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Why Is India Immune To US Recession? – Analysis

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Concerns are looming over the rising recession in the USA and its ripple effects on India. Surging inflation in the USA, leading to successive hikes in interest rates, crippled by the Russia-Ukraine war with no end in sight, disruption in supply chain owing to USA-China trade conflict, is causing jitters in India over its trade and investment relations with the USA. USA is the largest trading partner of India as well as one of the top two or three foreign investors. Given these economic dimension between the two countries, it is feared that the recession in USA is likely to have a major drag on Indian economy. 

In 2022, the USA reported consecutively negative growth in the first and second quarters, with 1.6 percentage and 0.9 percentage fall in GDP respectively. The US treasury bond fell 14 percent year-to-date in June. Consumer confidence is in a downtrend. The Consumer Sentiment Index, measured by University of Michigan, fell from 67.2 in January to 58.2 in August  in 2022. The downtrend is at par with 2000, the post Lehman shock. Observers view these factors as an indication of the USA plunging in recession. 

An important aspect of US recession is that not only it is feared to have direct impact on India, but also of collateral impact, which is likely to be spearheaded by other countries who are dependent on the USA for trade and investment, such as EU and Asian countries, with India has trilateral economic relations.

Nearly, one-third of India’s exports goes to the USA, which accounted for 18 percent of India’s exports in 2021-22.  As the EU is another major area of India’s exports, accounting for 15.4 percent in 2021-22 and the USA is the major destination for EU exports, eventually the situation possess vulnerable to unleash ripples on India’s exports to EU.   

The four big economies of EU — Germany, France , Italy and Spain, which account for half of India’s exports to the EU — have been downgraded by the IMF in the forecast for their GDP, as a consequence of the USA recession. 

The USA is also the major destination of India’s exports of IT and BPO services. Over half of its IT and BPO exports go to the USA. Besides, USA is the potential hub for job opportunities for IT services.

Major items of India’s exports to USA are petro products, drugs and pharmaceuticals, textiles, ready made garments and precious stones including diamonds. They account for more than half of India’s exports to USA. India’s exports to USA decipher that high growth in India’s exports to USA is  driven by textiles, precious stones including diamond and small machinery.    

An important aspect of India’s exports to the USA is that they are labour intensive industries. These industries are the potential hub for job creation in the country. Given this, trade expansion with the USA has multi-faced implications on the Indian economy, besides trade. 

However, the past trajectory of USA recessions and the impact on India should override the concern, which has been escalated with the impending recession in USA. The great USA recession in 2008 is a case in point. Initially, after having a little jerk, the Indian economy bounced back during US recession in 2008. India’s GDP growth plunged to 4.31 percent in 2008-09, from 7.38 percent in 2007-08. Soon, it was insulated from the shock and reverted back to 6.86 percent and 8.03 percent growth in 2009-10 and 2010-11, respectively. 

Similarly, India’s exports to the USA, after the initial shock, experienced a roaring growth during the US recession period beginning in 2008. Its exports to the USA, after a fall by 7.6 percent in 2009-10, sparked by 29.5 percent and 37.6 percent in 2010-11 and 2011-12, respectively. This demonstrates India’s immunity to US recessions.

Recently, American investors have been upbeat to invest in India and found it a major alternative to China after the COVID pandemic damaged China’s supply chain industry. In 2020-21, USA  investment in India increased  by 297.2 percent, albeit the country embraced widespread COVID 19. Over 80 percent of the investment was in digitization. They were inspired by Prime Minister Narendra Modi’s strong vision to make India a digitization hub of world. India emerged as the country with second most internet connections in the world, next to China. With nearly half a billion internet connections and the second most smart phone users, it has emerged as the global leader for digital economy. 

The recent decision of Apple to decouple from China and shift to India demonstrates American leaning towards India. The decision to set up semiconductor device manufacturing facilities in India with Foxconn, the main subcontractor for manufacturing of Apple iPhones and other high tech communication equipments, is another factor to spearhead US interests in India. These demonstrate that India stand for a strong immunity to US recessions.

The fundamental principles of India’s immunity strength depends on its economic fundamentals. Unlike Asian economic giants, India is not an export base economy. Asian tigers like Singapore, Thailand, Malaysia, South Korea, and China are export base economies. Nearly half of GDP is contributed by exports in cases of Singapore, Thailand, Malaysia, South Korea and 20 percent in the case of China. USA is the major export destination of these countries. For instance, the USA accounted for 16 percent each of exports of Thailand and South Korea, 18 percent of exports of China, 12 percent exports of Malaysia in 2021. As a result, the US recession has major drag on these economies. Against these backdrops, India escapes the ripples of US recession since exports does not play prominence in its growth. Export account for one-fifth of India’s GDP. Given this, even though the USA is the biggest destination of India’s exports, it will have a slender impact on Indian economy. 

All to say that the USA recession has less bearing on Indian economy, unlike Asian economic tigers and EU. 

Views are personal

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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