This is a billion $ question, though difficult to answer, which is being asked on daily basis, when someone meet another in a business meeting or a family get-together. There are countless social media messages, anecdotes and hear-says flying around shipping the assumptions about the present position of the economy and many of those are simply predicting that the economy is heading towards recession. Most of those messages are not authentic and cannot be relied upon fully. Some are putting the blame of that on stringent steps taken by the Government of India such a demonetisation, implementation of GST in hurried manner, heavy investment in infrastructure etc as reason for the so called downward trend. Many of the economist and corporate personalities are denying the ‘theory of economic recession’ and expressing high confidence in the steps taken by the government in recent past. Some corporate stalwarts such as N.R Narayana Murthy are exuding high level of conviction in the stability of Indian economy and projecting it as the strongest economy in past 300 years!.
Nevertheless the government is eying to reach an ambitious $5 Tn economy by 2024 with 8% growth rate in GDP, the spiralling unemployment rate, skyrocketing government debts, low consumption rate, low productivity, high profile corporate financial failures, struggling automobile sector, waning infrastructure sector, hassles and logjams in doing business and substantial outflow of foreign funds from stock markets, falling currency rates, news about ‘snatching’ of the reserve funds of RBI by government etc are remaining as worrisome facts and adding fuel to such assumptions. Though the opinions are varied and both sides have strong holds to justify their stand points, certain statistics released by government in recent past is pointing towards an intimidating query- Are we on recession?
Global trends- An influencing factor
The Government debt has risen substantially in emerging and developing economies and many of them are struggling to balance the same with their growth. The global economic trend is showing a weaker-than-expected growth in 2019 and the forecasts for 2020 are also not giving much signs of revival. The Emerging and Developing Economies are facing sluggish growth due to the weak investment and heightened risk factors such as trade barriers, financial stress and sharper than expected slowdown in the economies. The trade tensions between US and China had also contributed to the slowness in trade activities. The advanced economies are also facing a frailer than projected progress rate of 4% which is resulting in poor momentum in the investment activities. U.S. growth is forecasted to 2.5% this year and expected to decelerate to 1.7% in 2020. Euro Area growth is projected to drift around 1.4% in 2020-21, with softness in trade and domestic demand weighing on activity despite continued support from fiscal policy. A large number of economies are getting dragged, which is the weakest since the financial crisis happened a decade ago, due to financial stress and political uncertainty. The growth rates in low income countries are expected to rise to 6% in 2020 from 5.4% in 2019 but that is not sufficient to substantially reduce poverty. Though the global trends are showing weakness in projected figures, the growth rate of India is projected to accelerate to 7.5% in FY 2019-20 and the domestic growth rate is expected to remain robust with the support of monetary and fiscal policy. However, considering the present plight of Indian economy, the chance of reaching that projected figures is very marginal. When every economy faces such head winds, India, being an open economy, cannot shy away from the impact of general slowdown. The present sluggishness in the Indian economy may be a reflection of the global scenario and the same is expected to recover with the stimulus package announced by the Government.
The India story.
Recession is nothing but a period of general economic decline which can be usually identified through shrinking Gross Domestic Product (GDP) for consecutive quarters coupled with high rate of unemployment, stagnant wages, falling in retail sales etc. A recession generally does not last longer than one year and is much milder than depression. There is no definite formula for identifying the recession and the economists are having different viewpoints on the matter. No economist can accurately predict the recession. However, there are certain parameters which will help them to identify the trend.
The India’s economy had dropped for three straight quarters and the growth forecast also not showing the signs of advancement. The industrial production and core infrastructure sectors are showing downward inclination with automobile sector facing worse than ever situation. Though the Finance minister had announced many relaxations for ailing auto sector, the situation remains austere. The continued automobile plunge is resulting in loss of employment for masses and the said slowness may slowly grip other sectors too. So there is undoubtedly a slowdown in the Indian economy but it is too early to term it as a recession.
The Government of India, based on the feedback from economists and industrialists, had recently come up with a stimulus package to boost the sickly economy by relaxing surcharges on investment by FPI’s, relaxations to MSME is certain GST compliances etc and one more such rejuvenation announcement specific to real estate sector is expected soon. In order to boost the economic revival activities, the Government had successfully got released Rs. 1.76 trillion from the coffers of RBI and the said fund is expected to put use for the removal of the blockages in the economy. On top of the same the government had announced some relaxations in norms for foreign direct investment to attract more investors to the country.
The current economic impetus is not adequate enough to create more investment opportunities in India. Equipping the banks to release more money into the system is expected to boost the spending of the end- customer. The availability of more money at their disposal will prompt the individuals to spend money in housing and automobiles, which will in turn uplift the downtrodden infrastructure and automobile segments. The more orders and spending in those sectors, theoretically, will pave way for revival of those sectors and create more employment opportunities. However, the economy being a vicious circle, the poor employment rate will hold back the public from availing more bank loans and spending money on luxury items such as vehicles, even though the banks are now armed to pump more money into the system. As the fear of recession is engrossing the world economies, especially USA, for past 2 weeks, the chance of more investment from those countries to India is bleak in recent future. Hence the steps taken by the government to stimulate the economy by boosting the banking sector is towards the right direction as that will create more indigenous employment prospects. But the package announced by the Finance Minister has to be time-tested to weight the actual impact that had made on the economy.
A stronger than expected growth is essential to reduce the poverty and improve the living standards. A sustained increment in the investment is necessary to meet the development target of the economy. The depreciating currency may make India an attractive investment destination by Foreign entities when their economies starts showing revival trends and the relaxation of the norms for FDI investment in single brand retail trading and digital media may improve the situation further. The government have to ensure the proper utilisation of the funds taken out out of RBI reserves and thereby ignite the growth potential of the economy. More measures to attract investment to India by relaxing the trade barriers and offering more incentives to export segments will also stimulate the economic activities of the nation.
When reviewing the symptoms, the Indian economy, which is presently facing a slowdown, can easily slip towards an imminent recession unless the government steps in with proper action plans in timely manner. Timely intervention and action by government and policy makers may prevent that plunge and protect the economy from falling further .
Bijoy P Pulipra
The author is an Insolvency professional, Registered valuer and company secretary and can be reached at email@example.com
Picture Courtesy: Livemint