Is India headed into a recession? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is India headed into a recession? 

A  A  A
In this issue:
» Another interest rate hike on the cards?
» US dollar is under threat from this
» Oil to get dearer?
» Tug-of-war for talent in India
» ...and more!

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India was one of the lucky few countries that staged a smart recovery after the global financial crisis. The turnaround impressed the entire world. Its higher economic growth rate made it one of the hottest investment destinations. Conservative growth backed by prudent economic policies was the hallmark of India's steady recovery.

However, the continued global economic stress has not left India untouched. A trident of higher inflation, interest rates and slower growth is now plunging deep into India's heart. The country has been battling the inflationary pressures through stricter monetary policies. The Reserve Bank of India (RBI) has already raised interest rates eight times in one year. But inflation still continues to spiral upwards. And the higher cost of borrowing is forcing companies to delay their budget spends. This in turn is hurting GDP growth rates. Slower growth would put pressure on the country's burgeoning fiscal deficit in the form of higher subsidy payout. And if the spiral continues, then India would find itself sinking into the whirlpool of recession (lower consumption and growth rates).

It is more important to deal with the reasons behind this inflation monster. For this, the government needs to remove the bottlenecks that are causing prices to go up and lead to inflationary pressures. A major overhaul of reform policies is thus in order. Agreed that debating on bills for ruling out corruption is necessary. However, it is pertinent that policymakers work on reforms to arrest the recessionary trend on a more urgent basis. Else there is little to suggest that India's short term problems cannot spill over to the long term.

Having said that we believe that the very reasons that helped India emerge stronger after the crisis of 2008 will help it tide over problems this time as well. All we need is some more commitment and timely execution of the long term planning.

Do you think India will be second time lucky in emerging from the recessionary trends ahead of its developing peers? Share your comments with us or post your views on our Facebook page.

01:15  Chart of the day
The IMF (International Monetary Fund) is looking out for its new chief since the departure of Mr Strauss Kahn. The automatic choice for this post has always been a member of the European Union. However, this time around, the emerging countries have argued as to why should this be the case? Why is it that a member of BRICS (Brazil, Russia, India, China & South Africa) or even the Latam (Latin America & the Caribbean) cannot take up this post? Well, an answer to his question lies in the extent of influence that various political blocks have in IMF. This influence is in the form of the voting power as a percentage of total available votes in IMF. As today's chart of the day shows, European Union (EU), United States and other advanced economies rank way ahead of the BIRCS. Hence, little wonder that the BRICS are unable to influence IMF's decisions to their favour.

Data source: The Economist

Over the span of last 15 months, the Reserve Bank of India (RBI) has already raised interest rates 9 times in a row. But there doesn't seem to be any end to it. It is widely expected that at its review of monetary policy tomorrow, there will be yet another rate hike.

The reason is obviously the untamed inflation level which shows hardly any sign of abating. We are very close to witnessing the headline inflation in double digits. If you look at the revised data for March 2011, headline inflation stood at 9.68%. As per the latest households' inflation expectation survey by the RBI, inflation is expected to be much worse for consumers. Currently, it is estimated to be around 11.5%. The same is expected to rise to 12.7% by next year.

The thing to be nervous about now is that the latest hike in inflation has been led by manufacturing products. This group forms the largest weightage in the Wholesale Price Index (WPI). With price hikes of fuels such as diesel being very much in the offing, the pressure will only get worse.

The status of the dollar as the world's reserve currency has increasingly been questioned post the global financial crisis. Because of the poor state of affairs in the US, the dollar's value has been eroded and the Fed has often been blamed for the state the greenback is in today. For instance, according to an article in the Mint, the greenback has lost more than a quarter of its value against other currencies, adjusted for inflation, over the last decade. It is down by nearly 5% since the beginning of 2011. But has the fall in dollar's value been due to the loose monetary policies of the Fed or is it due to problems on the fiscal front? The fear is that the Fed keeping interest rates low will spark inflation and further destroy the value of the dollar. However, historically, a 10% fall in the dollar translates into only a 1 percentage point rise in inflation. Further, with a 9% unemployment rate, inflation in the medium term could be a phenomenon one may not witness. Thus, the problems for the dollar are more on the fiscal front. This is because of the gargantuan debt that the government has amassed. Unless some efforts are made to bring this down, the dollar is likely to remain under pressure. As the debt situation spirals out of control in the US, countries across the world will lose faith in US Treasuries and will look to diversify to other currencies. This would then spell the death knell for the dollar.

