By Albin Joseph

After a series of economic slowdowns, two of the world’s major economies, namely Japan and the United Kingdom, have plunged into recession recently. Japan has been displaced from its position as the third largest economy by Germany. The United Kingdom fell into recession at a critical juncture when the elections are just a few months away. This poses severe challenges to Prime Minister Rishi Sunak, whose primary commitment to the nation was to promote the overall economic growth of the kingdom.

A recession is defined as two consecutive contractions in the Gross Domestic Product (GDP) of a country. If there is a dip in GDP growth for a continuous six months, then it’s termed a Recession; Japan’s economy contracted by 0.4% and that of the UK by 0.3% in the last three months of 2023. There was a steady decline in the economies of these two nations throughout the course of 2023. From July to September 2023, Japan’s economy witnessed a de-growth of 3.3%, and the UK’s economy had a slump of 0.1%. Going by these numbers, it’s obvious that these two economies are under the grip of Recession.

The cost of living in the UK has risen considerably, major sectors like manufacturing and construction have not been performing well, and the British Pound has been on a weakening trend against the US Dollar during the past six months. During 2023, the UK’s economy grew by a meagre 0.1%, which is the weakest growth ever since the 2009 financial crisis. All eyes are set on the next UK budget that UK Finance Minister (Chancellor of the Exchequer) Jeremy Hunt is to present in a couple of weeks. The budget is expected to bring in concrete measures to curb inflation and propel overall economic growth.

Japan was relegated to fourth place in terms of GDP which totaled $4.2 trillion in 2023, whereas Germany assumed third place with its GDP estimated at $:4.5 trillion. A weaker Japanese yen is the major reason attributed to the slump in Japan’s economic growth. Moreover, there has been a slowdown in business, which leads to a lack of wage increments and layoffs. This lead to a fall in domestic demand, which made people curtail their expenses and hold on to their earnings.

A decline in population growth and an ageing population have affected the overall GDP, as well as the productivity of Japan. Traditionally, both Japanese and German economies were powered by small and medium-scale industries that were renowned for their high productivity. Of late, Japan’s productivity took a beating because of its shortage of qualitative labour, whereas Germany managed to keep its productivity intact by endorsing immigration, which led to overall population growth as well. By immigration, Germany’s population grew to 85 million in 2023. This not only made up for the low birthrate in Germany but also fueled the overall growth in GDP. Japan could overcome its labour shortage by endorsing immigration, but the country has its own reservations in the formulation of policies on this front.

Though this recession wouldn’t last long, it’s quite obvious that whenever major economies plunge into recession, it will have a ripple effect across the world, at least in the short run. The Euro zone has revised its growth forecast for 2024 from 1.2% to 0.8%, and it remains to be seen whether other countries will follow suit.

The author is a Member of Loka Kerala Sabha

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Albin Joseph

The ongoing economic crisis in Sri Lanka has been sending shock waves not only within the island nation, but across the South Asia region. Soaring prices and lack of essential food supplies have created panic amongst the vast majority of the 22 million population. Moreover, the lackluster attitude of the government in dealing with the crisis resulted in people taking to the streets. Sri Lanka’s problem stems from the fact that the country is quickly running out of its foreign exchange reserves; and while this prognosis may seem right at first, it’s a symptom of a problem that is much deep-rooted. Let’s take a reality check on the core issues and the way forward in resolving this impending crisis.

Basically Sri Lanka falls under the category of a “Frontier Economy”, an economy that’s neither developed nor big enough to be branded as an emerging economy. It can be positioned somewhere in between these two spheres. Countries like these are usually reliant on a few focused sectors to generate national income. The nation’s economy has also been classified as a twin deficit economy by Asian Development bank in 2019. Twin deficits signal that the country’s national expenditure exceeds its national income and that its production of tradable goods or services is inadequate.

Sri Lanka’s national income is highly dependent on tourism, tea and a few other agricultural products. In fact, tourism accounts for more than 10% to its GDP and  when the pandemic hit, it was inevitable that the country would have to deal with unprecedented issues in this sector. Sri Lanka’s tourism industry took a severe beating, and the economy nosedived, with a shrinkage of 3.6% in 2020. Tourists were no longer thronging the fascinating beaches of the island and the nation’s foreign income dropped significantly. According to data from Trading Economics, Sri Lanka used to earn revenues to the tune of $455 million a month during the healthy pre-pandemic days, which plummeted to a meagre $3 million a month in the second half of 2021. While large economies such as US, Japan, China, and India were easily able to muster resources to fight the pandemic, frontier economies like Sri Lanka had to face an uphill task on this front.

