Fears of Global Recession & Impact on India
With the world in turmoil, how will India look at the future? What are our options? What is dragging us down and what is helping the country to move ahead? These and a lot more questions were answered in this engaging event by eminent speakers.
The global disruption
Dr. S Narayan, IAS (Retd)
Former Economic Advisor to the Prime Minister
It is always interesting to talk about Indian economy because there are always lots of both good things and bad things to say about it. Let me start with the bad things:
Globally, there’s a problem. In Europe, most of the rivers are dry. BASF is a huge chemical plant south of Frankfurt and it moves all its raw materials by barge. They have cut down production by 30%. Because the river is dry, they are not able to move the raw materials. The Rhine and Danube are dry. Temperatures are going over the roof. With the Russia-Ukraine war, there is not enough energy available there. Globally, LNG is hugely in short supply, so much so that Bangladesh and Pakistan have shut down their LNG power plants. We are also scrambling for LNG. Normally we get it from Qatar. But Mr. Doval had to go to Russia to try and get some LNG for us because we have a great LNG demand, which has developed over the last 15 to 20 years.
Plight of the US
US inflation is about 7 or 8%, which is the highest in about 40 years. Because of the increase in interest rates, etc., there’s a slowing down of US economy. Housing prices have risen by 20%. Purchasing has dropped. At the same time, people are not turning up for work. School bus drivers are offered 30 to 40K$ incentive just to sign on to be a school bus driver. They are paid $22 an hour whereas the minimum wage rate is about $15 an hour.
That’s a disruption not just because of the war. The Russia-Ukraine war has certainly disturbed a lot of things like energy, food, wheat, sunflower oil, to name a few. There’s sharp increase in commodity prices. Last year, it came down because of a certain amount of deflation. China is also not going well at all because of their policies like zero covid. Shipping costs have doubled. Containers are stuck. Unloading at ports is not happening. Even at the height of the pandemic, things were better off economically than what it is today. Britain is in a free fall. Whoever wins, will have a tough time to bring the economy together.
Effect on India
What is the effect of this on India? Our costs of imports–coal and oil being 10% of our imports–are going up. Exports are dropping. In the entire Tirupur-Coimbatore-Erode textile belt, order bookings for the winter season is 30 to 40% lower than last year, which was a boom year and people made lots of money. IT and Services including Google and others are laying off employees. We have heard of 150 basis point increase in interest rates. We are also running a 6 to 7% inflation. We have run down on wheat stocks because we exported a lot. The wheat prices internationally got high, so we did not procure as much wheat. Because of delayed rains, wheat sowing is about 10% less. We are going to have a sharp increase in wheat prices and by this time next year, our chapattis and rotis will cost more.
A different picture inside
If we look inside, we get a different picture altogether. Though international IT orders are dropping, local digitalization is moving very fast. In fact, the IT sector is short of qualified and skilled personnel. Today, you cannot get a good developer or AI guy in Chennai as it has become a backwater for IT. IT skilled people have moved to Bangalore, Hyderabad, Pune or Indore. But overall, domestic IT is growing quite rapidly. We see TCS and others recalibrating their employee salaries and perks. They know their international business is coming down but local business is going up. So they manage their costs differently.
After the opening up of economy post-Covid, there has been a huge pent-up demand on all fronts. Hotels are full, though hotel prices have gone up by double. Restaurants are full. As there is a lot of travel, there is demand for taxis. Everybody is spending, driving consumption in many ways. Even the sale of white goods is up. Capacity utilization in Indian manufactured goods, which is usually based on domestic demand, had come down to about 55% during the pandemic. It has already gone up to 62%. More importantly, we rely heavily on the SMEs. In Tamil Nadu, which is one of the biggest SME centres, capacity utilization in SMEs has gone up at least by 10%. It means that production has gone up enormously. There is request for finance to expand and to invest in capital goods. Sales of two wheelers and four wheelers have gone up. EV sales are up. Though July has been a poor month, the PMI index is more than 53%. The equity market is bouncing back and foreign investment is coming back into the market substantially.