One more prediction for oil prices. And it comes from none other than Mr. Badri, the official spokesman of Organization of the Petroleum Exporting Countries (OPEC). He predicts a rise in oil prices later this year. The prediction comes with a caveat- "if an expected supply shortage materializes".

As we all know, the recent OPEC meeting has come to a naught once again sending oil prices northwards. If prices rise further, it will dampen the demand which is not in interest of OPEC member nations. Going by economic sense, they will have to bend to relax the limits. The reasons are that Saudi Arabia which has got the maximum spare capacity has already ditched the limits and will continue to do so as per the markets needs. The second factor is International Energy Agency (IEA) at the opposite end of OPEC decision. The agency has said it will not shy away from using emergency reserves if there is a need. If that happens, it will be a direct attack on the cartel's monopoly and will undermine its importance. Last but not the least; the recently seen high prices are not a pure play of demand and supply but riding on speculations. Hence we believe that the concerns are overplayed.

Considering the shortage of engineering graduates in India, IT and manufacturing have always been in a tug-of-war to acquire the best talent. Slowdown in one would present a lucrative opportunity for other to hire the best. Inevitably, IT has always had an upper hand in attracting the best talent due to higher wages and lucrative on-site assignments. It is only during a slowdown in the IT sector you see momentum gravitating towards manufacturing for stability. This was evident when the IT sector went through a slowdown recently.

However, with signs of turnaround visible in the IT sector it seems that the hiring activity is again expected to gain momentum. Sample this. Out of the total engineers graduating this year, more than half of them are expected to be hired by the IT industry. Now, this would create a supply crunch in the manufacturing sector and lead to salary inflation. Right now, the wage differential at the fresher level between the two industries is about 30%. So, increasing wages can provide a temporary solution. Apart from higher wages, better campus initiatives can be another way to attract talent. However, due to structural problems it is difficult for the manufacturing sector to match the wage levels and well-oiled recruitment strategy of the IT industry. Hence, the tug-of-war is expected to continue with IT in a dominating position.

Meanwhile, Indian stock markets continued to tread in the negative territory, dragged lower by weakness in the realty and banking sectors. At the time of writing this, the benchmark BSE Sensex was trading lower by 105 points (down 0.6%). Asian stock markets were trading on a mixed note with Japan and Korea trading in the green while China and Hong Kong have been witnessing selling pressure. The European markets have opened in the red.

04:55  Today's investing mantra
"We like to buy businesses, but we don't like to sell them." - Warren Buffett
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28 Responses to "Is India headed into a recession?"


Jul 25, 2012

I believe its much to do with ourselves than pointing fingers. If we do out bit things are bound to improve.
Recession is in our thoughts in our minds. Let our actions contradict it! Buy as much of Indian Products as you can, for day to use. Boost the "Indian way".

Like (1)

Manish Reddy

Jul 3, 2012

The govt. of INDIA in first place should do some research on what is causing inflation, its easy to say rising prices, but then what is causing the prices to rise, is it the handy work of the traders or is it a natural phenomenon, if its because of the traders then stringent measures should be taken to control them or if its because of the natural phenomenon of chain reaction, we should find the root cause of the problem and put an end to it. Also, we should ban all nonessential imported goods and encourage the domestic produce. Instead of wasting the money on various vote banking popular schemes Govt. should spend that money on employment generating works like building infrastructure or establishing medium and large scale manufacturing units thereby providing employment and creating subsidiary units. If we really thinking of surviving economic crisis need of the hour is to do the above !!!

Like (1)


May 6, 2012

india is second fastest growing economy of the world after china.but in recent times,indian economy has been throttled by various issues lyk increased inflation,weakening ruppee and hence increase in oil prices affecting common man the most,increased fiscal deficit and lowering of global economic condition,,,,,,,,
so the govt. together with rbi need 2 bring structural reforms and bringing right policies lyk removal f retrospective tax amendment 2 increase capital inflows and fight RECESSION.

Like (1)

Sheo M Yadav

Aug 10, 2011

Yes,India headed into recession because all indian imported to 50% consumable goods,india is former prime country.90% formers of india does not pay taxes to goverment due to in season of pota crop cutting rate of grains had minimum by government in such action a businessman block to money for a long time. You can say it black money.We all indias are follower to westen why can not india headed to recession. TX

Like (1)

bhawana purswani

Aug 8, 2011

yup!!! India will surely recover it vaery efficiently

Like (1)

om prakash

Jul 2, 2011

Dear All,
Market strugling with inflation & i hope there will be anyway to get out from inflationery monster . we are sure that India falling in slow down but any huge crises is not possible india ready to fight with any big crises untill we are not getting any big corruption news like , 2G spectrumor olympic. As we know that our IIP rate is still higher then expectation of RBI & suppose if it will fall then also we will go in slow down for certain time.

