Prime Minister Narendra Modi’s leadership amidst economic turmoil underscores India’s economic resilience and strengthens his prospects for continued governance
In the face of the recent recession’s emergence, India demonstrates remarkable resilience, while Japan and the United Kingdom, two significant global economies, have sparked renewed worries regarding the direction of the global economy. Both nations unexpectedly slipped into economic contraction on February 15, 2024, marking a surprising turn of events for Japan and unwelcome news for the UK, particularly amidst the looming prospect of national elections in 2024. Germany, another economic powerhouse, stands on the brink of recession according to signals from its central bank, the Bundesbank. These developments paint a grim picture of the global economic outlook, prompting heightened scrutiny and apprehension among analysts and policymakers alike.
The economic woes of Japan and the UK, characterized by consecutive quarters of shrinking gross domestic product (GDP), reflect broader global trends of deceleration. Projections from the International Monetary Fund (IMF) indicate a slowdown in global economic growth from 3.5 percent in 2022 to 3 percent in 2023, further exacerbating concerns about the resilience of the international economic system.
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Against this backdrop, the implications for emerging economies like India loom large. With major trading partners facing economic downturns, India’s merchandise exports have come under pressure, compounding existing challenges in its trade balance. The slowdown in foreign direct investment (FDI) inflows adds another layer of complexity to India’s economic landscape, highlighting the interconnectedness of global economies.
However, amidst the prevailing economic sluggishness, India stands as a beacon of resilience. Domestic investments, bolstered by government initiatives, have helped buoy the economy despite external headwinds. Prime Minister Narendra Modi’s leadership during crises, coupled with proactive policy responses, has instilled confidence both domestically and internationally, positioning India favorably amidst global economic uncertainties.
As the global economic slowdown casts its shadow across major economies of the world, India’s resilience emerges as a ray of hope amidst the gloom, underscoring the importance of domestic stability and effective governance in navigating turbulent times.
GDP Contractions Around the Globe
Source: Statistical agencies of Japan, UK, Germany
Both Japan and the UK witnessed their GDP decline on a YoY basis during the periods of July-September 2023 and October-December 2023. In the last quarter of 2023, Germany’s GDP also experienced a contraction of 0.3 percent, and it is anticipated to contract again in the first quarter of 2024, as indicated by the German central bank.
Similarly, India faced a recession in the initial half of 2020-21, marked by a 23.4 percent contraction in GDP during April-June 2020 and a further 5.7 percent decline in July-September 2020, attributable to the nationwide lockdown implemented to curb the spread of the coronavirus, which brought the economy to a standstill.
Impact of Recession
India has experienced a slowdown in its foreign direct investment (FDI) inflow over the past few years. Despite a 20% growth in the financial year 2019-20, FDI growth dropped to 10% and 3% in FY21 and FY22, respectively, before plummeting by 16% in the last fiscal year. However, the current fiscal year has seen record inflows from foreign institutional investors (FIIs), amounting to $20,873 million, after these investors withdrew nearly $19,000 million in the previous two financial years.
India maintains significant trade relations with the UK and Japan. Imports from the UK totaled $6,104 million by December 2023, constituting 1.2% of India’s total imports, while exports to the UK amounted to $9,456 million, representing 2.9% of total exports. Similarly, India exported $3,805 million worth of goods to Japan, comprising 1.2% of total exports, and imported $13,198 million from Japan, making up 2.6% of total imports.
India is engaged in discussions with the UK for a free trade agreement, originally expected to conclude by Diwali 2022 but delayed due to concerns over certain provisions. Both Japan and the UK are significant sources of FDI for India, ranking fifth and sixth, respectively, in terms of FDI inflows.
The slowdown in business and consumer sentiments in India could affect investment and growth rates in the UK and Japan. Furthermore, India’s exports and investment inflows indicate challenges not only with these two countries but also with other developed nations. There are concerns about Germany slipping into recession, as indicated by projections from its central bank forecasting a GDP contraction. Key global economic indicators such as the CPB trade monitor and the Baltic Exchange Dry Index have also shown weaknesses, with world merchandise trade declining by 1.4% and the Baltic Dry Index dropping by 50% in the last two months.
Resilience Amidst Sluggish Growth
Despite a slowdown in the global economy, India has managed to maintain growth momentum through resilient domestic investments, particularly bolstered by increased government capital expenditure over the past four years. This has helped shield the economy from external challenges. The government’s estimates project a growth rate of 7.3% for FY24, up slightly from the previous fiscal year, supported by domestic industrial and service sectors, as well as a relatively buoyant US economy.
Despite challenges such as the global economic slowdown and the Red Sea crisis, India’s merchandise exports showed a modest growth of 3.1% in January, aided by factors like a depreciating rupee and robust US growth. However, certain core exports experienced a slowdown in growth compared to the previous month.
Source: Commerce Ministry, Reserve Bank of India
Although there are concerns about the impact of global economic headwinds on India’s growth, the finance ministry remains optimistic, citing factors such as softening inflation, favorable agricultural harvests, and sustained manufacturing profitability as supportive of growth in FY25. Nonetheless, the ministry emphasizes the need to enhance export competitiveness to capitalize on favorable conditions.
Despite the global economic sluggishness, the Reserve Bank of India (RBI) has raised its GDP growth projections for FY25, indicating confidence in India’s growth trajectory, even as other economies face recessionary pressures.
Modi’s Resilience Amid Challenges
Resilience amidst sluggish economic growth in India has been instrumental in bolstering Prime Minister Narendra Modi’s prospects for another term. Despite economic challenges, Modi’s administration implemented reforms to enhance resilience, such as infrastructure investments, digitalization drives, and initiatives like “Make in India” to boost domestic manufacturing. These efforts diversified the economy and reduced dependency on specific sectors. Modi’s leadership during crises, like the COVID-19 pandemic, showcased resilience through swift policy responses and vaccine diplomacy, earning him public trust.
Moreover, Modi’s ability to communicate effectively with the masses, utilizing social media and addressing citizens directly, sustained his popularity. His emphasis on self-reliance resonated with a populace seeking stability amid uncertainty. Furthermore, diplomatic maneuvers strengthened India’s global standing, fostering investor confidence. The Bharatiya Janata Party’s strong organizational structure and effective electoral strategies also contributed to Modi’s resilience amidst challenges. Overall, resilience amid economic slowdowns, coupled with effective governance and communication, positioned Modi favorably for another term, reflecting the electorate’s confidence in his leadership.
In conclusion, the recent downturns in major economies like Japan, the UK, and potentially Germany have cast a shadow over the global economic landscape, impacting nations like India through reduced exports and investment inflows. Despite these challenges, India has demonstrated resilience driven by domestic investments and government initiatives. Prime Minister Narendra Modi’s leadership amidst economic turmoil underscores India’s economic resilience and strengthens his prospects for continued governance.
