A Recession Might Hit: Will it Affect India?

04 April 2023
5 min read
A Recession Might Hit: Will it Affect India?
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The global economy is an interconnected structure where the impacts of a recession on one nation can be experienced globally.

The outbreak of Covid-19 had a significant impact on the world economy. However, even as the economy battled to recover, the Russia-Ukraine conflict became another major setback.

Both of these factors are driving the world economy into recession. Unfortunately, India, one of the world's fastest-growing countries, is not immune to the effects of a worldwide downturn. 

While the country's foundations remain steady, worldwide volatility in product prices, capital inflows, and uncertainty in trade and financial deals can be contagious even in usually stable economies. 

India's Position Against the Recession

According to a recent World Bank study, India's economy is highly resilient and comparatively immune to global headwinds.

It is due to India's big domestic market, which is less vulnerable to foreign trade trends.

According to the report, while a one percentage point decrease in growth in the US is associated with a 0.4 percentage point drop in growth in India, the impact is approximately 1.5 times greater in other developing nations. 

Furthermore, India presently has one of the world's most significant holdings of foreign assets, which helps keep India's external position steady compared to other nations. As a result, foreign direct investment inflows have been adequate to fund the existing account deficits. Therefore, they will play an essential role in limiting the severity of the recession's effect.

Policy changes and viable regulatory measures have also added to India's economic resilience.

For example, rising dependence on market borrowings has improved India's fiscal policy's susceptibility and reliability. Additionally, establishing a formal inflation-targeting structure over the last decade was a significant move towards giving monetary policy choices credibility. 

Impact of Recession on the Developing Nations' Economy

Although not to the degree that many had predicted, India has felt some of the worst consequences of the global slowdown.

Furthermore, global layoffs, notably in the technology industry, impact employment significantly for employees in India. Some Indian start-ups also had to put off employees.

The Indian economy, on the other hand, has a strong predilection for the overproduction of services, which helps to minimize risk and increases its resistance to downturns.

Furthermore, a growing middle class and a growing, rising populace is expected to support the market for manufactured products.

During the 2008 global economic crisis, GDP growth rates skyrocketed in most of the world's countries. The primary cause for this was a rise in goods and service consumption. However, despite rising consumption rates, an enormous demand imbalance pushed up commodity prices.

- Significant Output Loss

If the pandemic had not occurred, the global output would have increased by 23% since 2016. However, it will expectedly advance by only 17%. The global decline will keep real GDP below its pre-pandemic capability and cost humanity more than $17 trillion, or nearly 20% of global income.

According to a United Nations Conference on Trade and Development (UNCTAD) report, Russia, Indonesia, India, the United Kingdom, and Germany are some of the nations that might contribute the most to this worldwide output loss.

India is anticipated to lose 7.8% of its production in 2023, while the Eurozone is expected to yield 5.1%, China 5.7%, the United Kingdom 6.8%, and Japan 6.8%.

Russia may lose 12.6% of its output. Rising interest rates, currency vulnerability, rising public debt, and all of these variables boosting food and gasoline costs have created volatility in global markets.

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- Mounting Public Debt

The International Monetary Fund (IMF) has also predicted an economic slowdown next year.

The IMF's managing director, Kristalina Georgieva, stated earlier that global economic development could reduce by $4 trillion by 2026. She further noted that things are more likely to get worse before they get better.

While all areas will be impacted, developing nations, many of which are on the verge of debt default, are receiving the most concern. In addition, lower-income and lower-middle-income nations are paying more on public debt payments.

The countries with the most significant proportion of revenue needed to service their national debt are Somalia, Sri Lanka, Angola, Gabon, and Laos.

- Weakening Currencies

Developing nations have consumed nearly $379 billion of their assets to cushion weakening currencies, roughly double the amount of new Special Drawing Rights (SDR) issued by the IMF.

An SDR's worth is determined by a cluster of the world's five major currencies: the US dollar, euro, yuan, yen, and British pound.

It is believed that developed countries' interest rate increases disproportionately affect the most vulnerable. According to the UNCTAD, nearly 90 developing nations' currencies have weakened against the dollar this year, with more than a third losing more than 10%.

- High-priced Food and Fuel

Food and electricity are two elements that directly impact the lives of ordinary citizens. Unfortunately, food and fuel prices hiked dramatically in 2022 and continue to do so in 2023.

Conclusion

Because the current recession is different from previous ones, we will be able to recover more rapidly. Of course, it could be a temporary economic shock, such as an energy price increase. However, it will facilitate the economy's recovery faster than one that needs long-term changes.

Export-dependent businesses, banking and finance, and the service industry are all potentially hit. But on the other hand, firms can confront the challenges of a worldwide slowdown with the assistance of the right business consultancy.

Diversifying products and markets, improving organizational efficiency, implementing risk management strategies, exploring government incentives, and embarking on digital transformation should be priorities for organizations.

Firms can stay functioning during difficult times and appear more substantial once the global economy recovers by taking these measures.

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