Recession: Knocking at door of Indian Economy or Not!

Hell Friends!

Hope you all are doing well and getting benefits from my previous posts. Today we will talk about “Recession 2019-whether India is heading towards it or not or Indian economy is witnessing a crippling slowdown”. We all know that India has successfully weathered the ‘Great financial crisis of September 2008’. Financial crisis 2008 began in 2007 with a crisis in ‘Subprime Mortgage Market’ in the United States. At that time India’s trade collapsed alongside global trade. Demand-Side factors seem to be the primary culprits. Let’s analyze whether India is again heading towards recession or not?

Trade Cycle:

Every country witnesses 'Boom and Depression' periodically. Depression is characterized by falling production, falling prices and rise in unemployment. Boom is characterized by rising production, rising prices and high employment. These changes are called Trade Cycles.

Phases of Trade Cycles:

(a) Expansion

(b) Peak

(d) Trough

(e) Recovery and Expansion

Recession:

In Economics Recession is a business cycle contradiction when there is general decline in economic activity. Recession may be triggered by financial crisis, external trade shock, adverse supply shock, bursting of an economic bubble.

Origin of Recession:

Under the phase of prosperity, the entrepreneurs make investment in certain ventures which do not prove to be profitable. Their optimism gives way to pessimism. Investment shows signs of decline. Many enterprises are closed down. Unemployment spreads and income of people falls. Thus beyond the stage of full employment, any increase in investment is followed by increase in interest, wages and other costs. Consequently prices rise sharply causing fall in demand. Fall in demand obliges the firms to sell their stocks at reduced prices. This paves the way for 'Recession'.

Features of Recession:

1. Fall in income and output.

2. Workers are rendered unemployed.

3. Prices begin to fall.

4. Wages fall.

5. Profits fall. No new borrowing despite fall in rate of interest.

6. Contractions of bank credit.

7. Fall in investment sets in motion the reverse action of the multiplier. Thus income falls many times more than decline in investment.

8. Demand of consumers for goods fall.

9. Sharp decline in stock of goods.

10. Fear among people. They turn pessimistic share-price falls.

Signs that suggest Indian economy is in slow down situation:

1. Sale of Maruti Suzuki and tractor sales for Mahindra has declined.

2. Slow down in consumption like food items.

3. Decline in GDP growth rate.

4. Drop in Industrial output growth rate of 8 Core Sectors (Steel, Cement, Fertilizers, Coal, Electricity, Crude Oil, Natural Gas and Refinery products) have declined.

5. Housing sales decline due to fall in prices in real estate sector.

6. Bank retail loans.

7. Revenue earning rail freight.

Is Indian Economy heading towards Recession or not?

1. Various economists have different views for this situation. Some are saying India is not close to Recession but is witnessing a crippling slowdown. Some sectors like 'Automobile Industry' is dangerously close to Recession. Some economists are saying that ‘Escalation in trade tension between US and China’ is the chief factor nudging the India economy towards a Recession.

2. Today ‘India’s Fiscal Deficit’ is touching ‘6%’. If situation is not brought under control then our generation will face the worst Recession so far.

3. In India we are rolling out more and more social welfare schemes thus rather controlling we are increasing expenditure. Thus Indian economy is heading towards Recession.

4. ‘GDP Growth’ is hovering at its lowest ebb in 5 years and 'Manufacturing, Capital goods and IIP' (Index of Industrial Production 5.2%) all coming under pressure. It is also predicting Indian economy is heading towards Recession.

5. ‘6.1% Unemployment Rate’ in India. There is no employment and economy is slowing down day by day.

6. ‘Global Trade’ uncertainties have started a negative cycle. Businesses do not feel confident to invest more, given the lower demand for consumer goods. ‘Reduced capital investment’ will show up in ‘Reduced Wages’ and ‘Lower Aggregate Demand’. Thus economy is moving towards Recession.

7. Indian economy is struggling to find a ‘Domestic Growth’ lever. In India government and businesses are overextended and household consumption is decreasing thus affecting economy.

8. In India ‘Structural Component’ that is determined by ‘Institutions, Productivity, Human Capital’ and ‘Cyclical Component’ that is determined by ‘Short term fluctuations’ both seem to be in a slowdown phase and my assessment is that it will slowdown further and India will face Recession in 2020-2021 as well.

9. ‘Bond Yield Curve’ across rich countries have started inverting, indicating that investors foresee greater stress in near future.

10. Indian economy is suffering due to many domestic confidence shocks like a bruised credit market leading to credit averse financial agents, demonetization, faulty goods and services tax structure, direct tax uncertainty, farm income compression and rising unemployment. All these shocks are heading economy towards Recession.

