Impacts of U.S. Slowdown on India

Source: The post impacts of U.S. slowdown on India has been created, based on the article “US RECESSION FEARS HYPED?” published in “Business Standard” on 10th August 2024

UPSC Syllabus Topic: GS Paper3- Economy

Context: The article discusses concerns about a possible U.S. recession due to rising unemployment but suggests it might just be a slowdown. It also explores how this could impact India’s economy, including trade, the rupee, and capital flows.

What is the Current Economic Situation in the U.S.?

1. The U.S. economy is experiencing mixed signals, with unemployment rising to 4.3% in July, the highest since October 2021.
2. Despite concerns, the U.S. Federal Reserve suggests the economy is not in a recessionary freefall.
3. The economy grew 1.4% in Q1 and 2.8% in Q2 of 2024, indicating resilience.
4. A potential slowdown is linked to the Federal Reserve’s tight monetary policy.
5. The International Monetary Fund (IMF) forecasts U.S. growth at 2.7% in 2024, slightly higher than the 2.5% in 2023.

What Are the Impacts of U.S. Slowdown on India?

1. Positive Impacts
2. Lower Oil Prices: A U.S. slowdown could lead to a drop in global crude oil prices, easing India’s oil import bill and reducing inflationary pressures.
3. Rupee Stabilization: With potential U.S. interest rate cuts, the Indian rupee, which closed at 83.97 against the dollar, might stabilize between 83-84, supported by lower oil import bills and capital flows.
4. Increased Capital Inflows: Slower U.S. growth may prompt American investors to explore opportunities in India, potentially increasing Foreign Direct Investment (FDI) and portfolio investments.
5. Negative Impacts
6. Trade Surplus Reduction: A U.S. slowdown could diminish India’s trade surplus in goods and services with the U.S., which has been significant, with exports to the U.S. comprising 17-19% of India’s total exports over the past five years.
7. Economic Growth Impact: India’s GDP growth forecast, already moderated to 6.5-7%, might face further pressure if global demand weakens due to a U.S. slowdown.
8. Service Sector Challenges: The Indian IT sector could face challenges, as seen during the pandemic, with potential reductions in demand for services from the U.S.

How Did Past U.S. Recessions Impact India?

1. During the 2008-09 U.S. recession, India’s GDP growth slowed to 3.3% from 7.7% the previous year, but it rebounded to 7.9% in 2009-10.
2. Capital inflows to India dropped significantly to $9.1 billion in 2008-09 from $108 billion in 2007-08 but recovered to $53.6 billion in 2009-10.
3. The rupee depreciated by 14.2% against the dollar in 2008-09.
4. During the COVID-19 recession in 2020, India’s GDP contracted by 5.8%, but it recovered with 9.7% growth in the following year.

Question for practice:

Discuss how a potential U.S. economic slowdown could impact India’s economy, considering both positive and negative effects.