How Recession Will Impact In India

How Recession Will Impact In India

How Recession Will Impact In India

The chance of another global recession happening soon is increasing, particularly if the current economic expansion remains. India is in a tumultuous situation with a weak economic situation, as shown by the falling GDP growth rate. High level of non-performing assets (NPAs), NBFC crisis as well as slow credit growth stand in front of the economy, challenging it towards recovering stronger in the short term. 

India has had experienced three such growth recessions in the past 10 years. The first incident was in the immediate outcome of the financial crisis that began in the US. Economic growth fell consecutively in the three quarters from June 2008, or the second quarter of financial year 2009. The recession was sharp but short.

The second incident was after the effects of the 2009 stimulus wore off. Economic growth had peaked in the three months ended March 2011 but decelerated for five following quarters after that. 

India is at present is in the third growth recession since 2008. Economic growth has already slowed down consecutively for four consecutive quarters. The economic growth in the quarter ended 30th June was slower than in the quarter ended 31st March, at least considering the latest high-frequency data, and several forecasts provided by the private sector economists. The latest goods and services tax (GST) collections data is also a sign of weak domestic demand, however, the fact that indirect tax collection is increasing slower than nominal GDP growth can also mean that demand which has been shifted to the formal sector after demonetization is again moving back towards the informal sector.

India's GDP growth has dropped down to 5%, which was the lowest in 6 years, effecting the sectors, which was already under pressure because of weak consumer demand as well as a credit squeeze from 2018.

A number of Indian sectors are experiencing the worst slowdown in months, even years. The Indian automobile sector, the 4th largest in the world in terms of sales, was facing deep decline for the last 10 months relating to the declining in demand, resulting in a noteworthy sales slowdown. The situation is the same, if not so serious, in a few additional sectors like real estate and banking.

In the meantime, activities of eight core sectors had fallen to 2.1% in August 2019, sharply falling from 7.3 % in the corresponding period a year ago.

Also, there was a slowdown in both services in addition to manufacturing sectors activities, which are equally significant for economic growth.

Though the above-mentioned points offer a small idea about India's economic spectrum, a thorough study of ground reports from many states specifies that the economic slowdown has hit India where it had more effect that is the vital medium and small-scale enterprises (MSMEs) or the support of most Indian sectors.

Also, it has been held that it is not the recession, the economy is rising but at a slower pace.

In India, the economy is growing; just the growth rate has slowed down, which is a huge impediment for the nation as it needs an accelerated growth towards providing employment to millions entering the job market each year

The current slip in GDP growth for four consecutive quarters is combined with a series of policy decisions. The two mega policy decisions are demonetization in November 2016 and the introduction of the goods and services tax (GST) in July 2017 which is said to have disrupted the Indian economy.

Intended at the greater formalization of the Indian economy, the twin disruptions hit a big setback towards the informal sectors that give employment to the maximum number of the workforce.

The policy disruption aftermath still continues and is emphasized by the crisis in banking as well as non-banking financial sectors. This has an effect also in the small and medium scale businesses more unfavorably than estimated following the downfall of Infrastructure Leasing and Financial Services (ILFS). Basically money just stopped rolling into the market. The net consequence was a huge loss of a job.

Jobs are the main key:

The precise estimation of job loss because of policy interventions is not available owing to contrasting claims ranging from 40 lakh to 4 crores since demonetization. As per the Centre for Monitoring Indian Economy (CMIE), the joblessness rate in July 2017 when GST has been rolled out was 3.4. It was rising since then and for the week ending August; it was at over 9%.

Jobs were lost in huge numbers. Rural India has undergone more owing to loss of employment. This was shown in the consumption pattern. Rural consumption showed greater falling trend than urban. Falling consumption or low demand forces manufacturing companies to cut down their output. Sustained low consumption rate led to layoff in corporations, closure of factories, showrooms and so forth.

Money eats/begets money:

When the economy is spiraling down, investment drives the growth figures up. But private investment is been dismal in the nation at a 15-year low. The government, then again, does not have sufficient money to invest.

Private investment has dropped in India on account of few factors, which are low demand, policy interventions as well as global factors. The lasting US-China trade war has kept the global investors predicting about what could be an enhanced and profitable investment. The impact is not restricted to India only.

The financial provision for a super-rich surcharge on foreign investments added towards the woes. The three factors combined to see an FII (foreign institutional investor) draw out from India to the tune of $2.2 billion in 10 months.

Simultaneously, the Reserve Bank of India (RBI) largely embraced an inflation-centric policy leaving lesser sum with the bank to lend towards the industry. The RBI has lately adopted a more favorable approach in its policy giving respite in the direction of the government.

While FIIs had pulled out huge sums of money from India and private investment was sagging, the government cannot push its own money into the market.

The government was managing with the non-performing assets of banks, the NBFC crisis as well as ensuring that the fiscal deficit target is not breached since this shall have a cascading effect.

The economy is rising and the prime minister has set an improbable target at this rate of GDP growth, on turning India into a $5 trillion economy by the year 2024, the government expenses come from the revenue it makes not from the size of GDP.

Fiscal deficit restraints mean the government would not be able to borrow money beyond a limit. This leaves a very small room for the government to invest. This is the condition of Indian economy currently. It is growing but at a reduced pace.

The latest policy declarations made by the government which includes withdrawal of super-rich surcharge are to be expected to bring back investment and produce jobs, and hence push demand for consumption. If that takes place, it would give a fresh boost to the Indian economy.

Will the economic slowdown have an effect on the Indian startup ecosystem?

Job cuts, employment freeze, factory shutdown, and suspension of production are few of the headlines staring at India as the Gross Domestic Product (GDP) growth rate of the economy fallen to 5% for the first quarter of 2019-20, the lowest in over 6 years.

