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

_IMF Blog, October 25, 2011_

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## Bibliographic details
- Authors: Anoop Singh
- Published: October 25, 2011

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### Overview / Context
- Author: Anoop Singh
- Date: October 25, 2011
- Key framing:
  - Global outlook described as “fairly uneven and uncertain.”
  - Risks building up especially in Europe, including “an extreme scenario with financial disruption.”
  - India historically less prone to external forces than many others, but still exposed and in need of a “new wave of reforms.”

### De-linked — why India can remain relatively insulated
- Growth projection:
  - “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.”
- Structural features supporting partial insulation:
  - India is less open to international trade than most other economies in the region.
  - Rural consumption is “fairly insulated from the world economy.”
  - India’s exports are “less dependent on advanced economies,” and are “more diversified—both geographically and in terms of the products it sells—than its neighbors and competitors.”
- Implication:
  - A protracted slowdown in advanced economies would lower India’s growth somewhat, but growth is expected to “still remain robust.”
  - In that scenario, the primary domestic challenge highlighted is elevated inflation.

### Linked — channels of vulnerability if global financial stress intensifies
- Historical evidence of financial integration and vulnerability:
  - India’s financial markets came under considerable pressure in 2008; investment “dipped substantially” as a transmission channel.
  - India’s stock market is described as “one of the most correlated in the region with the VIX,” linking it to global risk aversion.
  - The 2008 Lehman episode is invoked as an example of global financial contagion.
- Present-day vulnerabilities (as of the article):
  - India has a current account deficit.
  - Some major Indian corporates are global players relying more extensively on external debt issuance.
  - Foreign investors have more extensive holdings in the Indian stock market.
- Implication:
  - In an extreme scenario with contagion and further financial shocks, India would likely be hit materially.

### Time for reform — policy recommendations and priorities
- Policy space and constraints:
  - India “has the tools and the experience to deal with a repeat of 2008,” but “likely have less policy space now,” much of which was used during the initial crisis response.
  - Inflation remains above the Reserve Bank of India’s comfort zone, constraining monetary policy flexibility.
- Fiscal policy and buffers:
  - Rebuilding buffers to recreate policy space is emphasized; “fiscal consolidation remains pivotal.”
  - Recommended shift in budgetary expenditure composition: away from untargeted subsidies (examples given: fuel and fertilizer) and toward infrastructure, health, and education.
- Structural reforms to boost investment and domestic demand:
  - Proposed reforms include:
    - Introducing the GST.
    - Improving the business environment.
    - Liberalizing the labor market.
    - Furthering trade and financial reforms.
  - Rationale: Strengthening domestic demand and boosting investment will help India compensate for external headwinds and sustain growth momentum.
- Historical precedent:
  - Reference to 1991 reforms prompted by a balance of payments and fiscal crisis, which “have continued paying off to this day.”
- Conclusion:
  - “Today’s risks can be translated into tomorrow’s reforms and growth momentum.”

*IMF blog post: India: Linked or De-linked from the Global Economy? — Anoop Singh, October 25, 2011*

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## References

- [outlook for the world economy is fairly uneven and uncertain](http://blogs.imf.org/2011/09/20/strong-policy-action-the-essence-of-restoring-global-economic-hope/)
- [Regional Economic Outlook for Asia](http://www.imf.org/external/pubs/ft/reo/2011/apd/eng/areo1011.htm)
- [https://www.imf.org/wp-content/uploads/2011/10/apd-reo_india-trade-diversification.jpg](https://www.imf.org/wp-content/uploads/2011/10/apd-reo_india-trade-diversification.jpg)
- [https://www.imf.org/wp-content/uploads/2011/10/apd-reo_india-stock-market.jpg](https://www.imf.org/wp-content/uploads/2011/10/apd-reo_india-stock-market.jpg)

_Source: https://www.imf.org/en/blogs/articles/2011/10/25/india-linked-or-de-linked-from-the-global-economy_