Even before the pandemic’s onset in early 2020, the global economic climate was erratic. The world’s two largest economies—the US and China—were reeling from the effects of their ongoing trade war. COVID-19 only added fuel to this already raging fire. In a few months, the world slipped into a never-before-seen slowdown.
According to the International Monetary Fund (IMF), there is no ‘official definition’ for a recession. However, a widely accepted yardstick is a period of “two consecutive quarters of decline in a country’s real (inflation-adjusted) gross domestic product (GDP)”.
In the aftermath of COVID-19, governments worldwide adopted varying approaches to spark their economies. For the most part, there were one of two approaches followed – where both were based on theories by noted economists John Maynard Keynes and Friedrich von Hayek. Both advocated opposing strategies, however, to accelerate economic growth.
Two approaches on opposite ends of the spectrum
The Keynesian approach required governments to incur substantial public spending, in the belief that it will kickstart consumption. In simple terms, for every dollar of government spending, the corresponding output was expected to be higher than one dollar. Hayek’s approach, meanwhile, called for minimal government interference. Rather, market forces were expected to better catalyse an economy.
In what is now clearly established, the US went with the Keynesian philosophy, where the government, among other things, handed out sizable stimulus cheques to its citizens. Termed the Economic Impact Payments, they may have prompted an initial uptick in the economy. However, the stark outcome has been inflation levels that are at a 40-year high – a trend that has firmly held its ground even through October 2022.
This was possibly why the UK quickly voted out a prime minister who was in favour of greater government intervention by way of massive tax cuts. The current administration has reversed almost all tax cuts and have, instead, implemented tax hikes – a full U-turn from announcements made earlier in September 2022.
India, however, seems to have tread a ‘middle path’. For 2023, the IMF has forecast India’s economy as being on track to register 6.1 percent growth. Although this is a strong growth forecast, this was a downward revision on the back of less favourable external conditions and brisk policy tightening. In fact, prompt intervention by the central government has yielded positive outcomes in the past too.
Over a decade ago, when the Global Financial Crisis of 2008-09 was raging, India’s GDP output fell from 9 percent to 7.8 percent. An estimated USD12 billion in investments had been withdrawn from the stock market. However, much like in the current scenario, India’s then administration implemented remedial measures quickly.
The Reserve Bank of India (RBI) dropped policy interest rates by over half – from an earlier 7 percent to 3.25 percent. Additional policies—such as reducing the country’s 10-year government bond yields (from 9 percent to 5 percent) and expanding the fiscal deficit (from 2.5 percent of GDP to an eventual 6.5 percent)—restored India’s GDP output to pre-crisis levels, by 2010.
Layoffs are steadily rising in the tech sector
Elon Musk led Twitter has furloughed an estimated 66 percent of its workforce or about 5000 workers, in what seemed a restructuring exercise following a takeover. But in one fell swoop, several other tech conglomerates have also announced massive lay offs – from Meta to Amazon. This is a rather confusing trend because only a year ago, unicorns were being birthed at a furious pace.
Jeff Bezos of Amazon, meanwhile, went on record suggesting Americans should hold off on big ticket purchases such as automobiles and big-screen televisions, among others. “The probabilities say if we're not in a recession right now, we're likely to be in one very soon,” he opined.
Tech conglomerates in China have felt the heat, too. Both Tencent and Alibaba reported significant declines in revenue. Tencent registered a 50 percent drop in profits while Alibaba witnessed a similar 50 percent fall in net income. Job losses, therefore, have been an obvious outcome.
Will India be immune to a recession?
The Indian economy is “not overheating” unlike that of the US. A Chief Economist at Nomura stated, “We haven't seen demand fully recover in many sectors so we are seeing inflationary pressures despite there being, on aggregate, slack in the economy.” India’s economy is estimated to have recorded double-digit growth during Q1 of FY 2022-23. Real GDP growth rates were in the 13-16.2 percent range.
The Indian equity market, meanwhile, has witnessed over 5 percent gains consecutively over October and November, 2022. Foreign institutional investments totalled Rs 36,000 crores (about $4.5 billion) in November alone. Between July 2022 and now, an estimated Rs 90,000 crores ($11 billion) has been invested in the Indian equity market.
In terms of sectors, the services sector delivered an impressive 21.6 percent growth on the back of increased demand for IT services exports. The capital goods sector is also expected to perform well on account of the government’s increased CAPEX spending.
The agriculture sector is on firm footing too. Agricultural exports, in particular, grew by 19.92 percent registering an aggregate value of $50.21 billion. A large share of this growth was on account of a staggering 273 percent increase in wheat exports in 2021-22, totalling $2.11 billion.
From a manufacturing standpoint, the consumer electronics and automobile industries are poised for strong growth. Appliances and consumer electronics are on track to clock $21.18 billion by 2025. These strong performances—across sectors—have sent the Sensex soaring; it touched an all-time high of 63583.07 earlier in December 2022.
For the long term, two Indian business leaders are extremely bullish on India’s medium-term economic prospects. Gautam Adani expects India’s economy to clock $30 trillion by 2050. Likewise, Mukesh Ambani said the Indian economy is en route becoming a $40 trillion economy by 2047.
Substantiating this rationale further is a Bloomberg survey – one that was even cited by India's Finance Minister, Nirmala Sitharaman, in Parliament. This survey indicated there was ‘zero probability’ of India finding itself amid a recession in the coming year. Additionally, despite the Indian rupee falling to historic lows against the US dollar, a recession has been ruled out. Earlier in December 2022, RBI Governor Shaktikanta Das stated, “The Indian economy remains resilient and the country is seen as a bright spot in a gloomy world.”
A recent CRISIL report highlighted that “Strong consumption demand, healthy balance sheets of corporates and banks, and infrastructure focus of the government will support the economy.”
What is on the horizon?
On a broader level, there is a 20-25 percent possibility of Asian economies finding themselves amid a recession. Facing the highest risk—at 85 percent—is Sri Lanka while China faces a 20 percent risk.
The US, on its part, is faced with a significantly higher 40 percent risk of experiencing a recession, in 2023. Most economies in Europe have been negatively impacted by the Russia-Ukraine situation. There is a 55 percent possibility of a Eurozone recession.
In what is possibly a silver lining, Nathan Sheets, Chief Global Economist at Citi, said, “... the timing of these downturns varies, and they are expected to be relatively mild.” Amid the differing views held by economists and business leaders, it is perhaps market forces alone that will dictate what direction the global economy will choose to tread. Besides, Hayek’s approach might just hold more water than Keynes’ theory.
—The author, Amit Kumar
, is Chief Executive Officer at OLX.com. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Jan 24, 2023 10:47 AM IST
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