Recession: US recession set to impact India, may lead to growth slowdown in medium-term

Research firm Nomura in a note on Thursday said that as per its Nomura India Normalization Index (NINI), the Indian economy is now racing back to above-normal levels, led by broad-based improvements across consumption, investment, industry and the external sector.

The service sector was trailing at around 4pp below pre-Covid levels in March 2022, but is now trending at close to 40pp above those levels. This uptick is expected to support the Indian economy’s growth trajectory in the near term.

However, in the medium term, with a ‘prolonged mild recession’ in the US, as the firm has forecasted, India’s economy is likely to see a growth slowdown. Growth challenges exist already, with India being the only Asian country whose inflation is furthest above its target.

“Our US economics team has recently downgraded its base case for the US economy to a mild recession starting in Q4 2022, reflecting tighter financial conditions, a negative sentiment shock for consumers, worsening energy and food supply disruptions and weaker global growth prospects,” it said in a note.

The US constitutes around 18% of India’s merchandise export market and over 60% of India’s IT-ITeS exports. Alongside, the broader global growth slowdown is also likely to weigh on India’s export and investment outlook.

“When combined with elevated levels of inflation that is eroding consumption growth and the growth sacrifice from tighter financial conditions, suggests a broader growth slowdown for India over the medium term,” it said.

Nomura expects India’s GDP growth to average 7.2% on an annual basis in 2022 and moderate to 5.4% in 2023, with risks to the downside.

Soft landing in the US: Impossible?

Be it the stock market, commodities or yields, all have taken a hit in the recent weeks amid rising recession risks. Experts are divided over if a recession is already here or if it is heading for one.

In a bid to rupture the spiralling inflation, central banks have undertaken aggressive rate hikes, the US Federal Reserve being no exception. This is likely to trigger an economic downturn.

Fed Chair Jerome Powell on Wednesday acknowledged the possibility of the same, when he told the Congressional lawmakers that the central bank is ‘strongly committed’ to bringing down inflation and can do so with its monetary policy tools.

“We’re not trying to provoke and don’t think that we will need to provoke a recession,” Powell said. “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market as much as anything else.”