Recession In India: A Myth Or Upcoming Reality
As India was recovering from the devastating impact of Covid-19, the unprovoked invasion of Ukraine by Russia added new economic challenges to the existing ones. The war in Europe resulted in supply chain disruptions, currency falls and high inflation along with the predictions of possible stagflation.
Recently, the world’s top leaders met in Davos to tackle global issues and find solutions to recent challenges. During the high-level meeting, concerns of a possible recession topped the worries of the global leaders.
India did project itself as a reliable partner as a stable economy and friendly investment destination at the World Economic Forum (WEF) as Union Minister Piyush Goyal held meetings with leaders of various countries and regional and multilateral institutions.
India's growth story had been receiving enthusiasm globally amid constraints like Covid-19, chip shortages, conflict, rising commodity prices, container shortages and significant shipping and logistics issues, said Goyal.
The mega event did witness the murmurs of India's wheat export ban, to which Goyal said that India's wheat exports are less than 1 per cent of world trade and our export regulation should not affect global markets. He said that India will continue to allow exports to vulnerable countries and neighbours.
Goyal, who led the team India at WEF in Davos from May 23-25, 2022, finished his trip with several high-level engagements aimed at projecting India as a reliable partner, a stable economy and an attractive investment destination.
However, critics say that attending the event is not enough, as India will have to deliver considering the seriousness of ongoing development in Ukraine and in neighbouring countries like crisis-hit Sri Lanka, the political and financial instability of Pakistan and the brewing monetary tensions in Nepal.
BW Businessworld already reported that India is going to witness stagflation in the country, according to the experts. Now, in this article, we are going to assess the possible threat of recession.
Also Read: Will Soaring Inflation Cause ‘Stagflation’ In India?
Experts say that in a recession, inflation plays an important role along with many other factors like stock market crashes, high-interest rates and many more.
Notably, India's retail inflation surged to 7.79 per cent on an annual basis in the month of April, data from the Ministry of Statistics and Programme Implementation showed.
This now marks the fourth consecutive month where headline retail inflation has remained above the Reserve Bank of India's (RBI) upper tolerance level of 6 per cent.
The RBI has been mandated by the government to ensure that inflation remains at 4 per cent with a margin of 2 per cent on either side. The retail inflation has remained above 6 per cent since January 2022.
"High price levels of fuel and food items along with household services, contributed to the sharp rise in inflation, a level which is seen as being partly responsible for of turn repo rate hike of 40 basis points by the RBI. With global turmoil continuing and commodity prices remaining high, there will continue to be an upward pressure on inflation in the coming months raising expectations of a back-to-back rate hike in the June monetary policy meeting of the RBI," said Avinash Godkhindi, MD and CEO, Zaggle, a SaaS fintech firm.
Godkhindi said that borrowing will become dearer with EMIs of loans taken from financial institutions set to increase. This will burden the common man. The value of long term savings and deposits given to financial institutions on a lower rate of interest will likely erode.
"Inflation is the hottest topic across the world. In India, retail inflation surged to 7.79 per cent in April and wholesale inflation almost doubled that figure. Both these numbers are now beyond RBI’s tolerance band. The RBI has responded with a rate hike recently and is likely to raise rates again to bring down the inflation," said Asheesh Chanda, Founder and CEO, Kristal.AI, a private wealth advisory and fund management group.
Godkhindi fears that hoarding of essential items by stockists in anticipation of further increases will happen, leading to scarcity of these items. All these factors will lead to an increase in the cost of living.
Global crisis
According to the experts, the Ukraine crisis is definitely a roadblock or setback to global economic recovery after the Covid-19 pandemic. Now with Sweden and Finland wanting to join the North Atlantic Treaty Organisation (NATO), the region is likely to remain on the edge.
"Human tendency is to overestimate the effects of geopolitical problems in the short run while underestimating the long-term effects. Here too, the Ukraine affair is likely to hurt markets in the short run through effects on the supply side which is bound to be resolved over the course of a few quarters," said Chanda.
Chanda, however, added that the threat of a long-drawn-out formation of power centres with US-Europe on one side and China-Russia on the other is a major threat to the future of stability across the world.
"The war has caused a disruption in the global supply chain and pushed the prices of crude oil and other commodities. Higher fuel prices add to the transport costs, putting an extra burden on daily food commodities as well as essential non-edible products," said Godkhindi.
The USD10/bbl increase in crude oil prices adds around 25 bps to the baseline inflation. Even though they have small shares in world trade and output, Russia and Ukraine are key suppliers of essential goods.
"Overwhelmed factories, ports and freight yards have meant shortages, shipping delays and higher prices including food, energy, and fertilisers, supplies of which are now threatened by the war. Supply of various oils like palm oil has impacted economies leading to increase in prices of products," Godkhindi said.
Falling Indian currency
According to the experts, the strengthening of the American dollar on the back of higher rates in the US and the currencies of countries that have trade deficits are getting hurt.
"The Indian currency’s decline impacts our food, education, healthcare and other expenses. Generally, a weaker currency makes imports more expensive, while triggering exports by making them cheaper for overseas customers to purchase. A weak or strong currency can contribute to a nation's trade deficit or trade surplus over time," underlined Godkhindi.
On the global front, the US Federal Reserve also increased its interest rate by 50 bps, the highest seen in 22 years. Central banks have also indicated future rate hikes to bring down surging inflation.
"For the developed world including the US and Europe, inflation is again a worry. Central banks led by the US federal have taken aggressive action to combat inflation. The risk of recession in the US looms if inflation remains persistent and the Fed continues to raise rates and the job market slows down, leading to a rapid decline in liquidity," highlighted Chanda.
However, the economy remains robust with historically high employment numbers, solid wage growth and solid GDP growth. Corporate profits have also been strongly barring a few. Inflation is also helping certain industries like consumer staples and energy, Chanda added.
"Currencies of commodity exporters like Brazil and Australia have been appreciating against the US dollar. Short term pain from sharp currency moves is problematic. However, in the longer run currencies exchange rates are largely a function of trade deficits and relative rates of real interest rates," stated Chanda.
The major question
Amid the ongoing negative developments around the globe, analysts and economists on the basis of indicators have predicted that a recession may hit the USA, Europe and even China sooner rather than later.
"This recession has the potential to spill into the emerging markets including India. However, based on the Fed's recent communication, achieving a soft landing that includes tackling inflation while keeping unemployment low is a key target. Geo-political issues are of larger concern," said Chanda.
However, Godkhindi believes that India would enter a ‘technical recession’ when it sees two consecutive quarters of GDP decline. In the middle of the current geopolitical situation and central banks’ policy rollback, India is most likely to see an economic slowdown in the medium term.
"Unlike the US, the Indian economy is not overheating. The demand across sectors has not fully recovered leading to inflationary pressures. Weak consumption demand is likely to witness more headwinds in the coming months," explained Godkhindi.
In order to avoid situations like this, experts believe that a fuel duty cut is necessary since it has an immediate and secondary impact on electricity, transport cost, etc. The government also needs to ensure that food prices are in check by easing import limits and crackdown on the supply side amid hoarding.
"Agriculture, horticulture and food processing industries should be given a financial boost for quick revival of the economy in rural areas. A recession can be arrested with good planning. The Government needs to boost income-generating capacity to reduce the burden on low-income households," said Godkhindi.
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