Like (1)


Jun 19, 2011

Inflation is not a monstor as we are projecting it to be -but can be a friend ifn we adress it properly.

When the country has 50% population below poverty line one has to worry about them and not the middle class which has already comparatively raced ahead .

The middle class which comprises the salaried class and the small business class regularly get compensated for the dearness.
The middle class and the HIG are so affluent today that the roads not only in city but even in towns ate brimming with Skodas, BMWs and their like .A once proud owner of a Maruti 800 yesterday is the proud owner of Tata -MANZA (and its like) today ).When a builder announces a construction project the flats -costing from 40 lakhs to even 4 crores are booked in a matter of days -if not hours.
This middle class and the upper class is Indias strength also. Assuming 50% divide- the 50 crore persons in the middle class and above constitute a big internal market which is double of that of USA -Europe and Australia put together.
This factor steered India out of trouble with a smart recovery after the global financial crisis and will continue to do so now also - so, no need to make big hype on this issue.
The above (MIG+HIG)class are unfortunately politically inactive and would like to take a days' rest rather than go to the voting booth- but a miniscule of this vast ~ 50 crore population have off late become vibrant
-they want water but will no permit dams to be built(some birds or monkeys or some gathering place getting submerged)
-they want power but will notallow the power plants to come up
-they want production but will not not allow the big Industrial units to come up
-they want clean environment for monkeys and birds and fishes but will turn a blind eye towards for the environment of human beeings living in slums
-etc, etc .. and the list goes on
Instead of inflation control we have to prey to God to de-inflate the ego of thes persons sothat they use this energy to focus on national development
Take a look at our neighbour China -silently building Dams -industries-canals for irrigation-highways. in India they gradgually out pricing our handicrafts. This is the area where recession has already statted and is hitting not the MIG+HIG but the ballance 50% people (BPL)since these activities of handicrafts are their livelihood .
If potatoes sell at Rs 10 per kg atleast Rs 9.50 go for the middlemen and transport where as the toiling farmergets only 50 p/Kg(the farmer will be apparently broke , and will inturn fleece his labour)
If potatoes sell at Rs 40 per kg the amount Rs 9.50 will still go for the middlemen and transport and the toiling farmer gets Rs 29.50 p/Kg(the farmer will have a reasonable income and thus pay his labour well and thus alleviate the poverty and bring this labour class out of poverty line)
The US approach of not increasing the Interest rates has merit since they are lookong into the interest of the Country by giving facility for Industry to develop and accordingly generate higher income for their countrymen instead of chocking the industry and the countrymen as we are doing here to save the embrassment of(people who matter) listining to slogan shouting by some misguided MIG miniscule fraction

Like (1)

Dr. R. P. Kane

Jun 18, 2011

I believe in Charts. The 5-year chart of SENEX shows that fron a low of about 9000 in 2006, it rose to 21000 in December 2007, fell down to ~9000 in the end of 2008, rose to 21000 by the end of 2010, and has started falling. Since there is no good reason to even test 21000 again, leave aside piercing it upwards, to me, the writting on the wall is clear. We are going downwards. Of couse, individual scrips will have their own trends, but the leaders making SENEX are headed downwards.

Like (1)

Ibrahim Khan

Jun 17, 2011

The real power and potential of INDIA is its emotional people who are very dramatic and more active
the reason INDIA emerge from 2008 resession is the strong leadership on the government level (PM Mnamohan sing ji and Ahluvalia and more others) and on market level each and every Indian invester who is a true belever in INDIA's economy
I uploud and happy for the government policies and RBI, Interest rate hike and these policies will show its colour definately and lately most probably when we are in deep turmoil
i have nery grate confidence in My Nation INDIA and its people who are too sentimental and strong trend followers
NOw it is a down trend hence we are following it
when the Uptrend starts We and every one will follow it very strong which will lead us out of any kind of ressession
# i am not a very good writer but a good observer and a Invester

Like (1)


Jun 16, 2011

Look at the road when one minister travels there are at least 10 cars accompning his car, some for his bodygards some for chamchas , who pays for this show the tax payer. the govt needs to fix the allotment of vehicals to ministers to stop this missuse and wastage. thanks

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