How recession in the west can impact Indian exports?

A seasoned economist asked what was the big difference between 2008 and 2022. The immediate answer was that in 2008, the global marketplace was not as connected as the current situation.

There were linkages but there was still a lot of discrete performance. In the last 14 years, since monetary policy became synchronized, the linkages deepened. One big impact of all this could be how a recession in the West could hit Indian exports.

Most economists are now veering around to the view that the US and EU economies could be going into a recession in the foreseeable future.

This expectation is on the back of the reality that central banks are trying to raise rates despite low unemployment. Economists feel that this could lead to a situation wherein the rate hikes may not control inflation but instead may end up impacting growth or driving economies into recession.

In a recent report, EY India has pointed out that a slowdown in the Western developed markets of the US and Europe could have long term negative repercussions for the Indian export market.

Indian exports had touched a record $422 billion in FY22 while total trade comprising of exports and imports had crossed $1 trillion for the first time in FY22. EY India has underlined that exports of the Indian economy could be a casualty of the slowdown.

While rising oil prices are a concern, the export machinery of the Indian economy are veering to the view that there could be real risk to exports.

For instance, if the US and the European economies go into recession in next couple of years, there could be a lot of demand destruction for Indian products and services, hitting exports badly. This could be one outcome of raising interest rates to manage the unprecedented inflation levels.
 

The export weakness could be a challenge for India in more ways than one. India is projected to grow faster than China till the year 2028. More importantly, this is likely to be well above the global average.

A major chunk of this growth will come from the exports sector, which has been one of the few sectors to grow even in the midst of the COVID pandemic. We have already seen tensions created by the supply chain blocks in China.

The reason, the next few years are important is due to the demographic dividend for the Indian economy. That is the period, India cannot afford to see its export momentum disrupted. Between 2028 and 2058, as per the EY report, India’s share of working age population will be more than that of China.

That is when India has a golden opportunity to export its way to a higher level of economic growth. Of course, that is assuming that a recession in the West does not tamper with India’s grand export plans.