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13 Aug, 2022
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Economic Times

Impact of USA’s Recession On India’s Economic Growth

Being a global superpower, the United States of America influences all aspects of the global growth. At present, the country is experiencing a growth slowdown, which (according to experts) will hamper India’s growth as well. The assumptions are indicated in the Nomura India Normalization Index (NINI) reports.

According to the reports, the Indian economy, which is now progressing back to the above-normal levels, will experience a slowdown in its GDP growth in the medium term. The growth trajectory has been led by broad-based improvements across consumption, investment, industry and the external sector.

The reports suggest that the service sector, which was trailing at around four percentage points (PP) below pre-Covid levels in the last quarter of FY 21-22, is now growing close to 40 percentage points (PP). This uptick, according to experts, is expected to support the Indian economy’s growth trajectory in the short term.

However, in the medium term, due to a ‘prolonged mild recession’ in the US, the Indian economy will experience a growth slowdown. In fact, the country has been experiencing growth challenges to this date as well. Its growth challenges lie due to inflation which has been moving above its target for more than three quarters in a row. This makes India the only Asian nation experiencing inflation to this date.

What Is The Significance Of the Terms ‘Inflation’ And ‘Recession’?

In the context of a country’s economic growth, both Inflation and Recession are bad terms. You can better interpret these terms under the following heads:

Inflation

It is a term which describes the forward growth of the economy at high speed, sometimes uncontrollably. Under this situation, economies experience high commodity pricing along with high rates of employment. Probably, you may be wondering that if it increases the employment rate, how is it a bad term in economic studies? Well, the answer lies in the high cost of living that an average consumer experiences due to high Inflation rates.

Recession

This term describes an economic scenario just opposite to inflation. In this scenario, economies experience slow and negative economic growth. This means countries experience reduced economic activities and high rates of unemployment. The surge in unemployment rates happens due to reduced demand and increased supply from the production side.

What Is The Prime Cause of Recession?

In a country’s economic cycle, a recession is a common scenario. It is because an economy that grows over time tends to slow down after a certain interval. During the recession, the economies experience a loss of business and consumer confidence. The prime contributors to recession-like economic situation involves:

  • Loss of consumer’s interest in investing in the country’s economy.
  • High-interest rates.
  • Stock market
  • Reduction in price and sales.
  • Reduction in production activities.
  • Poor management.
  • Strict wage-price norms.
  • Post-war slowdowns.
  • Credit crunches.

Nomura India Normalization Index (NINI) Predictions

From Nomura’s note, Our US economics team has recently downgraded its base case for the US economy to a mild recession starting in Q4 2022, reflecting tighter financial conditions, a negative sentiment shock for consumers, worsening energy and food supply disruptions and weaker global growth prospects,”

Such a situation in the US’s economic cycle will impact India’s overall GDP growth, due to which the country will grow at 7.2% in 2022 before moderating to 5.4% in 2023. Adding to this economic slowdown, the rate hike by the US Federal Reserve will dampen the investor spirit to a great extent.

Although the central agencies in the USA have not officially declared recession in the economic growth, Fed Chair Jerome Powell acknowledged the possibility of the same while addressing the Congressional lawmakers. During his address, he stated: “The Central Bank is ‘strongly committed’ to bringing down inflation and can do so with its monetary policy tools,”

How Does US’s Recession Relates To India’s Economic Growth? 

Indian companies rely heavily on US companies for their outsourcing requirements. Also, India’s exports to the US have grown substantially over the past few years. All thanks to the economic tie-ups that happened due to strong political will.

Currently, the US constitutes around 18% of India’s merchandise export market and over 60% of Information Technology (IT) and Information Technology-enabled Services (ITeS) exports. This means recession in the US will mainly affect the IT sector of the country. Alongside it, the growth slowdown in the globular term will also likely weigh on India’s export and investment outlook.

Looking at the current situation, economic experts predict that India will lose between 1 to 2 percentage points in its GDP growth in the upcoming financial year. The major impact will be on Indian companies having big-ticket deals in the USA, as their profit margins will shrink due to decreasing Dollar value against the Indian Rupee (INR).

This is because the value of the Indian Rupee is inversely proportional to the value of the US Dollar (USD). It means the surge in Rupee value means a decrease in Dollar value. Due to the inverse relation of commodities, both exporters and importers get affected whenever any shift in the value system occurs.

Other Reasons For Country’s Growth Hampering

In addition to the US’s factor, the Russia-Ukraine crisis, emerging variants of the SARS-Cov2 virus, Monkeypox disease, and many more issues are contributing to the slowdown in the country’s economic growth.

Possible Solutions For Overcoming Such Economic Challenges 

The challenges that India is experiencing at present have the potential to impact the economic progress of the country in the short or in the medium term. However, these challenges have exposed many loopholes in India’s economic policies. One of these loopholes involves the over-dependence of India on specific countries for its market and supply chain requirements.

To overcome such challenges, in the long run, the first step that economic policymakers need to take is to reform the supply chain network of the country. Secondly, they need to look for other markets in the country’s nearby region. The second suggestion will also work for promoting the country’s neighbourhood first policy.

Meanwhile, to handle challenges in the short term, the RBI has to bring reforms in its monetary policy so that established RBI rates and inflation can come down to their normal position.

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