Skip to main content

Why global recession is 'big threat' to India, despite Nirmala Sitharaman’s bravado

By Prasanna Mohanty* 

It would be imprudent to assume that a global recessionary trend will bypass India. In fact, a day after Finance Minister Nirmala Sitharaman categorically ruled out the possibility of recession and stagflation (with high unemployment and high inflation India is technically witnessing stagflation) hitting India in her responses to the Parliament earlier in the week, Commerce Secretary BVR Subrahmanyam dropped a bomb shell.
He released latest trade data showing fast deteriorating trends. The data showed, in July 2022, exports fell to five-month low of $35.2 billion and imports sequentially increased to $66 billion. The details revealed a fall in seven of top 10 export items: engineering goods, petroleum products, gems and jewellery, pharmaceuticals, readymade garments, cotton yarn and plastics. All this happened, Subrahmanyam acknowledged, due to the growing recessionary trends in developed countries and elevated commodity prices.
The trade deficit (merchandise goods) hit a record high of $31 billion in July 2022 – up from the previous record high of $26.2 in June 2022 and three times more than $10.6 billion in July 2021. The trade deficits during April-July 2022 jumped to $100.01 billion, from $42.07 billion in the corresponding previous fiscal. Subrahmanyam commented: “The external world is no longer benign”.
India’s big trade partners, the US, China and Europe, are in deep trouble. The US is already in recession with last two quarters of growth turning negative, Europe is under pressure with Russia cutting down energy supply and China continues to witness pandemic disruptions. These are not happy developments for India’s trade, particularly exports.
Exports drive growth and a global recessionary trend hurts it.
India’s exports have been falling from a peak of 25% of the GDP in FY14 to 21% in FY22 and trade deficits ballooning to -4.8% of the GDP from -1.8% during the same period. Adverse trade equations and rising global demand for the US dollar (even the Euro has fallen below the dollar for the first time in nearly 20 years) have weakened the rupee. It hit all-time low against the US dollar multiple times in recent weeks, crossing Rs 80 per dollar. This forced the RBI to spend billions of USD to prop up the rupee.
There are multiple adverse consequences of these related developments.
For one, when rupee weakens, import bills rise, building up pressure on forex reserve. A fall in exports worsens it. When the RBI spends its dollar reserve to defend rupee, it further hits the forex reserve. India’s forex reserve has rapidly fallen from $640 billion in November 2021 to $571 billion in July 2022. It may not be time to worry yet, but the trend is adverse. India’s counter measures – opening up rupee trade and relaxation in foreign investment in debt, external commercial borrowings, and NRI deposits – are yet to yield tangible result. If forex reserve dwindle, India would be forced to cut imports (essentials like crude oil, edible oil, fertilizers etc.), thereby raising domestic inflationary pressure.
In the meanwhile, foreign investors have been fleeing India. By June 2022, the FPIs pulled out a record $39 billion in equity exposures for nine consecutive months until then. In July 2022, the trend broke as FPIs bought in $618 million. But this is not a significant change and the future prospects are dependent on several factors. After a healthy growth in FY20 (20%) and FY21 (10%), the FDI inflows fell to 2% in FY22. With the sharp rise in interest rate in the US and Eurozone, there would be pressure on FPI and FDI inflows. This is one of the reasons why fund flows to start-ups dried up in 2022. According to one report, funds dropped by 33% during the second quarter of 2022 (April-June 2022), as against the first (January-March 2022).
When FPI, FDI and venture/angle funds for start-ups dry up, the growth impetus is lost. This year has already seen start-ups, including many unicorns, shedding over 12,000 jobs – another adverse consequence of the recessionary trend. Nothing can hurt households more than job loss at the time of high inflation. The weakening of rupee further adds to the inflationary pressures.
So, the current global economic trend has adverse impact on India’s several growth drivers – exports, foreign investment, employment and inflation (called “imported” inflation as commodity prices remain elevated). It also depletes forex reserve. All of these have the potential to derail the growth now and in future.
There can be unforeseeable adverse consequences too.
In fact, Centre’s whimsical policy response to the emerging global economic scenario is an equally big threat to the economy
For example, India’s largest gas supplier GAIL is in trouble (its market price fell sharply) with its business severely hit. It is unable to supply fertilizers, power and petrochemical products because Russia’s Gazprom is unable to fulfil its LNG supply commitments to it. The Singapore unit of Gazprom, which was supposed to supply LNG to the GAIL, is under German control after the Russian invasion of Ukraine and the supply meant for the GAIL has been diverted to European spot market where rates are very high (and so is the returns).
The IMF has warned that the global economic outlook has “darkened significantly” with inflation broadening beyond food and energy, primarily because of the prolonged war. It has lowered global growth to 3.2% in 2022 and further moderated growth in 2023 to 2.9% due to “disinflationary monetary policy” – that is, tightening of interest rates in developed economies. It particularly flags of worsening economic conditions of three big economies – the US, Europe and China.
It is tough to say whether the global recessionary trend will actually lead to recession in India – two consecutive quarters of negative growth – but the growth drivers are not promising.

