India, United States and the World Economy

What’s old, what’s new and what’s next?

By Rajesh Mehta & Shanayaa Saumya Suneja

Global economic stability for the year 2023, after being exposed to consecutive catastrophes year-on-year, looks bleak at best. The COVID pandemic, followed by Russia’s invasion of Ukraine in 2022, and now, the onset of a banking crisis in 2023, accompanied by rampant tech layoffs have contributed to this unpromising outlook for the current fiscal year.

With high levels of debt, the fiscal policymakers are limited in their ability to tackle new hurdles.

Moreover, the uncertainty is amplified by geopolitical tensions and the ongoing conflict in Ukraine. The layoffs in the technology industry in the first quarter of 2023, have already surpassed the total for all of last year. The forecast for global growth predicts a decline from 3.4% in 2022 to 2.8% in 2023, before gradually increasing and settling at 3.0% over the next five years.

The International Monetary Fund (IMF) recently announced its revised growth estimates; claiming that China and India will account for roughly half of global development this year, highlighting Asia’s growing economic influence. However, despite these optimistic prospects, the Indian economy must remain vigilant against potential pitfalls that could undermine its progress, lest it fall prey to the same afflictions plaguing its more developed counterparts. 

The rise in interest rates, combined with supervisory and regulatory gaps and bank-specific risks, has created financial instability concerns. The unexpected failures of two specialized regional banks and the loss of confidence in Credit Suisse have led to a tightening of financial conditions, with lower lending and activity expected to persist.

The world economy had shown signs of stabilization after last year’s adverse shocks, but the recent increase in financial market volatility has heightened uncertainty, with the balance of risks shifting to the downside. Policymakers face difficult trade-offs to bring inflation down and maintain growth while preserving financial stability.

The US Federal Reserve increased interest rates by a quarter point, but it may hold off on subsequent hikes in order to balance inflation concerns with the soundness of the banking system. The main interest rate has increased for nine straight months, reaching its highest level since 2007. However, a significant change in the Fed’s policy statement, brought on by recent bank failures like Silicon Valley Bank and Signature Bank, reduces the expectation of further rate hikes. According to JPMorgan, the US seems to be entering a recession as a result of the financial crisis and increasing interest rates.

According to the current Chief Economists Outlook from the World Economic Forum, rising prices and energy shortages may begin to abate by the year 2023.

According to the World Bank, several nations are experiencing a cost-of-living crisis due to double- or even triple-digit food price inflation as a result of historically high commodity prices, Russia’s war in Ukraine, uncertain fertilizer markets, and other factors.

The COVID epidemic and economic volatility have raised government and private debt in most economies to heights not seen in decades. Debt levels remain high, and tighter monetary policies have raised borrowing prices, raising worries about debt sustainability. Despite terms-of-trade impact and economic sanctions from Russia’s invasion of Ukraine, the European economy has shown resilience.

Global commerce volume growth is expected to slow from 5.1% in 2022 to 2.4% in 2023 due to falling demand and increased trade restrictions. After rising sharply in 2022 due to increased commodity costs from the Ukraine crisis, current account balances are expected to decline in 2023. Creditor and debtor stock positions were robust in 2022 due to higher current account balances and the US currency.

Medium-term holdings are projected to stay strong despite current account balances falling.

The dominance of the US dollar as a reserve currency has caused problems for many economies worldwide, leading to a push for alternative reserve currencies such as China’s yuan and a possible BRICS+ Central Bank Digital Currency. Rather than completely replacing the dollar, diversification through a “dollar+X” approach is seen as a more viable solution akin to the “China+X” approach in manufacturing to address over-dependence on China.

Despite the chaos, Daniel Leigh, the International Monetary Fund’s division chief, called the Indian economy “very strong.” Due to its high growth rate, he called India a global economic bright spot despite economic downturn fears. Hamid Rashid, Chief of the UN-Department of Economic and Social Affairs’ Global Economic Monitoring Branch, said India’s economy is strong due to lower unemployment, inflation, and import bills. India’s “double diversity” advantage, successful reforms, and effective counter-cyclical policies have allowed it to endure repeated shocks in the past three years. The country’s flexible economy has weathered global slowdowns well. 

According to the Bay Area report published by the Bay Area Council, India’s robust IT sector is responsible for India enjoying a trade surplus of US$32.8 billion with the US and thereby occupies a position of global dominance. Globally, services account for more than 40% of India’s exports, with the U.S. being its largest market. Bay Area companies have been making significant Foreign Direct Investment (FDI) in India, particularly in the ICT & Electronics sector, with 2022 poised to be a record year in terms of dollar amount and deals.

Silicon Valley (Santa Clara County) and San Francisco are the primary sources of this investment, focusing on R&D, software, and engineering activities. These elements have a chance of keeping growth at or above 6%. Moreover, recent advances in AI hold huge potential to profoundly influence India’s biotech, space technology  and IT industry for the better.

Although India has been enjoying steadily increasing exports over past quarters, the level of imports has been increasing by greater margin. Despite efforts to boost exports in sectors with a comparative advantage, India has not been able to establish itself in international markets, even during times of opportunities such as US restrictions on Chinese imports or the recent Ukraine conflict.

China is still a major source of Indian imports, reflecting an urgent need to work on diminishing this dependence, especially if we want to beat it in the global race for becoming the next superpower.

To conclude, China’s rise, Europe’s independence, India’s assertiveness, and Saudi Arabia’s renewed focus on Asia are shifting global power dynamics towards Asia. Nations form and break alliances in a multipolar world. Russia is making friends in the East and South despite its Western isolation. More countries are using their own currencies instead of the US dollar. However, Africa’s abundant resources may make it a formidable power rival. The UN’s inability to negotiate and reach consensus on international crises has cast doubt on its role as a leading multilateral organization. To preserve peace and the global economy, these multilateral organizations must be strengthened.



Rajesh Mehta is a leading consultant & columnist working on Market Entry, Innovation & Public Policy. Shanayaa Saumya Suneja is an independent researcher.

Disclaimer: The views expressed are not necessarily those of The South Asian Times 


Images courtesy of (Image: ISM) and Image: provided

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