Economic Downturn, just around the corner?

Recession is something that haunts the mind of every working-class citizen, from business tycoons to daily wage laborers.

It has been over a decade since the world faced a severe decline in economic activities, frequently termed as a Recession. It is something that haunts the mind of every working-class citizen, from business tycoons to daily wage laborers. Technically speaking, a recession is classified as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP). Typically, a recession produces a domino effect- stagnating economic growth leads to the generation of lesser revenue, due to which unemployment increases. This leads to shrinkage in demand for goods and services and henceforth tightening credit.

Inversion of the U.S. Yield Curve

Since the very 1960s, one of the most scrupulous models to measure economic sensitivity has been the U.S. Treasury yield curve, which is plotted between the bond yield and maturity period. Generally, the longer yields are always greater than the shorter ones. However, recently the yield on a 10 year U.S. Treasury note has dipped below the yield of a 3-month note, former being more sensitive to inflation while latter to Federal Reserve policies. When the Fed tends to raise the rates, investors tend to invest more into the longer-dated bonds, indicating a strengthening economy. While the inversion of this curve signifies that there is a higher perceived risk among the investors, of an approaching economic depression.

Mounting Global Tensions

World Bank’s Global Economic Growth estimate has seen a decline from 3% in 2018 to 2.9% in 2019 and it has been predicted to go down to 2.3% in 2020. The increasing stress over trade relations between the US and China is acting as a catalyst to the situation; any further escalation in this matter can cause damage of around $600 billion to the global economy, according to Organization for Economic Cooperation and Development. The tensions between the US and Iran have also soared, accounting to the suspension of the nuclear deal by Iran, giving rise to the intensification of military activities around the Strait of Hormuz with Iran threatening to block the international oil chokepoint from which 19 million barrels of oil pass through every day. Oil shocks have destroyed more economic expansions over the last forty years than any other single cause. Oil prices are also affected by the rising interest rates in the US, which increases the Dollar Exchange Rate. While Trade wars and oil price hikes target the supply side aspect, they also threaten aggregate demand and thus consumption growth, because tariffs and increased fuel prices reduce disposable income.

A slowdown of Domestic Economy

Countries like India which are primarily dependent on exports are more sensitive to such issues. The domestic economy of India has also shown signs of fatigue over the past couple of years. According to government sources, the GDP growth rate is expected to fall from 7.2% in 2017–18 to 7.0% in 2018–19, primarily because of the degradation in the sales of automobiles and consumer durables. International developments such as the US-India trade impasse in which the United States revoked the preferential trade status given to India under the GSP (Generalised System of Preference) resulting in import duties on over 200 billion dollars’ worth of Indian exports. New Delhi has retaliated with taxes on agricultural exports by the US. Any further escalation of the conflict might adversely affect the bilateral relations between the two countries.

Unemployment and Farmer Distress

The economic situation has been exacerbated by the rising unemployment rate which reached a staggering 7.6% in the year 2018, which also makes it the highest in the last 40 years. Considering that a third of the Indian population will belong to the age group of (15–24) years by 2020, the World Bank estimates that India needs to create 8.1 million jobs annually to maintain its employment rate. This presents an enormous challenge to the functioning government to ensure the employability of the growing youth in the country. Additionally, mounting distress among farmers across the nation fuelled by deficient rainfall, mismanagement of water resources and collapse in farm prices has deteriorated the agricultural sector. Government schemes aimed to curb the crisis have not helped in reviving the economy either. A recent report by NSSO (National Sample Survey Organisation) points out that 70% of the farmers have never heard about direct cash transfer schemes by the government.

What can be done to ward off the consequences of a Recession?

The possibility of a recession in the near future does seem pretty imminent. Nevertheless, with steps in the right direction and efficient governance by the newly elected government, we surely can avert the severe consequences of a recession. Firstly, a lot has to be done to rejuvenate the manufacturing and housing sector of the country. Initiatives such as the “Make in India” movement have to be realized to its utmost potential and opportunities coming from the US-China trade war have to be utilized to boost manufacturing and employment in the country. With both cement and real-estate coming under the 28% GST slab the housing sector has also been under pressure due to rising prices. A relaxation of taxes on these commodities will encourage buying and investment, signaling a positive trend in the market. The agricultural sector also demands significant structural reform. Myopic efforts by the government such as a slight increase in MSP (Minimum Support Price) or loan waivers to farmers have not helped in mitigating the root cause of this nationwide crisis of farmers. Moreover, rather than engaging in a conflict with the RBI over the procurement of funds from its cash reserve, the government should work cohesively with the governing body to tackle the liquidity crunch in the market and revive the NBFCs.

Learning from past experiences

After 2008, to stave off panic and bolster economic performance, developed countries took several steps in this matter, since they were affected the most. The US Federal Fund rates were reduced from 5% to almost nil, while in some countries like Japan and Switzerland, it was kept below 0%. Major Banks then started large scale asset purchases, bringing down long term yields, expanding balance sheets and flooding market with liquidity. In 2007, the federal deficit in the US was about 1.1 % of the GDP, while in 2009, it increased up by 9 folds, and similar trends were observed in the EU. But on the other hand was India, which due to its long vision policy making and implementation was able to tackle recession much easily. After the liberalization in 1991, the Indian market was continuously regulated by various ministries and autonomous bodies like Reserve Bank of India (RBI) and the Security and Exchange Board of India (SEBI). They tend to implement a P note (participatory note) system which prevents Multi-National Corporations to take their money out of the Indian market in case of a recession. RBI also tends to maintain a high Cash Reserve Ratio. The basic difference also lies between the mind-set of Indian citizens, which are more inclined towards savings and avoidance of any risky investment like in the stock market; they instead prefer gold which reduces the risk of losing money.

With India resting its faith and trust once again in the BJP government by giving it a landslide victory in the 2019 LokSabha elections; the people and especially the youth are looking up to the government to accomplish its promises of job creation and economic growth. With efficient policymaking and collective public-private investments, the government can surely nurture a conducive environment for economic development; which may help it weather the storm once again, and maybe even advance towards reaching an ambitious goal of becoming a 5 trillion dollar economy by 2022.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store