By B Yerram Raju Several economists, in the wake of the Russia-Ukraine war and the rise in global inflation index, have been talking of recession. It is important to understand the meaning of recession. It occurs when there is a contraction of demand for goods and services consecutively for two quarters; employment falls precipitously; consumption […]
By B Yerram Raju
Several economists, in the wake of the Russia-Ukraine war and the rise in global inflation index, have been talking of recession. It is important to understand the meaning of recession. It occurs when there is a 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 macroeconomic indicators show an alarming trend.
In layman’s language, when your neighbour loses his job, it is a 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 was viewed as a 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 that met on May 2 and 4 calling for a rate hike close to the rate hike by Fed.
The impact of the global recession is seen against the backdrop of Covid-19 variants making aggressive re-entry and unnerving many economies. Externalities like the Russia-Ukraine war, collapse of Sri Lanka in our immediate neighbourhood, strained global value chains added fuel to the fire. Fuel prices are not likely to relent in the short term and edible oil prices are going through the roof.
A bit of History
Unprecedented banking crises in the past triggered recession both in advanced and emerging economies. Advanced economies: Herstatt crisis in Germany, Japan in the 90s, Norway in 1988-92, Spain in 1985, Sweden in 1985, UK in 1995, USA in 1980s to early 90s. Emerging economies include: Brazil (1994), East Asian Crisis (1997) hitting Korea, Thailand, Malaysia, Vietnam, and the subprime crisis of 2006. These crises hitting the whole world are examples of recession if we leave the 1930 recession. 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
The latest hike in the basic rates announced by RBI Governor Shaktikanta Das 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.
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. The Currency and Finance Report (CFR 21-22) mentioned that economic growth slowed down since the second half of 2016, taking the average GDP growth during the financial year 2017-20 to 5.7%. There is an 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 the 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 at a 17-month high of 6.95% in March. Wholesale inflation index rose to a 4-month high of 14.55% 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
The CMIE data released almost simultaneously reveals that the urban unemployment rate was 9.22%, and rural unemployment rate was at 7.18%.
International Trade
Trade balances are 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 the AatmaNirbhar Bharat Abhiyaan 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 4.58 crore population had been vaccinated – first, second, and precautionary and child vaccines together. To keep the export markets diversified, Prime Minister Modi embarked on a Europe tour. This may also signal to 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% pre-pandemic, nosedived during the pandemic. But it recovered fast and is at 17% with a likely 10% annual growth in the next decade, according to Boston Consulting Group. E-commerce is on the rise and is likely to reach $130 bn by 2026.
Clear Signals
For a 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; meltdown 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 assets and liabilities. After digitalisation, the risks went beyond their normal reach and added to that are the cryptocurrencies and cybercrimes.
The government asserts the growth is here to stay and the RBI reinforces its argument 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 during the 2006 crisis, the Indian financial system is not a closeted one but exposed to global value chains.
Globally, forex markets have nosedived. Commodity markets are on a 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 against this backdrop that makes economists nervous and they feel that recession is very likely.
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