Talks about recession have been around for a while. It all started with the World Bank increasing repo rate. Soon there were currencies falling against the dollar, especially the Japanese yen plunging. Not to forget soaring oil prices.
But here's the big question - is it going to affect India? We need to step back and have a layman’s perspective.
But first, what does a recession mean? Recession is a state when an economy has two successive quarters of negative growth. This is usually accompanied by high unemployment rates. India’s GDP growth in Q1FY23 was 13.5%. At this rate, India is likely to be the fastest growing economy in the current fiscal.
More so, the unemployment rate has kept steady after hitting a peak in the pandemic. The indicators suggest that it is a slow growth rather than an imminent recession. So, if we’re not stepping into a recession, why all the talk?
To break it down, the reason for the current global recession boils down to two key factors : -The Covid-19 pandemic that slowed the economy -The Russia-Ukraine war.
Economists are broadly divided into two camps -
One which sees India in a globalised setup and believes recession would seep in through monetary routes.
The other camp, including our finance minister, believes in an optimistic take. They believe the Indian economy will stay on course despite the global headwinds as our economy is decoupled from the rest.
There is some merit in both arguments
So how would it affect us?
There's certainly no need for doomsday predictions. But the rupee weakening against the dollar is definitely a sign of worry. It means the government, companies and citizens are paying increasing amounts of money for goods and commodities.
Foreign investors are exiting the Indian market dumping a record $33 billion thus affecting our cash flows.
But is there hope?
While the rate hike by the US Fed sent the rupee tumbling, a recession in advanced economies will cool prices of commodities. This means that the demand for the dollar will come down, helping in stabilising the rupee.
Our economy is resilient because it is domestic-oriented. Growth comes from consumption, which is largely domestic, supported more by government and investment expenditure rather than global trade. This means that although we’re taking a hit from the global headwinds, our domestic demand provides us with a cushion.
While the foriegn investors are pulling out money, the Indian retail investors are holding the fort, pumping in more capital. Thus, cushioning the markets from external shocks.
To sum it up, the Indian economy might be able to ride this recession wave as we are largely self-reliant. Our debt is owned domestically and that protects us from the risk of defaults and a full-blown debt crisis. This is the exact risk several developing economies could face in the coming quarters.
It’s not going to be a smooth-sail.
The RBI has been taking measures to counter the inflation. Interest rates have been hiked and will be adjusted in the future. But in this process, SMEs will see their finance costs rise.
While inflation impacts everyone alike, small businesses are disproportionately impacted. This is because they have limited liquidity and resources. A recession might bring a sudden spike in costs combined with a possible fall in demand. This can spell disaster for them. They don't have a lot of options and will have to bank on time and patience to wait this out.
In conclusion, Self-reliant India is here and it would ride out the storm but with a few ruffled feathers.
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