to tackle the global slowdown may make a bad 2009 even worse, according to an interview released on Sunday.

Strauss-Kahn told BBC radio that the IMF may need to cut its next economic growth forecasts, due in January, referring to "2009 as really being a bad year".

"I'm specially concerned by the fact that our forecast, already very dark ... will be even darker if not enough fiscal stimulus is implemented," he said in an interview.

The IMF has called for fiscal stimulus -- higher government spending and temporary tax cuts -- worth $120 trillion, or two per cent of global annual economic output, to fill the gap caused by slumping private demand following the credit crunch.

Britain has announced fiscal stimulus worth around 1 percent of output, and despite a "disturbing" level of public debt, Strauss-Kahn said more public borrowing would be the lesser of two evils.

"The question of having social unrest has been highlighted by journalists ... but it's only part of the problem," he said. "The problem is that all the whole society is going to suffer."

"The threat is that big today that I think that between two different problems, increasing deficit -- which is never good -- and fighting against recession -- which is even worse -- we have to choose the less bad solution," he said.

Strauss-Kahn dismissed recent criticism of higher government borrowing by German Finance Minister Peer Steinbrueck and European Central Bank President Jean-Claude Trichet, saying both men had traditionally taken a strong stance against heavy government borrowing.

Strauss-Kahn said help was unlikely to come from further global interest rate cuts -- or even a move to so-called quantitative easing, where central banks try to increase the volume of credit in the economy.

"We've probably reached a point today where the quantity of money in the economy is fine globally. The question is even with this liquidity banks are very reluctant to lend. The main thing we have to do today is to restore confidence," he said.

ADAG says no firing; to hire 90,000

In the midst of massive layoffs being announced by various corporate houses hit by a global economic slowdown, Anil Ambani group on Friday said it is not planning any job reduction and is rather planning to create up to 90,000 employment opportunities in the next few months.

Debunking the reports that the group is laying off 6,000 people in its financial services and entertainment businesses, a spokesperson said, "There are no layoffs."

"In fact, the coming three months are high investment period for tax saving products and we are going to appoint almost 75,000 to 90,000 agents and sales representatives in the coming months," he added.

Earlier this month, Reliance Life Insurance's chief P Nandagopal had told PTI that the company would recruit 90,000 insurance agents and 2,500 sales managers by March 2009.