Impact of Recession on Indian Economy
Impact of Recession on Indian Economy
Table of Contents Reason for Recession to occur 2 Channel through which recession got transmitted to India from US 3 Effect of recession on different sectors 4 Impact on Indian Economy 6 Steps that government took to tackle recession 9 References: 11
Reason for Recession to occur
What happened was this: banks were approached by thousands of possible new home owners asking for loans. This was during a period where the United States real estate market was climbing fast, and the value of homes was rising quickly. The banks approved these ‘bad’ or ‘sub-prime’ mortgages under the mentality that if the new home owners were to foreclose, the property would have a higher value than what it originally was due to the climbing real estate market, meaning that the bank would not lose money but make a profit! What actually happened was that the real estate market crashed, and banks were out of pocket due to the massive numbers of foreclosures on mortgages occurring. This set off the global financial crisis, which led to a global economic downturn and the recession in most developed countries. All that because of some bad debts in the States!
What went wrong? * Increasing pressure of inflation lead to higher interest rate. (Interest Rate cycle turned around middle of 2007) * As result cycle of taking loans and consumer spending practically stopped. * Demand for homes dropped due to rise in interest rates. People with low credit profile (to whom sub-prime loans were given) came under pressure and started defaulting. * Housing prices came down (the basic calculation of mortgage players of increase in property prices went wrong) and mortgage players failed to provide cover for the mortgage loans when sub-prime borrowers started defaulting. * Easy liquidity gradually
Table of Contents Reason for Recession to occur 2 Channel through which recession got transmitted to India from US 3 Effect of recession on different sectors 4 Impact on Indian Economy 6 Steps that government took to tackle recession 9 References: 11
Reason for Recession to occur
What happened was this: banks were approached by thousands of possible new home owners asking for loans. This was during a period where the United States real estate market was climbing fast, and the value of homes was rising quickly. The banks approved these ‘bad’ or ‘sub-prime’ mortgages under the mentality that if the new home owners were to foreclose, the property would have a higher value than what it originally was due to the climbing real estate market, meaning that the bank would not lose money but make a profit! What actually happened was that the real estate market crashed, and banks were out of pocket due to the massive numbers of foreclosures on mortgages occurring. This set off the global financial crisis, which led to a global economic downturn and the recession in most developed countries. All that because of some bad debts in the States!
What went wrong? * Increasing pressure of inflation lead to higher interest rate. (Interest Rate cycle turned around middle of 2007) * As result cycle of taking loans and consumer spending practically stopped. * Demand for homes dropped due to rise in interest rates. People with low credit profile (to whom sub-prime loans were given) came under pressure and started defaulting. * Housing prices came down (the basic calculation of mortgage players of increase in property prices went wrong) and mortgage players failed to provide cover for the mortgage loans when sub-prime borrowers started defaulting. * Easy liquidity gradually