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Thursday, June 8, 2017

Is India heading into recession? The growth engine of the largest and the fastest developing economy has been slowed down!!!

Before reading this article one must be aware that the Government does not create a situation of recession or prosperity in the country. What government can do at the most is to create an inducing and efficient infrastructure in the country to promote more investment in the private sector, creating jobs. Modi’s government has brought many changes to the age-old corrupted financial infrastructure to promote healthy investment atmosphere in the country. However, no government in the world has a power to stop the recession.

There is a debate whether demonetization caused economy to slow down or economy had already started to slow down before the demonetization was triggered. However, there is no doubt that the demonetization actually sucked out the purchasing power (in terms of cash held) of the consumers for more than 6 months, since the time it was announced in the first week of November 2016. The Indian economy advanced 6.1 percent year-on-year in the first quarter of 2017, slowing sharply from a 7 percent expansion in the previous period and well below market expectations of 7.1 percent. It is the lowest growth rate since the last quarter of 2014, due to a slowdown in consumer spending and a drop in investment. One must also consider the continuous decline in the quarterly GDP number since March 2016 as depicted below. I am more interested to know the GDP growth in the 2nd quarter of the calendar year 2017.

Actually, based on the chart below it is pretty obvious that the economy has been shrinking with every quarter since April 2016; for 4 quarters continuously.


(click on the image above to maximise)

Generally accepted definition of the recession is “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters”.

RBI and the government has been claiming the inflation is under control. Could this not be the result of underlying recession in the economic activity? A possibility could not be ruled out. Besides, RBI has been reducing interest rates for the past 4-5 quarters to boost the demand for credit in the economy, still the picture of investment in the private sector is not promising and the picture of employment looks all the more gloomy.
India being the global hub of outsourcing be it for Information Technology or for Business Processing has been more dependent on the developed countries in the world for the employment purpose. The picture in the IT sector is not very promising. While many employees have been laid off, most IT companies don’t have enough projects to engage the staff to its full capacity. Changes in VISA regulation in major outsourcing countries such as the UK and the USA have already escalated cost of operating for these companies. Post BREXIT IT companies have also lost the geographical advantage of operating in whole undivided EUROZONE. To add fuel to this fire, a NEWS was released yesterday that the IT companies have to negotiate pricing of their existing projects and of course for the future projects also; which would be a great toll on the revenues of IT companies. Plus, post BREXIT and since the rise of Mr. Donald Trump as the President of the US, the concept of protectionism (reversal of the globalization i.e. localization) has been taking it’s roots. There is also a fear that the Indian IT companies are not finding sufficient talent pool to work on the latest technologies. One cannot imagine how the IT sector would survive in next few quarters.
Pharma and Telecom sectors have been badly hit already due to reduction in prices by one reason or the another. The wave of unemployment has already touched telecom sector. One would not be surprised if even Pharma sector gets hit by loss of jobs. While the fresh demand for credit has not grown up satisfactorily, the demand to refinance existing companies is definitely going up with every passing day. The increase in the demand to re-finance existing loan is a clear indicator of inability of Business Conglomerates to serve the existing debts at the current rate. The reduction of interest rates is another effect and the signal of recession. Automobile sector has given mixed numbers for the month of May.

The Global uncertainty is highest and tensions have risen to such an high extent that I had not witnessed in my life since the time I was born, I believe. Political & economic tension between England + Wales and Ireland and Scotland and Eurozone. Eurozone by itself cannot promise it’s existence for long. Geo-pollitical tensions in the middle-east countries. Also rising tensions between the US and the North Korea.

With Africa has already been declared to be in recession for the second time in a decade, it remains to be seen how other countries in the world dodge or manage to keep away the wave of recession.


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