The latest report released by RBI for the fiscal year 2018-19 confirmed the speculations around Indian Economy’s bad break. The GDP growth was the lowest in six years with the first quarter of FY20 observing only a 5 percent growth rate. There are several factors contributing to the sluggish growth rate and there are tougher times waiting for the Indian Economy at the horizon. The most crucial question that is hovering each individual’s mind is if the near future will witness recession in India or is it just an economic slowdown?
Current occurrences in the Indian economy can be seen as causes of recession in India which include the recent downfall of the automobile sector and an increasing amount of non-performing assets. The deteriorating manufacturing sector and groggy consumer demand are also impacting the GDP of the Indian economy.
Before we go ahead and answer the above-mentioned question, let’s first try to comprehend the current economic status of India. Since 2009, India has been progressively exposed to global economies leading to international organizations from all sectors from textile to technology, to take bigger space in the Indian marketplace. This implies any fluctuation in the global market trends can significantly upset the Indian economy.
Loss of jobs is the first side-effect of the sluggish economy and India is already experiencing a 45-decade high unemployment rate. This is enough to paint a bothersome picture for the economy. The growth in the number of jobs lost in the automobile sector which is the fourth largest in the world in terms of sales along with the jobs lost in the biscuit manufacturing sector has led to a unanimous acceptance of the economic downturn.
This is not the first time for India to experience an economic slowdown. It is the third instance of the decade following that of June 2008 and March 2011. Speaking in technical terms, we are overlooking a growth recession in India. However, this is very different from an overall recession.
An economy is said to be in a recession when it experiences GDP contraction for three consecutive quarters. The cause of recession includes a plethora of reasons pertaining to domestic and global economic activities. Given the size of the Indian economy, recession in India is a far cry since contractions in large developing economies is rare. India hasn’t experienced a recession since 1979. What India is witnessing is the growth recession which implies that the economy is growing but at a sluggish pace as compared to usual, for a sustained period.
Let’s take a look at the contributors to the economic slowdown.
- Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE) has preponderated the growth of the Indian Economy. Previous five years saw an average growth rate of 7.8% in the total consumption expenditure made by Indian households. This was better than that of 2011-14 which saw an average consumption expenditure of 6.1%. Worries rose when the June quarter witnessed a sharp fall in the same dropping it to 3.1% as compared to 7.2% in the March quarter.
- IHS Markit conducted two Purchasing Power Manager’s Index (PMI) surveys. The results indicate an economic slowdown in both the services and manufacturing sectors. These two are significant factors of economic growth and a drop in both is enough to induce tremors in the economy.
- There are several exogenous factors that might have caused this growth recession. One of the most obvious reasons is the US-China trade war which is becoming increasingly intense and has negatively impacted the world trade causing a major blow on the Indian exports.
- Other factors domestic factor includes high GST rates and a liquidity crisis in NBFCs caused by mutual funds halting the refinancing of NBFC loans post the IL&FS crisis.
- The increasing number of young workforces has significantly altered the behavioral pattern of the workforce. The new workforce is observed to save less which in turn led to a decreased amount of money available for investments.
It is a relief that the Indian economy is more dependent on internal factors inclusive of consumption (reinforced by demographics) and investments (reinforced by infrastructure) instead of global trade. Due to this along with its size, it is unlikely for the Indian economy to slip into recession.
Additionally, if corrective measures are taken by the government at the right time, a recession can prove to be short-lived. For now, the rise in FDI inflows from $12.7 bn in FY19 to $16.3 bn in Q1 FY20 has brought a sigh of relief for the government. To bring the economy back on track, the government also revised GST for the automobile sector and opened gates for FDI in the contract manufacturing sector. It even made an announcement regarding its intention to recapitalize the banking sector.
However, we need to brace ourselves for a global recession. According to Bharat Iyer, Head of India Equity Research, JP Morgan there is a 40% chance of the world observing a recession over the following 24 months. These estimates were made after research conducted by the global macro team of JP Morgan. In the case of a global recession, slow international demand and greater competition posed by imports will adversely impact India’s growth. Indian equity markets are more likely to take a hit by the volatility in the international financial market due to its relatively open nature.