Startups in manufacturing
The time for the startups is gone. You will not see much of new IPO issues. We will see a movement from startups in the services sector to startups in the manufacturing sector in the next couple of years. Chennai is one of the major startup centres. There are hundreds of startups in the IIT campus, which make very innovative things like sensors and 3D manufacturing equipment. In agriculture, though wheat is going down, this year we got good rainfall in the southern parts of the country. So rice production will go up, and farmers will be more benefited. They will buy tractors, pumps, agriculture equipment and fertilizer. Increased farm income will also drive consumption.
So definitely, we are growing very comfortably. Our economic growth, considering a nominal growth of about 13 to 13.5% and inflation, real growth will be 7 to 7.5%. Tamil Nadu is extremely fortunate because of the large dispersion of industries and a good agricultural season. Telengana, Tamil Nadu, Maharashtra and Gujarat will be the star performers this year and they will outperform national average by 30 to 40%. Telengana is better off than Tamil Nadu in many spheres.
We are affected because we import oil and coal. We are dependent on China as well. Our China imports have gone up enormously and we need to do something about it. We continue to nibble at the edges and we have not got the solutions to the core of the problem. However, infrastructure investments are happening in defence, roads, ports and ships. That also will create opportunities in steel, cement and other sectors.
So, this year, we are comfortable. But we always skate on the edge, sometimes because of our own mistakes and sometimes because of global mistakes. Hopefully, we will remain on the right side of the edge all of this year.
Like it or not, we are dependent no China…
Mr Raghuvir Srinivasan
The Hindu BL
Recession or the ‘R’ word is being used very freely. Textbooks define recession as two successive quarters of contraction. The impact of recession on economy, nation and people is very severe. So the word should be used very carefully. People call every slowdown a recession either because of lack of understanding or to create a fear psychosis or for other reasons.
Are we on the throes of a recession? Is the globe on the throes of a recession or is it going to stare at recession? I would say no, though there are lots of factors to be worried about. There are tremendous headwinds. The two engines that run the global economy–US and China–are in trouble. Europe is in equal, if not greater, trouble than the other two. That leaves only India as a big major economy, which is looking at a positive growth this year.
The global scene
The US is looking at a deep slow down, if not a recession. The first quarter was negative growth i.e. contraction. The second quarter was also a contraction but less than 1% and it has since improved. We will soon get an indication of the Fed’s thinking on the economy, inflation and interest rates. The US is in a spot of bother. There’s no question about that. There are a lot of positives that are happening. Consumer sentiment in the last one month apparently has picked up and jobless claims are coming down in the US.
Europe is in a deep hole of its own making. You have 10% inflation in the UK and predictions are that it will go up to 17-18 percent over the next year and a half. There is a runaway inflation in other countries in the European market.
Energy costs are primarily driving this inflation, thanks to the Russia-Ukraine war. We are not even looking at the worst part yet, which is going to be the winter with gas supplies dwindling and gas prices going up. LNG is now at 55 per MBTU. The normal price is around 10 to 15$. The UK is messing itself up in more ways than one–politically and economically. That’s the second factor.
The China factor
One country which is escaping the radar is China, which is in an even greater trouble than the United States, thanks its zero covid policy or whatever. The second quarter growth in China was 0.4 percent. The IMF has said that the growth for 2022 for China will be 3.3%, which is unimaginable. It’s a 40-year low. There’s political uncertainty as well with the party Congress likely to happen in October and President Xi Jinping is setting himself up for a third term. There are some political backroom manoeuvres going on. There is the Taiwan crisis and eternal tension with India. The factories are locked. Shenzhen, which is the electronics manufacturing hub, went through shutdown a couple of months ago and there are dire predictions for the world’s electronics and automobile manufacturing. We are more dependent on China than what we realise.
China property’s market is in trouble. Loans are not being repaid. Mortgages are not being respected by borrowers. Three weeks ago, in the city of Hainan, the Chinese government had to bring tanks onto the streets to drive away depositors who were standing and protesting outside banks because they are not able to withdraw their money. That is a serious situation. Across the whole world, when central banks are tightening their monetary policy and increasing interest rates, China alone dropped interest rates. Therefore, China is a greater worry than the United States at this point in time. What about the other big worries? The crude prices went past comfortable levels. They are now at a manageable level, though they are still very high. Crude oil, along with China, will be major determinants of what’s going to happen to the global economy in the next one year. If energy prices continue to shoot up, it’s going to cause mayhem in Europe and United States as well. There are already moves to resurrect the Iran nuclear deal, so that Iran’s oil can be brought back. But even that may not have much of an impact. This is the broad global scenario which we are up against. Does this mean that India’s prospects are also bleak?
