While we aspire for the best in 2023, we have to perspire for all of it too
By B Yerram Raju
The year 2022 left us with a bad taste in every way. It reminded us of the recession of the 1930s and 2008, unending inflation, unemployment, energy crisis, internal strife, a continuing fight against the re-surfaced Covid-19, and severe disruptions to the global supply chains with China remaining a locked nation for more than six months in a row and with no end in sight over Russia’s war against Ukraine. Recalling the facts should guide us to an enduring future and a happier 2023.
Recession
According to McKinsey, “Recession is part of an economic cycle that involves economic contraction.” Recessions usually start in one geographic region and spread to the rest of the world. It implies loss of jobs, erosion of savings, decline in consumption and affects all sections of the population. This time, the whole world is engulfed at once due to the pandemic, and the subsequent Ukraine war, leading to a polycrisis.
Lessons from the Great Recession (1930s) reveal that companies showing more resilience focused on improving their margins through proactive cost-cutting, while others were reactive while taking such steps. Sizing up demand, gauging the mood of the people when they look at their wallet, keeping an eye on opportunities and failed competitors, and moving swiftly into thriving supply chains are the ways to fight a recession.
India and the world today remind me of Michael Spence, Nobel laureate and the author of ‘The Next Convergence’(2011). Many are questioning the impending change in the political spectrum. The response to this question stands in good stead even today. “The uniform answer had been no, that the basic approach to growth and development is now firmly embedded in the politics and the minds of citizens. Turning back or away from the present course would not be a viable political option,” says Spence.
Job losses have surpassed the one witnessed during the 2008 recession with Big Tech like Meta, Twitter, Netflix, Microsoft, going for mass layoffs. In 2008, tech companies laid off about 65,000 employees but this year, they have laid off over 1,50,000 employees globally, according to global outplacement and career transitioning firm Challenger, Gray & Christmas. Tech startups laid off 18,000 employees in 2022.
Severe Supply Chain Disruptions
The Business Development Bank of Canada carried out a few surveys on supply chain disruptions consequent to the pandemic in November 2021 and March 2022. Among the SMEs, 75% up to November 2021 and 85% by March 2022 were the worst sufferers.
On the supply side, causal factors included health restrictions and plant closures, particularly in China where even 2022 saw continuous lockdowns in the entire country. Compulsive closures of tourism halted travel plans, severe labour shortages and disengagement of migratory labour led to production lags and even stoppage in a large number of enterprises across sizes and nations.
On the demand side, significant fiscal stimulus by governments, more online purchases, faster digitisation helped economic recovery reducing only the intensity. The combined effects of limited supply and strong demand have led to shortages of consumer goods and inputs, such as semiconductors.
Transportation and warehousing sectors too have been under severe stress, with congestion at ports and staff shortages contributing to longer delivery times. All these are reflected in strong inflationary pressures, which are still unabated.
Inflation Surges
The OECD 2022 Annual Report confirms the deterioration of financial market conditions against the backdrop of inflation, slow global growth, volatile commodity markets and persisting geopolitical conditions. “With growing concerns that elevated inflation could continue, many central banks in advanced and emerging economies have increased their policy rates, and several have begun to reduce the size of their balance sheets.”
The effect of inflation is seen more in the poor and middle-class population than in the rich. Rising interest rates on high inflation expectations contributed to declining corporate profits and global equity prices in 2022. Treasury and repo funding markets in the US were under pressure with the Federal Reserve reducing the size of its balance sheet. Markets reeled under severe uncertainties and high fluctuations triggered by energy price sensitivities and oil prices crossing $100 a barrel.
“Inflation has come back faster, spiked more markedly, and proved to be more stubborn and persistent than major central banks initially thought possible. …In 15 of the 34 countries classified as AEs by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was running above 5%. Such a sudden, shared jump in high inflation (by modern standards) has not been seen in more than 20 years,” states a World Bank blog. Unlike the oil-based supply shock of the 1970s, the Covid-19 supply shocks are highly diverse and opaque, and, therefore, more uncertain, it stresses.
