Afsha
The world is still recovering from the post-pandemic hit, and factors such as war, inflation, and slower economic growth are only further solidifying the probability of a global financial crisis.
For a country, a recession is one of the most difficult times; even the world’s largest economy (the USA) is fearing a predicted recession in the coming years. And the ongoing inflation, increasing interest rates, and energy crisis due to the Russia-Ukraine war are shifting the world towards the possibility of facing a global recession by the year 2023.
Also contributing to this predicted recession are the massive tech layoffs concentrated mainly in the US market. And it goes without saying that the US or the global recession will most certainly have a negative effect on the Indian economy. Factors ranging from rising fuel prices and interest rates to the dropping of the rupee may contribute to the recession in India.
In addition to the five significant recessions faced by India, the country is highly likely to face a recession in late 2023 or early 2024. With the prior four recessions being primarily caused by a bad monsoon and globally increased fuel prices, there is still a dilemma over the uncertainty of the next recession in India.
This blog further sheds light on the current situation of the recession in India, its impact on small and large businesses, and the challenges faced by businesses during this grueling period.
What is a Recession?
Before we move any further, it is important to understand what a recession really means.
A common definition of recession is a gradual or massive fall in a country’s economy and a negatively growing gross domestic product (GDP) for two consecutive quarters. Although recession is a temporary period that lasts for a few months, it definitely has prolonged and long-lasting effects.
The National Bureau of Economic Research (NBER) in the United States defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months”.
As varied as the definitions might be, there are certain things that a recession is bound to cause, namely unemployment and a reduction in the country’s economic output.
Will India Witness a Recession in 2023?
The overall picture of the recession in 2023 in India is still pretty blurry, as there is a fifty-fifty chance for it. This predicted recession of 2023 is the result of negative economic growth and growing uncertainty in the US, Europe, China, and Japan.
In 2023, the World Bank projected Indian growth at 6.3%, which was one point lower than the previous year. Numerous Indian CEOs also stated that the predicted recession would have a negative impact, but Indian startups and companies would cover that loss in a short period of time.
Also, as per the government, they have backup plans to save the Indian economy if need be. Also, since India relatively depends on imported goods, reducing the Indian rupee’s value would not adversely affect growth during the predicted recession in India.
All in all, it can be said that the predicted recession might not have a direct effect on the Indian economy, but it most certainly will have indirect effects.
What to Expect if Recession Strikes India?
An economy demonstrates several signs months before a recession commences; however, whether or not a country is genuinely in a recession or not takes time to decipher. Recessions can be short, but with their severity, they often leave long-lasting effects on a country’s economy.
One of such effects is unemployment, which tends to increase rapidly once an economy experiences a hit from a recession. This is more common in industries involving low-skilled workers, and to cut costs, private companies as well as government organizations start to lay off their employees.
Startups are also resorting to laying off their employees in order to cut expenses and prepare themselves for the predicted recession. Though these can be treated as signs of an approaching recession, the severity of the same has yet to be determined.
Another consequence of the recession would be a fall in the output of businesses. This drop continues to prevail until the less resilient businesses are driven out of the market, and then the output growth picks up with the surviving businesses.
With more people out of work and families struggling to make ends meet, there will be a rise in demands for government-funded social schemes. However, with the downsizing of government revenues during the recession, it will prove extremely difficult to meet the rising demands of the general public.
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Impact of Recession on Small Businesses
Micro, Small, and Medium Enterprises (MSME) provide a great share of industrial production and dominate over others by contributing a total of 29.7% of the GDP and a share of 49.6% of exports.
Despite their stronghold, these businesses often suffer the most during the recession. Since they operate on a much smaller scale, they have fewer chances of turning around their plans as and when the situation calls for it.
With no safety net to rely on, they are left on the fence about whether to continue operating while lacking resources and a basic crew or entirely shut down their operations.
Small businesses run on a tight budget and have limited cash flow. With the predicted recession, customers might delay payments or purchases because of the delay in their own income. This further creates a long chain of delayed payments, thus slowing down other aspects of business too.
Also, with the customers experiencing a financial constraint on their end, they are more likely to spend it on essential items or save it elsewhere, which leads to a decline in their sales and revenue.
And with little to no backing, these businesses might also face problems while raising funds for their businesses to sustain themselves, unlike the larger businesses, which can sell their stocks or issue bonds when the time calls for it.
Small businesses will also be prone to making budget cuts in order to survive and make it through the crisis. This might lead to a freeze on hiring and/or layoffs across all departments or specific areas. And with fewer employees left to deal with the daily operations, productivity will take a direct hit, which will further result in increased work-related stress and employee demoralization.
Going by the bigger picture, the smaller businesses would take a harder hit, making it more difficult for them to recover later when compared to the bigger businesses.
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Impact of Recession on Large Businesses
As of now, there are around 1200 large enterprises (businesses) in India, which contribute around 40% of India’s GDP.
The large businesses will not experience the impact of the recession as instantly as the smaller businesses. The majority of these businesses might already have an idea about the predicted recession once a decline is highlighted in their revenue reports, which will then take a hit at the business’ share prices and often be preceded by a bear market (a sustained period of decline of 20% or more of a major stock market index).
The large businesses, however, have more ways than the small businesses to fight against revenue declines and protect their earnings during recessions.
With access to larger manpower and capital, the large business can divert the situation to ensure that the margins are sufficient to keep the business in profit. They may also reduce hiring, temporarily put a freeze on the hiring process, and suspend pay raises. And if the above methods fail, the businesses can also resort to layoffs.
Businesses might also start cutting off any unnecessary spending on marketing, curbing any research and development projects, and postponing new product launches. Such cutoffs would help businesses save money but eventually result in ripple effects on their employees and other service providers.
