Financial institutions are careful in uttering the word, but the dire state of things in India is becoming clearer with each day – sectors losing money, defaulting corporations, struggling RBI and drowning markets – Recession isn’t coming, its already here.
The slump that’s currently shackling the Indian Economy is the impending recession that will not only hit India but the whole world. Early signs of recession in the US are very evident because of the ‘inverted yield curve’. Yield curve terms out to be inverted when the return from an investment in long term bond or security is lower than the return from a short-term investment. Historically, an inverted yield curve has indicated a knock by the recession. Recession looms at large over the entire globe. The World Bank slashes its estimate for global economic growth from 3% in 2018 to 2.9% in 2019.
Indian stocks appear to be doomed, shedding around $149 billion in investor wealth since 5 July when finance minister presented her Union budget.
Financial institutions and observers have been careful in uttering the word though. Fitch Ratings say that there are no signs of the setting on the global recession. Analysts opine the despite the global circumstances, major economies like the US are rising above trend with household income growth stable, and the unemployment rate quite low. Further recent surveys have indicated that US companies plan to invest more in 2019.
In India, the dire state of things is getting clearer day by day. Since their record highs in late 2018, BSE Midcap and Smallcap indices are down 25.2% and 35.4%, respectively. Indian stocks appear to be doomed, shedding around $149 billion in investor wealth since 5 July when finance minister presented her Union budget. IHS, in a report published by WEF, predicted a recession in two years. According to SBI research wing, 330 out of 384 companies exhibited negative growth. De Beers, the world’s largest diamond mining company, recorded a drop of 17% in its revenue due to decreased demand in India.
The Signs of Alarm – Recession is here
Slumping sales forcing Automobile Sector to cut down
According to Society of Indian Automobile Manufacturers (SIAM), passenger vehicle segment- 17.5% sale gone down in June 2019. Production cut down also some units shut down leads to 8 to 10 lakhs job lost.
FMCG Sector witnessing consumption restraint
FMCG, one of the fastest growing and flourishing sectors in India is showing consumption restraints. Hindustan Unilever reported the lowest growth in Q2 FY19- 5% in volume compared to Q2 FY18-12%. Dabur only 4% growth and Godrej only 1% growth
Struggling Core sectors bringing down markets
Eight Core sector growth came down while the cumulative growth of 2018-19 stood at 4.4%. It is 1.5% down from 7.8% in June 2018 to 6.3% in April 2019. The bear trend in the market owes the trajectory to this decrease in growth.
Agrarian Crisis fuelled by Domestic fuel shortage
Average annual agricultural GDP growth came down to 2.9% of the last five years compared to the preceding five years that was 4.3%. Agricultural Export decreased from $43 billion in 2013-2014 to $39 billion in 2018-2019 whereas imports increased from $14 billion to $23.5 billion.
Major Factors spurring Recession in India
Demonetisation (Nov 2016) brought an unending liquidity crunch
The sudden, stunning decision of the government to ban the larger ‘500 and 1000’ rupee currency notes. The currency scrapped amounted to Rs. 15.4 lakh crore of hard cash in circulation. This resulted in a severe blow to consumption, in a country like India majorly dependent on cash. Demonetization also factored in income decrease, demand decrease, supply decrease, and the vicious cycle of job loss accelerated.
Infrastructure leasing and unpaid debts fuel banking crisis
IL&FS is the infrastructure project in India funded by the corporates like ICICI, IDBI. LIC owns the highest share 25.34%, followed by ORIX(Japan) 23.54%, followed by ADIA (Abu Dabi) 12.56%, HDFC, SBI, CBI. Raising funds by loans, bonds, non-convertible debentures, certificate of deposits, and commercial papers. Now, Debt of 91,000 crores when unable to repay the amount back to the investors. The crisis is yet to blow in full face of the economy.
The staggering list of NPAs (Non-Performing Assets)
Whenever the NPA stats increase, infrastructure, growth, development and sustainability of market all are forced into trouble. One of the schemes that NDA I launched was Mudra Bank scheme, which helps in providing income-generating opportunity. Mudra Bank is a NBFC (Non-Banking Financial Company). It is not dealing directly with the people, and there is no collateral required, which increases the chance of defaulters. It is under SIDBI. Government’s wavering of loans has also contributed to the economic instability.
US-China inspired Global Trade War: The tariff tussle
Recently, the US designates China a ‘Currency Manipulator’, in response, China allowed its currency to drop, and Chinese companies have halted the purchase of American goods. Rising protectionism and interest rate globally in the developed world can affect the Indian Economy severely. And rising interest rates in the US will strengthen the dollar and weaken the rupee further, and the cost of import will increase. As per Sunil Kumar Sinha, principal economist at India Ratings one needs to wait to see the US march GDP data to conclude on prospects of recession, as the similar trend was observed, but it did not lead to recession.
The Ensuing Effects of an Economic Meltdown
The sector worst affected can be the IT sector as 75% of its revenue comes from the US. If a full recession hits, then companies in the service sector like health care, financial services will likely have to cut down their spending. In such a situation, India will have to revise its GDP to about 8-8.5% or even less. This will also affect the portfolio and fixed investment flows.
The Reserve Bank of India cut repo rate for the fourth consecutive time this year to 5.4 percent from 5.75 percent amid low inflation, faltering economic growth and uncertain global scenario.
About two lakh jobs have been cut across automobile dealerships in the past three months as vehicle retailer community tide over the impact of an unprecedented sales slump. The Reserve Bank of India (RBI) on Wednesday cut repo rate for the fourth consecutive time this calendar year to 5.4 per cent from the current 5.75 per cent amid low inflation, faltering economic growth and uncertain global scenario.
Volatility in foreign exchange rates will severely impact the corporates. Taking safe side companies have already started to develop market and supply chain links in alternate markets like Europe and Asia. Known investors such as Rakesh Jhunjhunwala, Ashish Kacholia and Dolly Khanna, among others, were seen trimming stakes in several midcap and smallcap stocks during June quarter.
India’s exports to the US have increased recently. So, a recession in the US will hit big Indian companies shrinking their profits, thus reducing GDP growth. However, experts are of the opinion that long term prospects for India are stable as a weak dollar can bring more money to Indian markets.
By: Abhishek Kumar Sushil, Staff Writer, Dkoding Media