Hi all,

The biggest BUZZ word around the globe today is recession. Doomsday scenario are being forecast, new lows are being predicted for the stock markets. Everybody has his own opinion about the recession, and this spalsh is all about how I see the recession playing out in India.

The biggest concerns for India before the current economic crisis began were inflation and widening trade deficit. The slowdown and exit of speculative money has brought down the Inflation figure back to single digit figure.

Trade Deficit

India ran a trade deficit, that is, we imported a lot more than we exported. A major factor contributing to this trade deficit was the crude oil bill. India has once again been lucky. With crude oil shedding nearly 100 dollars from its peak, the trade deficit would have greatly reduced. It would be interesting to keep an eye on the next balance of trade figures that would be announced by the Government.

Oil Pool Deficit

Another big concern was how the government was going to finance the losses of the oil marketing PSUs.

When crude went right up to 147 dollars / barrel, the oil PSUs were losing millions daily. All this was being financed by the Union government through oil-bonds. This was weighing down on the budget deficit, and the questions being asked were how long would the government be able to bear the subsidy burden before collapsing under its weight. With the current domestic prices pegged at around 61 dollars/ barrel, the oil PSUs are no longer bleeding. Since the government has not cut the fuel prices, and rightly so for the time being, much of that deficit is now being made up. This not only frees up the money that the government would have set aside to issue fresh oil bonds, the PSUs should now have started making money that would help payback the older oil bonds. This money, that would have been freed up,  would give a lot of flexibility to the Government to increase the infrastructure expenditure. This increased infrastructure spending should not only help better the infrastructure in India but also help to mitigate some of the effects of the global recession through increased spending at home.

Low Cost Advantage

A major effect of this recession would be the focus on cutting costs. India has developed itself as a low cost center in both manufacturing and services sector. The global drive to cut costs, should see more off-shoring to low cost centers like India.

Real Estate

The Real Estate sector is now seeing a price correction. Housing prices that had gone out of reach for normal Indians are now once again coming down. With the interest rates also headed south, the house dream of many middle class Indians should once again become affordable in near future.

The Dollar Reserve

The dollar reserve has come down in the last few days on account of continued FII selling in the Indian stock markets. Also the next bubble is being predicted in the dollar. If the dollar indeed corrects from here on, by a stroke of luck, India would be saved on a lot of loss on account of its idle dollar reserves.

Today ET carried an article that RBI has made a profit of Rs 2000 crores last quarter by selling dollars.

Some Stats

Trade Figure

Exports during September 2008 at $13.74 billion
Imports during September 2008 at $24.38 billion, of which around $9 billion is crude import.

If the effect of recession hits Indian exports, the corresponding Indian imports would also slow down. However the correction in crude prices that has taken crude to below 50 dollars/ barrel, should lower our crude import bill by atleast 35-40%. This itself would lower the trade deficit by around 3.5 billion dollars every quarter.

Oil Pool Deficit

From April-Sep Oil marketing PSUs lost Rs 92,853 crore on account of selling fuel at prices lower than the price at which they buy. Of the loss, 50% was compensated through oil-bonds that added to budget deficit.

Since the domestic prices are pegged to around 61 dollars / barrel, the Oil PSUs are no longer making any losses as the crude oil prices is hovering around the 50 dollar/barrel mark. This should ensure that the Government saves around 45,000 crore every quarter here on. Where would this money go? My guess is that a significant portion would flow into the domestic infrastructure sector to ward off the effects of recession.

Over all, in my opinion the bitter pill of recession, would act as a medicine for some of India's woes and help us become a stronger economy.