Will economic recession hit small businesses in India?

Mahi Kapoor (35), owner of a small designer boutique in Uttarakhand in North India, is once again making adjustments to her business. After surviving the last two years, Mahi is now thinking about how her boutique – selling designer garments and artifacts to clients in India and Europe – can weather a possible economic recession.

 

Raj and Sunitha Rajan, an entrepreneur couple, who run a hand-made chocolate shop and a corporate gifting business in Kodaikanal in Tamil Nadu, are also worried about the fate of their business. They are offering cheaper options to their corporate and retail customers, in India and abroad.    

The global economy is facing turbulent times, with the three global powerhouses — the U.S, Europe and China — all facing formidable headwinds. In India too, rising inflation, widening trade deficit and a declining rupee makes the situation worrisome for the hundreds and thousands of small businesses.  

However, it is important to understand what a recession is and if India is likely to have one.

Also, it is worth exploring how your small business can turn the tide by looking at new opportunities and adopting strategies that ensure their long-term sustainability. 

Related: 7 ways to protect your small business from an economic slowdown

What is a recession? 

In simple terms, recession is used to signify a slowdown in general economic activity.  

The Reserve Bank of India (RBI) defines recession “as a period of prolonged decline in output experienced across much of the economy.” Some experts consider a recession to be in progress when GDP has declined for at least two consecutive quarters.

The RBI calls an economic decline an actual recession between 12-18 months after the recession’s beginning. 

What happens in an economic recession?  

The first and most important sign of a recession is a steady rise in unemployment or job loss.

During a recession, people may experience significant impacts on their daily lives.

• Everything — from groceries to shoes — is often more expensive
• Workers may have less job security

Here are certain areas that are impacted the most when a recession hits. 

Personal income stagnates or declines 

Economic recession is a period of lull. Most people experience either a drop in their income level or stagnation or, worse, job loss.

At the same time, prices of commodities rise steeply, leaving everyone in distress. Income inequality widens as the lower and the middle-income groups suffer the most. 

Unemployment rate goes up 

In a recession, the unemployment rate — the percentage of the total labor force that is unemployed but actively seeking work — tends to increase as companies cut back on staff to reduce their expenses.

The Centre for Monitoring Indian Economy (CMIE) reported that unemployment reached a high of 15.53% in April 2020, the peak of the recession during the Covid-19 pandemic. 

Business and manufacturing activities decline 

During a recession, businesses cut back on production, as the cost of raw materials goes up. This leads to subsequent decline in manufacturing activity, leading to a dip in exports as well.

For instance, India faced a recession in the 1960s after the China War in 1962, followed by the Pakistan War in 1965. Again, India faced two terrible droughts in 1965 and 1966 respectively. As per several reports, GDP growth was negative 3.66% during that time.  

Big hit on consumer spending  

Retail sales, or the total amount of money people spend on goods and services, gets affected the most during a recession.

People have less money to spend and stick to only essential goods and services.

The dip in retail sales invariably impacts the economy on the whole. Many businesses lay off workers to reduce costs, and some may even shut shops.  

Related: 10 unconventional ways to make passive income

Is Indian economy under a recession? 

When the global economy has slipped in a recession, India cannot remain immune.

Moody’s Investor Service predicts India’s real GDP growth will slow from 7.7% in 2022 to 5.2% in 2023.

Nonetheless, the economy has shown resilience. According to a July 2022 Bloomberg survey of economists, the probability of recession is zero for India. Inflation and a possible growth slowdown are primarily due to global shocks.

A more recent S&P Global Ratings has retained its 2022-23 growth projection for India’s economy at 7.3%, citing a smaller impact from the global slowdown on its domestically-driven economy. 

What are the effects of a recession on small business?  

During an economic recession, small businesses are often hit the hardest. Budget constraints, reduced spending power and inadequate preparedness can make it extremely difficult for a small business to survive.

Those without adequate support systems even stall their operations.

Related: Protect your future with a business continuity plan  

Reduced cash flow

Small businesses run on a tightly controlled budget with limited cash flow. Customers may delay purchases or payments for longer than usual because they are waiting for income to arrive themselves.

