The effects of the global recession, which according to economist Nouriel Roubini will begin by the end of this year and last through the entire year 2023, will definitely not leave India unscathed.
Lower commodity prices would, however, partially offset the negative effects of the recession on the economy. Every country is feeling the effects of Russian President Vladimir Putin's unprovoked attack on Ukraine, from the United States to Europe, the Middle East to South Asia.
In addition to the deadly effects of the Covid-19 pandemic, the most recent geopolitical disaster has brought the world to its breaking point.
Global central banks have become overzealous in their efforts to control inflation.
The US Federal Reserve raised its key interest rate by 75 basis points for the third time this year in September. The Fed's rate hike demonstrated its commitment to lowering inflation in the United States, it is at a four-decade high of 8.5%.
The Fed's rate hikes are aimed to cool an overheated US economy and force people out of work, putting a downward pressure on wages and inflation.
India's economy has been moderately integrated with the global economy, but it is not invulnerable to the US or global recession.
Even in typical Fed-driven recessions, the domestic rate of growth has slowed by 1.5% to 2.5%. This recession, in contrast to other shallow recessions, is expected to be long and unpleasant.
According to the data, India contributes a relatively small amount to the world's exports (2.2%), and even when it comes to GDP, it is still low when compared to other nations.
However, the trade route will have some effect on India. Five countries together account for about 30% of India's total exports, including the US and the EU.
Additionally, a significant portion of international exports are dependent on the US.
The United States' percentage of India's exports of goods increased from 10.1% in FY2011 to 18.1% in FY2022.
India's susceptibility to a US economic downturn has undoubtedly increased as the US market share in its exports has grown. With a share of 54.8% in FY2021, the US accounted for most of India's software exports.
A US recession will undoubtedly have a significant negative effect on India's software exports, margins, and employment in the service sector.
Foreign Portfolio Investment (FPI) fund flows, forex reserves, and the rupee have already begun to be impacted by Fed rate increases. As the Dollar keeps getting stronger following the Fed's most recent 75 basis point jumbo rate hike, the declining Rupee is coming under new pressure.
The Rupee is falling to new lows because of rising crude oil prices, continued Fed rate hike expectations, and the expanding current account deficit.
The rate cycle of the RBI may not be opposite to that of the Fed, and rate increases will undoubtedly have an impact on India's economic growth.
To reinstate a pretense of price stability without stifling growth, the RBI's monetary policy panel must walk a fine line between two opposing objectives. On September 30, the RBI raised the repo rate by 50 basis points, to 5.9%.
All this puts India's growth rate, current account deficit, macroeconomic stability, and currency at risk. The Indian economy will continue its current course, according to Finance Minister Nirmala Sitharaman, despite the global economic challenges.
Even though India's economy is not fully integrated with the global economy, policymakers cannot ignore the global headwinds.
A moderate growth rate of around 5% (as predicted by UNCTAD) would still rank India as having the "fastest growing economy," millions would still be forced into poverty.
The poorest people will be hit the hardest by rising inflation as a result of currency depreciation and widening "twin deficits," which will further fuel it.
(The author is Vice President, Bonanza Portfolio)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Certainly! Let's dive into the concepts mentioned in the article:
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Global Recession: A worldwide economic downturn affecting various economies, leading to reduced economic activity, decreased trade, and often marked by declining GDP, rising unemployment, and reduced consumer spending.
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Commodity Prices: The cost of raw materials or primary agricultural products that have a universal demand and are traded globally, such as oil, gold, agricultural produce, etc.
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Geopolitical Events: Refers to political and economic impacts on a global scale due to actions taken by governments or entities, often affecting international relations, trade, and economic stability.
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Central Banks' Actions: Actions taken by the central banks of various countries, such as interest rate adjustments or monetary policy changes, aimed at controlling inflation, stabilizing the economy, and managing currency value.
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US Federal Reserve Interest Rate Hike: The adjustment of interest rates by the US Federal Reserve to regulate the economy by influencing borrowing costs for businesses and individuals, impacting consumer spending and investment.
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Global Trade and Exports: The exchange of goods and services between countries, affecting economies based on the volume and nature of trade relationships, and the impact of economic downturns in major trading partners.
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India's Economic Integration: Refers to how interconnected India's economy is with the global economy, affecting its susceptibility to external economic shocks, trade, and economic policies of major trading partners.
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Foreign Portfolio Investment (FPI): Investments made by individuals, hedge funds, or institutions in foreign financial assets such as stocks, bonds, or other securities, impacting a country's capital flows and currency value.
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Currency Exchange Rates: The value of one currency relative to another, affected by factors like interest rates, inflation, geopolitical events, and trade balances, impacting international trade and investment.
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Monetary Policy: Actions taken by a country's central bank to manage the money supply, interest rates, and credit availability, influencing economic growth, inflation, and employment.
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Economic Growth Rate: The percentage increase in a country's GDP over a period, indicating the health and development of an economy.
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Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power and affecting standards of living.
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Current Account Deficit: The difference between a country's total exports of goods, services, and transfers versus its imports, impacting the balance of payments and currency value.
Understanding these concepts provides a comprehensive view of the economic dynamics and challenges discussed in the article, highlighting the interconnectedness of global economies and the potential impact on India's economic stability and growth.
