The effect of the USA recession on Indian economy

Abstract

In this report we have attempted to predict the effect of a possible recession in the US on the Indian economy. To trace this link we have considered the GDPs of the 2 countries and in particular the impact of the exchange rate between the 2 countries which acts as a direct measure of the magnitude of trade exposure that India has to the US through exports and imports. We also consider the effect that cash flow impacts through FDI and possible trends that may be caused by amount of macroeconomic policy flexibility that is possible in the current state of the Indian economy to bear the impact of a possible recession in the US. We have also attempted to capture the indirect Indian trade exposure to the US through its exports to other countries that are in turn have a trade exposure to the US. In this report we have analyzed a mathematical model based on the above framework and considered a number of regressions on various models based on different kinds of GDP data and the different methods of capturing the indirect effect. We have finally arrived at a model that we consider best explains the relationship between the GDPs of India and the US. Based on this model we note that the effect of a one-unit change in the US GDP causes a relatively small change in the Indian GDP. Even if we account for factors such as policy effects that have not been quantitatively accounted for in this report, the resulting effect is quite small. This report therefore concludes that despite the enormous impact that the US economy variations may have on the rest of the globe, the Indian exposure is not sufficient to be much impacted. As such a recession in the US will not have a large impact on the Indian economy as a whole.