Ever since the COVID-19 crisis started all over the world, the risk of different economies falling into the grip of recession has increased. The fear of recession once again in the world has deepened. Worries around a recession have emerged as prominent central banks around the world like the US Federal Reserve, Bank of England, and European Central Bank are hiking interest rates aggressively to curb the surging inflationary pressures amid the ongoing war in Russia-Ukraine and the roll-back of pandemic-era measures.
Fears of a global recession have gripped all markets alike but analysts have opined that recessions in advanced economies may benefit the Indian economy. India being a net importer of commodities should benefit on the inflation front. However, as per the analysis, the impending growth slowdown in the United States is set to hamper the growth trajectory of India in the medium term. With a ‘prolonged mild recession’ in the US, India’s economy is likely to see a growth slowdown in the medium term.
The US constitutes around 18 per cent of India’s merchandise export market and over 60 per cent of India’s IT-ITeS exports. Alongside, the broader global growth slowdown is also likely to weigh on India’s export and investment outlook. Nomura expects India’s GDP growth to average 7.2 per cent on an annual basis in 2022 and moderate to 5.4 per cent in 2023, with risks to the downside.
The International Monetary Fund (IMF) in its July update of the World Economic Outlook (WEO) has lowered India’s growth forecast for the current year by 80 basis points to 7.4 per cent. The revised growth projection is closer to the official estimates and appears more realistic. For the next year, the IMF has projected India’s economy to grow by 6.1 per cent. The revision in growth projections is attributed to less favourable external conditions and rapid policy tightening.
The IMF report has sharply revised the US growth projection to 2.3 per cent in 2022, a 1.4 percentage point decline from the April report. In 2023, the US economy will likely grow by 1 per cent. This growth is expected to weaken substantially in the second half of 2023. The economy is projected to grow by only 0.6 per cent in the fourth quarter of 2023.
While global growth is projected at 3.2 per cent for 2022, the IMF report has flagged concerns regarding an oncoming global recession (defined as two consecutive quarters of negative growth). This could be a concern for the US and other advanced economies. However, the probability of a recession in India seems to be low as of now.
On the likelihood of a recession, US-based brokerage firm Goldman Sachs in its report has said it sees a 30 per cent probability of the US entering a recession in the next year and a 25 per cent conditional probability in the second year if one is avoided in the first. Bank of America Securities also sees a roughly 40 per cent chance of a US recession next year, with inflation remaining persistently high.
Recessions in advanced economies may benefit India in a “perverse way” as moderation in global commodities prices will help cool domestic inflation, according to Citigroup Inc.’s head of economics for the country. India would still face pressures from a global slowdown as it will crimp exports and economic growth.
Research firm Nomura said that as per its Nomura India Normalization Index (NINI), the Indian economy is now racing back to above-normal levels, led by broad-based improvements across consumption, investment, industry and the external sector.
According to the Bloomberg survey of economists, the probability of recession is zero for India. Inflation and a possible growth slowdown are primarily due to global shocks. The external headwinds having a bearing on the Indian economy could see moderation. High-frequency indicators suggest that there is a lesser probability of a sharp slowdown in the economy. Most of the indicators in the services sector have shown a significant rebound in the past couple of months.
“India is nowhere near a recession or stagflation and the government is making all efforts to bring down retail inflation below 7 per cent,” Finance Minister Nirmala Sitharaman said on 1 August. Replying to a debate on price rise in the Lok Sabha on the demand of opposition parties, Sitharaman said the government has taken several measures to make raw material prices cheaper and reduce inflation of food items.
The impact of a US recession on India will depend on the magnitude of the recession; how big the recession is. While the Indian economy has shown resilience, it cannot remain immune to a slowdown in the global economy and a possible recession in advanced economies.