decoupling of indian economy from u.s

8/8/2019 Decoupling of Indian economy from U.S

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DHEERAJ AGARWAL ISHNEET DHILLON KAPIL RUSTAGI

(26) (31) (32)

DHEERAJ AGARWAL ISHNEET DHILLON KAPIL RUSTAGI

(26) (31) (32)


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The decoupling hypothesis is the idea that business cycles

in emerging market economies have become moreindependent from business cycles in advanced economies

in recent years. Decoupling essentially amounts to astructural break in the degree of business cycle

interdependence between the two groups of economies


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For long, the US was the engine of the ride, fuellinggrowth in the rest of the world by offering up its giganticexport market

The domestic economy of India is now robust enough tosustain itself through internal demand, and export-dependency is pass

In other words, India has decoupled or delinked itself

from the American engine.

This implied that India would be able to eschew the impactofan economic down-turn in the developed world


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Economic growth is picking up in india, which seems toprovide a new frontier for the world economy

Trade among the new players intensified, suggestingstrong complementarity between them

Also, the strength of our rural economy, that iscompletely disconnected from the developed world is a

cause for decoupling Indias much smaller export sector that is relatively less

reliant to commodities from the us


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Thefinancial systemin India is in a veryrobustposition

Savings rateis high householddebtis extremelylow fiscalconsolidation seems tobe wellunder way withthegovernment

willingtotakekeyreformistdecisions. Fundingcosts forthehugeinvestments requiredforinfrastructure

development willremainlow duetothedeflationary scarein Westerneconomies which willkeyrates low for a prolongedperiodoftime.

As suchbothequity anddebtfunding shouldbeeasily available.

Consumptiongrowthin India willbe strong withthenearly 10%expansionin PercapitaGDP peryearoverthenextdecade.

Thus bothinvestment andconsumption willdriveeconomicgrowth.


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In the 1990s, private consumption accounted for 67% of the GDP, while the share of exports was9%. In 2008-09, the share of private consumption had gone down to 59%, while that of exportsincreased to 24.5% of the GDP.

every one per cent decline in the world GDP growth leads to around 3.71 per cent declinein Indian exports

business cycle synchronization (in terms of GDP) of the Indian economy with U.S. hasincreased over time, in particular during recent periods (Q1 of 2006-Q2 of 2009)

For every one per cent decline in the world GDP, Indian software exports were down by 4per cent

The share of manufactured exports has risen from 27.1% in 1990-91 to 52.2% in 2000-01and further to 72.3% in 2008-09. This significant export-orientation of manufacturing hasalso exposed the sector to external demand shocks

The services export to GDP ratio is relatively lower, although it, too, has risen from 3.2%in 1990-91 to 15.1% in 2008-09

In 2008-09, exports plus imports of goods and services formed at least half of the GDP.Same for gross capital inflows and outflows.

the share of foreign direct investment has increased in investment (7-8% of domestic

capital formation in 2007 and 2008)


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Thegrowthofthe Indianeconomyhasbecomemoretightlycorrelatedto world

growthinthelastdecade. Whilethecorrelation was 0.43 inthe 1980s and 0.59 in

the 1990s,the slow and steadyopeningupof

theeconomyledto anincreaseinthiscorrelationto 0.92 duringtheperiod 2001-08


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Emerging Markets are shownbythegreenline,the USA bytheblueline, andnon-US developed stockmarkets by

theorangeline


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Thefinancial andcommercialinterdependencybetweenIndia and US was evident

Eventhoughhavingnodirectexposureto sub-primeassets,itknocked-onindirecteffects as largecapitaloutflows weretriggeredbyinternationalinvestors

Enterprises facedtighteningofliquidityintheirdomesticmarket as well as constraints intheir access toexternal

financing

Thedropin US demandledto anendtoexportdrivengrowth anddisruptioninintra-Asiantrade, stillhighlydependentonextra-regionalmarkets


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India is a capital-deficient country and a lot of capital is required fromoutside the country to have the kind of growth rates which we aspire for.In that context, the decoupling may not really happen, but as long as thefundamentals are strong, whenever the global markets are stable, theglobal economies are stable, India will have a disproportionate share ofinflows coming into the country.

The decoupling theory held good till the financial crisis broke loose. Theway the economy and trade contracted with the world economiestumbling, it was established that Indian economy is not decoupled withthat of the world, - RBI

The Indian economy has been decoupled, but not delinked from the restof the world. While our economy thrives on the engines of domesticconsumption and infrastructure, it is still prone to effects of the crisisthat has been panning out globallyinthepast few months


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decoupling of indian economy from u.s

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