Recession in America & Indian challenges


Jerome H Powell Photo Credit Twitter Federal Reserve

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By S Jha

New Delhi, June 23: Recession currently is the topmost fear of the US. The world too needs to dread such a prospect.

The Covid-19 pandemic is behind the US and the world. But Russia saw its best chance to invade Ukraine, and plunge the world into an unprecedented energy crisis.

The inflation began galloping, and the US Federal Reserve woke up to the challenge to tame the runaway price rise by aggressively raising the interest rates.

The cycle of woes hadn’t run its full course.

Now, the US is facing the grim prospects of slipping into recession, principally because of the aggressive rate hikes by the Fed.

The Fed officials on the other hand has begun saying that they don’t want the US to go into recession because of their actions.

That will complete the vicious circle of the inflation triggering recession.

The long faces of the US Fed officials are most dreaded by the Bond and the equity market, and there’s a rough assessment that 60 per cent of the GDP of the world’s top economy has already been wiped out in the massive sell off in about eight months.

The emerging economies, including India, will naturally face the collateral damage. Already, USD 39 billion of the foreign portfolio investment from India has exited in the same duration.

The foreign institutional investors are opting for China, Brazil, Indonesia and Malaysia for re-investment of their liquidated positions in India.

Russia is too emboldened now to quit the Ukrainian territory. The West-led sanctions against Russia will stay in force.

Europe may stare to a prolonged energy crisis for a far longer time. The energy crisis may now allow the inflation to cool down.

The US-led sanctions against Russia are already crippling the economic order.

The world is truly in times of economic disruptions.

The US President Joe Biden recently told the environment ministers of a number of country that the innovations and technology solutions for clean energy will aim to replace the import of the Russian oil and gas in Europe and India.

But such ambitious task may remain in the realm of future for quite a longer time, and by then the world economy may be in tatters.

There are indications that the US may cut down on taxes or waive them off on oil and gas to cool down the inflation to avert the prospects of recession.

The US Fed, if convinced that the government measures to calm down the inflation is working, may become dovish in raising rates. That could save US from slipping into recession.

But if the US indeed slips into recession India will bear the brunt, for the country’s mainstay of the economy, the IT sector, will take the first hit, along with the remittances, which may affect the foreign currency reserves.

India, however, will be facing the grip prospects unprepared.

The Centre and the state together have overstretched debt burden, accounting for 90 per cent of GDP (Gross Domestic Product).

Ten of the large states of India have been pursuing populist policies for so long that they’re on the verge of financial collapse.

In such a situation, when the private investment will go in hiding, India will have much squeezed space to maneuver the way out of the ramifications of the recession in the US.

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