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.)
As a seasoned economic analyst with a deep understanding of global financial dynamics, I can provide valuable insights into the intricate web of factors influencing the article you've presented. My expertise stems from years of closely monitoring economic trends, analyzing data, and making predictions based on a comprehensive understanding of the global economic landscape.
Let's dissect the key concepts embedded in the article:
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Global Recession and Nouriel Roubini's Prediction: The article discusses the anticipated global recession projected by economist Nouriel Roubini. This suggests a potential downturn in the global economy starting at the end of the current year and persisting throughout 2023.
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Impact on India's Economy: The assertion that the global recession will not spare India emphasizes the interconnectedness of the world economies. Despite India's moderate integration with the global economy, the article anticipates negative repercussions, highlighting the vulnerability of India's economic landscape.
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Commodity Prices as a Mitigating Factor: The article notes that lower commodity prices could partially offset the adverse effects of the recession on India's economy.
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Geopolitical Events: The geopolitical disaster involving Russian President Vladimir Putin's attack on Ukraine is highlighted as an additional factor exacerbating global challenges, alongside the ongoing effects of the Covid-19 pandemic.
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Central Banks and Inflation Control: The role of global central banks, particularly the US Federal Reserve, in aggressively combating inflation is discussed. The Fed's key interest rate hikes, aimed at cooling the US economy, are presented as a measure to address the four-decade high inflation rate of 8.5%.
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India's Exports and Dependency on the US: India's susceptibility to a US economic downturn is explained, emphasizing the significant impact on software exports, margins, and employment in the service sector. The growth in the US market share of India's exports is highlighted, posing challenges for India's economic stability.
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Foreign Portfolio Investment (FPI), Forex Reserves, and Rupee Impact: The article underscores the impact of Fed rate increases on FPI fund flows, forex reserves, and the Indian rupee. The strengthening US Dollar, fueled by rate hikes, is noted as a factor contributing to the depreciation of the Indian Rupee.
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Reserve Bank of India's (RBI) Monetary Policy: The RBI's response to the global economic challenges is highlighted, with a 50 basis points repo rate increase to 5.9% on September 30. The potential consequences of the RBI's rate increases on India's economic growth are discussed.
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Macroeconomic Stability and Currency Risk: The broader implications on India's growth rate, current account deficit, macroeconomic stability, and currency are explored. The delicate balance the RBI must maintain between price stability and economic growth is emphasized.
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India's Economic Outlook: Despite Finance Minister Nirmala Sitharaman's optimism about India's economic trajectory, the article concludes by acknowledging the existence of global headwinds that policymakers cannot ignore.
In summary, the article delves into the intricate interplay of global economic factors and their implications for India, emphasizing the importance of strategic policy decisions to navigate the challenges posed by the anticipated global recession.
