The high inflation rate has resulted in a 10%-12% increase in building costs, affecting developers’ expected cashflows and project completions.
The State Of The Upcoming Recession In The US & How It Might Affect India
Negative attitude shock for consumers, supply chain disruptions, decreasing energy availability, and tighter financial conditions are some factors that might slow the economy's development.
According to Nomura, India’s GDP would increase by 7.2 percent in 2022 before slowing to 5.4 percent in 2023. The research company warned in a research report on Thursday that the ‘prolonged mild recession in the US might lead to a slowdown in India, which has been returning to pre-pandemic levels. The Federal Reserve’s rate move may potentially depress market spirits.
Nomura launched the Nomura India Normalization Index to measure the progress of several industries in India. According to the indicator, the service sector is up more than 40 percentage points (PP) from pre-pandemic levels. Almost all sectors in the country are improving, including consumption, investment, industry, and the external sector.
Negative attitude shock for consumers, supply chain disruptions, decreasing energy availability, and tighter financial conditions are some factors that might slow the economy’s development. Inflation, which remains higher than its Asian counterparts, is already weighing on economic development.
We believe the RBI’s latest FY23 inflation prediction of 6.7 percent year on year is optimistic, and that inflation has yet to peak, with our expectation of 7.5 percent. We retain our prediction for a terminal repo rate of 6.25 percent by April 2023, with a 35 basis point increase in August. It gets followed by 25 basis point increases in each of the four subsequent policy sessions. The risks appear to favor more front-loaded rises and higher terminal rates. We also anticipate 100 basis point CRR increases in the second half of 2022.
According to the research organization, the economy is resuming above-normal growth, with consumption 14 percentage points higher than pre-pandemic levels (PPL). Investment, industry, and the external sector are performing much better than pre-Covid. The big surprise has been the services sector, trailing 4 percentage points below the PPL in March but is currently heading close to 40 points over the PPL. Overall, aggregate demand is presently 35 percentage points higher than PPL, while supply is around 17 percentage points higher.
US Recession Impact on the Indian Economy
It is becoming increasingly impossible to ignore the rumblings of an impending recession. There are whispers that a recession in the US might engulf global bourses and developing nations, resulting in slaughter and significant job losses.
And the signals coming from the Indian corporate world are far from encouraging. In its most recent quarterly reports, Mukesh Ambani’s Reliance Industries highlighted the possibility of a US recession harming its future revenues. Kristalina Georgieva, director of the International Monetary Fund (IMF), recently warned that 2022 would be difficult, and 2023 would be even more difficult.
When the G20 gathered in April, gloomy clouds were gathering on the horizon of the global economy, prompting the IMF to lower its global growth prediction for this year to 3.6 percent. Given the enormous negative risks, the IMF made no bones about the reality that the 2023 growth rate might deteriorate.
Meanwhile, Indian corporations gear up for a string of poor quarters. In a study done by brokerage and research company JP Morgan, 142 CIOs from technology businesses projected a 30-31 percent likelihood of a recession impacting the US and European economies, plus a 35-38 percent chance of growth slowing over the next 12-18 months.
Furthermore, 39 percent of CIOs believe companies will have to postpone IT acquisitions in the second half of FY22. According to the JP Morgan research, organizations that use TCS, Wipro, and Infosys would likely reduce their IT investment. If the future is bleak for IT firms, a bloodbath is already starting in the Indian startup industry. According to Inc42, a news service that closely monitors the Indian tech, startup, and internet sector, more than 11,360 people have been let off as the startup ecosystem confronts a financing block till July 14.
Amid such doom and gloom, the Reserve Bank of India maintains some semblance of optimism (RBI). The recent drop in crude oil prices and the subsequent impact on commodities globally has fueled the central bank’s belief that “unjust inflation may be peaked.”
The central bank is banking on the southwest monsoon to provide another bumper crop year, allowing rural demand to catch up with urban expenditure and cement economic recovery.
If the current commodity price slowdown continues, combined with the easing of supply chain pressures, the worst of the recent increase in inflation will be left behind, allowing the Indian economy to escape the global inflation trap and reap the benefits of the exuberant supply response.
The RBI has ample reason to hope that a recession does not occur. In a recessionary climate, demand drops. As a result, expenditure falls across the board. This does not appear to be the case with demand data originating on the ground.
Consider the transportation indices, which increased significantly in June. In June 2022, railway freight traffic increased over pre-pandemic levels and a year prior (11.3 percent year on year). There was an increase in freight transportation for coal and cement. Cargo at primary ports increased by 13.6 percent year on year in June, owing to an increase in coking coal and thermal coal freight, as well as other miscellaneous cargo, which account for around 39 percent of the overall cargo.
Construction activity remained on the rise in May-June 2022, with cement output and steel consumption increasing over pre-pandemic levels. The impact of growing input costs was limited since demand outstripped supply, as seen by capacity utilization in the cement sector reaching over 70% in June 2022.
However, these measures do not reduce India’s susceptibility to foreign shocks, which is heavily reliant on crude oil prices. Crude oil price fluctuations significantly influence a variety of economic indices, including the current account deficit, inflation, GDP, fiscal health, and rupee levels.
With the rupee now trading at 80, analysts are sounding the alarm, warning that the currency is headed for 81-82 levels. However, these measures do not reduce India’s susceptibility to foreign shocks, which heavily rely on crude oil prices. Crude oil price fluctuations also significantly impact economic indices, including the current account deficit, inflation, GDP, fiscal health, and rupee levels. With the rupee now trading at 80, analysts are sounding the alarm, warning that the currency is headed for 81-82 levels.
Is a soft landing in the United States impossible?
US economics team recently downgraded its base case for the US economy to a mild recession beginning in Q4 2022, reflecting stricter financial conditions, a negative sentiment surprise for consumers, worsening energy and food supply disruptions, and weaker global growth prospects.
The US accounts for around 18% of India’s goods export market and more than 60% of India’s IT-ITeS exports. In addition, the global recession is projected to weigh on India’s export and investment prospects. When paired with rising levels of inflation that are reducing consumer growth and the growth sacrifice caused by tighter financial conditions, this predicts that India’s medium-term development may decline. According to Nomura, India’s GDP growth would average 7.2 percent in 2022 before slowing to 5.4 percent in 2023, with downside risks.
The stock market, commodities, and rates have all taken a knock in recent weeks due to increased recession worries. Experts disagree on whether a recession has occurred or is on its way.
Central institutions, like the US Federal Reserve, have aggressively raised interest rates to halt the spiraling inflation. This is likely to cause an economic downturn.
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US Recession Effect on India FAQ'S
The Great Depression had an immediate impact on Indian trade. Between 1928 and 1934, India’s exports and imports were practically halved. Prices in India fell as worldwide prices fell. Wheat prices in India plummeted nearly 50% between 1928 and 1934.
A weaker dollar may attract more international capital to Indian markets. Oil prices may fall, lowering inflation. Also, oil prices might fall below $70 in a recession. Because Asia is dependent on the US economy, a recession would affect the whole region.
According to a Bloomberg survey of economists, the likelihood of a recession in India is nil. Global shocks are mostly to blame for inflation and a likely slowdown in growth. External headwinds affecting the Indian economy may moderate.