Can India Escape the Effects of a Global Recession?

Central Banks around the globe have got into a hyper-active mode to control the hyperinflation. Late to act on the worst inflation in four decades, central banks are now desperate to redeem themselves in fulfilment of one of their key tasks – inflation control.

About 90 central banks have hiked interest rates this year. Many did so more than once. Chief Economist of Bank of America, Ethan Harris labels the phenomenon as “a competition to see who can hike faster.”

This is the broadest tightening of monetary policy globally in 15 years – a stark contrast to the easy money era ushered in post the 2008 financial crisis and then the pandemic. Last month, Fed hiked its key rate by 75 basis points for a third time in this year. The Bank of England lifted its benchmark by 50 basis points. The Fed rate hike showed its commitment to bring down the US inflation, which is at a four-decade high of 8.5%.

Fed is expected to hike the interest rates by another 50 basis points each in November and December. That would lead the Fed funds rate by year’s end to be between 4% and 4.25%. To cut through the euphemisms, Fed’s rate hikes are intended to slow down an “overheated” US economy and to throw people out of work to put downward pressure on wages and inflation.

Economist Dr Nouriel Roubini – nicknamed as Dr Doom for correctly predicting the 2008 housing bubble crash and the ensuing financial crisis – sees a “long and ugly” recession in the US and globally occurring at the end of 2022 that could last till end of 2023. He says that achieving a 2% inflation rate without a hard landing is going to be “mission impossible” for the Fed.

There is now a 98% chance of a global recession, according to Ned Davis Research data released in late September. The only other times that recession model was this high has been during severe economic downturns, most recently in 2020 pandemic and during the global financial crisis of 2008 and 2009.

India is not immune to a US recession or global recession, though its economy was never fully coupled with the global economy. Domestic growth rate has slowed by 1.5 to 2.5 per cent even in normal Fed-led recessions. Dr Doom predicts that this recession is going to be a long and a severe one, unlike any other shallow recession. So, India’s growth rate could take a beating of 2 to 3 per cent in the days to come. India’s Gross Domestic Product (GDP) growth is expected to decelerate to 5.7% in 2022 from 8.2% last year due to higher financing costs and weaker public expenditure, the United Nations Conference on Trade and Development (UNCTAD) has said last week.

US market share in India’s merchandise exports has increased to 18.1 per cent in FY2022 from 10.1 per cent in FY2011. The rise of US market share in India’s export basket has obviously increased India’s vulnerability to a US recession. In FY21 and FY22, software exports to US recorded the fastest growth since FY11. In FY21, the US was the major destination for India’s software exports, accounting for 54.8 per cent share. A US recession is bound to have a major adverse impact on India’s software exports, margins and the service sector jobs. IT companies including Wipro, Infosys and Tech Mahindra have revoked many employment letters that they had given to students. Indian IT companies may hire up to 20 per cent fewer people in campus placements and entry-level hiring in the next financial year.

Fed rate hikes have already started impacting the FPI fund flows, forex reserves and the Indian Rupee. FPI outflows from Indian equities may not yet be over, even though they paused a bit in August 2022. India’s foreign exchange reserves dropped to the lowest since July 2020 to $532.66 billion, as per the Reserve Bank of India’s (RBI) weekly statistical supplement released on Oct. 7. India’s forex reserves declined for a ninth consecutive week.

A declining rupee is yet again facing a renewed pressure, as the dollar continues to strengthen in the wake of the Fed’s latest 75 basis points jumbo rate hike. The Indian Rupee weakened past the 82-mark against the US dollar for the first time ever in last Friday’s intraday trade. Surging crude oil prices, expectation of continuing US Fed rate hikes and widening current account deficit are pushing the rupee to new lows. According to the brokerage house Motilal Oswal Financial Services, India’s current account deficit will likely widen to a decadal high of 3.8 per cent of gross domestic product (GDP) in 2022-23 from 1.2 per cent last year.

RBI’s rate cycle may not be counter to Fed’s rate cycle and the rate hikes will obviously put pressure on India’s growth. RBI’s monetary policy panel will have a tightrope walk as it battles to reconcile two obviously contradictory goals — to restore a semblance of price stability without choking growth. RBI increased the repo rate by 50 basis points to 5.9% on Sept. 30, 2022.

All this makes India’s currency, macroeconomic stability, current account deficit and growth rate vulnerable. However, global rating agency S&P had recently said even though the US and the Euro zone are headed to recession, India is unlikely to face the impact given the “not so coupled” nature of its economy with the global economy.

India’s policymakers cannot remain complacent to the global economic headwinds, though its economy is not completely coupled with the global economy. For a developing country like India, a modest growth rate of 5 per cent or thereabouts will push millions into poverty. A depreciating currency and the widening “twin deficits” (trade deficit/ current account deficit and the fiscal deficit) will further fuel an already elevated inflation, which will hit the poorest hard.

[Photo by Gerd Altmann/Pixabay]

The views and opinions expressed in this article are those of the author.

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