World Bank’s forecast on Slowdown

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• The World Bank in its latest “Global Economic Prospects” stated that India’s growth is slowing to 6.6% in FY24.

More about the news

• Forecasts for India:
  • Slowdown:
    • India’s economic growth will slow to 6.6% in the next fiscal year from an expected 6.9% in the current year according to the World Bank.
      • It stated that the slowdown in the global economy and rising uncertainty will weigh on export and investment growth.
    • Beyond the fiscal year ending March 2024, growth in India is likely to slip back towards its potential rate of just over 6%.
  • Expansion:
    • Increased infrastructure spending and “business facilitation measures” will, however, crowd-in private investment and support the expansion of manufacturing capacity.
  • Fastest growing:
    • India is expected to be the fastest-growing economy of the seven largest emerging markets and developing economies, it said. 
• South Asian region:
  • For the South Asian region, growth in 2023 and 2024 is seen at 3.6% and 4.6% respectively. 
  • This is mainly due to weak growth in Pakistan, the World Bank said.
• Global position:
  • Globally, the bank is forecasting a sharp, long-lasting slowdown, with global growth declining to 1.7% in 2023 from the 3% expected just six months ago.
    • This reflects synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from the Russian Federation’s invasion of Ukraine.
  • Europe, long a major exporter to China, will likely suffer from a weaker Chinese economy.
• Affecting investments:
  • The World Bank report also noted that rising interest rates in developed economies like the United States and Europe will attract investment capital from poorer countries, thereby depriving them of crucial domestic investment. 
  • At the same time, the report said, those high interest rates will slow growth in developed countries at a time when Russia’s invasion of Ukraine has kept world food prices high.

Impacts & threats of recession:

• Impacts:
  • Unemployment:
    • One of the consequences of recession is unemployment, which tends to increase, especially among the low-skilled workers, due to companies and even government agencies laying off staff as a way of curtailing expenses. 
  • Fall in output:
    • Another result of recession is drop in output and business closures. 
    • Fall in output tends to last until weaker companies are driven out of the market, then output picks up again among the surviving firms. 
  • Pressure on government exchequer:
    • With more people out of work, and families increasingly unable to make ends meet, there will be demands for increased government-funded social schemes. 
    • With drop in government revenues during recession, it becomes difficult to meet the increased demands on the social sector.
  • Global impact:
    • When large economies such as the US, the Eurozone and Japan go into recession, it has a worldwide impact. The countries that depend on these economies to buy their products and services are the worst hit. 
    • As Indian software companies have major clients in the US and in the Eurozone, they will see their top lines shrink as their clients cut down on expenses due to the recession. This, in turn, will adversely impact India’s GDP growth.
• According to IMF, the threat to India comes from at least four sources:
  • Higher crude oil and fertiliser prices will spike domestic inflation
  • Global slowdown will hurt exports, dragging down domestic growth and worsening the trade deficit.
  • A strong dollar will put pressure on the rupee’s exchange rate, which will likely result in reducing our forex reserves and reducing our capacity to import goods when the going gets tougher.
  • Low demand among most Indians, the government might be forced to spend more towards providing basic relief in the form of food and fertiliser subsidies. 
    • This will worsen the government’s financial health.

Possible ways to prevent & way ahead

• The most popular, or most recommended, policy for any country to dig itself out of recession is expansionary fiscal policy, or fiscal stimulus. This can be usually a two-pronged approach – tax sops and increased government spending.
  • Targeted tax cuts or spending increases on safety net programs like unemployment insurance that kick in automatically to stabilise the economy when it is underperforming.
  • Approving new spending on infrastructure projects in order to stimulate the economy by adding jobs, increasing economic output and boosting productivity.
• In the prevailing market situation, hybrid funds are best placed to protect the downside for the investor.
• It is always a good idea to diversify the portfolio with Gold and Foreign reserves to reduce the risk.
• Creation of an emergency corpus while the jobs are vanishing.

Source: TH