Recession, Inflation and the India Story

Is India going to survive this?

After two years of being consumed by Covid 19, its fears, lockdowns and the economic downturn it brought about, 2022 was an interesting year. While the early part of the year saw the arrival of the Omicron wave and the fears around it, thankfully it left as quickly as it arrived. The world had started to heave a sigh of relief, putting Covid behind and looking forward for the economy to bounce back but in Moscow, Vladimir Putin had other thoughts in his mind.

Russia’s invasion of Ukraine on 24th February ‘22 changed everything! The world suddenly became an unstable place, the sanctions on Russia from the rest of the world, Europe’s dependency on Russia for its energy needs, the threat of fuel prices, and the resulting inflation all shook the world in a significant way

We saw a huge rise in inflation across the world in the second half of 2022. Some of the current inflation numbers across the world is staggering, USA is at 7.5%, UK 11%, and Europe is 10% to name a few. The world average is around 8.8%. Fortunately, in India, the inflation rate is still hovering around 6%, well below the average.

India Last Year

Flights resuming by summer of last year gave me an opportunity to travel around the world, which gave me a better perspective of the world. I clearly see an impressive buzz in India as compared to many other geographies I have recently travelled to.

It is no surprise that post the lockdowns, manufacturing could not immediately meet the demands of the time. There was also a huge labour shortage in many sectors and eventually, all this led to some massive price hikes in energy. Despite all this, I was happy to read the news that India’s manufacturing output rose to a 13-mth high and factories ended 2022 on a positive note. (ET)

Our Finance Minister, Nirmala Sitharaman recently said that a recession in the West will gives us a chance to draw Companies into India. This may be true to some extend as even when we are hearing about global layoffs, Indian companies are calling people back to work. However, the Minister has warned that the rising global debt vulnerabilities could trigger worldwide recession if left unaddressed. I am vaguely reminded of year 2008, wherein India managed to survive in spite of the odds in the US.

Morgan Stanely believes that this decade is going to be India’s. We all certainly hope it is.

We see the US hiking interest rates to control cashflow. In India, the take is slightly different. With a focus on business growth, the interest hikes are lighter in comparison. The trend in India is such that despite the expensive borrowing, we are still using credit to spend!

Experts in India including the RBI Governor and the Niti Aayog have said that India’s inflation risk is lower in comparison. IMF also believes that India is doing better than the developed economies. With increasing salaries and promising growth in sectors like technology, we still have a rainbow to look forward to.

The layoffs and the threat of recession

The beginning of 2023 might mean multiple layoffs with many companies planning to start to lay off people in January. Indian start-ups, especially in the edtech, social media and ecommerce have already been downsizing. Should we call it a snowball effect since it seems to be contagious or is it real? What matters in the end is performance and we recently also had the issue of moonlighting (I’ve given my take on it in this blog). On the journey to public listing, performance is certainly key.

Interestingly, while most people would like to believe that work from home has improved productivity, data actually shows that there was a dip in productivity in 2022. One wonders if companies will be able to bring people back to work and address this issue.

In Summary

Of course, with the connected global economies of today, we cannot say that India will be untouched by the global economic downturn. There is bound to be some impact for sure. But, apart from all the connections, we are also a growing powerhouse that is independent. With China’s economic power peaking and potentially plateauing, there is clearly no other country with the scale of India. India, if it plays its cards right, it has a lot to gain.

Clearly India is unlikely to see a recession even if there is a short one in the western world. Even the governments across the globe are ensuring minimal impact of the downturn by willing to provide stimulus packages and thereby avoiding a recession. India is still likely to grow around 5 to 6% despite what happens in the world. Economists believe that the dollar has reached its peak and the Indian rupee is likely to strengthen too.

No matter what the year may look like, one thing is certain according to me, India, as a country should lay her bets on manufacturing, traditional businesses as well as the service sectors and focus on innovation and expansion. Recession or not in other parts of the world, we have a lot to look forward to!  

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