A global recession and its likely fallout on India's economic growth

While foreign fund inflows could ebb and exports could take a beating, the Indian economy is unlikely to suffer recession again

While chief economic advisor V Anantha Nageswaran does not foresee a recession in India this financial year, the global economy could indeed be caught in its throes or suffer a significant slowing down, depending on how long the Russia-Ukraine war lasts. If that happens, India cannot avoid the repercussions, though it might not enter into a recession again.

India's economic growth, at 8.7 per cent in 2021-22, was largely due to the low base caused by a 6.6 per cent contraction in GDP the previous year. But if the pre-Covid period of 2019-20 is taken as the base, the economy expanded by just 1.5 per cent during FY22.

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Any recession at the global level may bring down India's economic growth drastically. Technically, a recession is typically recognised as two consecutive quarters of decline in gross domestic product (GDP) in conjunction with monthly indicators, such as a rise in unemployment. In that respect, India's economy was in recession in the first half of 2020-21 when it contracted 23.8 per cent in the first quarter and 6.6 per cent in the second, aggregating to a 15.2 per cent fall during the first six months of FY21 due to Covid-induced lockdowns.

However, nowadays a recession is defined as a significant decline in economic activity spread across the economy, lasting more than a few months. It is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Nageswaran had said after the release of FY22 GDP numbers that he does not see the prospect of recession in India in FY23, adding that the country is in "a better place than many other nations."

"As far as India is concerned, I do not see the prospect of recession as defined in the West, in the US, or even as understood in the context of developing countries... I do not see a recession for the Indian economy for 2022-23," he added.

Dark clouds and silver lining 

Bank of Baroda chief economist Madan Sabnavis said, "Recession, meaning negative growth, will drive down imports and commodity prices. Foreign flows will ebb and stock markets will go down. Corporate business will go backwards. Our growth will slow down but I think we can manage 4-5 per cent growth in this doomsday scenario."

Icra chief economist Aditi Nayar said a global recession would slow down the demand for Indian exports. At the same time, a likely correction in commodity prices could ease pressure on inflation and margins, she added.

India Ratings chief economist Devendra Pant opined that the global recession will have both positive and negative impact on the Indian economy.

"Recession will reduce demand for goods and services and impact economic growth. On the other hand, global recession may help in cooling-off of commodity prices, which will reduce inflation, current account and fiscal deficit. However, net-net, while inflation may decline, growth will certainly come down," he said.

The exact impact will depend on the severity of recession and countries experiencing recession, he pointed out.

So far it does not look like India's growth has been severely hit, despite the economy recovering by just 1.5 per cent during 2021-22 over pre-Covid year of 2019-20 as cited above. 

Sabnavis said one needs to see how things are shaping this year.

"April core looks positive even though the base is high. PMI (purchasing managers' index) is good, so is GST. Hence things are looking nice. (I) Agree inflation is the main threat and hence we can't celebrate as yet. All we can say is that the economy is on the right path now," he said.

The eight-industry core sector grew by a six-month high rate of 8.4 per cent in April despite a high base of 62.6 per cent in the same month of the previous year.

PMI for manufacturing stayed high despite inching down to 54.6 in May from 54.7 in April. Its services counterpart rose to an 11-year high of 58.9 in May from 57.9 in the previous month.

GST collections remained above Rs 1.40 trillion for the third consecutive month in May.

However, economic growth had slowed down to a four-quarter low of 4.1 per cent in the fourth quarter of FY22.

Nayar said Q4 was a challenging quarter for consumption given the third wave. "Inflation may dent consumption in some categories in the ongoing quarter. However, there is anecdotal evidence that capital goods companies have healthy order books, suggesting that a nascent investment revival may be underway," she stressed.

The World Bank view

Talks of recession hitting at the global level have been doing the rounds of late. For instance, World Bank President David Malpass on May 25 had warned that Russia's war in Ukraine and its impact on food and energy prices, as well as fertiliser supply, could lead to a global recession.

"As we look at the global GDP ... it's hard right now to see how we avoid a recession," Malpass said but did not specify any forecast.

The World Bank has already dropped its global growth prediction for 2022 by nearly a full percentage point, to 3.2 percent from its earlier forecast of 4.1 percent due to the ongoing Russia-Ukraine war.

Later on Tuesday, the World Bank turned more pessimistic. It now talked of stagflation instead of just recession. Stagflation refers to stagnating economic growth resulting in rise in unemployment and accompanied by elevated inflation.

In its latest Global Economic Prospects, it said, "Compounding the damage from the Covid-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation."

This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike, it further added.

It further lowered its global economic growth forecast to 2.9 per cent in 2022.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said Malpass.

The Bank said the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly five per cent below its pre-pandemic trend.

However, for India, the World Bank cut economic growth forecast to 7.5 per cent for FY23 as rising inflation, supply chain disruptions and geopolitical tensions taper recovery.

This is the second time that the World Bank has revised its GDP growth forecast for India in the current fiscal. In April, it had trimmed the forecast from 8.7 per cent to 8 per cent and now it is projected at 7.5 per cent.

It should be noted that the World Bank's projection is still higher than that of RBI's Monetary Policy Committee (MPC), which is 7.2 per cent. 

According to OECD, in the G7, quarter-on-quarter GDP growth turned negative in Q1 2022, falling by 0.1 per cent compared with an increase of 1.2 per cent  in Q4 2021. The G7 result in the first quarter of 2022 reflects negative GDP growth in the United States (minus 0.4 per cent), Italy (minus 0.2 per cent) and Japan (minus 0.2 per cent), as well as zero growth in France and weaker positive growth in the United Kingdom (0.8 per cent) and Canada (1.4 per cent) than in the previous quarter.

Germany was the only G7 country where the pace of growth increased, with GDP growth of 0.2 per cent in the first quarter of 2022 compared with a contraction of 0.3 per cent in the previous quarter, OECD says.

In a different context, Tesla CEO Elon Musk had said the world is already experiencing a recession owing to multiple macro-economic factors that could last up to 18 months. He, however, favoured this kind of situation as loss making companies will die. 

Table: India GDP growth projections in %age for 2022-23

IMF	8.2*
World Bank	7.5
MPC	7.2

* IMF is in the process of revising this growth forecast; Source: Respective institutions

Table: World Bank's latest projections for GDP growth in % for 2022

Economy	Latest projection	Departure from earlier projections
US	2.5	-1.2
Euro Area	2.5	-1.7
Japan	1.7	-1.2
China	4.3	-0.8
India *	7.5	-1.2
World	2.9	-1.2

*2022-23; Source: World Bank's latest global economic prospects