Recessionary winds in the 20-country Eurozone saw zero economic growth for the October-to-December quarter in 2023, after a 0.1 per cent contraction, while the United Kingdom slipped into recession after its economy contracted for two consecutive quarters. 

All this has meant a hefty fall in orders for Indian firms shipping goods to European buyers. “I do not know how to manage this situation. As it is orders were fewer last year compared to earlier years, and now there are cancellations,” Singh told The Secretariat. 

Recessionary Winds 

The fresh bad news for businessmen like Singh is that Germany, the third largest economy in the world, may also slip into recession by the end of this month and the crisis they are facing may deepen.

In a recent outlook report, the German banking regulator, Bundesbank, said, “There is still no recovery for the German economy… Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession."

To make matters worse for the Eurozone, France, the second biggest powerhouse in the European continent, has also lowered its 2024 growth forecast to just 1 per cent. 

With Japan and the UK, the world’s fourth and sixth largest economies, already in recession, Germany’s economic woes would mean three major economies worth over US$12.6 trillion will be contracting instead of expanding.

Even though the downslide is in fractions of a percentage, it will mean these economies, along with a host of other countries that are reporting flat or negative growth, will be buying less from the rest of the world.

Singh said the situation has worsened ever since the Red Sea crisis began as both shipping cost and time went up and clients asked him to hold on to orders as they switched to manufacturers in Turkey.

“I thought the Red Sea disruptions would be a blip, but now it seems it will drag on and what is worse is that the recession which we had seen in other parts of Europe is spreading to Germany,” he said.  

Some 17 per cent of India’s foreign trade is with EU countries and nearly 3 per cent of its export earnings are from the UK, according to Commerce and Industry Ministry data. 

“The recessionary trend in the advanced economies is certainly going to impact India. These countries are facing a combination of low demand coupled with inflationary pressures, which, in turn, impacts our prospects for trade with them,” explained N R Bhanumurthy, Vice Chancellor of the Bengaluru-based Dr Ambedkar School of Economics University.

Obviously, with foreign trade accounting for 49 per cent of its GDP of US$4.11 trillion, any recessionary trend in its major buying nations could affect India, impacting firms, jobs and spending at home.

“We expect not only goods trade to be affected but even services exports to be affected because of recessionary trends,” Bhanumurthy said. 

India’s economic planners, who have boldly forecast a growth rate of 7 per cent for 2024-25, are more than a tad worried about how a recessionary wind in three of the world’s largest economies would play out on the Indian market.

As it is, in the ten months of April 2023-January 2024, India’s merchandise exports have shrunk by over US$18 billion or nearly 5 per cent compared to the same period year-ago. 

“The US economy has been experiencing growth mainly on account of the stimulus measures the Biden administration has been giving. If the Republicans win the elections, the stimulus may be rolled back and that could affect US demand too,” said Biswajit Dhar, former Director General of the Research and Information Systems for Developing Countries.

India’s merchandise exports to the US, its single largest trading partner, have already shrunk by nearly 6 per cent in April-December 2023 compared to the year earlier. During the same period, India’s exports to Germany, France and Japan also shrank by between 6-9 per cent, Commerce and Industry Ministry statistics show.

Red Sea Crisis 

Analysts do not expect trade to pick up from India to these countries as consumer demand there is likely to remain weak. 

The crisis in the Red Sea where  Yemen’s Houthi rebels have targeted shipping and forced most liners to take a longer route to Europe from India has pushed up inflation and scaled-down demand.

India has long been dependent on the Red Sea route through the Suez Canal for its trade with Europe, the east coast of North America as also with much of West Asia. The countries in these regions also account for nearly half of India’s US$451 billion exports in the year ended March 2023. 

Shipments are being delayed by between 15-28 days, while shipping costs have gone up. According to Drewry’s World Container Index, the average price of transporting a 40-foot (12-metre) container on a cargo ship rose 123 per cent to US$3,403 on February 29 from US$1,521 on December 14. 

All this is likely to drag down foreign trade earnings and impact the overall GDP growth, feel economists. This would imply the growth engines for India will have to be found within its own borders rather than without. 

“We believe that given foreign trade’s weightage on GDP growth, India’s economy could still grow by 6-7 per cent in 2024-25," Bhanumurthy, who was earlier professor at NIPFP, said. 

Drop In FDI Inflows 

At the same time, FDI flows have been slowing down. Between April-December 2023, FDI inflows stood at US$32.04 billion, down 13 per cent compared to the same period in 2022. This came after a 16 per cent drop in FDI inflows in 2022-23 compared to 2021-22.

Though some 49 per cent of FDI inflows into India are routed through Mauritius and Singapore because of tax reasons, much of it originates from the advanced economies of the West. 

A slowdown in the West coupled with a possible drawdown in liquidity injections into the US market could well impact FDI inflows into India in the year ahead. 

“As it is we are in competition for FDI inflows with a number of other countries and the pool of FDI available globally is shrinking, we cannot really expect a big boost there unless the situation changes,” said Dhar. 

What Steps Can Be Expected

India’s trade mandarins have consequently been burning the midnight oil to redefine strategies which could help Indian businesses weather the slowdown storm in markets abroad. 

While one pillar of this has always been to diversify markets and improve value additions, the “other principle is to shift away from the earlier regime of incentive-based exports to one which gives businesses remissions and entitlements”, said Commerce Ministry officials. 

A number of steps have already been taken to reimburse all duties and taxes paid by manufacturers when they export outside India’s borders. The scope for this is likely to be enlarged to include state and municipal level charges, officials indicated. 

At the same time, officials said, there was a need to engage with states not only on reducing costs for exporting firms but also improve India’s Ease of Doing Business Index. 

The government is also likely to push e-commerce exports, which are projected to grow to a value of US$ 200-300 billion by 2030, as a promising category which can push export volumes. The foreign trade policy 2024 wants to set up e-commerce hubs with modern infrastructure to push this new avenue of exports. 

“Diversifying our export market is, of course, a key measure, which has been suggested by a number of think-tanks and by the government’s own foreign policy documents,” said Dhar.

Africa, which is expected to emerge as the new growth engine of the world, will remain a focus area for Indian businesses with more firms being encouraged to both ramp up sales to it and to invest in factories there to process semi-finished products from India for distribution there. 

India has already become one of the top five investors in Africa with cumulative investments worth US$73.9 billion between 1996 and 2022.

The Indian government is likely to push for more investment in Africa. “With some 36 per cent of this investment in Africa being in manufacturing, there is scope for more processing plants as we ramp up trade with the continent,” said officials. 

More Indian factories abroad selling cars to paints to medicines, means more orders from the home country for raw materials and ready-to-assemble kits, Dhar pointed out.

Officials said they were hard-pressed to work out complete ongoing trade deals as well as start negotiations on new trade pacts which could facilitate not only easier trading access for Indian businesses but also easier investment rules for them.

However, if the global recessionary shadow extends, pushed by a rise in oil prices, then even the best-laid plans may well come to nought.