As the country was reeling under the pressure of an economic crisis, its government took an untimely and unwarranted decision to go “hundred per cent organic” and in a bid to fully realise this vision, it banned the import and sale of all chemical fertilizers. This was a severe blow to the tea plantations and since tea exports accounted for a major chunk of the foreign trade, foreign exchange reserves took a hit once again. Tea accounts for the major share of Sri Lanka’s exports, generating more than $1.25 billion a year and making up almost 10% of the country’s export income. This “ill thought out” crusade not only cost tea plantations and farmers dearly but also impacted related services and financial sectors that fed off from tea exports. Eventually, tea industry capitulated, as did many other plantations. By the time the government relaxed some restrictions, the damage was already done beyond repair, and the country had already lost out on much needed foreign income.

At present, Sri Lanka is in a state of economic emergency. The nation’s foreign exchange reserves are getting depleted as it plummeted to $2.0 billion by the end of 2021 from $7.5 billion in November 2019. The outbreak of the Russia-Ukraine war was the last nail in the coffin on the foreign exchange reserves of Sri Lanka, as fuel prices soared globally making imports too expensive. With the current state of affairs, the chances of making a major recovery at the foreign exchange reserves front seems to be very remote.

What makes foreign exchange reserves so precious?

Foreign exchange, basically dollars ,  is how a country makes payment  for importing goods from international markets. So, if Sri Lanka wants to buy fuel or foodstuff, it will have to pay for it with foreign exchange reserves they have earned. Unfortunately, they have been spending a lot of foreign currency while not earning as much. So, if they need to import basic amenities from the international markets anytime soon, they’ll be in a bit of a pickle.

That’s not the end of the nation’s woes. The country was heavily reliant on foreign loans to pursue developmental and infrastructure activities. Sri Lank must repay $26 billion of its loan by 2026 and by the end of 2022 alone, they will have to settle $7 billion as repayment of loans, that they have borrowed from countries like, China, Japan and India. With hardly $1.5 billion in its reserves, and deteriorating foreign exchange income, the repayment of loans would turn out to be a herculean task.

What’s the way forward?

Although there aren’t any quick fixes to resolve these issues, the first priority is to ensure that the nation’s loan repayments need to be restructured with the major lending countries. The forex reserves will get a sigh of relief, once a deferred and prolonged repayment schedule is charted out.  Subsequently, the government will have to come out with concrete and positive measures to boost its exports with impetus on tea and other agricultural products. Imported coal accounts for almost 44% of Sri Lanka’s electricity generation, which causes a major drain on the foreign exchange reserves. Long-term policies to reduce the dependency on coal for power generation are the need of the hour. Approaching International Monetary Fund for immediate financial assistance is very much on the cards to get an immediate bailout. Though this is viewed as one of the ideal measure to deal with this crisis, it can only be done by adhering to IMF’s stringent regulations and measures to restructure the economy in its entirety.

Lessons Learned

It’s quite imperative to have a look at the lessons learned from this crisis from a political point of view and from an academic perspective as well. Misappropriation of government funds and corruption at the peripheral level can ruin the economic stability of any nation and this is a key learning that one can infer from the current turmoil in Sri Lanka. Secondly, borrowing of loans has to be done with adequate due diligence and clear rationale. Obtaining foreign loans for the overall development of a nation is ideally right and this is something that most of the frontier economies and developing nations do on an ongoing basis. But these loans can turn out to be a heavy burden on the exchequer if they are not utilised in productive areas.

Sri Lanka is a classic example of an economy that took huge loans, particularly from China for infrastructure development, which hardly generated any significant revenue to the government directly or indirectly. A frontier economy such as Sri Lanka should have used these loans in highly productive areas that could enhance the technology to fuel agricultural and industrial growth. Last, but not the least, decision making on major policy change should be done rationally and logically instead of doing it in an ad hoc manner. The current regime did a historical blunder by taking a decision overnight to abolish the import of fertilizers in order to resort to hundred per cent organic farming. The end result of this immature decision-making was quite apparent, with drop in agricultural produce and resulting in acute food shortage.

The author is a Member of Loka Kerala Sabha.

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“India’s GDP is expected to contract by 9.6% in the fiscal year that started in March,” the World Bank said on Thursday. Regional growth is projected to rebound to 4.5% in 2021, it said.

The Washington-based global lender, in its latest South Asia Economic Focus report ahead of the annual meeting of the World bank and International Monetary Fund, forecasts a sharper than expected economic slump across the region, with regional growth expected to contract by 7.7 per cent in 2020, after topping six per cent annually in the past five years.

