Cycle of Recessions

 

Covid Scare since 20, Russia-Ukraine war, China supply chain issues, Inflation and tight monetary controls worldwide, and Political upheavals have created Recessionary warnings here in the US. Google and Meta CEOs have announced their forecasts. The uncertain global economic outlook has been top of mind," Sunder Pichai said in an internal memo and confirmed by a spokesperson. "Like all companies, we’re not immune to economic headwinds. To avoid any unpleasant surprises and above all to anticipate a sharp slowdown in the economy, Google will take preventive measures to control its own costs”. The internet giant will slow down hiring for the rest of the year in view of a potential recession. Meta will accentuate its cost reduction policy. The firm only plans to hire between 6,000 and 7,000 new engineers in 2022, against an initial project of 10,000 new recruits. Microsoft is also hedging against a slowdown in the economy by cutting back on the number of employees it hires. 

 

In this interconnected world, where does India stand? Some say India never had a recession till the Pandemic. But technically it’s the fifth recession.   India’s economy contracted 7.3 percent in 2020-21,   its worst recession since independence as lockdowns kept millions out of work. While manufacturing returned to growth, the services sector suffered a decline till very recently. As things look bleak in the US, we in India should also be prepared. Interestingly, the previous contractions in India's GDP had two common culprits -- weak monsoon and energy crisis. During 1957-58, India encountered its first drop in economic growth when a negative GDP growth of 1.2 percent was recorded. The reason behind it was a ballooning import bill, which swelled by more than 50 percent between 1955 and 1957. The FY66 recession was caused by severe drought and wars with China and Pakistan. In 1965-66, due to drought, food grain production fell 20 percent. Foreign food aid came to the rescue of the starving population and India received 70 lakh tonnes of food aid in fiscal 1965. The 1972-73 recession came on the back of an energy crisis as the Arab Petroleum Countries targeted nations supporting Israel during the ongoing war. In the 1979-80's oil shock led to the BoP crisis, and the cost of India's imports almost doubled from 1978 to 1982. During this time, India's exports also took a hit as they contracted by 8%, which led to a balance of payment crisis. After that, we saw no recession till the Pandemic but the IT/services industry was always linked to US/Global market trends which it has to take note of. 

 

 

When we are kids in the 80s, we saw the first US recession through our only window to the world news: The world this week by NDTV.  This recession ran for nine months, from July 1990 to March 1991. It was caused by the 1989 savings and loan crisis, higher interest rates, and Iraq's invasion of Kuwait. Then we opened up 91 and our economies got interlinked. The first major recession was in 2001   It was caused by a boom and subsequent bust in dot-com businesses. The Y2K scare had partially created the boom in 2000. Companies bought billions of dollars’ worth of new software because they were afraid the old systems weren't designed to transition from the 1900s to the 2000s. Many dot-com businesses were significantly overvalued and failed. The 9/11 attack worsened the recession. Then we saw a great Indian boom lasting till 2007 followed by the Great Recession lasted from December 2007 to June 2009. The subprime mortgage crisis triggered a global bank credit crisis in 2007. By 2008, the damage had spread to the general economy through the widespread use of derivatives. GDP in 2008 shrank in three quarters, including an 8.5% drop in Q4 in the US. The unemployment rate rose to 10% in October 2009. 

 

Now as the US heads towards recession, our generation of IT entrepreneurs is the third instance of tightening seatbelts as announced by leaders like Pichai and Zukerberg.  But riding on the emergence of new technologies, transformations will be on the rise and there will be room for innovations. Though the startup market is tight we will see existing companies innovate in order to survive.  Based on history, things will probably get worse before they stabilize. The Feds are trying to fight inflation by raising interest rates and as a side effect, it can trigger a recession. No one can predict a recession for sure, but the odds are pretty high. As individuals, we can fasten our seat belts. 

We should resist Drastic Changes: When things feel precarious or a recession actually happens, it’s natural to want to do something — liquidate your assets, hoard beans, buy random stocks you read about online everything in a panic.  A better way to channel that stress is to take stock of your spending. The only thing you can really control right now is your cash flow from day to day 

You may have to improvise:  It certainly helps to have an emergency fund to fall back on. 

Beware the get-rich-quick schemes: When people are nervous and desperate, they turn to the internet— where bizarre scams proliferate.  

Don’t be afraid to seize the moment: No one wants to profit off widespread misfortune and economic suffering. But if you’re one of the lucky ones who can afford it, investing your long-term savings in the market during a downturn can be extremely smart 

Remember that the economy will recover: When the economy goes down, it can seem as if our entire financial system is crumbling and we’ll be burning our worthless dollar bills to cook our food. And someday in the near future, it’s much more likely that things will bounce back. That’s because recessions are, unfortunately, a normal part of how our economy functions.  

These are cyclical and we should believe in ourselves. Though not have seen past recessions in India, as entrepreneurs who started in Y2K days we have come a long way.