11. ‘Consumer Economy’ that is passenger vehicle sales, two wheeler sales and domestic tractor sales recorded negative growth rate in first half of 2019. Thus consumer demand is decreasing and slowdown in economy. If demand is low then industries cut production.

12. ‘Investment’ in new projects is low in June 2019. Drop in value of new projects was driven by drop in private and public investment thus slowdown is continuing in Indian economy.

13. In July the sale of automobile industry slumped 18.71% that is 18.25 lakh units from 22.45 lakh units. This is steepest fall in 19 years. Total cost of vehicle ownership went up largely due to increase in fuel prices, higher interest rate and hike in vehicle insurance costs. IL and FS crisis has led to severe liquidity crunch. Lack of working capital has led to closure of nearly 300 dealerships across the country. Thus Indian economy is still in slowdown situation.

14. Over the last two years, ‘Bank Credit’ slowed down because banks had to make higher provisions for bad loans. With six public sector banks under central banks Prompt Corrective Action Framework and some others have pressed pause button on lending, retail and businesses found it difficult to access credit.

15. Poor bank credit, liquidity crisis and high interest rates all created huge drag on economy.

16. Amendment to FRBM (Fiscal Responsibility and Budget Management Act) 2018 have squeezed govt. expenditure instead of redirecting it to productive uses. FRBM is not an expenditure compression mechanism, it is an expenditure switching mechanism.

17. Contraction in India’s merchandise exports.

What will be the Impact of Recession on Indian economy?

1. ‘Global trade conflict’ will hurt emerging economies like India. It is expected to slow down to 4.6% in 2019.

2. Indian economy will suffer from rising ‘Protectionism, and rising ‘Interest Rates’ in developed countries.

3. There will be affect on Indian economy in form of crude oil prices, dollar exchange rate and foreign portfolio investors.

4. ‘Decline in industrial production’ will adversely impacted the electricity generation, steel production, downtrend in petroleum product consumption, real estate sector etc.

5. Recession will hurt people by declining income level and rise in unemployment level.

6. Rising interest rate in U.S. increase the value of dollar as well as lead to outflow of foreign money from Indian stocks and other financial assets leading to a vicious cycle that will weaken the rupee further.

7. Fall in rupee will result in rise in cost of imports and Indian consumer will have to pay more for same goods and services.

8. Some hope that government will control it by using monetary policy. But ‘Overuse of Monetary Policy’ will lead to ‘Diminishing returns’.

Measures to Control Recession:

1. Expansionary Fiscal Policy:

Expansionary fiscal policy increases the level of aggregate demand either through increases in government spending or through reduction in taxes. It is most appropriate when economy is in Recession and producing below its potential GDP.

2. Counter Cyclical Fiscal Policy:

If fiscal policy of government is so formulated that it generates additional purchasing power during depression and contracts it during expansion it is known as Counter cyclical Fiscal policy. It is needed that favors expansion in terms of slow down but cuts back on expenditure during good times.

3. Expansionary monetary policy:

(a) Cutting interest rates should help to boost aggregate demand. Central bank could buy government bonds or mortgage securities. These bonds cause lower interest rates and help to boost spending in economy.

(b) Quantitative Easing: Under this Central bank electronically create money and use this money to buy long dated securities. This increases bank reserves and should help encourage bank lending. It reduces interest rate on bonds which thus encourage spending and investment.

4. The government should encourage exports of readymade garments instead of raw cotton and yarn. That’s why Bangladesh and Vietnam have an advantage. Thus it will grow domestic market.

5. Push Public Sector Undertakings (PSUs) for asset creation.

6. Increase household saving. Government could have come up with saving instruments like infrastructure bonds.

7. Structural Change:

Government should boost spending by taking advantage of low bond yields. Increase in discretionary fiscal stimulus will boost aggregate demand, create jobs, improve business and consumer confidence.

8. Government should set out concrete plan to deal with long spending like evaluation of health care spending, caps on costs of health care, increase taxes and raise retirement age.

9. Adopt Sectoral incentives and confidence building steps for private sector. Boost infrastructure investment, GST relief to specific sectors like automobile sector that could boost demand, cut red tape on cross border trade.

10. Improve ease of doing business.

At last we can conclude that an appropriate mix of fiscal and monetary policy would always prove more effective than a single policy. We need a fresh set of reforms to control this slow down situation to attract private sector to invest.

If you like this article then please share with your friends and family and also like my Facebook page…Link below:

Please subscribe my Blog (Sidhuz Vlog) by click on the below "Bell Icon" for latest updates.......

Recession: Knocking at door of Indian Economy or Not!