IInflation has taken America—the world’s financial superpower—by storm. Its annual inflation rate rose to 9.1 percent In June 2022 – the highest number of sightings in the country since November 1981. This increase in inflation is due to several reasons, including the unprecedented rise in energy prices due to the Russia-Ukraine conflict, and supply chain issues due to the COVID-19 pandemic. High food prices due to severe natural calamities.
This hot streak of inflation is proving to be quite disruptive to the US economy and thus, has become public enemy number one for the US Federal Reserve. With sights set to counter (and conquer) this enemy, the Federal Reserve has opted for an aggressive approach – by insisting, raising interest rates.
What can be the consequences of this? For starters, this essentially means that the US could very soon enter a recession. Analysts at Bank of America say there is a 40 percent chance that the US will hit a recession by the end of 2022 or early 2023. The US, being the capitalist giant, makes up about 30 percent of the global GDP. Naturally, if there are any changes to the US economy, they will affect not only America, but the rest of the world as well.
So, what’s in store for India? Will the recession in America have any effect on the other side of the world? The short answer is yes. There are several areas in which India could be affected if there is a (seemingly) slowdown in the US.
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Falling rupee, GDP
India’s currency has been depreciating rapidly since the beginning of 2022. Rupee touched The US dollar hit a historic low of 80.06 last week from 74.25 in January this year. NR Bhanumurthy, Vice Chancellor of Dr BR Ambedkar School of Economics University, Told Kamalika Ghosh Outlook The magazine said the US Federal Reserve’s decision to hike interest rates would “put pressure on the Reserve Bank of India (RBI) to further increase India’s interest rate, as there will be an impact on the balance of payments, which will put pressure.” Government Bond Yield” and further weaken the Indian Rupee.
About 18 percent of India’s goods exports and 60 percent of IT and ITeS exports are dependent on the US market. According to Madan Sabnavis, Chief Economist, Bank of Baroda, this heavy dependence will lead to a slowdown in trade and exports will be affected to a great extent. The slowdown in the US economy will play an important role in the decline in India’s GDP. Long-term trends confirm that India’s GDP growth is set to slip by more than 7.2 per cent in FY13, which was the original estimate. Like Domino’s, the fall in GDP growth means that revenue resources for India will be adversely affected and its growth trajectory will soon see a downward slope.
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the threat of unemployment
External factors such as the projected recession in the US will further contribute to a chronic job crisis that shows little or no sign of improvement, and exacerbates pre-Covid issues of hunger, poverty and income inequality. The prolonged pandemic has only made these conditions worse. service sector, which contributes 50 percent of India’s GDP, is set to take a massive hit in the form of layoffs and unemployment.
The US Federal Reserve is using an induced recession as a weapon to combat inflation. Though considering the weapons, it’s pretty much a double-edged sword. Rohit Azad, Professor of Economics at Jawaharlal Nehru University, Told Kamalika Ghosh Outlook The magazine said that although the US is raising interest rates to combat inflation, “it will affect the global economy in many ways. They may have been successful in controlling inflation, but the nature of the move will cost growth.” The outflow of finance would have a devastating effect on developing economies. In that case, their currency would devalue, leading to very high inflation.”
If it’s any consolation, experts say a possible slowdown will be mild and short-lived. Thankfully, the country’s domestic economic factors can shield India from any major negative impacts. That being said, no matter how untouched India is, it is still going to be caught in the winds blowing in the west. What matters is being prepared for it.
Asha Jadeja is a Silicon Valley-based entrepreneur, venture capitalist, philanthropist and ‘change agent’.
(Edited by Zoya Bhatti)