This causes a chain of delayed payments from one vendor to another, which typically slows down all aspects of business. 

Decline in sales 

When customers experience cash constraints, they are more likely to put that money towards essential items and save elsewhere. Lesser customer spending directly translates to a decline in revenue for businesses. 

Freezing on hiring and layoff 

Small business owners look for budget cuts in every area possible to survive an economic crisis, one key area being reducing staff. They may do so across departments or some specific areas.

Marketing is one activity that is often hit when a business experiences budgetary constraints.

However, with fewer employees left to do the remaining work, there may be chances of:

• Lack of productivity
• Fatigue among employees
• Demoralization

What’s the difference between a recession and a depression? 

As mentioned, a recession is a widespread economic decline that lasts for several months. Depression is a more severe downturn that lasts for years. 

Recessions are characterized by:

• High unemployment and decline in wages
• Drop in the prices of real estate and stock market
• Negative gross domestic product (GDP)

The longest global recession that occurred since World War II was the Great Recession, lasting from December 2007 to June 2009. 

India has gone through four economic recessions in 1958, 1966, 1973 and 1980. The most recent would be the one that some believe may occur post the Covid-19 pandemic. 

During an economic depression, unemployment rates rise into the double-digits and stay there for years.

 

As a result, companies reduce production or shut down manufacturing facilities, with fewer exports. 

A case study

The Great Depression was a severe worldwide economic depression between 1929 and 1939 that began after a major fall in stock prices in the United States.

The country’s industrial production between 1929 and 1933 fell by nearly 47%, GDP declined by 30% and unemployment reached more than 20%. Also, 20% of banks in existence in 1930 had failed by 1933.

Its impact was also felt in India, as nearly 25% of the labor force was unemployed.

India’s real GDP fell nearly 6.4% in 1931 and around 12.9% in 1932. Import and export were nearly reduced to half during the depression.

How do you survive an economic recession? 

While a recession-like situation is the worst nightmare for small businesses, many have shown remarkable flexibility as they find creative ways to survive a downturn. 

Here are a few tactics to survive an economic downturn:

 1. Invest in your existing customers 

Instead of trying to acquire new customers, you must focus on maintaining the existing ones. This is true even at the best of times.

During a recession, people clamp down on their spending, making it even harder to persuade a new customer to give you a try.

Hence, investing in the customers you already have becomes even more important.

Talking to them on their requirements, pain points and priorities as well as getting those addressed can go a long way in boosting customer loyalty.

This might seem obvious, but past customers were once active customers. During an economic recession might be the perfect time to re-engage with past clients. 

2. Refocus in branding strategy 

While recessions can be stressful for everyone, entrepreneurs should strive to bring their business online in a meaningful way.

For this, they can:

• Send regular, content-rich emails to existing customers on their mailing list
• Follow up with prospects, making them a compelling offer
• Post consistently on social media in the form of recommendations, contests and other messages to push the company’s brand identity and agenda

Bur experts advise to go slow and not push a hard sell during economic recession, as people face many financial issues during these difficult periods. 

Editor’s note: Make sure your business is easy to find. Put your business online in less than 10 minutes with Online Starter Bundle.

3. Automate parts of your business  

Automation or using IT solutions and machines to do repetitive tasks can save you an incredible amount of time and also money.

Many of the things that your workers do to drive business can be automated, meaning that you can use your people, time and money in other ways.

For example, you can streamline your marketing tasks, data entry activities, e-commerce order management, credit control tasks, and more, with the help of multiple custom software, applications and tools to reduce workload and increase productivity.  

Related: Contact management software — 5 good options

4. Don’t give up

This is the catchphrase when dealing with a challenging time like an economic recession. While there will be challenges in the way — and you must prepare for those — being flexible is the best way to face the new reality.

If you plan, focus and execute well, you can recession-proof your business and come out stronger on the other side. 

 

Since World War II ended, the average economic recession has lasted 10 months. 

In fact, oftentimes tough economic situations can help you build the confidence in your ability to run your business and bring greater innovation to your enterprise.