Opinion: On edge with recession fears https://telanganatoday.com/opinion-on-edge-with-recession-fears
Recession? Near and yet Far.
B. Yerram Raju
Several economists, in the wake of Russia-Ukraine war and
the rise of global inflation index, have been talking of recession. It is
important to understand the meaning of recession. It occurs when there is
contraction of demand for goods and services consecutively for two quarters;
employment falls precipitously; consumption declines; both exports and imports
fall; credit markets shrink and finally, the GDP declines. This means that all
the macro-economic indicators show an alarming trend.
In layman’s language, when your neighbour loses his job, it
is recession, while depression is, when you lose your job. Before going into
the macro-economic indicators that prompted such prediction, the discussion is
timely because price stability is viewed as necessary precondition for growth
by the authors of the Currency and Finance Report (RBI), 2021-22. This is the
wake up call to the Monetary Policy Committee meeting on May 2 and 4 calling
for a rate hike close to the rate hike in Fed-US.
Impact of global recession is seen in the backdrop of
Covid-19 variants making aggressive re-entry unnerving many economies.
Externalities like Russia-Ukraine war, collapse of Sri Lanka in our immediate
neighbourhood, strained global value chains added fuel to fire. Fuel prices are
not likely to relent in the short term and edible oil prices are touching the
roof.
A bit of History
Unprecedented banking crises in the past triggered recession
both in advanced economies and emerging economies. Advanced economies: Herstatt
crisis in Germany, Japan in 90s, Norway in 1988-92, Spain in 1985, Sweden in
1985, UK in 1995, USA in 1980s to early 90s, and emerging economies: Brazil
1994, East Asian Crisis in 1997 hitting Korea, Thailand, Malaysia, Vietnam, and
the subprime crisis of 2006 hitting the whole world are examples of recession
if we leave 1930 recession way behind. The Economist, London in its special
report of May 16,2009 said: ‘the dirty secret of the golden age of finance was
that it was obscenely easy to make money.” Interest rates rose and housing
prices fell.
Rate Hike:
Latest hike in the basic rates announced by Governor
Shaktikant in a huddle on May 5,2022 shocked the stock markets. Lenders, rating
agencies, and investors commented that this hike is just the beginning in the
wake of unrelenting inflation for the past three quarters in a row.
Gross Domestic Product:
The most important macroeconomic factor is decline in GDP {[C+I+G+(x-m)],
where C= consumption; I=investment; G=Government spending; x= exports and
m=imports} . Total goods and services produced in the economy declines. Currency
and Finance Report (CFR 21-22), mentioned that economic growth slowed down
since the second half of 2016, taking the average of GDP growth between 2017-20
fiscal to 5.7 percent. There is understandable decline post 2020 due to
Covid-19 that saw irrecoverable loans in all segments, rents prohibited for
more than a year in several states in 2020-21, unoccupied hotels and unmoved
airbuses hitting tourism and aviation industry, several drivers losing their
jobs and cabs parked in sheds with a steep fall in fuel consumption.
Inflation:
One must begin with inflation. Data released four days after
the MPC's April 8 decision showed Consumer Price Index (CPI) inflation saw a
seventeen-month high of 6.95 percent in March. Wholesale inflation index rose
to a four-month high of 14.55 percent the same month. This data was in the RBI’s pages even three
weeks before. Should it be behind the curve in announcing the rate hike for so
long? A question that would have few answers from the powers that be. Money
Control, a financial blog, vents its disappointment over the RBI Governor’s
statement:” CPI inflation has been above the
medium-term target of 4 percent for exactly two-and-half years. In these
30 months, CPI inflation has been above 5 percent 27 times and above the 6
percent upper bound of the RBI's flexible inflation target 16 times. So, to
state now — after not saying anything in the last two years — that inflation
expectations could get unanchored is a tad disconcerting.”
Unemployment:
CMIE data released almost simultaneously reveals that urban
unemployment rate was 9.22 percent, and rural unemployment rate was at 7.18
percent.
International Trade
Trade balances were hit badly all over the world. Thanks to
seizing the right opportunities, India’s trade balances moved to $400bn in
April 2022. Several measures taken under Atma Nirbhar Bharat Abhiyan
(self-reliant India) started yielding results. Startups swelled to encouraging
levels. Thanks to agriculture and pharmaceutical sectors, the economy looked up
during the covid time. There were no deaths due to hunger. More than 4.58crore
population had been vaccinated – first, second, and precautionary and child
vaccines together. To keep the export markets diversified, PM Modi is on Europe
tour. This may also signal export markets that India is keen to see that the
war between Russia and Ukraine ends sooner than later.
India’s consumption, growing at 12 percent pre-pandemic,
nose-dived during the pandemic. But it recovered fast and is at 17 percent with
a likely 10 percent annual growth in the next decade, according to Managing
Partner, Boston Consulting Group. E-commerce is on the rise. It is likely to
reach US $130bn by 2026.
For recession to set in there are certain conditions:
Foreign capital should flee; people’s confidence should evaporate; stock
markets should take a deep dive continuously; melt-down of global markets;
tumbling currencies; flight of assets to safety; financial institutions blowing
cold on credit; increasing government interventions in every sphere; federal
politics on hostile note; and trust deficit in the governments. Banks will be
on the nervous hook. Banks have always been on a weak wicket because of their
inherent mismatch between the assets and liabilities. After digitalization, the
risks went beyond their normal reach and added to that are the crypto
currencies and cybercrimes.
Government asserts that and the RBI reinforces its argument
in that growth is here to stay as banks, corporate enterprises and agriculture
are all looking up. Credit from institutions for the second month in a row saw
a rising trend. But unlike in 2006 crisis, Indian financial system is not a
closeted financial system but exposed to global value chains.
Globally, forex markets nose-dived. Commodity markets are on
continuous decline. Industrial production everywhere wears a disappointing look
due to the war and continuing Covid-19 variants making economies nervous.
Volatility exists in all the stock markets. Several FIIs are keen to pull back
their investments.
It is this backdrop that still makes economists nervous to
feel that recession is very likely. India
is far and yet near. It’s export thrust in the wake of volatile forex markets
is enough cause for worry. Further, the freebies, rising public debt,
indiscrete valuations of public assets put to sale, large official haircuts in
official IBC resolutions need rethinking if India would escape recession. Next
two months in a row, we may witness rate hikes to contain the galloping
inflation.
The views expressed are author’s own.
