Sourav Roy
Sourav Roy

India’s challenge as the world slips into recession

However, there is no escape from global recession especially for export-oriented businesses.

Gem and jewellery exports in December declined 11.25% to Rs 19,432.88 crore ( USD 2.36 billion), mainly because of a drop in demand in the US. Looking at the nine-month April-December window, jewellery exports grew 6.28% to Rs 2,27,537 crore, but in dollar terms, there was a marginal fall of 0.73%.

With just three months of the current financial year left, and exports touching a little over USD  28 billion so far, it is almost certain that the target of USD 46 billion for fiscal 2022-23 will not be met.

These are some of the signals of what is brewing. As the US economy slows and could fall into recession, the jarring impact will be felt all over including India. The US accounts for nearly 40% of India’s jewellery exports, and gems and jewellery are the third largest in India’s export bucket.

World Bank’s grim warning

On Tuesday, the World Bank sent out a grim warning that the world’s financial health was “on a razor’s edge”.In its latest Global Economic Prospects report, it said the world’s economy was expected to expand just 1.7% this year, a serious downgrade from its previous estimate of 2.9% in 2022. If this turns out true, this decade would see the world entering recession twice over, something that has not happened in 80 years since the Great Depression of the 1930s.

“The risks that we warned of six months ago have materialised and our worst-case scenario is now our baseline scenario,” World Bank economist Ayhan Kose said. This will drag down development and hit the poorer countries hardest. The Bank expects growth to claw back to 2.7% in 2024. Elevated inflation, an aggressive central bank policy aimed at throttling unnecessary spending and the shocks of the Ukraine war are some of the reasons being cited for the extreme slowdown.

The International Monetary Fund (IMF) concurred with the gloomy outlook. The bank’s managing director Kristalina Georgieva warned last week that a third of the world’s economy would fall into recession in 2023. The World Bank’s report said advanced economies would expand just 0.5% in 2023, down from 2.5% last year. The 20 countries that use the euro will see zero growth. China is projected to expand by just 4.3% following the lifting of Covid restrictions.

“The world’s three major engines of growth — the United States, the euro area and China — are undergoing a period of pronounced weakness,” the World Bank said in its report. By now, everyone and his uncle agrees the world is slipping into recession.  Deutsche Bank was the first to stick its neck out about 9 months ago. A Bloomberg survey last month of 38 top economists saw concurrence that there was a 70% chance of the US hitting recession.

But their important naysayers too. Goldman Sachs believes the chance of the US going into recession this year is 35%. The firm’s economists, Alec Phillips and David Mericle say that “below-potential growth can gradually rebalance supply and demand in the labour market and dampen wage and price pressures”.

Goldman Sachs has now gone even further and said the Euro area may also skip recession as natural gas prices have eased, and inflation seems to be cooling faster than expected. A November analysis by Morgan Stanley concurs that recession may miss the US but Europe may not be so lucky.

Dodging the axe

For India, the forecasts are better. The World Bank says the Indian economy is expected to grow at 6.6% in fiscal 2023-24, “before falling back toward its potential rate of just above 6%.”At this pace, India will be the fastest growing among the 7 largest emerging market and developing economies (EMDEs). India is not fully ‘coupled’ with the global economy and is largely driven by large domestic demand.

In this respect, FMCG companies, agricultural products, and infrastructure businesses like power, transportation and roads may not feel the heat and continue to grow. However, there is no escape from the global recession, especially for export-oriented businesses. The US’ share in India’s merchandise exports has increased to 18.1% in FY2022 from 10.1% in FY2011.

Software exports to the US account for as much as 58% of this segment’s exports. Shrinking demand in the US will majorly impact these sectors. A contraction of jobs in the US and Europe will also hit the country’s émigré workforce, many of whom may be forced to return home.

A glimpse of the way things will play out can be seen from a recent survey by a business daily that showed 41 Nifty companies mainly in the production and supply commodities, metals, chemicals and logistics will see net profits shrink to just 3.1% in the third quarter. This trend may worsen in the 4th quarter and beyond as recession overtakes much of the developed world.

Meanwhile, the US Federal Reserve’s interest rate increases are already impacting the flow of foreign portfolio investments, and our foreign exchange reserves; and the rupee is weakening by the day. These are serious speed bumps our policymakers will have to tackle.

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