Amidst global recession threat, India finds hope!

The threat of recession is not only looming large over the U.S. economy, the International Monetary Fund (IMF) now fears a global recession by saying that the economic outlook has “darkened significantly”, primarily because of the prolonged Russia-Ukraine war.

The IMF had cut the global growth forecast from 4.4% for 2022 in January this year to 3.6% for 2022 and 2023 in April. These numbers are significantly lower than 5.9% global growth in 2021. Now it has declared the growth projections for 2022 and 2023 would be further lowered later this month with its managing director Kristalina Georgieva declaring that “it is going to be a tough 2022 – and possibly an even tougher 2023, with increased risk of recession”.

Georgieva notes that the economic impact of the war has worsened, slowing down growth and exacerbating a cost-of-living crisis, and warns that it is going to worsen further. Inflation is not only expected to remain higher but “has broadened beyond food and energy prices”. The resultant tightening of monetary policies all over the world would impact the economic recovery.

The recessionary fear in the U.S. was sparked by the inversion in the “yield curve” of the U.S. treasury in the last week of May 2022 – long-term treasury (10-year) yield falling behind short-term (two-year) treasury yield. Such inversion, historically speaking, has been a sure sign of an impending recession for the U.S. in the next 6 to 24 months. Former U.S. Treasury Secretary Lawrence Summers is of the opinion that the risk of recession hitting the US this year has significantly increased.

In sharp contrast, the Indian government thinks the global recessionary threat is working to its advantage.

Why India thinks global recession will spare it?

The Finance Ministry’s monthly economic report (MER) of June 2022, released on the very same day that Georgieva was warning the world of impending recession, said: “For the present, their global prices have softened, as fears of recession have dampened prices somewhat. This would weaken inflationary pressures in India and rein in inflation. In addition, various measures taken by the government to temper inflationary pressures may also contribute to capping inflation.”

It does, however, say that as long as “retail inflation” remains higher than “RBI’s tolerance level” of 6%, the stabilisation policy measures will need to continue “walking the tight rope of balancing inflation and growth concerns”. In June 2022, the headline CPI inflation was 7%; it has remained 6% or above since January 2022 with the RBI saying that it would remain above 6% for the entire FY23. The WPI inflation for June 2022 was very high at 15.8%; it has remained above 15% during April-June 2022. It has been in double-digit for one-and-half years.

The MER also recognises that “if recession concerns do not lead to a sustained and meaningful reduction in the prices of food and energy commodities” then India’s current account deficit (CAD) “will deteriorate”. Last month, the MER (May 2022) drew attention to twin-deficit challenges – growing fiscal deficit and current account deficit (CAD). The June’s MER adds another “twin challenges” of elevated inflation and widening trade deficit (CAD).

The June MER’s convoluted analysis of the economy is not new. In its April 2022 report, it had made two claims: (i) inflation doesn’t hurt the poor but the rich and (ii) the lowering of CPI inflation leads to “redistribution of income”. The basis for these claims was the moderation of headline CPI inflation from 6.2% in FY21 to 5.5% in FY22 and the food inflation from 7.7% to 3.8% during the same period. It used these data to analyse the household consumption expenditure patterns from the 2011-12 NSSO survey – a decade old data (as it hasn’t collected data since then).

These are exaggerate claims because while moderation in inflation brings relief to the poor it does not add to their incomes; does not increase the burden on the rich and certainly does not lead to redistribution of incomes. The right way to compare the impact of inflation is to look at the income and saving levels of the poor and the rich to know how inflation impacts them disproportionately. Besides, redistribution of income means reduction in the gap between the incomes of the poor and the rich – with relative improvement in income of the poor.

What more has improved?

The optimism of the June MER springs further from four key factors it listed: (i) good monsoon pointing to robust agricultural growth (ii) corporate sector showing signs of revival with growth in net sales with sustained momentum in manufacturing and services (iii) well-capitalised financial market instilling confidence in investors and (iv) hope for higher private investment due to the second and third factors.

None of these factors are strong or definitive ones, given the worsening global economy and domestic trends – elevated inflation, growing fiscal and current account deficits and poor growth in investment and industrial production. For example, the agriculture’s share in the GVA is small – 15.5% in FY22 and 16.3% in FY21. The agriculture GVA grew by 3.3% in both fiscals. Its net contribution can’t rally growth significantly.

The corporate sector has registered huge profits in the pandemic fiscal of FY21 and FY22 but that has not translated into higher investment. The CMIE’s Mahesh Vyas says that he tracked both listed and unlisted companies and found both made “massive profits” during the two pandemic fiscals but their net fixed assets grew only by 2.4% by the end of March 2022. According to him, this growth in net fixed asset is “extremely small” and indicates that corporate entities have no appetite for investment or demand for credit. In fact, he says the rise in interest rates (twice since May 2022) doesn’t really matter to corporate entities because they are not investing.

The RBI data on sectoral credit growth shows, in the first four months of 2022 (January-April), the average growth in credit to industry was 2% and that to large industries was 1.6%. For services sector, it was 1.9%. These are not signs of revival in investment. The industrial production (IIP) did grow by 12.9% during April-May 2022, over the corresponding period of 2021, but this is because of the low base of April-May 2021 – which witnessed the devastating second wave and industrial production was at the lowest level then than that of the rest of FY22.

Then, there are further risks to investment as the FPI outflows have reached record high in 2022 and more is expected to flow out with the US Federal Reserve likely to raise interest rate significantly due to high domestic inflation. The rupee has, in the meanwhile, weakened considerably, touching new lows. The impact of India’s counter measures, such as opening the rupee trade and relaxation in foreign investment in debt, external commercial borrowings, and NRI deposits, etc., to stem the outflow and soar up foreign exchange, is yet to be clear or visible.

Meanwhile, the growth projections for FY23 are on the downside.

The RBI lowered it from 7.5% to 7.2% in June. Global financial service provider Nomura, which had earlier projected 2023 (January-December 2023) growth at 5.4%, cut it down to 4.7% a few days ago amidst recessions fears and rising interest rates.

Given that India’s growth was -6.6% in FY22 when the global average growth was -3.1%, there is no reason to believe that when the recessionary trends hit the global economy and global growth falls below 3.6% (as the IMF has said), India would shine to 7-8% growth.