Not a recession
I would stick my neck out and say, ‘no!’ There is enough to worry about in India. Not everything is hunky-dory, but I would still be cautiously optimistic about India’s prospects in the next year. We’re not looking at recession, for sure. That is not going to happen. It’s a question of growing at 7 or 6 or 5%. Even at 6%, India will be the fastest growing major economy in the world. Even multilateral agencies like the IMF and World Bank say this.
Our inflation in the last six months has been above the comfort levels of the monetary policy committee’s limits, which is 4% plus or minus 2%. We went past seven and dropped to 6.7. The good news is the trajectory is going down. The RBI Governor went on record to say that the inflation may have peaked in April. It is certainly something that we need to keep an eye on, considering our problems with the energy prices.
An intelligent budget
What are the things which are working? We have a stable, macroeconomic environment. Even with the fiscal deficit at very high levels, it is still under control. Government revenues and tax revenues are galloping. Direct tax and GST revenues are on the higher side. There may be worries for the government on the expenditure side but not the revenue side. This year’s budget was crafted very intelligently. There are enough buffers built into it for the fiscal deficit and it is a very conservative budget. The estimates for revenues are pegged quite low. Disinvestment is not going to happen this year, the markets being what they are. To compensate for that, the government got 1.5 lakh crores from ‘spectrum’ sales. The government is very confident of meeting the fiscal deficit target, if not overachieve.
CAD: The real worry
The worry to my mind is not fiscal deficit but the current account deficit, because exports are in trouble, largely because of the slowdown in the west and India’s major markets. Two months ago, the government imposed export duty on petroleum products. They had their reasons but it has lowered our exports of petroleum products. With exports falling and imports rising, especially because of crude oil and gold, our trade deficit is ballooning. It was $150Bn in the first quarter of this year. Last year, it was $40Bn–a 2.5 times increase in one year. We are looking at a CAD of over 3% for this year which is quite on the borderline of what should set alarm bells ringing. Last year’s current account deficit was 1.2%. So this is a problem, especially in a situation where capital flows are under threat.
When RBI rushed in…
We saw what happened between March and July, and even now it’s happening in some measure as capital started going out of this country when foreign investors started selling in the stock market and pulling out the money. About 13 or 14 billion dollars were pulled out between April and August first week from the Indian markets and the impact was immediately seen. The rupee started going on a cartwheel and the RBI had to step in. Of course, it has a huge arsenal–$650Bn of reserves. They spent 20 to 30 billion dollars to support the rupee and yet it went down from 75 to almost 80. Today, it is a shade below 80. This is a risk we need to be mindful of, due to its impact on the larger economy.
But the good thing going for India today is that our financial system is quite robust. Banks, which were reeling under NPS four years ago have cleaned up their balance sheets. They are strong now and in a position to lend. The latest data released by RBI shows that bank credit growth went to 14% in the April to June period, compared to 5% last year. In 2016-17, India was hit by sick banks and sick corporate sector. Both are now cleaned up. Thanks to Covid, the corporate sector has slimmed down and they are now in a much better position than what they were 4 to 5 years ago.
Consumer sentiment has picked up, thanks to the pent-up demand in the last few years during Covid. People are out buying everything they can lay their hands on. People are travelling and spending on luxury goods and gold. The next three months marking our festive season, beginning with Onam soon in Kerala and ending with Diwali in October-November are going to be crucial. There is a heavy booking of passenger cars, and companies are not able to handle the demand. The constraint comes on the supply side, for various reasons, like the chip shortage for automobiles.
To sum up, the positives are a strong financial system or stable macro environment as of now. We need to watch some variables like CAD, inflation, and interest rates. Consumer sentiment will depend on how interest rates move from here. We have already seen a 1.4% point rise in interest rates by the RBI in the last three months. We will begin to feel the full impact by September-October. There are more rises in store, I think.