A clueless government

An equally big cause of worry is the Indian government’s policy responses to the emerging scenario. Instead of proper assessments, roadmaps and strategies, it seems to revel in impulsive flip-flops to appear dynamic and responsive.

Here are a few such recent policy decisions for illustration.

  • On July 1, windfall tax was imposed on oil exporters – special additional excise duty/cess of Rs 6 per litre on petrol, Rs 13 per litre on diesel and Rs 6 per litre on aviation fuel– for making a killing after the Russia-Ukraine war. It was withdrawn 19 days later, on July 19, on the plea that the crude prices had moderated. On August 2, 2022, taxes on oil exports were further cut – for diesel from Rs 11 per litre to Rs 5, and for jet fuel, from Rs 4 per litre to zero. But, tax on domestic crude production was raised from Rs 17,000 per ton to Rs 17,750 per ton – the logic of which is not very clear. The tax cuts primarily benefit private export houses, while the tax hike hurts primarily public sector entities. During this period, Brent crude price may have moderated but remains elevated at over $100 per barrel.
  • On July 18, a 5% GST was imposed on unbranded packaged food items like wheat, rice, curd, lussi, puffed rice, mutton, fish etc. – directly hurting the poor already reeling under prolonged high inflation.
  • In April-May 2022, Prime Minister Narendra Modi sought the WTO’s permission to “feed the world” and wished to “save the world from hunger”, as the supply from the global food-bowl, Russia and Ukraine, disrupted due to their war. Days later, the government put a complete ban on wheat exports (in May) as wheat shortage hit India and price soared.In August, the government is thinking of wheat import by cutting down import duty.
  • Three months after directing power generators to “mandatorily” blend 10% of imported coal to overcome domestic coal shortage and the consequent power crisis, the Centre withdrew it in August. By then the Coal India and NTPC had already awarded huge import contracts to the Adani Enterprises belonging to Gautam Adani, the Prime Minister’s favourite businessman. Incidentally, imported coals are 10 times costlier than domestic coal and would raise power prices.
---
*Source: Centre for Financial Accountability

Comments

TRENDING

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

How lead petitioner was rendered homeless when GM mustard matter came up in SC

By Rosamma Thomas*  On January 5, 2023, the Supreme Court stayed a December 20, 2022 direction of the Uttarakhand High Court to the Indian Railways and the district administration of Haldwani to use paramilitary forces to evict thousands of poor families occupying land that belonged to the railways.  Justice AS Oka remarked that it was not right to order the bringing in of paramilitary forces. The SC held that even those who had no rights, but were living there for years, needed to be rehabilitated. On December 21, 2022, just as she was getting ready to celebrate Christmas, researcher Aruna Rodrigues was abruptly evicted from her home in Mhow Cantonment, Madhya Pradesh – no eviction notice was served, and nearly 30 Indian Army soldiers bearing arms were part of the eviction process. What is noteworthy in this case is that the records establishing possession of the house date back to 1892 – the title deed with the name of Dr VP Cardoza, Rodrigues’ great grandfather, is dated November 14

Savarkar 'criminally betrayed' Netaji and his INA by siding with the British rulers

By Shamsul Islam* RSS-BJP rulers of India have been trying to show off as great fans of Netaji. But Indians must know what role ideological parents of today's RSS/BJP played against Netaji and Indian National Army (INA). The Hindu Mahasabha and RSS which always had prominent lawyers on their rolls made no attempt to defend the INA accused at Red Fort trials.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

Tax buoyancy claims when less than 4% Indian dollar millionaires pay income tax

By Prasanna Mohanty  In FY18, the last year for which disaggregated income tax data is available, only 29,002 ITRs declared income above Rs 5 crore, while Credit Suisse said India had 7.25 lakh dollar millionaires (the wealth equivalent of Rs 8 crore and above) that year. Often enough, the Centre claims that demonetization in 2016 raised tax collections, improved tax efficiency, and expanded the tax base. Now RBI Monetary Policy Committee (MPC) member Ashima Goyal has also joined their ranks, attributing the “claims” of rising tax collections in the current fiscal year to “tax buoyancy” brought by the demonetisation . Do such claims have any basis in official records? The answer is unequivocal. The budget documents show the tax-to-GDP ratio (direct plus indirect tax) increased from 10.6% in FY16 (pre-demonetization) to 11.2% in FY17, remained there in FY18 (demonetization and GST fiscals), and then fell to 9.9% in FY20. In FY22, it improved to 10.8% and is estimated to drop to 10.7% in

