Deeper US recession spells big trouble for India, says Swaminathan Aiyar

There is not the slightest chance that the world has a hard landing and India does not. We are only 7% of the global economy; the idea that we will stand out is a fantasy to me,” says Swaminathan Aiyar, Consulting Editor, ET NOW in an interaction with Tamanna Inamdar. Edited excerpts:

How worried should we be about the US going into recession?
We should be very worried; there are actually two recessionary scenarios. In the first quarter of this calendar year, United States’ economy was minus 1.5% GDP. The second quarter figures are not out yet, and it is possible they will also be negative. This would mean that we have already had a recession in the first half of 2022 but that would be a mild recession from which there may be some kind of a comeback in the third quarter. But beyond that, if the Fed keeps increasing its interest rates, it will create a much deeper recession by the end of this year or in 2023.

So, currently what has happened in the first half is that we may have seen a very very mild recession, which is not a serious issue. There has been a slowdown in the world economy, no doubt about it, but if this is all and we do a little better, it would be a very bearable thing. The real problem we face is what happens six months or nine months down the road. It is entirely possible that if the Fed keeps raising interest rates, it can spark a recession in the USA by squeezing activity. At the same time, the rise in interest rates by the Fed can spark an enormous flow of dollars out of all emerging markets. We would be hit by something different, not only a fall in demand but also a huge exodus of dollars out of emerging markets. This will create other problems where the exchange rate will go down, our imported inflation will go up and we would feel a bigger need to raise interest rates. If we get another deep recession, which is a possibility but not a certainty, there would be a lot of trouble for us.

How would a hard landing for the global economy play out for India?
There is not the slightest chance that the world has a hard landing and India does not. We are only 7% of the global economy; the idea that we will stand out is a fantasy to me. I will, however, say that it is possible that the world itself has a soft landing, and so if the world has a soft landing India could; if the world has a hard landing, I am sure India will. In good times India looks much better than other emerging markets, but if panic sets in, it affects all emerging markets because when money starts to flow out of emerging markets, a large number of funds dedicated to them, and those are not India-specific, exit.

Right now already we are suffering from imported inflation because the rupee has depreciated against the dollar and gone from 74 to 80. You will have a huge panicky exit if it goes from 80 to 90; that itself causes so much additional inflation in India. Suppose China ends all the lockdowns, there is peace in Ukraine and everything returns to normal, can the world suddenly look nice and sunny? It is a possibility although I do not think it is probable. On the other hand, two more things can happen — Russian sanctions and the war can deepen, there can be further cuts and this time the West may actually really cut off oil consumption from Russia. In that scenario, I think it is Goldman Sachs suggesting that oil price might go to $280-$300 a barrel. On the other hand, Citibank says that if there is a deep recession and demand disappears the price of oil may fall all the way to $65 and perhaps further to even to $45. I personally say you must hope for the best and prepare for the worst.


This article was originally published in Economic Time son July 28, 2022.

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