Expert Zone

Straight from the Specialists

How much will U.S. recovery help India?

Photo

(Any opinions expressed here are those of the author and not of Thomson Reuters)

After a prolonged slowdown, the U.S. economy is finally showing signs of recovery though much of it comes from investment in inventories and may not be sustained at the present high rate.

The United States is the largest economy with a share of more than 22 percent in the world GDP. Naturally, even small changes in its behaviour have a perceptible impact worldwide. To India, the United States counts for a lot, although possibly less than it does for China.

The Indian economy is linked with the U.S. economy through three major routes. First, the United States is a market for more than a fifth of India’s total exports. In 2012-13, our exports declined because the U.S. economy had slowed down. Since June, our exports have been growing steadily to coincide with its recovery. The sector which has and is most likely to benefit is information technology. The manufacturing industry could not share the export boom or step up growth. This is one reason why non-oil imports shrunk and consequently reduced the trade deficit and the current account deficit.

Second, there is a strong link with the United States through investment, both portfolio and direct. FII investment is extremely sensitive to U.S. economic trends and policies. When the Federal Reserve announced its intention to reduce quantitative easing (QE), the world bourses reacted adversely — the BSE more than most others. FIIs partly exited the Indian market with the result that in 2013, there was a net outflow. That put pressure on the rupee, which depreciated substantially against the dollar.

No quick fixes to India’s growth problems

Photo

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Over the past year, the government has silenced its critics with several pro-reform policy initiatives including the relaxation of FDI norms, freeing FII debt investment limits and a calibrated deregulation of petroleum prices. These reforms were cheered by the markets by way of increased FII inflows.

India’s widening twin deficits – fiscal and trade – appeared to have been reined in. But in the first few months of the fiscal year 2013-14, everything seems to have come undone for India – be it the potential end of the U.S. Federal Reserve’s quantitative easing policy or the dollar’s appreciation against emerging market currencies.

India’s current account deficit: solution lies in exports

Photo

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The U.S. dollar is the major currency for international trade. Most countries use it to pay for their imports and also peg the dollar for exporting products and services.

The balance of trade (net import or export) would determine if a country is a net payer or a receiver of dollars. Trade, along with other dollar inflows (portfolio/FII, FDI, inward remittances), determines the overall availability of the international currency for a country to engage itself in the global economy. This also has a bearing on determining the exchange rate of a country’s own currency with that of the dollar.

Consequences of an export squeeze

Photo

(The views expressed in this column are the author’s own and do not represent those of Reuters)

In June, exports shrank more than five percent to $25 billion largely due to recessionary conditions in major importing countries such as the U.S. and the EU. Although exports are not as critical to us as they are to Singapore or China, they do count for a lot.

Exports on the bounce

Photo

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Exports are performing exceedingly well. This does not look like a spark in the pan because the commendable performance has lasted more than 10 months in spite of repeated warnings by the Secretary, Ministry of Commerce, that the escalating trend line will bend down because of the slowing of the U.S. and EU economies.

  • Editors & Key Contributors