As Recession Fears Loom, Can India Escape Economic Slowdown?

From the United States to Europe and the Middle East to South Asia, every nation is bearing the brunt of Russian President Vladimir Putin’s unprovoked attack on Ukraine. As if the deadly consequences of the Covid-19 pandemic were not enough, the recent geopolitical crisis has pushed the world to the extreme edge.

From inflation to high-interest rates and poverty to supply chain disruptions, the Ukraine war has turned everything upside down. In its annual World Economic Outlook report, the International Monetary Fund (IMF) said that the global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures and the slowdown in China.

For India, IMF has slashed its projection of economic growth in 2022 to 6.1 per cent, the fastest among major economies. However, even as economic activities in India have seen sharp increases in terms of growth rate, the recovery to above pre-Covid levels is incomplete and India is unlikely to be immune from the global slowdown, said the Kotak Mahindra Bank in a report.

"Indian economy is better now but also more integrated into the global economy. Hence, it will also suffer from the energy price rise. It has escaped the worst since it has evaded the sanctions and bought directly from Russia. But as the war is likely to go on for some time more (say two to four years by my reckoning) India would also be caught in stagflation, said Meghnad Desai, Chairman, Meghnad Desai Academy of Economics (MDAE) and Professor Emeritus, London School of Economics.

Desai said that at present India is still in a euphoric mood about having got to number 5 in total GDP. But the slide in the dollar Rupee exchange rate indicates the direction of travel. It is not just India but the global economy which will be caught in the trap. India will be hard put to escape.

"The latest projections by the IMF indicate positive signs for India in the wake of the impending global recession as it finds that India will continue to be the fastest growing major economy this year and the coming year. Multiple factors contribute to our economy's edge over other countries in combating the recession. Firstly, given the large domestic demand, our economy is relatively independent of global markets, which is a boon as our GDP remains driven mainly by domestic demand over exports,” said Alok Mittal, Chief Executive Officer (CEO), Indifi Technologies.

Global shocks propagate to the domestic economy through four key channels — trade flows, commodity prices, capital flows and financial sector "As global demand slows down, India is unlikely to be immune with the trade and capital channels being the key risks and determinants of India’s growth," Kotak’s report added. 

“Unlike the US, China and Europe, India is a service-led economy and not a manufacturing-led economy. When we look at empirical evidence from past global recessions of 1991 and 2008, global trade in services has remained much stronger compared to global trade in goods owing to their dependence on global supply chains,” said Alok Mittal, Chief Executive Officer (CEO), Indifi Technologies.

As per the data, India is not a major global exporter (around 2.2 per cent of world exports) and even in terms of contribution to gross domestic product (GDP), it remains relatively low compared to other countries. 

However, the trade channel will impact India to some extent. The United States (US) and the European Union (EU) — five together account for around 30 per cent of India’s total exports. Also, a large part of the global exports is dependent on the US and Europe, which in turn will have an indirect impact on India too. 

“Exports must increase by 15-20 per cent by giving fiscal incentives. Exports curbs and high export duties must be rationalised. The cost of logistics and energy must be reduced by all means. Mineral and Coal taxes must be cut drastically. Further hike in interest must be paused. All these actions will make export competitive and reduce CAD. Eventually, it shall cool down inflation as well. I firmly believe that; CAD is more damaging than fiscal deficit,” said R P Gupta, Economist and Author.

Gupta also said that imports must be reduced and replaced by domestic production by deploying all policy tools. Gold imports must be cut and replaced by domestic gold, as suggested in my book “Turn Around India-2020”.

Mittal believes that India has made unprecedented digital leaps opening up significant avenues for local entrepreneurs and businesses, both large and small. As a result, the intrinsic fundamentals remain strong and will likely have minimal impact owing to such short-term turbulence.

Recently, many agencies have cut India's gross domestic product (GDP) growth forecast amid higher inflation and rising policy interest rates. On 06 October, the World Bank curtailed its growth forecast for India for 2022-23 to 6.5 per cent year-on-year from a previous estimate of 7.5 per cent. Ealier, American credit rating agency, S&P Global Ratings on Monday estimated India's economic growth at 7.3 per cent in the current fiscal with downside risks. 

Also, the Asian Development Bank (ADB) downgraded India's economic growth projection for 2022-23 to 7 per cent from 7.2 per cent. According to the ADB, the step came due to the higher-than-expected inflation in India and monetary tightening by the Reserve Bank of India. 

Meanwhile, Fitch also slashed India’s GDP growth forecast to 7 per cent in the financial year 2023 compared with 7.8 per cent in its earlier projection. The move came on the back of a global slowdown and tighter monetary policy. 

Experts noted that India must draw a composite plan to escape from global turmoil. On priority, India must reduce the current account deficit (CAD) which is a record high which can pull down GDP growth below 5.0 per cent in the coming years. That India can’t afford it while considering higher unemployment and lower “per capita income” in comparison to other nations. By March 2022, India's GDP was almost the same as FY-2019-20. Therefore in the next two decades, India must grow over 7 per cent.

“High CAD is the root cause for the “falling Rupee” and “depleting forex reserve”. Falling Rupee is importing inflation since; India imports energy, fertiliser, edible oil etc. If it gains momentum, forex reserves might further deplete below comfort zone inviting multiple problems. We must take preventive steps before facing any external crisis,” Gupta said.

In India, a combination of unemployment and inflation is causing trouble for its population (poor and lower middle class). Global conflicts are indeed worrying. India must acknowledge problems and take all preventive measures for mitigating the probable risks before it is too late, experts added.

For resolving falling employment, India must give immediate priority to the micro, small and medium enterprises (MSME) sector; which provides large employment next to the farming sector. For this, India needs several regulatory and taxation incentives besides credit easements.