Green Cash
When there was an oil crisis in the 1980s, to tide over, the world created Special Drawing Rights — an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves — and petrodollars, US dollar traded for worldwide crude-oil exports. Now, the world is under the siege of climate risk. It is time to convert carbon credits into cash coupons — on the polluter pays principle. The UN should take the lead in creating carbon-proof dollars to enable carbon credits into cash for future development and while doing so, it should devise ways of funding democracies through green euros, green pounds and green dollars on a federated basis.
India in a Disordered World
India, like many other countries, witnessed an increase in the cost of sovereign, household and corporate debt and credit risk premium. Growth forecasts for all firms crashed. RBI Governor Shaktikanta Das recently cautioned banks on credit quality in general and in particular, of real estate and housing assets under adverse macroeconomic conditions.
Several inefficient cooperative urban banks have been shown their place during the last couple of months. Depositors and digital customers have been provided some comfort in grievance redress. KYC (Know Your Customer) changes reflect the trust in the citizen. Higher UPI penetration, larger number of digital transactions despite cash remaining the king, veiled NPA reduction (thanks to the creation of National Asset Reconstruction Company — Bad Bank) and introduction of digital currency among others apparently contributed to financial stability.
A new initiative to prevent fraud has been taken on board by the RBI. But unless and until the system can detect internal fraud perpetrators and ensure that bank staff have domain knowledge accompanied by system knowledge, this attempt will take enormous time and resources to become effective.
Manufacturing Growth
“The Fourth Industrial Revolution represents a fundamental change in the way we create, exchange, and distribute value. It is a technology shift merging our physical, digital, and biological worlds into one.” The best mantra to fight inflation in such a scenario is giving manufacturing sectors the biggest-ever push by declaring 2023 as the year of manufacturing across sizes and sectors. The country is well-poised for such a declaration as it is focused on $5 trillion spend on infrastructure and has put in place a logistics policy.
It is contextual to look at human resources in terms of attraction, diversification, and retention of talent. We can no longer risk the creation of degree-holders unsuitable for industry. There is awareness among all the States about the need for close coordination between industry and academia. Innovation hubs in manufacturing and information technology have surfaced in several conscious States like Telangana, Tamil Nadu, Maharashtra, Haryana, Gujarat and Odisha.
MSMEs, the heart of Manufacturing
Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) and National Credit Guarantee Corporation set up during the first phase of Covid-19 have not accelerated the pace of credit to the intended medium and small enterprises from the commercial banks to a similar degree as the newly introduced pre-pack scheme for revival and restructuring of MSMEs under the Insolvency and Bankruptcy Act of India. There is a need to revisit these schemes and examine whether appropriate insurance mechanisms need to be created for the MSMEs for improving their access, availability, and resilience.
More rich, more poor
India had a billionaire boom between 2011 and 2021. In addition to the billionaire legislators and parliamentarians, wealth creators increased from 45 to 140 during this period contributing 19.6% to the GDP.
The number of poor people dropped by about 415 million. The poorest States reduced poverty the fastest, and deprivations in all indicators fell significantly among poor people. But based on 2020 population data for India, it has by far the largest number of poor people worldwide (228.9 million), followed by Nigeria (96.7 million). Though poverty among children fell faster in absolute terms, India still has the highest number of poor children in the world (97 million, or 21.8% of children ages 0–17 in India), says a new Multidimensional Poverty Index (MPI) released jointly by the United Nations Development Programme) and the Oxford Poverty and Human Development Initiative.
India is also set to surpass 1 billion internet users and $400 billion in online spending by 2030. Google wants to scale up 100 startups while the Ministry of Electronics and Information Technology targets similar scaling up of startup hubs across the country.
But “most of the internet users are in urban educated classes. This situation reflects that majority of the Indians remain unfazed by the information technology revolution. With such a disparity in digital access and literacy, it is hard to aspire for inclusion and equity… India is expected to have the largest working-age population, which requires rapid job creation. Digital literacy becomes a crucial medium of communication with global citizens,” says a NITI Aayog post (Feb 2022).
The nation is at the crossroads when we look at the leadership. History has proved that democracy has a knack for putting in front a leader who can look to a formidable future rather than a glorious past or impending present. While we aspire for the best in 2023, we have to perspire too.
(The author is an economist and Risk Management professional. Views are personal)