India: Linked or De-linked from the Global Economy?

By Anoop Singh

With economic growth expected to continue at a reasonably good clip this year and next, it’s all too easy to think there’s not much to worry about. Even as Diwali celebrations begin across India, the outlook for the world economy is fairly uneven and uncertain. More worrisome than the subdued global growth outlook, risks are building up especially in Europe—and these include an extreme scenario with financial disruption.

Although India’s economy has generally been less prone to external forces than many others, we still need to contend with the larger than typical risks in the global economy. These risks harken the need for a new wave of reforms.

What does the more somber darker global outlook mean for India? And exactly what policies are needed?


In our latest Regional Economic Outlook for Asia, we expect India to grow by about 7½ percent in 2011 and 2012, only marginally below its estimated potential. Even within Asia, India does relatively well in this world.

India is less open to international trade than most other economies in the region. In particular, its rural consumption is fairly insulated from the world economy. More importantly, India’s exports are less dependent on advanced economies, so it suffers less from the current anemic outlook in those countries. The chart below shows that India’s exports are more diversified—both geographically and in terms of the products it sells—than its neighbors and competitors.

So, while a more protracted slowdown in the advanced economies will also lower India’s growth somewhat, we expect that it will still remain robust. In this scenario, India has to remain focused on the challenge of elevated inflation.


But what happens to India in an extreme scenario with the contagion of further financial shocks, similar to what happened after Lehman?

India has become more financially integrated with the global markets than commonly thought. We saw this in 2008, when India’s financial markets came under considerable pressure and investment became the main transmission channel, dipping substantially. To give another example, India’s stock market is one of the most correlated in the region with the VIX, a measure of market expectations of near-term stock market volatility and hence a good indicator of global risk aversion.

In such a scenario with more extensive financial shocks, we expect that India would also be hit as it has a current account deficit, some of its main corporates are global players that now rely more extensively on external debt issuance, and foreign investors now also have more extensive holdings in the Indian stock market.

Time for reform

At the same time, India has the tools and the experience to deal with a repeat of 2008. But, like other emerging market countries, they likely have less policy space now, with much of it having been used as a buffer when the crisis first hit, and inflation remaining above the Reserve Bank of India’s comfort zone.

While dealing with the present challenge of reigning in inflation, the need remains to rebuild the buffers to re-create policy space. In this regard, fiscal consolidation remains pivotal. Implementation of the official plans to shift the composition of budgetary expenditures away from untargeted subsidies (such as those on fuel and fertilizer) and toward infrastructure, health, and education will help in both dimensions.

The strength of domestic demand was, in large part, India’s saving grace when the crisis hit. And, today, domestic growth drivers still need to compensate for the external headwinds.

In 1991, India’s government undertook critical reforms, prompted by a balance of payments and fiscal crisis. And these reforms have continued paying off to this day. The planned budget expenditure reforms should certainly help domestic demand to be the backbone of India’s ability to withstand external pressures. Also, a new wave of structural reforms can help boost investment: from introducing the GST to improving the business environment, to liberalizing the labor market, and furthering trade and financial reforms.

Indeed, today’s risks can be translated into tomorrow’s reforms and growth momentum.


2017-04-15T14:16:35-05:00October 25, 2011|


  1. GS RADJOU October 25, 2011 at 11:11 am

    Dear Mr Singh,


    1- I think the growth forecast fo Asia, India has been revised- not so strong as it previously delivered by the media.

    Asia has also, its own problem-and this need to be look at seriously. Issue with water, sociology, poverty, growth,…disaster, terrorism,…manufacturing, too. But, as you said, it is a fast growing economy (in quality and volume)-

    2- What is a source of wealth and crisis? It is the population growth that creates the engineering needs and a positive dynamic –

    In 2050 India will be the most populated country on earth (Europe 530 millions, India 1.7 billions….)- So population growth is a strength and a weakness with an environment, whith threats and opportunities.

    3- What the chart does not show is the principle on which China made his reputation and the $3,000 billions saving during the last crisis.It is called the Japan carry trade e.g. the differential of interets rates between China and USA that created the transfer of capital, commodities and investment….-

    Also, it is the same process source of development for Germany and the role of the foreign labor forces after World War II, this trend was more important for Germany than for France, because germany was the defeated power, at that time- today, it is different.

    Today with the deflation and the Quantitative easing, and the Chinese currency being re-valued, it is less likely, to retun to it, but, why not? Thefore, the decoupling issue.

    4- Decoupling Asia, would not work. I think there has been an attempt, during the crisis between China and Asian countries (Korea, Singapore, Japan, Taiwan, Malaysia,…)- So, China has discovered, it would not work, because, there is a need to grow, and they do not have yet all the technology expertise- Still relying on the west to produce-And also, like India, there is a huge population to empower.

    But, I think also, the Asian expectation cannnot be like the one Europe and America have had in the last 200 years, with their own growth issues and manufacturing.
    What in the Occident we made with little population is enough, and we would not expect, half of the planet to take the same development path. So, there is a new paradigm in development, which is inventing and revolutionarize the tommorrow society in a new model of growth, which green growth.

    5- In summary, Asia -including China, India often aslo, competing against each other instead of cooperating- have strong economical fundamentals at the moment

    -China acumulated billions dollars, labour market influenced by the wellbeing and living standards, India accumulated Gold reserves, and also has a skilled workforce, but a cheap labors, all this cannot last for ever-
    There will be a time like in the Occident, Asia would have to change his way to think and to produce, if Asia wants to align in some kind with Occident technological progress)-

    So, all these vibrant figures of economical growth, may not be ever lasting and are source of opportunities and risks in the future, and to me as the world is more globalized than ever because of speed of transaction, it seems to me that de-coupling scenario is archaic and would not work, if not creating more issues.

    6- Growth is not all for decoupling, there is also, congruence that matter, as well as leadership, country governance- In fact most of the growth depends of the preventive diplomacy between actors.

    7- I suggest, that India keeping growing with decentralized manufacturing, because of the aboves within the Japan carry trade with the rest of the world.

    I look forward to hearing from you.

    Yours sincerely,

    Georges Radjou

  2. George Naumovski October 25, 2011 at 9:54 pm

    China and India will soon become the new super powers!

    It is the Asian century and for any country to survive, they must adapt to the coming Asian dominance.

    The more outsourcing from the western countries to Asia, the more business power and capital Asia gets and eventually they will take over as owners and makers.

  3. kamal taori December 11, 2011 at 11:24 am

    Congrats for the frank analysis. Those sitting at the top hardly know the reality. Let us look from the bottom and the picture is disappointing. The so-called GDP is a racket for the masses. And there is a need to look from the people’s angle.

  4. GS RADJOU December 15, 2011 at 3:12 pm

    Some say tomorrow’s main focus will be a war of brains between China and India (how fit are the respective country educative systems for tomorrow’s actions and comparative advantages) and my personal view suggests finding out how to build Strategies (it looks to me as though all economies are turning to operations and logistics)

Leave A Comment