India may not be able to completely avoid impact of global recession

Lower global commodity prices to help the economic growth

India may not be able to completely avoid the impact of global recession, which economist Nouriel Roubini said will hit by the end of the current calendar year and last the entire 2023. However, lower commodity prices would help the economy offset the recessionary headwinds to an extent. 

Total external trade of goods and services still constituted almost half of the country's gross domestic product (GDP) in the first quarter of the current financial year. This is slightly lower than the global financial crisis period of 2008-09 and the Eurozone crisis years of 2011-12 and 2012-13. 

However, if one looks at the East Asian crisis period of 1997-98, the external trade has gone up drastically from 23 per cent of GDP that year.

The country has gone a long way from the period of the East Asian crisis, caused by the dominance of short-term debt in external debt of those countries. And now external trade is more than double of what it constituted as a percentage of GDP at the time of the East Asian crisis.

Even then economic growth came down to just 4.8 per cent in 1997-98, preceded by 7.8 per cent and followed by 6.5 per cent economic expansion. However, the sharp drop in growth rate in 1997-98 was also because of the contraction of agricultural production that year. It should be noted that 1998-99 saw a 6.8 per cent growth rate despite the imposition of sanctions against India for conducting nuclear tests.

Economic growth in 2008-09, when the collapse of the Lehman Brothers had a ripple effect on India, fell to just 6.7 per cent after three years of over nine per cent growth rates. The next year — 2009-10 — saw growth recovering to 8.6 per cent, responding to the stimulus announced by the government.

However, by the time of the global financial crisis, India was significantly entrenched to the global economy. Its external trade of goods and services was more than half of GDP.

In the years 2011-12 and 2012-13 when the economy again faced external headwinds from the Euro area, the economy grew 6.6 per cent and 5.4 per cent respectively. The growth rates came down from 8.9 per cent in 2010-11. Even in 2013-14, the economic growth recovered to 6.4 per cent even as the US resorted to the taper tantrum since then Reserve Bank of India (RBI) Governor Raghuram Rajan took prudent steps.

During all these years since 2008-09, India's trade of goods and services accounted for at least 45 per cent of its GDP.

It came down to 45.3 per cent in 2020-21 but even then the economy contracted 6.6 per cent due to a technical recession as the first two quarters of the year saw the economy falling due to lockdowns in various parts of the world including India. 

In the first quarter of the current financial year, trade again constituted half of India's GDP and the growth rate stood at 13.5 per cent. Though it looks quite high it was lower than the RBI Monetary Policy Committee's (MPC) projection of 16.2 per cent. It also represented just 3.3 per cent over the first quarter of the pre-Covid year of 2019-20.

With external trade constituting half of the country's GDP, it looks at the outset that the economy would face a severe downturn if the recession does hit the US and other parts of the economy as Roubini, who is also known as Dr Doom, has predicted.

However, if one looks at the breakup of trade figures, these are imports which constituted as high as 27.8 per cent of the country's GDP in Q1 of FY23. Exports accounted for just 22.5 per cent of GDP. Now commodity prices are correcting and are expected to come down significantly, going forward.

If this happens, it would not only cut the import bill but would also boost consumption, which would help the growth momentum.

Icra chief economist Aditi Nayar said the impact of a potential global recession on Indian macros would mainly be through two channels. Lower commodity prices would cool inflation, some subsidy requirements and margin pressure for corporates and boost demand, Nayar said.

“However, the benefit to the growth and the current account balances would be dulled by lower merchandise and services exports”, she added.

Roubini, who correctly predicted the financial crisis in 2008, now said that the US and the rest of the world is about to face an ugly and long recession. Roubini said the S&P 500 could fall by 30 per cent in a normal recession and 40 per cent in a brutal recession.

Roubini expected the next recession to hit in late 2022 and last for all of 2023.

Roubini earned his nickname — Dr Doom — for correctly predicting the 2007-2008 crisis and saying people should expect huge debt ratios for governments and corporations.

He said many zombie countries, shadow banks, banks, corporates, zombie households, and zombie institutions would die.

Roubini warns that recession will drag the global markets down because of debt levels worldwide, and it will be impossible for the Federal Reserve to keep inflation down to 2 per cent.

World Trade Organisation Director-General Ngozi Okonjo-Iweala also said, "I think a global recession — that is what I think we are edging into.”

Next month, the World Trade Organisation (WTO) is expected to slash its trade growth projections for 2022.

In April, the Geneva-based trade body lowered its projection for growth in merchandise trade this year to three per cent from its previous projection of 4.7 per cent.