India is likely to suffer significant slowdown in exports, higher interest rates, instability in financial markets, increased unemployment as well as lower growth should the US fall into recessionary conditions.
According to the D’conomics report by Deloitte in India, along with global integration, the dependence of the Indian economy on the US has grown and is evident from the fact that the US has been the second favorite destination for Indian exporters and the third largest source of FDI inflows in India.
"With such deep interconnectedness through trade, finance and confidence channels, it would be naïve to presume that India will be unaffected by the developments in the US economy," stated the report.
"With a high degree of global financial integration, any reduction in the US balance of trade will have negative effects on many countries throughout the world. A depreciated dollar would diminish the value of reserves held by various countries including India".
"This will also impact import capabilities of various countries as their import appetite would be dependent on US dollar as well as the value of international reserves", further clarified the report.
However, it is possible that the buoyancy in agricultural sector growth, major infrastructure investments, improvements in manufacturing sector yields and a robust service sector may help India weather the negative repercussions that may arise from the US.
The report also indicates that India’s global competitiveness is suffering while other countries are effectively eating into India’s global share of world trade.
The recently concluded trade and economic cooperation agreements with Singapore, Japan and Malaysia and the Free Trade Agreement with ASEAN are important steps for Indian businesses to capitalise upon and improve their productivity such that the economy can continue to expand its productive capacity.
The report concludes that the time is right to frame policies and remain optimistic about economic prospects as building and restoring consumer confidence is critical to avoid the consequence of a prolonged economic slowdown.
