The cat is finally out of the bag. Union Minister Narayan Rane told the G20 meeting on Infrastructure Working Group (IWG) in Pune on January 16 that global recession is likely to hit India after June 2023, largely due to global GDP contraction, and that the government was working on handling it effectively. “This is what I have gathered from the discussion in the meetings of the Union government. The recession is expected to hit India after June,” says Rane.

Notwithstanding months of talk of India becoming the fastest-growing major economy and the fifth-largest economy in the world in 2022 and that it is unlikely to go into recession, the grim realities are finally hitting home. The IMF has already warned of a global recession in 2023, which would impact one-third of countries. While the global recession is a big factor, it would be naive to think that only external factors are responsible for the threat of recession to India. It is as much due to internal factors like import barriers (reduced exports and massive trade deficits); loss of jobs and businesses, distress migration during the pandemic; 'twin shocks' of demonetisation and GST – all of which have hurt the economic fundamentals in recent years.

Worrying economic fundamentals

Is there a threat of India sliding into a recessionary phase, even if for a short while (two-quarters of negative growth constitute a “technical” recession)? In June 2022, Fortune India article “Like the U.S., is India headed towards recession?” warned about such a possibility, citing the signals emanating from multiple economic indicators. It particularly highlighted how despite 8.7% GDP growth in FY22, the average Indian’s income and consumption (demand) – key to economic growth – was below the pre-pandemic FY20 level (when the GDP growth was just 3.7%).

The per capita GDP (income) and per capita PFCE (consumption or demand in the economy) in FY22 were lower by -0.5% and -0.6%, respectively, than in FY20. This was a clear indication of the continuation of the economic slowdown and that the 8.7% GDP growth in FY22 (just 1.5% more than FY20) was a mere statistical mirage. This growth came from a low base effect, after a stiff fall to -6.6% in FY21 – more than double the global average of -3.1%.

The actual average income and consumption of Indians – the real economic base – in FY22 were far worse because the per capita GDP and per capita PFCE data include income and consumption of non-households like general government, corporate and non-corporate entities.

The downward trend in average income and consumption is likely to continue in FY23.

Going by the First Advance Estimate (AE1), the per capita GDP and per capita, PFCE for FY23 would be higher than FY20 by 5.3% and 5.9%, respectively. It also projects GDP growth at 7%. But the AE1 estimations are projections based on the actual data of the first two quarters. Quarterly data are known to be primarily based on formal sector indicators. Since the informal economy contributes about 50% to the GDP, the quarterly data are expected to get the picture wrong.

What does the actual first two quarters’ data (H1 of FY23) reveal?

It shows, the per capita GDP and per capita PFCE in FY23 (by using the population count of 1,383 million provided in the AE1 data) would be just about half (50% and 52%, respectively) that of FY20. In normal circumstances, these can be expected to rise to 100% or more of the FY20 level in the full fiscal. But here is a catch: The GDP growth in H1 of FY23 averaged 9.9% and for H2, it would average 4.1% to meet the AE1’s projection of 7% growth for the full fiscal. If the H2 growth is less than half that of H1, can the per capita GDP and per capita PFCE cross the FY20 level? This may be unlikely.

Quite apparently then, the AE1 for FY23 is an overestimation. The government must have known as three weeks earlier, on December 23, 2022, it turned “subsidised” ration for 62.5% of households or 813.5 million people into a “free” ration.

The long-term trend in the GDP, as a sign of healthy economic growth, has been distressing too. From 8.5% in FY11, it went down to 5.2% in FY12 (2011-12 series, constant prices), before the 2011-12 series was introduced in 2015 and there was a temporary uptick in growth. Growth peaked at 8.3% in FY17 (the demonetisation fiscal) and then progressively fell to 3.7% in the pre-pandemic FY20.

Foreign investment flees, trade deficit balloons, and unemployment rises

There are three other key indicators that show India must watch out for.

First, foreign portfolio investors (FPI/FII) continue to flee. In FY22, they pulled out a net $17.9 billion from equities – a reversal of the trend after FY16 when they last pulled out (net). The latest round of (net) pulling out began in October 2021. During January 1-16, 2023, the trend continues as they pulled out $2.4 billion (in a fortnight). On the other hand, long-term foreign investments (FDI) are slowing down. As against 10% growth in FDI inflows in FY21, it fell to 3% in FY22 and is likely to fall further in FY23, as up to September 2023 (H1 of FY23), the inflow was just 46% of FY22. With the prospects of the US interest rates going further up and the rupee further weakening, a slowdown in FDI is more likely.

Second, exports – another key growth engine – continue to decline. The import barriers (tariff hikes) that began in 2014 and got embedded in the AatmaNirbhar Bharat scheme of 2020, have slowed down both imports and exports. But trade deficits are rising sharply.

From 1.48% of the GDP in FY15, the trade deficit (merchandise and services taken together) went up to 4.8% in FY22. In the first three-quarters of FY23 (April-December 2022), it has already touched 6% of the GDP (deficit of $118 billion or Rs 9.4 lakh crore @Rs80 in the GDP of Rs 157.6 lakh crore), for the first time after FY13. For the full fiscal of FY23, the trade deficit is likely to reach far higher – putting tremendous pressure on forex reserves.

Third, the job crisis remains grim and overlooked.

In fact, after the CMIE data showed that the unemployment rate reached a 16-month high of 8.3% in December 2022, the government warned people that “surveys conducted by private organisations generally are neither scientific nor based on internationally accepted norms”. This is when the RBI and the Finance Ministry routinely use the CMIE data on employment/unemployment. That is because the government’s own data is too old (the last PLFS was for 2020-21) and unreliable to boot (as Fortune India explained in “Budget 2023: Why India Needs A Jobs Policy”. Mid-way through the next month, on January (16), 2023, CMIE data shows the unemployment rate at 7.4%.

The consequences of all these – falling average incomes, consumption (demand), foreign investment, exports and employment – are signs of a recession waiting down the line. A high GDP growth merely hides the growing income and wealth inequalities. Rising corporate profits and income of the top 10% may make the GDP numbers impressive, but they can’t hide the fact that the government is compelled to feed 62.5% of the population with “free” ration or that nearly half of rural households take up manual, low-paying MGNREGS work for survival.

Is capex boosting growth?

For the past eleven and half months, the government has been vocal about a higher fiscal push (capex) to boost growth. The AE1, however, says the government’s fiscal push (GFCE) – another growth engine –turns out to be lower than the previous two fiscals – 10% of the GDP in FY23 as against 11% in FY22 and FY21. A cut in government spending has been foretold many times.

The only positive indication in the AE1 is capital expenditure (GFCF) of both government and private. It is expected to rise to 34% of the GDP – from 30% in FY21 and 32% in FY22. This would indeed be a welcome development, should it actually materialise when the final data are released in the middle of the year (May 30).

But before that, the next budget, to be presented on February 1, would be eagerly awaited by all to find out how the government responds to the recession threat (which it fears will hit after June 2023). Since 2014, the policy drift has been prioritising the growth of private businesses and emergency reliefs for the poor (“free” ration and MGNREGS jobs for 40-50 days a year). If the budget could lay down a plan to obviate the need for such emergency reliefs for 62.5% of households or 813.5 million people, the threats of a recession could be easily handled in future, not in FY24.

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