Recession in India: Is the risk of a recession in India imminent?
Broadly speaking, India would enter a “technical recession” when it sees two consecutive quarters of GDP decline. However, the National Bureau of Economic Research (NBER), based in Cambridge, USA, defines a recession as a “significant decline in economic activity that extends throughout the economy and lasts longer than a few months.”
In a conversation with
AND onlineSonal Varma, chief economist at global research firm Nomura – India and Asia ex-Japan, said amid current geopolitical developments and central bank policy rollback, India could experience a medium-term economic slowdown. term.
“There is a risk that if the export cycle slows down globally and domestic policy is tightened, over the next 12 to 18 months we could see a slowdown in India. This is not a recession, but the risk of slowing growth is significantly higher from a medium-term perspective, meaning in the next 12 to 18 months,” Varma said.
In recent weeks, analysts have signaled the growing risk of a recession in the United States as the Federal Reserve aggressively reverses its ultra-accommodation to rein in rising inflation.
Bank of America chief investment strategist Michael Hartnett, in a note to clients, said the “inflation shock” is deepening and the “rate shock” is just beginning. The Fed had signaled that it would likely start eliminating assets from its $9 trillion balance sheet at its meeting in early May and would do so at nearly twice the pace of its previous exercise in “quantitative tightening.” as she faced four-decade high inflation.
The pandemic-era revival and rising savings meant that the demand scenario in the United States was relatively better than in India, which has yet to experience a robust, secular demand recovery.
“Unlike the United States, the Indian economy is not overheating. We haven’t seen demand recover fully in many sectors, so we are seeing inflationary pressures despite the overall slowdown in the economy. Our view is that the pandemic has caused some destruction on the supply side. Many changes have taken place during the pandemic which lead to inflation despite the downturn,” Varma added.
When the first wave of the Covid-19 pandemic broke out and a nationwide lockdown was imposed to curb the spread of the disease, India experienced one of the deepest recessions in the world, with a decline in GDP of up to 23.8% in the first quarter of FY21.
In this context, the Reserve Bank of India, like its peers, opted for an accommodative monetary policy to support growth. But external issues have largely meant that inflation has edged up even as the economic recovery has remained uneven, paving the way for household inflation expectations to rise.
“The other important reason is (for higher inflation) rising commodity prices as well as some supply issues created during the pandemic. For India, I think the role of inflation expectations is quite flood and fuel in particular are fueling inflation expectations. We haven’t seen the kind of recovery in demand that we would have liked,” Varma said.
Analysts believe that the recent decision by RBI Governor Shaktikanta Das to prioritize inflation over growth signifies that policy normalization has begun in India.
Nomura expects headline retail inflation in India to remain above the set target of 2-6% for most of FY23. “The trade-off for the RBI will only getting more complicated and faster Fed tightening is negative on the external sector, but even on the domestic front, tightening tends to be bad for investment-related growth,” Varma said.
In its April 2022 Bulletin, the RBI compared the current situation with that of the 1970s. prizes are spreading around the world. Household spending could be undermined and the risk of a recession could intensify,” the report said.