Is India ready to tackle recession and next COVID waves?

As 2022 was the most volatile year, Raj is bit worried, about his investment portfolio, and decided to meet his financial advisor, Mr Sameer Desai. Sameer could sense the nervousness, and decided to immediately catch-up Raj.

Raj told Sameer that, he is investing his hard-earned money to meet certain goals. But given the market volatility in 2022, he is doubtful, whether going forward his portfolio, will deliver desired returns.         

Sameer understood that, amid rising economic uncertainty and market volatility, its natural for all his clients, including Raj to panic. But it is crucial to calm them, and persuade them, to remain invested for the long term. 

Sameer admitted that, market was highly volatile in 2022. But still, the benchmark index Nifty 50, managed to give positive return on seventh year in a row. Further, there was nothing, structurally wrong with the Indian economy.  Market sentiments were, largely dented owing to weak global cues, including rising inflation, hawkish stance of the global central banks, including US Federal Reserve, Ukraine-Russia war, and stronger dollar.  

All of these, impacted the foreign flows, into domestic financial markets, but retail and domestic institutional investors, continue to lend a strong support.  Since India is integral part of the global village, the challenging external environment, will affect our country through trade, and financial channels.

Sameer showed the growth chart to Raj, and explained that pandemic disrupted the economic growth, across the globe in 2020. However, global and Indian economy witnessed a sharp rebound in 2021, owing to stimulus measures by policymakers, and quick vaccination. In fiscal 2022, India was the fastest growing economy in the world, with 8.7% gross domestic product, according to International Monetary Fund.  While, the monetary tightening in the developed economies, and elevated commodity prices, resulted in large foreign outflows, depreciation of the Indian rupee, and widening of the current account deficit.

Source: IMF World Economic Outlook October 2022; Note: For India, data presented on a fiscal year basis

Still, Indian economy remained resilient, and navigated through the storm owing, to robust domestic demand, and a solid cushion of the foreign exchange reserves.  Reform and regulatory measures by the government, RBI also played a vital role, in managing the challenges that have emerged, over the past two years.  For instance, to fight rising inflation, RBI withdrew the accommodative policy stance, in a calibrated manner, as it aims to strike a balance between growth and inflation.  The government also reduced excise duty, and other taxes on fuel, to moderate the impact of higher global oil prices on inflation.

Raj said, I am not doubting the resilience, of the India economy in last two years. But, the last year, interest rate hike, by the US Federal Reserve, to combat inflation triggered the recession worries, in the world’s largest economy – U.S.  The situation is challenging for other economies as well. Worsening the scenario is the surge in the covid-19 cases in China, and spread of virus to other economies, Japan, US etc.   But aren’t we exposed, to dual attack of recession, and covid-19 wave in 2023?

Sameer said, that India is not immune, to likely global economic slowdown. Exports, particularly software exports, are expected to be worst hit. Rising interest rate, inflation coupled, with volatility of the financial markets, weakening currencies, and rising fiscal, CAD will continue, to the dent sentiments for the domestic economy.

But, US recession are always followed by US Fed interest rate cuts in the past. In addition, Indian economy, is not fully coupled with the global economy. In other words, it is relatively independent, and governed by the domestic demand, strong macroeconomic fundamentals, financial sector stability, and healthy balance sheets of companies.  RBI in its Financial Stability Report December 2022, stated that, sound macroeconomic fundamentals, and healthy financial, and non-financial sector balance sheets, are providing strength, resilience and engendering financial system stability. RBI’s stress test results, reveal that scheduled commercial banks, are well capitalised, and capable of absorbing macroeconomic shocks, even in the absence of any further capital infusion by stakeholders.             

Let see, list of risk factors and favourable aspects for India.

Relative strength, and resilience of Indian economy, puts it in a bright spot in 2023. The economy is estimated, to grow at 6.8% as per forecast by RBI, in its December Monetary policy meeting. IMF too anticipates growth rate of 6.8% in fiscal 2023, and 6.1% in fiscal 2024, as per IMF.  The World Bank estimates, growth rate of 6.9% for fiscal 2023, and 6.6% for fiscal 2024.  

Note, a mild recession in US, could led to decline in the commodity prices, including crude oil. India been importer of crude, this could be blessing in disguise for India. Retail participation post COVID, and domestic investors, will be also be prominent drivers, of domestic equities, along with foreign institutional investors, who will show renewed interest, in local markets after massive outflows, in 2022. We also need to wait, and watch, for the upcoming Budget, in February 2023, when government will lay down its roadmap, for capex, and fiscal consolidation.

Raj was quite convinced, by Sameer putting some crucial facts, and despite all the downside risk, he became confident, that India will be able to fight back, the likely economic slowdown of 2023.

Raj asked Sameer, one last query – What about next COVID wave? I read articles, that soaring COVID cases in China, Japan, UK, France, and Italy.

Sameer responded that, rise in COVID cases, have renewed fears of next COVID wave. A fresh wave back home cannot be ruled out.  But government officials, in India are highly cautious, and urging people, to follow safety protocols, and complete their vaccination doses. The government has mandated RT-PCR test, for flyers coming from China, Hong Kong, Japan, South Korea, Singapore and Thailand, from January 1, 2023.  Union Health Minister Dr. Mansukh Mandaviya, stated that, government is reviewing the situation, and preparedness of public health system, for surveillance, containment, and management of COVID-19.  The next 40 days, would be crucial, in determining the possibility, of a resurgence of COVID-19 cases in India. There are views, that Indians, have developed, hybrid immunity, (immunity acquired from both prior infection, and vaccination), so COVID-19 wave, may not affect us, the same way as it is, being reported in countries like China, Japan. For time been, we can follow, all the protocols, and need to see, how situation emerges, in next few weeks.

Sameer told Raj, to be patient, don’t take any hasty investment decisions, in the light of rising, uncertainty, and hold on the investment, for long term wealth creation.  He quoted as.

The mind is like water, when it’s turbulent, it’s difficult to see. When it’s calm, everything becomes clear.

Raj agreed, that right now, we have to be calm, cautious, and hope for the best. Raj was grateful, that Sameer understood his anxieties, and took so much efforts, to calm down his fears.