Most important of all, businesses that realize cost savings without cutting any employees while making long-term strategic investments during the recession tend to outperform the industry once the situation is over.
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Challenges Faced by Businesses During Recession
1. Declining Sales and Revenue
At times of recession, with everyone on tight budgets, aggregate demand declines, which results in a drop in sales for the majority of businesses until they cater to the basic everyday necessities.
Businesses with high retail fixed costs, such as technology vendors, face a hard hit as the revenue of their customers declines. Manufacturers often face overflowing inventories and reduce production until the demand for the product recovers.
The lowering of customer demands affects the returns from advertising and marketing spending, leading to budget cuts in that area, which result in a revenue decrease for media businesses regardless of their medium of advertising.
2. Financial Impairment and Bankruptcy
The initial and most prominent effect of the recession on businesses, no matter their size, is the tightening of financial conditions. Owing to the uncertainty of the situation, money lenders become more cautious about the underlying risks they are willing to take on.
Customers might slow their payments they owe to a business or fail altogether to make payments, which in turn puts a hold on the business’ payments. And with financial debts that must be met despite lowering profits, many businesses end up filing for bankruptcy during the recession.
3. Employee Layoffs and Unemployment
If the countermeasures prepared to combat the recession fail, businesses will resort to layoffs to cut costs, especially if they require fewer workers to meet the reduced demands of their products or services. This, as discussed earlier, increases productivity per employee, which affects the morale of the employees left.
Manufacturing businesses are often forced to shut down entire plants and discontinue product lines that perform poorly, resulting in massive layoffs and unemployed workers.
Causes of Recession in India
There is no one significant reason that could be held responsible for the predicted recession in India. There are a myriad of factors that contribute to any recession in India, some of which are as follows:
1. Rise in Interest Rates
2. Inflation
3. Deflation
4. Unequal Manufacturing and Demand
5. Inefficient Finance Management
1. Rise in Interest Rates
The interest rate is the amount a lender charges a borrower and is a percentage of the principal amount (the loaned amount). The interest rate on a loan is noted on an annual basis. And when interest rates rise, so does the cost of borrowing money; i.e., if someone has a loan, they could end up paying more for the amount they originally borrowed.
The continuous increase in interest rates makes it difficult for the common man to have a comfortable life. The increased interest rates disrupt economic planning and financial markets, increase borrowing costs, reduce demand, and discourage investments, in turn hindering liquidity flow.
2. Inflation
To put it simply, inflation is the rise in prices over a given period of time, which can then also be described as the decline in purchasing power (the value of currency in terms of the number of goods or services that can be bought with one unit of money).
Inflation raises the cost of living as well as interest rates and impairs the growth of stocks and bonds. This in turn gravely impacts households, making it harder for the common people to fulfill even their basic requirements.
Continuous inflation could eventually lead to a recession, which would result in less cash flow and more unemployment.
3. Deflation
Being antonymous to inflation, deflation implies the decline in prices for goods and services, which translates to the rising purchasing power of the currency.
Deflation can signal a downturn in an economy, which could then lead to a recession or, in worse cases, depression. It decreases the spending power of people and businesses, which is a major component of economic growth.
Companies tackle the falling prices by slowing down their production, which results in layoffs and/or salary reductions.
Also, goods and commodities priced at lower rates will result in a decrease in their respective values. And lowering costs will result in the public waiting for more price reductions, which weakens the currency.
4. Unequal Manufacturing and Demand
As the goods requirement reduces and slows down, so will the manufacturing sector. With fewer demands for goods, manufacturing companies would eventually turn to layoffs and pay cuts in order to save themselves from a possible bankruptcy situation.
And as the manufacturing sector slows down, the businesses and livelihoods of many will be adversely affected.
5. Inefficient Finance Management
Banks are the backbone of the country’s economy. If the multiple banks fail to manage their flow of liquidity and experience multiple bankruptcies, it will eventually lead to a recession in the country.
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Last Words
Recessions are a part of a country’s economy and happen more often than you expect, some of which shake nations to their cores and others not so much.
Recessions cause businesses of all sizes and backgrounds to adapt to the sudden decrease in demand while cutting costs for growth prospects.
It goes without saying that small businesses have smaller margins of error when compared to large businesses when the recession hits. And then the rest is the survival of the fittest; the most capable of those businesses survive and may even increase their market share as their competitors fail, securing themselves a position for growth and success in the economic recovery.
Also, many believe that this predicted recession would not affect the Indian economy severely since our economy is strong enough to maintain its present growth momentum.
Not to mention, not all businesses or industries experience the same things during the recession. Strong businesses with great insight and planning strategies will be the ones that tread through this hard time and make an opportunity out of it to thrive as labor and capital become more economical.
Key Lessons
- Recessions are periods of temporary economic decline, generally identified by a fall in gross domestic product (GDP) for two successive quarters.
- The predicted recession of 2023 might probably hit India, but the Indian economy and businesses will be quick to recover and will mainly suffer the indirect effects of the recession.
- An economy displays various flagging signs before a recession actually hits. Layoffs, which later result in unemployment, increase rapidly once a recession hits the country.
- Businesses, both small and large, face declines in sales and profits in a recession.
- They might resort to layoffs, cutting any expenditure in marketing, research, or any other additional spending in their efforts to cut costs.
- Recessions lead to a slump in sales, decreased revenue, financial constraints, and even bankruptcies.
- The predicted recession in India is a result of numerous factors, such as inflation and increased interest rates.
- Large and small businesses might suffer some of the same consequences of the recession; however, with their lack of resources, they become more vulnerable and prone to failure in times of a downturn.
- Not all businesses experience the same struggles during the recession; the ones that use this time as an opportunity secure themselves a place in the ensuing economic growth.