A US recession doesn't mean the end of the world to us

While the recent downgrade of the US by S&P might have fuelled speculation on the imminent decline of the US economy, for India the US has actually been losing significance for much of the last decade. In other words, India has lesser reason to worry on account of the US than a decade ago.

A decline in the dominance of the US economy in India is evident from its shrinking share in foreign trade and capital flows. This has happened largely on account of faster growth in trade and investments with other economies as well as the recession in the US, which has softened the country’s commercial ties with India.

Having said that, in absolute terms, the US economy still measures up well for India, even with a decline in its share of trade and capital flows. Take the case of goods exports to the US. Ten years ago, in the financial year 2001-02, the US economy was India’s largest export market with a share of as much as 19.4 percent and a value of $8.5 billion.

The second-largest export destination - the United Arab Emirates (UAE) - had a share of 5.7 percent, which was almost one-third the share of the US. These figures give a snapshot of the overwhelming importance of the US market at the turn of the century.

But with the recession that began in the US in 2008, the demand for Indian exports has slowed, while exports to countries like the UAE and China continue to rise at a fast clip. As a result, in 2008-09, when the recession hit, the UAE became the largest export market for India, followed by the US.

According to the latest data available for April-December 2010, the US remains firmly at spot 2, with a share of 10.4 percent, almost half the level at the start of the century. While the quantum of exports to the US has managed to double over the decade, the UAE’s has risen over 10-fold to $21 billion for April-December 2010.

It needs to be noted, however, that this trend applies only to merchandise exports. The US and UK remain the biggest markets for India’s services exports. While comparative data are unavailable, the US is likely to be the leading destination for services exports.

A story similar to goods exports is visible in goods imports too. The US was the largest source of India’s imports in 2001-02, with a share of 6.1 percent, and is now only the fourth-largest source of imports with a share of 5.7 percent as of April-December 2010 - with a value of $14 billion.

There are two reasons for this. First, China, which became factory to the world in the 2000s, did not leave India untouched either. The rapid rise of competitively priced imports from China resulted in an improvement in its rank from No. 6 among India’s import sources at the start of the decade to the top one by the mid-2000s, with a share to about 7.4 percent.

Despite the loss in rank, however, the US was an increasingly important source of imports since its share in India’s total pie improved to 8.4 percent as of 2007-08.

However, the meltdown that ensued has seen a sharp decline in the US’ slice and position in India’s imports to 5.7 percent as of April-December 2010 - a decline of almost 3 percentage points from its decade high.

With respect to capital inflows, data on foreign direct investment (FDI) also show a gradually declining position of the US in India, even though it has not lost its position as a leading investor. After the opening up of the Indian economy in 1991, the US was the biggest investor into India after Mauritius - but then the latter is really a routing destination.

The US had a share of as much as 20 percent in the first decade after India opened up. This share, however, declined fast as other countries too discovered India as an investment destination. As a result, from the first half of the 2000s, when the share of the US in FDI inflows had already declined to 14.4 percent, it halved to 7.3 percent in the latter half of the decade.

It was also during the second part of the decade that the US took a step back as Singapore became a bigger investor into India with a share of 11.3 percent. Up to 2011-12 so far, the US has maintained a 7 percent share. As a result of increasing investments from Singapore, from April 2000-May 2011, its investments have far exceeded those of the US at $13.2 bn (versus investments of $9.7 billion for the US). In fact, the UK and the US are now fairly close in terms of overall investments, with the former at $9.1 billion.

Remittances originating from the US have also declined in relative terms. According to Reserve Bank data, North America accounted for 44 percent of total worker remittances in 2002-03. Since the US and Canada were the primary destinations for immigrants from India, and the numbers for Canada were relatively small, it is safe to assume that a large part of the figure was accounted for by remittances from the US. These were followed by the Gulf countries with a share of 24 percent.

However, World Bank data for 2010 show a sharp deterioration in the share of North America to 28 percent. Of this, the US accounts for 22 percent and Canada for 6 percent. This is in contrast with the Middle East, where the UAE alone has seen a rise in share to 25 percent. Overall, the Middle East now contributes 44 percent of total remittances.

Despite the evident decline in the US’ position with respect to India, there are two factors that could turn the tide in its favour. One, during Obama’s visit last year, a number of deals were signed which could make up for some of the lost ground in trade and investment flows.

Second, once normal growth conditions resume in the US, one could see a steady rise in its share as well. But with the recession showing few signs of abating, it is quite possible that some of the US’ share might actually be lost for good.

Manika Premsingh is the promoter of Orbis Economics, which provides research on the economy.