World Bank said that India is facing an exceptional situation since the spread of the coronavirus and containment measures have severely disrupted supply and demand conditions in India.

There was a 25% decline in GDP in the second quarter of the year, which is the first quarter of the current fiscal year in India.

“The situation is much worse in India than we have ever seen before,” Hans Timmer, World Bank Chief Economist for South Asia told reporters during a conference call.

Factoring in population growth, however, income-per-capita in the region will remain 6 per cent below 2019 estimates, indicating that the expected rebound will not offset the lasting economic damage caused by the pandemic, it said.

Prime Minister Narendra Modi announced a nationwide lockdown from March 25 to contain the spread of Covid-19, which brought as much as 70% of economic activity, investment, exports, and discretionary consumption to a standstill. Only essential goods and services such as agriculture, mining, utility services, some financial and IT services and public services were allowed to operate.

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Compared to the first quarter of the previous year, the GDP has declined by 23.9 per cent. The last financial year has seen a slowdown in growth. With the advent ofCOVID, growth had disappeared and the recession had started.

Even before the corona attack, our economy was in a weak state. Due to the lock-down following COVID, economic activity fell sharply and the economy was hit harder. The country experienced a bigger economic downturn in the first quarter than predicted by various studies. Only the agricultural sector has seen growth. The economy is becoming more dependent on agricultural activities than usual. The good monsoon has paved the way for the growth in the agriculture sector.

According to SBI, the country’s largest bank, the country is expected to experience a 10.9 per cent recession in the current fiscal. The report predicts a slowdown in the July-September quarter.

The central government needs to address this issue by recognising the reasons why the economy has been weaker than expected despite the expected slowdown. Even before COVID, the state of the economy was bad. We have been facing a situation where the economy has been struggling for a few years now due to the ban on notes and the shortcomings in the implementation of the GST. Last year saw the highest unemployment rate in the last 45 years. The corona came like thunder out of the clear blue sky at a time when the labour market and the small business community were in crisis. Prolonging the lockdown has exacerbated fundamental financial problems.

The endless opportunities for small businesses that are unique to India are disappearing. Cosmetic interventions are not enough at a time when wartime solutions need to be found to revive the economy. Interventions are urgently necessary to move the market, which has lost grounds due to the repercussions and lockdowns created by COVID-19.

The Prime Minister’s ‘Atmanirbhar Bharat’ announced in May was claimed to be a package of 10 per cent of GDP. But the new expenditure from the government for this package is only Rs.1.5 lakh crore. Even when corporate tax cuts were made last year, the government spent Rs.1.45 lakh crore. That’s about the same amount as government spending on the ‘self-sufficient’ package. That is, only 1-1.2 per cent of GDP. With such a plan, the current severe economic downturn cannot be eliminated. We can only recover from the recession if the government initiates a strong package with a long-term vision.

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During this data heavy week, the investor focus will also remain on global market trends and COVID-19 updates like the number of infection cases and news related to the progress of vaccines.

“This week, participants will be closely eyeing auto sales number and GDP data for cues on how the economy is progressing. Besides, monsoon progress and news updates related to COVID-19 would also be on their radar,” said Ajit Mishra, VP-Research, Religare Broking Ltd.

The Indian market last week, ended August 28, showed a stellar performance, with the BSE Sensex gaining 1,032 points and the NSE Nifty adding 276 points — both indices rising 2 per cent each.

The National Statistical Office (NSO) will release the infrastructure output data for July and the GDP number for the April-June quarter on Monday.

Various rating agencies and industry experts have been forecasting GDP contraction for the first quarter as the economy came under a severe pressure in the wake of the coronavirus outbreak and ensuing lockdowns during this period.

As other macro data are concerned, auto companies will announce their monthly sales data for August this week and PMI data for manufacturing and services sector are also due.

“Market is expected to continue the momentum. There could be a slight consolidation in the markets, when profit-booking emerges, but it is not likely to be a long drawn out correction,” Vinod Nair, Head of Research at Geojit Financial Services, said.

Samco Securities Senior Research Analyst Nirali Shah said, “For the week ahead, markets may watch out for August auto sales numbers from India Inc which might broadly act as a proxy for the health of our ailing economy, to an extent.”

Experts are of the view that movement in rupee/USD, trend in foreign fund and crude oil would also be monitored by market participants.

Meanwhile, India’s COVID-19 case tally crossed 35 lakh mark with a spike of nearly 79,000 new cases in a day on Saturday. The number of deaths has topped 63,000, as per official data.

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