India: Combating Recession

 Introduction

Being history enthusiasts in a country like India with a vast and diverse history nurtured us to become a citizen who has a lot of curiosity about the nation's future prospects. India from the very past has always been seen as a prosperous nation with tons of resources, land and rich cultural diversity but economically the world view about India is a little different, we mean there are a little to no schools of Indian economic thought and the country is often perceived as “a place with many resources with disappointing potentials of exploiting them”. However, from time to time India has proven the world wrong whenever it tried to degrade the nation’s potential. The first democratic election was called the biggest gamble in history and remarks were passed highlighting the ignorance of the nation and undermining its democracy but proving all the allegations and remarks wrong, India has emerged as one of the world’s biggest and most successful democracies and the fifth largest economy. It achieved this feat in a matter of mere years. A similar scenario can be observed today, where it is believed that the world’s most powerful countries are on the verge of entering into a recession, we believe India is sailing its way through endeavours by overcoming the obstacles thrown in its way.

SUPERPOWERS- NOT SO IN SUPER POWER!!!!

United States

For a central bank that has such a prominent research infrastructure as the US Federal Reserve, is definitely overlooking some key indications that its economy is slowing. Investor Michael Burry of The Big Short (watch it guys, it's too good!!) had once asked “what strategy will pull us out of this real recession? What forces could pull us so? There are none. So, we are really looking at an extended multi-year recession.” In 2023, the possibility of a U.S. recession nevertheless exists. According to Goldman Sachs Research, the consensus estimate on the likelihood of a significant decline in the American economy over the next 12 months is 65%. Economists concur that the reason behind the US inflation is the supply side, including rising oil prices as a result of Russia's invasion of Ukraine, government authorities should be the ones to take action. The US therefore must invest far more money to boost productivity and innovation to reduce such effects. But, on the other hand, it seems difficult to envisage any legislative movement toward enhancing US economic efficiency given that Republicans currently hold control of the House of Representatives and have hinted at not financing the government or raising the debt ceiling, placing Washington on the edge of default.

China

Even though the zero-COVID policy resulted in tremendous economic harm and broad discontent, China maintained it for over three years. This resulted in the growth slowing sharply, company profits collapsing, and youth unemployment surging to record levels, in 2022. A potential global recession is another major concern that will shape China's economic landscape in 2023. 

Trade had powered much of China's economic growth earlier, as exports were boosted by rising prices of goods and a weaker currency (lowest since 2008). However, a global economic downturn has caused the trade industry, which accounts for around a fifth of China's GDP and employment of 180 million, to start displaying signs of weakness. The hasty reopening of the Chinese economy is one of many issues affecting the economy. 

Rise of the RAGGED

India

Now it’s India. So, India may not be able to completely avoid the impact of the global recession, which several economists and we believe, BUT, there are several factors like lower commodity prices that might assist the economy in partially offsetting these effects to an extent. FIIs massively withdrew Rs 2.75 lakh crore from the cash market in 2022. A spike in US 10-year bond rates may be to blame for the massive departure from FIIs. In the midst of the covid-19 outbreak, these bonds only earned 1% or less. FED raised interest rates in response to rising inflation, causing bond yields to reach a 14-year high of above 4% in October 2022. Even yet, domestic institutional investors (DIIs) countered by investing a massive Rs. 3.07 lakh crore, indicating a rise in household equity exposure. As a result, markets have remained stable. The peak in interest rates for the US, India, and Dollar Index is anticipated in 2023. The Indian rupee did depreciate along with many other currencies by around 10 per cent against the US dollar in 2022 as the Fed tightened its interest rate amid the uncertainties but still managed to sustain itself because of its robust forex reserves. Let’s not dive deep into the statistical analysis and take a very simple example to understand the situation.

Economic Dimensions

Due to structural factors including production-linked incentive schemes, free trade agreements, domestic demand, especially supportive policies, and robust consumer, business, and bank balance sheets that raise GDP, India has a superior growth profile than other developing nations. Given the global economic downturn, industries with a domestic focus are anticipated to perform better in the short term than those with an export focus. India is actively pursuing PLI schemes and FTAs, and given that Indian exports now account for barely 2% of global exports, we think that the export-led themes will drive growth in the long run.

Due to government efforts to address Corona's aftereffects during the previous two years and the succeeding Russia-Ukraine war, there has been an upsurge in global inflation. It became obvious that we would also be harmed because a significant portion of our imports come from oil. The market expected the inflation rate to be 6.4%rate was expected to be 6.4% by the market, but on November 22, it dropped to 5.88%, marking a significant decline. The RBI's stringent monetary policy has largely made this possible. Our primary import is petroleum, so every increase in oil prices makes us concerned about our $561 billion in foreign exchange reserves.

Apart from that, India gains from the US-China decoupling and the construction of technology supply networks without China. According to a Morgan Stanley report, the Indian economy is expected to maintain its development rate in 2023. The economy's main driver is still considered to be domestic demand. Real growth is expected to be slower due to a convergence of elements including a weaker global economy, declining pent-up demand, and normalizing base effects. The four global trends—demographics, digitization, decarbonization, and deglobalization—fall in our court as Morgan Stanley referred to as "New India."

Conclusion

Nehru said that "Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.”

Today India is living that dream when the whole world is facing a recession, India is awake and can prove its resilience. Global engagement in India is at an all-time high. Imagine 10 years ago the country barely had any fast food chains, startups and financial literacy. Present India is more awake, and more active, even if the people are not very engaged in the sectors they are well aware of the prospects that are available to them. India tackled the covid situation tremendously well. Even during the global recession, India is considered to be the safest place to invest and survive. India may be negatively affected by global conditions but will still manage to grow at a rate of 6-7 per cent in 2023-24, simply because it seems better placed when compared to the US, UK and China, who still lie on the edge of entering into a global recession, if not already.

Credits:

Sania Wasim

Yash Tolani