Is recession coming soon?

India’s GDP

If we look into the downfall of India’s GDP in 2008 and 2012 there was a huge downfall. And currently, it is also showing downtrend which can show us that in the near future there are chances of GDP going further down and some other indicators support the fall in this GDP.

There are some factors which are making us believe that there is a huge chance of recession in the near future.

Nifty Returns

As we can see in the table below, there has been a reduction in the return given by the markets in the years when the GDP Growth rate is low. This clearly suggests the positive relation between market returns and GDP Growth rate

YIELD CURVE

If the difference between the interest short run and long-run interest rates starts to reduce, it means that the economic position is weakening. The yield curve is steeper for India and the growth rate of India is diminishing.


If we see the graph above, though the difference has increased it is presumed to converge in the near future and can lead to a slowdown in India’s economy.

P/E and EPS

The red line indicates the P/E, P/E ratio has crossed the EPS line, this can be indicative that the index is overvalued and can fall in the near future. As in a period of 6 months, the market has been performing good but P/E didn’t cross EPS. So if the correction comes in the market there are chances of the market falling.

These are some of the indicators which may predict a slowdown in the recent future if the indicators tend to state the information in a similar way and do not diverges.

Unemployment Rate

According to experienced economists, the unemployment rate has been at 45 years high. In 2018, the unemployment rate rose to 6.1 %.

If we see, in the year 2008 the unemployment rate was at a maximum of 4.116%. Now it is way higher than the last few years. So this is one of the indicators stating the downtrend in India’s GDP in current and upcoming years.

Chances of war with Pakistan?

Since 1947 partition, India and Pakistan have come across there have been many reasons for conflict between India and Pakistan. There are huge chances of Indo-Pak war, because of ceasefire violation. On 14th Feb 2019, terror strike which lead to the death of 40 Central Reserve Police Force personnel were killed on Feb 14, 2019. After 12 days of Pulwana attack, India strike on Jaish-e-Mohammed on Pakistan soil which lead to a huge tension between India and Pakistan. This tension if continues can hamper the growth rate of India and somewhat indirectly contributing to the recession.

Oil Shock

Rebounding oil prices have pushed up oil import costs and will widen India’s currency account deficit. This will, in turn, weigh on the rupee, which is expected to depreciate further, economists say. India could overtake China as the world’s largest oil demand growth centre by 2024, according to a Wood Mackenzie report. Oil prices have shot up this year, and are set to go up further when sanctions on Iran kick in. The increase in oil prices and India being one of the largest importers of crude oil, can lead to an increase in the current account deficit and hence, contributing to the downfall in India’s GDP.

Author
Apoorva Goenka
Team Leader- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

Connect with Apoorva on LinkedIn
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