International Research Journal of Finance and Economics ISSN 1450-2887 Issue 45 (2010) EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.

htm

Impact of Recession on the Indian Tyre Industry

Jasmine Kaur Assistant Professor in Guru Arjan Dev Institute of Management & Technology, New Delhi jasmine.rus@gmail.com Tel: (91) 9811160007, (91)9811669777; (91) (011) 25133012 Abstract Recession is the much talked about topic now-a-days in every sphere of work-field across the globe. It refers to the state of an economy when it is having a negative growth rate. It is the result of reduction in the demand of products in the global market over a sustained period of time. Recession has had a negative effect on India Share market, Real estate IT and Industrial sector leading to increased lay-offs, unemployment etc. This article analyses the impact of recession on the Indian tyre industry w.r.t its effect on production, exports, sales and profits of the industry and the measures undertaken to stimulate growth and competitiveness of the tyre industry. This industry has been worst-hit by recession. The bus and truck tyre production has declined from 6.2% to (-7.5%) in 2008-09. The sales have also declined leading to a loss of 2.17% in the third quarter of the year 2008-09. Keywords: Recession, Indian Tyre Industry, Economy

Introduction
Global economic meltdown has affected almost all the countries. Strongest of American, European and Japanese companies are facing severe crisis of liquidity and credit. India is not isolated either. Although, Indias cautious approach towards reforms has saved it from possibly disastrous implications, Indian economy is also facing a slowdown. The prime reason being, world trade does not function in isolation. All the economies are interlinked to each other and any major fluctuation in trade balance and economic conditions causes numerous problems for all other economies. According to official data, industrial growth has plummeted to 1.3% which definitely is a cause of concern for policy makers and industries. 1.3% industrial growth is the lowest IIP(index of industrial production) data ever registered since last ten years. It is also not possible to achieve a yarget of 7.5% GDP growth rate this fiscal. As the global financial and economic crisis deepen, the growth in India would continue to be affected. The external economic environment of India is likely to worsen as the major developed countries contract further and international trade growth slows down sharply. Today the Indian business is facing the following broad risks: A deeper and prolonged recession in the world economy. Future lightening of external funding conditions. Financial stress due to volatile capital flows. Weak domestic demand.

108

International Research Journal of Finance and Economics - Issue 45 (2010)

Recession: Conceptual Understanding

A Recession is a contraction phase of business cycle. National Bureau of Economic Research(NBER) which is the official agency incharge of declaring that the economy is in a state of recession, defines it as,significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales. An economy typically expands for 6-10 years and tends to go into a recession for about six months to two years. A recession normally takes place when consumers loose 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. U.S faced major crisis because of: Subprime mortgage crisis(home loan defaults) Rising oil pricesat $100 a barrel. Global inflation. High unemployment rates. A declining dollar value. All this slowed down the growth of the U.S economy as the GDP rate fell to 2%leading to recession of the economy.

Impact of Recession on India

A slowdown in the U.S economy has also affected India because: Indian companies have major outsourcing deals from the U.S. Indias exports to the U.S have grown substantially over the years. Indian companies with big ticket deals in U.S are having their profit margins shrinking. This has impacted India in the following ways: The Industrial growth has declined drastically. Government and private companies are reluctant in starting new ventures and projects. Projects that are halfway to completion or companies that are stuck with cash flow issues on businesses that are yet to reach break-even, have run out of cash. Foreign investors have pulled out of stock market leading to heavy losses in stock and mutual funds. People have started saving in banks rather than investing in shares or real-estate. Due to liquidity crisis, companies have laid-off many employees. There is cut in salaries, perks and other benefits. They have put their expansion plans on hold, stopped hiring employees and projected lower manpower needs. Exports have also declined.

The Indian Tyre Industry

The Indian tyre industry is in troubled waters. The impact of global credit crunch is re-sounding in India as well. The Indian economy has perceptibly slowed down and the automobile companies are struggling to push sales. A fall -out of this has been a distinct slow down the Indian tyre industry as well. Tyre industry has always been working with low margins but managing with high volume of sales. Reduction in domestic demand has affected the operating margins of these companies drastically. Automobile industry world wide including India has been adversely affected due to the present crisis (Exhibit-1) Due to this, the requirement of tyres with the original equipment manufactures have come down because of the reduction in production level of vehicles to match the demand. (Exhibit-2)