Take care of the Delta
The Western central banks are now in a coordinated operation, raising interest rates and making capital scarce. Assuming that inflation goes down in India and that India is in a comfortable position where it need not increase the interest rates, will it be able to do? That is the question mark. Because if we don’t maintain the delta between interest rates in India and the West, there are chances of capital outflows and the rupee will be in trouble. The central bank is brave, but they raised rates one fine morning. The next night, the Federal Reserve was all set to raise rates by 75 basis points. If RBI had not increased rates on May 4th by 50 basis points in India, the rupee would have been in trouble the next morning in the markets. This is a risk we are running. Now, this is a part of the globalized world.
When you get capital flows, asset prices rise and you make money. Everybody is happy. The sensex goes to 60,000 and people celebrate. When the opposite happens, we should be prepared for that. That’s the risk I would like to flag.
Despite challenges opportunities galore…
Mr P Ravichandran
I believe the moment has arrived for India and Indian economy. Post pandemic, there are two important challenges the world is facing: one, of course, is climate change, the cost of which has been quite devastating on every country and there has been a general consensus on decarbonisation of economies. This is opening up new frontiers for industry.
The second biggest challenge is the 6-month old war between Ukraine and Russia. It has disrupted three areas:
a) The food challenge; Ukraine has been a very prosperous agricultural part of Europe.
b) Supply chain of raw materials for future technologies; Ukraine has raw materials for future technologies on mobility and hybrid solutions for a lot more.
c) Supply of defence equipment, Ukraine being a large exporter of defence equipments.
The PLI scheme
The Centre’s efforts to push the PLI schemes has attracted investment in many sectors. The PLI schemes were launched for many reasons–one, to de-risk India by reducing imports. Manufacturing has picked up, and there has been a positive growth in the export of automotive components in the last two months from India to the rest of the world. The government’s impetus on the ease of doing business has helped both new and existing businesses. Many new industries are coming into India, especially the semiconductor sector. About 3 to 4 years back, our mobile industry was more into assembling. Today, there is more of local production of PCBs, air conditioners, electronic sub-assemblies and consumer durables. In 10 years’ time, we will be as big as China in some of those industries.
Though there has been a push back on the agricultural reforms, but in the last 3 to 4 years, value addition in agriculture has gone up. We also see the seafood industry moving from just producing seafood to seafood cultivation as well as offering value-added branded products. The food and food processing industry is today the biggest employer, putting more employment than the IT industry. It is the real sunrise industry, and India has a great opportunity to become the food basket of the world in the next 10 years. The biggest challenge the industry is facing is managing the supply chain. It has become a nightmare because we have a lot of dependence on components that comes from rest of the world, especially the electronics components.
The renewable opportunities
The second area that we see is the cost of electricity. India produces about 500 GW of power and still about 60% to 65% comes from coal. Indian coal is not as efficient as imported coal, say for example, coal from Australia. In this backdrop, there has been a big push by the government on the renewables and on energy efficiency. The energy efficiency act has been enacted and government has started energy labelling program. It has made many SMEs to use energy efficient products. Many have cut down on energy bill in lighting by introducing technologies like LED. We have close to 20 billion dollars equivalent of LED manufacturing footprint in India.
Indian automotive industry has a great potential to deliver to the rest of the world. India is already there in many of the world markets. Indian IT companies can partner with a lot of automotive companies to really play this game very differently in the future.
Focus on ESG
Many companies see ESG as a vehicle to survive the future. We see a lot of investment happening in India on the water side. In agriculture, government is nudging to use less water by changing crops. Telangana and MP have done remarkable work on water. It is attracting a lot of investment. There is no other country in the world which is growing as fast as we can in electric mobility. What really stops us is the availability of raw materials and the right pricing, because the supply chain is still not ready to absorb all the price increases but the technologies are already there. The charging infrastructure needs to be built and there’s a lot of work going on. This will open up a lot of opportunities.
The third area of opportunity for India is decarbonisation of heavy industries. Some of the cement manufacturers have said they want to be carbon neutral by 2028. By 2025 or 2026, carbon tax will likely come in Europe and so, some of the textile companies are looking at decarbonisation as well. Demographics and the digital capabilities are two great advantages for India.
ONDC: The game changer
We have a great opportunity to build a lot of India centric digital platforms. The initiative by Mr Nandan Nilekani on the ONDC (Open Network Data Commerce) would be a game-changer for India because this is a platform which will enable someone sitting in a village corner sell to someone sitting in Delhi. India is a country of 30 + states. Lot of innovation is happening everywhere. The people from bottom of the pyramid are moving up and creating many opportunities.