India Is Geared To Overcome Recession

S Mohini Ratna, Editor, VARINDIA

There have been severe supply chain bottlenecks across the globe with huge shortages of semiconductors or chips. The current global chip shortage rivals only a few of the past imbalanced markets. 

Economists feel that a recession may hit the USA, Europe and even China sooner rather than later . The fears of a prolonged recession have emerged, fuelled by a sharp uptick in inflationary pressures and poor demand recovery. Adding to this, the Covid situation in China and the Russia-Ukraine war, the global economy is in a vexing position. 

One can expect a “long and ugly” recession in the US and globally occurring at the end of 2022 that could last all of 2023 and a sharp correction in the S&P 500. Even in a plain vanilla recession, the S&P 500 can fall by 30%, in “a real hard landing,” they expect it could fall to 40%. 

The 2008 crisis led households and banks to take the hardest hits. This time around,  corporations, and shadow banks, such as hedge funds, private equity and credit funds, “are going to implode”. Secondly, we are going to witness the case of deglobalization and protectionism, relocating of manufacturing from China and Asia to Europe and the US, aging of population in advanced economies and emerging markets, migration restrictions, decoupling between the US and China, global climate change and recurring pandemics. 

India and the USA are two different economies. Further, in India, the major contributor to exports is from services and not merchandise helping India surpass the United Kingdom (UK) and becoming the fifth largest economy in the world, behind the United States (US), China, Japan and Germany. We have witnessed that the Indian economy became bigger than the UK’s in the three months ended March.

The world was already witnessing a rise in digitisation, and experts point out that the pandemic expanded the scale manifolds. India will continue to remain the fastest-growing major economy amid a global slowdown. The International Monetary Fund (IMF), in its latest July update on the world's economic outlook (WEO), has brought down India's growth forecast for 2022-23 to 7.4%, which is slightly higher than the 7.2% projected by the usually conservative Reserve Bank of India (RBI). 

The central bank has since February lowered its GDP growth forecast for 2022-23 once - from 7.8% to 7.2% in April - after hostilities broke out between Russia and Ukraine. It raised its inflation estimate twice, from 4.5% in February to 5.7% in April, and then to 6.7% in June as the West ratcheted up sanctions on Russia. Retail inflation in April-June came in at 7.3% against the central bank's forecast of 7.5%. 

Most of the global conglomerates were hit hard by supply chain restrictions that followed the invasion of Ukraine. Whereas, India is in a very advantageous position in the sense that of course there are inflation concerns, but we are seeing a strong underlying volume demand from a rising middle class and people reaching higher levels of income, it overpowers some of the concerns that may come from inflation .

India is not immune to the US recession and domestic growth has slowed by 1.5-2.5 percent even in normal Fed-led recessions. Assuming a mild US recession and GDP growth of 7.5 percent in FY23. Experts believe that GDP growth could slow to 6 percent in FY24 (revised down from 7 percent earlier). Stable domestic fundamentals in terms of strong financial sector and non-financial sector balance sheets, high forex reserve and some amount of counter-cyclical fiscal policy ahead of elections in FY24 will limit the growth slowdown to 1.5 percent.

Today, India is recognised as the hub for the service sector, the fast-growing sector in the world accounting for 60% of the economy and 28% of employment.

The services sector is the highest contributor to India’s GDP at over 50% and also attracted significant foreign investment, has contributed significantly to export and has provided large-scale employment. It is supported by the emergence of the gig economy and hybrid workforce, backed by a robust digital infrastructure and well-drafted laws, the gig economy is sure to create enormous employment in the foreseeable future.

The SME sector has emerged as a key sector in the growth of the Indian economy and India’s digital economy is boosting the growth and is estimated to reach US$ 1 trillion by 2025. By the end of 2023, India’s IT and business services sector is expected to reach US$ 14.3 billion with 8% growth. During these economic turbulence, one has to be light on equities and have more cash.

The strong SME sector is helping to drive employment and technological advancement and grow the Indian economy. With this we expect India to grow by 7.1% - 7.6% in FY22-23 and 6% - 6.7% in FY23 - 24. This will ensure that India reigns as the world's fastest-growing economy over the next few years, driving world growth even as several major economies brace themselves for a slowdown or possibly a recession.