Gandhian unease at Mahadev Desai book launch: Sabarmati Ashram may lose free space

By Rajiv Shah  A simmering apprehension has gripped the Gandhians who continue to be trustees of the Sabarmati Ashram: the “limited freedom” to express one’s views under the Modi dispensation still available at the place which Mahatma Gandhi made his home from 1917 to 1930 may soon be taken away. Also known as Harijan Ashram, a meeting held for introducing yet-to-be-released book, “Mahadev Desai: Mahatma Gandhi's Frontline Reporter”, saw speaker and after speaker point towards “narrowing space” in Gujarat for Gandhians (as also others) to express themselves. Penned by veteran journalist Nachiketa Desai, grandson of Mahadev Desai, while the book was planned to be released on January 1 and the meeting saw several prominent personalities, including actor-director Nandita Das, her scholar-mother Varsha Das, British House of Lords member Bhikhu Parekh, among others, speak glowingly about the effort put in for bringing out the book, exchanges between speakers suggested it should be rele

Civil rights leaders allege corporate loot of resources, suppression of democratic rights

By Our Representative  Civil rights activists have alleged, quoting top intelligence officers as also multiple international forensic reports, that recent developments with regard to the Bhima Koregaon and the Citizenship Amendment Act-National Register of Citizens (CAA-NRC) cases suggest, there was "no connection between the Elgaar Parishad event and the Bhima Koregaon violence." Activists of the Campaign Against State Repression (CASR) told a media event at the HKS Surjeet Bhawan, New Delhi, that, despite this, several political prisoners continue to be behind bars on being accused under the anti-terror the draconian Unlawful Activities (Prevention) Act. Addressed by family members of the political prisoners, academics, as well as social activists, it was highlighted how cases were sought to be fabricated against progressive individuals, democratic activists and intellectuals, who spoke out against "corporate loot of Indian resources, suppression of basic democratic

Kerala natural rubber producers 'squeezed', attend to their plight: Govt of India told

By Rosamma Thomas   Babu Joseph, general secretary of the National Federation of Rubber Producers Societies (NFRPS) at a recent discussion at Mahatma Gandhi University, Kottayam, explained that it is high time the Union government paid greater heed to the troubles plaguing the rubber production sector in India – rubber is a strategic product, important for the military establishment and for industry, since natural rubber is still used in the manufacture of tyres for large vehicles and aeroplanes. Synthetic rubber is now quite widespread, but styrene, which is used in making synthetic rubber and plastics, and also butadiene, another major constituent of synthetic rubber, are both hazardous. Prolonged exposure to these even in recycled rubber can cause neurological damage. Kerala produces the bulk of India’s natural rubber. In 2019-20, Kerala’s share in the national production of rubber was over 74%. Over 20% of the gross cropped area in the state is under rubber cultivation, with total

Why no information with Assam state agency about female rhino poaching for a year?

By Nava Thakuria   According to official claims, incidents of poaching related to rhinoceros in various forest reserves of Assam in northeast India have decreased drastically. Brutal laws against the poachers, strengthening of ground staff inside the protected forest areas and increasing public awareness in the fringe localities of national parks and wildlife sanctuaries across the State are the reasons cited for positively impacting the mission to save the one-horned rhinos. Officials records suggest, only two rhinos were poached in Kaziranga National Park and Tiger Reserve since 1 January 2021 till date. The last incident took place probably in the last week of December 2021, as a decomposed carcass of a fully-grown (around 30 years old) female rhino was recovered inside the world-famous forest reserve next month. As the precious horn was missing, for which the gigantic animal was apparently hunted down, it could not be a natural death. Ironically, however, it was not confirmed when

Lack of welfare schemes, BSF curbs force West Bengal farmers to migrate far away

Counteview Desk  In a representation to the National Human Rights Commission chairperson, a senior West Bengal based activist has complained that villagers living near the border with Bangladesh are forced to migrate to as far away as Mumbai and Kerala because of lack of government sensitivity towards their welfare in original villages. Giving specific instances, Kirity Roy, secretary, Banglar Manabadhikar Suraksha Mancha (MASUM), said, if the Border Security Force (BSF) had not put any restriction on agricultural activities, and if villages had properly implemented welfare schemes, these people would never migrate to other States. Text: I want to attract your immediate attention to the inhumane condition of the migrated workers of Gobra village, Swarupnagar Block in North 24 Parganas district of West Bengal to seek your urgent intervention to protect the rights of these people. Gobra is a village situated near the Indo-Bangladesh Border where the border fencing is about 500 meters i