The Myth of Decoupling and Why It Matters
Issue #04 India and the Global Economy
Is India Truly Decoupled from the Global Economy?
Many believe that India’s economy is mainly driven by domestic demand, meaning it would not be heavily affected by global events. While this idea sounds comforting, it’s not entirely true. Let’s break it down.
Why India is Connected to the Global Economy
India may not be as dependent on exports as countries like China or Korea, but it relies on the global economy in other ways.
Here are the three main channels through which global events affect India:
1. Capital Flows
India depends on foreign investments for growth.
These investments (capital flows) can stop during global crises when investors seek safer options.
If foreign capital dries up, the Indian rupee weakens, inflation rises, and projects can get delayed.
2. Trade
Even though exports make up a smaller share of India’s economy compared to domestic demand, they are still important.
A slowdown in global trade impacts sectors like IT services, manufacturing, and more.
3. Global Prices
India is a price taker for most commodities, meaning we buy at global prices rather than setting them.
This includes:
Energy: We import oil, and prices are set globally.
Metals: Industrial materials like copper and steel are priced globally.
Food: Even in agriculture, many prices depend on international markets.
When global prices rise, India pays more for imports, increasing costs for businesses and consumers.
India Inc. top lines move in tandem with Global Economy: A tight linkage
Lessons from the Past: The 2008 Financial Crisis
Before the 2008 Global Financial Crisis (GFC), there was a lot of talk about “decoupling” — the idea that India and other emerging markets could grow independently of the US and global economy. However, the GFC proved otherwise:
Foreign investments stopped, the rupee weakened, and inflation rose.
Export-dependent industries suffered as global demand dropped.
Falling commodity prices reduced input costs (e.g., oil) but also hurt companies’ revenues, leading to lower GDP growth.
This shows that India is closely linked to global business cycles, no matter how strong its domestic economy is.
Why India Should Care About Global Events
India’s economy is connected to the global economy in one way or another:
If foreign capital dries up: Projects and investments in India slow down.
If global trade slows down: Exports and related jobs are affected.
If global prices rise: India pays more for imports, increasing costs for everyone.
Even though domestic demand supports our economy, these global factors play a crucial role.
Let me know your thoughts! 📢
Much love,
Priyank
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