Vijay Kumar Gaba

Notwithstanding the official position about the state of economy in the US, the market is building an elevated probability of a recession (or a recession like, if I may say so) situation in 2023. The short term (1-2yr) bond yields are now higher than the benchmark 10yr yields in a number of developed economies, including US, UK, Canada, Sweden, and emerging economies like Brazil, Mexico, Hong Kong, Turkey, Pakistan etc.

Historically, the yield curve inversion has been a harbinger of recession in the majority of instances. For example, in the case of the US, the yield curve inversion has been followed by a recession in all of the past seven instances.

In this context, it is important to note that the US Federal Reserve (Fed) and European Central Bank (ECB) have unambiguously stated that they are willing to accept a measured slowdown in the economy to achieve the goal of price control. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) also stated categorically that for now price control is the primary objective and not economic growth. This implies that RBI is also willing to accept a calibrated slowdown in the economy to meet the end of price stability.

As it appears from the commentary of global central bankers, renowned economists and widely acclaimed market experts, the process of monetary correction may be a protracted one; and hence the global economy may not return to the desired trajectory of growth anytime soon. The situation for the stronger emerging markets like India may however be different. These economies could find their own course and avoid recession. Nonetheless, the impact of the slower (or negative) global growth would be felt and remain a key obstacle to high growth.

In particular, if our growth plans have accorded high priority to (a) exports to developed countries and (b) reliance on manufacturing growth due to global businesses preferring Indian facilities over China or Germany (China+1 or Europe+1); then probably we our policy makers would need to rework the strategy for the interim period.

So far, we have not heard any credible plan from our policy makers to mitigate the impact of impending recession-like slowdown in our major trade partner economies. In such an environment, RBI’s 4.5% real GDP growth projection for 2HFY23 might prove to be marginally optimistic and growing 7% in FY24 would be a big challenge. The markets need to take cognizance of this, in my view.