Sectors which includes automobile, real estate, financial services, non-banking finance companies (NBFCs) in particular and manufacturing have shown indications of impact from this economic slowdown. Nowadays, it remains to be understood whether the thriving Indian startup ecosystem would also come under the cloud.

The startup ecosystem in India could be broadly divided into two groups. Those that are only building their new corporations whereas the others those are out there to gain a superior market share. In similar to this is the funding setting, which could vary contingent upon the growth stage of the corporation.

It was stated that economic slowdown shall have a trickle-down impact on startups. The startups are focused on the India market providing several kinds of goods and services might be impacted owing to lower spending power.

Others in the business feel that given how Indian customers normally purchase low ticket price goods online, the e-commerce/ sector is not likely to be impacted by the economic slowdown.

Many in the industry also feel that for few early-stage startups with a limited market share, the effect of the economic slowdown might be minimal. But it is not the same situation for those who command a large chunk of the market. Here, the economic slowdown is may affect their overall growth.

On the other hand, others believed that the economic slowdown might not have any effect on startups in India at all.

However one of the most vital elements is funding for startups. Slowdown usually doesn’t impact the early-stage ecosystem as investments are completed keeping in mind a 5 to 7-year cycle. Consequently, there is not likely to be an impact.

Though, the same could not be assumed concerning the late-stage corporations where funds come in looking at a shorter period of investment period.

The Indian startup environment is also much reliant on foreign inflows and any alterations in the overseas markets can put some constraints on the flow of money. It also relies on the direction of the public markets.

Given the present environment, funds that have been already raised capital are most probable in a safe zone, but the same could not be held regarding the ones with similar plans.

The slowdown might not impact the capital-raising capability of startups as they do not require heavy capital. Their fund-raised shall be reliant on several other factors for example nature of their business, competitive situation, as well as risk factors.

Since the economy looks to emerge out of the recession, with automobile corporations like Maruti Suzuki and Ashok Leyland forced to cut down manufacture because of lack of demand, the new-age economy has not actually offered any hope.

One of the aspects of the auto market slowdown is the growth of the sharing economy that is normally provided by startups. Therefore, there are two cases here; the traditional economy is slowing down as well as a shared economy is getting better.

As the nation goes into the festive season from next month, it was anticipated that it would ride on improved customer sentiment and their purchasing behavior. And, startups have a big role in this section.

The Coming next two months crucial:

The next two months would be vital for the government relating to reviving the Indian economy. A mixture of policy decisions and demand dynamics can decide whether India would be able to survive the economic storm or face a continued slowdown.

Government is expected to closely monitor sales all through the festive season, which is about to set in from the beginning of the next month. Generally, consumer demand gets better during the festive months as sales actions increase considerably.

While the government shall be hoping for a demand boost during the next two months, it is not going to be easy without reforms.

Focusing On Real Estate, Construction:

Since the real estate, as well as construction sectors, provide employment towards a large pool of people, economists consider that the government must introduce some momentary boosters to support the real estate sector comes out of its weak streak.

Many construction workforces and daily wage laborers who work in real estate were pushed out because of the economic slowdown. Thus, a large number of individuals are now sitting jobless which is a key reason why demand has dropped. Stimulating the demand in real estate and construction can steer the economy to revival.

Boosting MSMEs, Employment:

The government is required to come up with measures towards increasing wage growth, which dropped significantly because of certain policy reforms intended at correcting macroeconomic imbalances, as shown by an SBI study.

This, on the other hand, is not possible without inserting more liquidity into the system. Regardless of the bank mergers as well as shots of recapitalization, Indian banks are far from retrieval, with non-performing assets (NPA) close to Rs 8 lakh crore.

The NBFC or shadow banking segment, which is the main lender to Medium and Small Scale Enterprises (MSMEs), is still unwilling on lending towards business as they continue to face the effects of the liquidity crunch.

It is going to be almost impossible to manage the slowdown without stimulating small scale enterprises, which make a bulk of employment prospects across sectors.

Not Mergers, Higher Lending:

While the government was busy stating bank mergers as well as minor policy reforms, economists had made it clear that such measures would not play a crucial role in economic revival.

The decision to amalgamate non-performing banks with anchor banks, those carrying out much better, could turn into a fruitless move, as per many economists who think that it shall only increase complications.

Considering those previous bank mergers which have not turned out the way they were imagined, there are numerous doubts over the latest move stated by Finance Minister Nirmala Sitharaman.

The government also must focus on measures that would enhance bank and NBFC lending instead of further complicating the situation with bank mergers, as per many economists.

Though the slowdown will perhaps continue for the next quarter, it is high time the government emphases on fixing the liquidity emergency, which has choked lending towards most MSMEs and decreasing the tax burden on individuals and corporations.

Conclusion :

An economy is well-defined to be in a recession if growth contract for two quarters consecutively. That is not the case with India. Though there are some sectors in the Indian industry such as automobiles and textiles, two of the biggest providers of employment, are already facing a recession. It is a matter to think about seriously but not a matter to panic.  The more money the government would be spending in stimulating the demand as well as investment in the economy either by sops for consumers or incentives for companies, the sooner the economy shall revive. 

It shall be safe to believe that the Reserve Bank of India's rate cuts assisted by its order on following external benchmarks for loans can lower interest rates, causing much-required relief.

Apart from adding stimulus packages, the government also requires to keep monitoring the situation for the coming two-three months when demand is estimated to increase due to the start of the festive time.

eStartIndia is the professional tech-based online business and legal services providing a platform which helps the clients to simplify the procedures of all kinds of registration, implementation, tax concerns and any additional legal compliances and services related to the business in India.


eStartIndia Team

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