The effects of the global recession, which according to economist Nouriel Roubini will begin by the end of this year and last through the entire year 2023, will definitely not leave India unscathed. Lower commodity prices would, however, partially offset the negative effects of the recession on the economy. Every country is feeling the effects of Russian President Vladimir Putin’s unprovoked attack on Ukraine, from the United States to Europe, the Middle East to South Asia. In addition to the deadly effects of the Covid-19 pandemic, the most recent geopolitical disaster has brought the world to its breaking point.

Global central banks have become overzealous in their efforts to control inflation. The US Federal Reserve raised its key interest rate by 75 basis points for the third time this year in September. The Fed’s rate hike demonstrated its commitment to lowering inflation in the United States, it is at a four-decade high of 8.5 percent. The Fed’s rate hikes are aimed to cool an overheated US economy and force people out of work, putting downward pressure on wages and inflation.

India’s economy has been moderately integrated with the global economy, but it is not invulnerable to the US or global recession. Even in typical Fed-driven recessions, the domestic rate of growth has slowed by 1.5% to 2.5%. This recession, in contrast to other shallow recessions, is expected to be long and unpleasant.

According to the data, India contributes a relatively small amount to the world’s exports (2.2%), and even when it comes to GDP, it is still low when compared to other nations. However, the trade route will have some effect on India. Five countries together account for about 30% of India’s total exports, including the US and the EU. Additionally, a significant portion of international exports are dependent on the US.

The United States’ percentage of India’s exports of goods increased from 10.1 percent in FY2011 to 18.1 percent in FY2022. India’s susceptibility to a US economic downturn has undoubtedly increased as the US market share in its exports has grown. With a share of 54.8% in FY2021, the US accounted for most of India’s software exports. A US recession will undoubtedly have a significant negative effect on India’s software exports, margins, and employment in the service sector.

Foreign Portfolio Investment (FPI) fund flows, forex reserves, and the rupee have already begun to be impacted by Fed rate increases. As the Dollar keeps getting stronger following the Fed’s most recent 75 basis point jumbo rate hike, the declining Rupee is coming under new pressure. The Rupee is falling to new lows because of rising crude oil prices, continued Fed rate hike expectations, and the expanding current account deficit.

The rate cycle of the RBI may not be opposite to that of the Fed, and rate increases will undoubtedly have an impact on India’s economic growth. To reinstate a pretense of price stability without stifling growth, the RBI’s monetary policy panel must walk a fine line between two opposing objectives. On September 30, the RBI raised the repo rate by 50 basis points, to 5.9%.

All this puts India’s growth rate, current account deficit, macroeconomic stability, and currency at risk. The Indian economy will continue its current course, according to Finance Minister Nirmala Sitharaman, despite the global economic challenges. Even though India’s economy is not fully integrated with the global economy, policymakers there cannot ignore the global headwinds. Even though a moderate growth rate of around 5% (as predicted by UNCTAD) would still rank India as having the “fastest growing economy,” millions would still be forced into poverty. The poorest people will be hit the hardest by rising inflation as a result of currency depreciation and widening “twin deficits,” which will further fuel it.

(This article is written by Achin Goel and was published in Economic Times on December 5, 2022)

Link to the economic times article: https://economictimes.indiatimes.com/markets/stocks/news/can-india-escape-the-effects-of-a-global-recession/articleshow/95997892.cms