Is the Global Economy headed for another Recession and what are India’s Prospects?

Signs of Global Recession and the Near Death Experience of the Indian Economy

There seems to be a global recession lurking behind the surface what with the combination of Emerging Market Crises including the looming Indian debt crisis as well as Eurozone Sovereign Debt Crisis making its presence felt.

There are many triggers for such a recession ranging from the widening spreads in the United States Treasuries or Sovereign Bonds, the Italian government defying the EU (European Union) budgetary rules, and the Emerging Markets seeing continuous depreciation of their currencies and the bond and debt markets headed for a correction.

Indeed, the Canary in the Coal Mine or in other words, the signs of distress in the Global Economy have been made apparent in recent months with the Turkish Lira losing its value sharply, the Indian Economy approaching a Near Death moment with the IL&FS (Infrastructure Leasing and Financial Services) defaulting on debt repayments can very well portend another recession in the making.

Even the relatively strong Australian Economy is showing signs of distress as is the case in the Latin American continent with the outright default of Venezuela, Political uncertainty leading to market swings in Brazil and Argentina as well.

Storm Clouds Ahead for the Indian Economy

Starting with the case of India, anyone who has been following the Pink Papers or the Economic news media would have noticed the ongoing saga of the Indian Shadow Banking Sector what with its many NBFCs or Non Banking Financial Companies in deep distress owing to their inability to access capital and funding for their debt maturing over the next few months.

Indeed, the very public spat between the Reserve Bank Governor and the Finance Ministry with multiple news outlets reporting that the former might quit is the latest sign that all is Not Well with the Indian Economy.

That a person who went along with the government’s decision to Demonetize the Currency is now standing up to the latter means that there are some serious aspects about the state of the Indian Economy which are not yet in the Public Domain.

Indeed, there can be no further proof of the liquidity crisis in India than in the recent reports about the NPAs or the Non Performing Assets of leading PSU or Public Sector Banks now approaching Critical Mass moments which can lead to a full blown Banking Crisis.

Added to this is the ever depreciating Indian Rupee and the makings of a Classic Crisis are all too apparent.

Calm before the Storm in the United States

As mentioned earlier, things seem better at least on the surface as far as the United States is concerned.

Indeed, the fact that the US Economy is healthy can be seen from the record rates of employment at levels that parallel a few decades ago before the 1970s and what were essentially regarded as the Golden Era.

However, many experts believe that the Rosy Economic headlines mask Fundamental weakness in the US Economy to do with Record Growth and High Levels of Inequality and Depressed Wage Growth.

In other words, as it is happening world over, there is a divergence between the economic situations of the HNIs or the High Net Worth Individuals and the average worker or professional and hence, unless this dichotomy is corrected, the next recession would again play out the same way as that in 2008 with Banks being bailed out and the Main Street or the term used to describe people like you and me left with the Bill for the bailouts.

Moreover, even on Wall Street, some traders point to how the Spreads or the Differences in the Interest Rates and the Bond Yields are increasing which can lead to a Bond Crisis.

Debt is the Root Cause of All Problems

At root of all these problems is excessive debt held by Banks, Corporations, Central Banks, and Financial Institutions as a part of the Reckless Expansion during the last few decades.

Indeed, it can be said that no lessons have been learnt from the periodic Booms and Busts world over.

While in the Indian case, crony capitalism has reigned supreme, in other countries, it is irresponsible policies followed by the Governments. For instance, the much Touted Tax Cuts initiated by the Trump administration would mainly benefit the Rich whereas the cuts to Medicare and Social Security would hit the poor the most.

Thus, this is Socialism for the Rich and Capitalism for the Poor that is playing out in most Western countries. While some would say that this is the case in India as well, the fact remains that due to Political Compulsions, India cannot afford outright Wealth Transfers like these.

Every Nation for Itself

No discussion on the Global Economy is complete without mentioning how China is also grappling with the Double Whammy of Shadow Bank Crises and the effects from the Trade Wars.

For that matter, some experts believe that the ongoing Trade Wars would leave everyone poorer than richer though there are others who argue that this represents a much needed correction of imbalances.

Indeed, what is worrying now is that in case of a Global Recession, coordinated global responses might be difficult since each nation is essentially looking out for itself.

Whether it is Trump’s America First or the Populists and the Nationalists worldwide, there cannot be a situation where a Global Crisis would lead to uncoordinated and hostile responses from each country rather than a unified response.

To conclude, the next crisis might be sooner or later and around the corner, and hence, it is advisable to keep a close watch on the economic and political developments.

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