Indian Economy and The Global Recession

Pranav Bharara NMIMS Mumbai

Covid-19 caused the world to experience severe economic hardship. As a result, in 2020, the global GDP decreased by 3.2% and crawled back to recovery by 6% the following year. However, even before we could shakeoffshocks of thepandemic,another threat toglobalsecurity and growthappeared in the form of Russia's adventures in Ukraine.

Now, it appears the world is about to experience another economic crisis. This possibility is suggested by signals coming from Europe and the US, which form 40% of global GDP. During the first half of this year, the US economy slid into the red. Also, just like it is in US, high inflation is a problem in Europe. Inflation in the Eurozone was reportedly at a record high of more than 10% in September. Despite the fact that the European region's economy grew by 0.2% from July to September, analysts predict that the continent will enter a recession in the last quarter.

It's interesting to note that China will have a slower recovery at 3.2% and 4% this year and the next, according to IMF's report. Its zero-tolerance policy toward Covid is the cause of this self-inflicted suffering. The Indian economy will continue to be the fastest-growing major economy in the world by rising at a 6.8% in 2022 and a little slower 6.1% in 2023, according to the IMF. However, many economists contend that India is not isolated from the rest of the world and that a growth rate of 6% at a time when inflation is above 7% is concerning. Therefore, in the midst of constant conjecture of a global recession, let's examine how it will affect the Indian economy.

How have the economy’s moving components have fared last year?

❖ Trade and Exports:

While imports are rising due to the local economy's recovery, exports are slowing due to declining global demand.45% of India's merchandis exports go to developed nations, whose economies are predicted to decline. A drop in exports would hurt consumer spending and discourage companies from making new investments.

Source: CMIE, BCG India Economic Monitor

Source: CMIE, BCG India Economic Monitor

❖ Contact-intensive services: Contact-intensive businesses including trade, hospitality, and transportation continued to be major contributors to the economic momentum in the last quarter, growing by 14.7%. Due to ongoing lockdowns, this sector had taken the brunt of the pandemic, but it is now displaying a robust recovery due to pent-up demand.

❖ Private consumption: Private consumption is presently 11.2% greater than it was before the epidemic, with increase of 9.7% in the second quarter. As the rate of global growth is expected to drop in the coming quarters, India's GDP growth would depend on how resilient the domestic demand remains.

Despite rising consumer confidence, spending has not increased consistently. For instance, vehicle registrations have stayed flat while retail sales are expanding, albeit at a sporadic rate.

❖ Manufacturing: Government expenditure on infrastructure, particularly in industries like steel and cement, is helping manufacturing in certain ways. Production over the festive season and the ongoing high demand for automobiles were unable to stop a general decline in manufacturing. In the second half of the fiscal year, manufacturing is anticipated to experience difficulties, particularly because export growth will suffer.

❖ Tax revenues: The government has been able to pay its massive subsidy bill and investments thanks to healthy tax revenue collections, which has reduced pressure on the budget imbalance. Investments increased by 10.4% in the second quarter, driven by government capital expenditures. The focus will probably be on the prudent use of scarce resources given that government expenditure is already high.

The good news is that even as the government reduces revenue costs, the percentage of capital expenses (on assets bearing long-term benefits) is increasing (on assets having short term benefit).

❖ Investments: All 2,725 publicly listed firms' net profits decreased by 6% in Q2, marking the first decline in earnings following eight consecutive quarters of increase.

This is significant because it gives businesses the opportunity to jump-start the investment cycle once uncertaintysubsides, as well as safeguard them against globalheadwinds. Programs liketheproduction-linked incentive have encouraged private investment in industries like pharmaceuticals and electronics.

However, loan growth in the business and services sectors has sharply increased, suggesting that the outlook for capex spending by businesses is improving.

What are major Challenges for the Economy?

Perhaps the largest concern is the high inflation rate and all of the difficulties that come with it. Business expenses rise, profitability and margins are affected, and buying power is decreased under inflationary circumstances. It therefore interferes with both supply and demand.

Inflation earlier this year was mostly caused by rising commodity costs and supply problems. Higher yields benefited upstream energy businesses, but profitability in most other industries remained challenging as a result of increased production and transportation costs.

Inorderto lowerthecost ofessentials andotherimportedrawmaterials forindustries andfuel, thegovernment cut excise tax. In order to solve problems with local supplies, it also placed export restrictions on a number of goods. To absorb surplus liquidity in the system, the RBI swiftly increased its repo rates by 1.9% over a fivemonth period and also launched the standing deposit facility.

However, with global economic growth likely to moderate, global prices may ease. A possible moderation in crude oil and industrial raw material prices may reduce inflation by mid-2023. Falling cost of production will be of great help to small industries that have struggled because of rising prices.

What can the Government do?

Markets remain optimistic about India's growth narrative despite a slow decline in a number of macroeconomic indicators. The government and the RBI, however, have a difficult task ahead of them. Recently, the government required a special report from the RBI since it was unable to control retail inflation within the target range of 2% +/- 4%.

This is because retail inflation being consistently above 6% affects the poor the most. Providing financial support by targeting underprivileged communities will be one approach for government to solve this issue without going overboard with spending.

Also, in order for smaller firms to stay in operation, the support may through loans at rates that are lower than the high market rates now in place. Hence, the government must use all policy tools at its disposal necessary to boost economic activity and increase the supply of products and services.

The capacity of authorities to properly calibrate monetary policy such that there is neither an over-tightening nor an under-tightening of monetary conditions will determine the international economy's immediate future. As has already begun to happen in countries like Sri Lanka, over-tightening will result in a protracted recession as well as debt and payment issues, while being too slow will result in an inability to manage inflation. To achieve a soft landing amidst the potential of a crash in advanced nations would be India's main policy task.