Global crisis may slow down turbocharged Indian economy

global economy facing recession
The global economy is facing multiple challenges and uncertainties, from the impact of rising interest rates to the struggles of key sectors and the persistence of inflation.

State of Indian economy: India has been an outlier in global growth in the last two years at a time when all other major economies were witnessing low growth rates. Last week, Chief Economic Advisor V Anantha Nageswaran had expressed confidence that the Indian economy will grow at 6.5% in the next 10 years on the back of a turnaround in financial and investment cycles. In an interview to the Economic Times, World Bank chief economist Indermit Gill said India will record a robust growth rate despite the global headwinds.

The optimism around the world’s fifth largest economy is despite the fact that it recorded a growth rate of 4.4% in the third quarter of 2022-23, down from 11.2% in the same period of the previous year. The growth rate in the second quarter of the last fiscal year was 6.3%.

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The economic conditions are at a flux at present which makes it a difficult period for forecasters. While there is an air of optimism surrounding India’s growth prospects as expressed by CEA Nageswaran and World Bank’s Gill, there are a few factors that threaten economic growth in the next decade. These factors include the risk of a global recession, slower export growth, and a demand slump.

Looming recession risk

While it is true that the economic fortunes of any country may turn in a span of 10 years, the ongoing macroeconomic conditions have a bearing on the current growth prospects. This is especially true at a time when the world is staring at a possible recession. The ongoing Russia-Ukraine war and the banking crisis in the US have accentuated the economic crisis triggered by the coronavirus pandemic. Analysts with financial services firms such as JPMorgan believe that a recession is inevitable.

A few important events are now increasing the likelihood of a world economic crisis. These include a series of bank closures including those of Silicon Valley Bank in a span of a week that led to fears about a financial sector collapse. That the Federal Reserve continued with its planned interest rate hike in its March meeting despite the banking drama is further evidence of a looming financial crisis.

Indian economy is highly sensitive to the growth cycles of advanced economies which are themselves in trouble, according to major economic forecasters in the world. The January 2023 World Economic Outlook by IMF predicts a slowdown in major economies and a World Trade Organisation report estimates the global trade growth to slow to 1% in the current year.

Slower global exports

The country is facing another problem in the form of slower global exports. The CEA also pointed to this, saying that global exports growth may be tepid due to the kind of uncertainties the world is facing. As global slowdown this year will be led by advanced economies which are a major importer of Indian goods and services, a slowdown in the US and the eurozone directly translates into slower demand from these areas.

Several industrial sectors such as textiles, footwear and leather are heavily dependent on these countries for exports. The ongoing slowdown will make these sectors particularly vulnerable, says a CRISIL report. The demand for Indian goods will suffer. In the last fiscal, the US and the eurozone accounted for 18% and 15.4% of India’s merchandise exports.

Unemployment rises

India’s unemployment rate has risen to a three-month high of 7.8% in March because of a slump in the country’s labour market, according to the latest data from the Centre for Monitoring Indian Economy (CMIE). As per the CMIE data which was released on April 1, the country’s unemployment rate spiked in December 2022 to 8.30% but came down in January to 7.14% before rising again in February to 7.45%. However, this figure only captures a fraction of the true extent of unemployment in the country, as many people are employed in informal or non-regular work, which is not captured by official statistics.

One of the key factors contributing to unemployment in India is the slow pace of job creation in the formal sector. The new jobs creation is not keeping pace with the growth of the workforce. Additionally, there are a number of structural issues in the Indian economy that make it difficult for people to find work. These include poor infrastructure, low levels of education and skills, and a lack of investment in labour-intensive industries. Unemployment remains a long-term issue for India which will have a strong bearing on the country’s growth prospects in the near future.

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Slowing Agriculture growth

One risk that is building up in India is the risk of slowing agricultural growth. The year may see subdued agricultural growth firstly due to the El Nino effect. The probability is increasing day by day with heat waves across the country, and the same may hamper the sowing this year. Some governments have already cautioned farmers to delay sowing. Also, with three straight years of good agricultural production, it is also natural to experience a decline in marginal output.

Nevertheless, India remains one of the best performing economies around the world with the nation’s average annual GDP growth for last year at about 7%. By comparison, the World Bank projects the global economy will grow just 1.7% this year, the third slowest growth in almost three decades. Almost all reports from the international financial institutions such as IMF and World Bank suggest India is a bright spot in the troubled global economy. Meanwhile, the world’s second largest economy China grew slower than India for the first time since 2016. China’s National Bureau of Statistics reported the country’s annual GDP to be $17.94 trillion, a 3% increase from the previous year.