Encouraging Sustainable Growth
By Sanjeev Oak
While billions of dollars are being wagered on the prospect of a recession in the United States, experts have cautioned that such a downturn could adversely impact Indian markets. Yet, the Indian stock market continues to move with assurance, even amid global uncertainty. Domestic investors have played a crucial role in cushioning the blow.
The political transition in the United States has failed to allay recessionary fears. Despite President-elect Donald Trump’s pledge to “restore America’s greatness”, forecasts continue to point toward a looming economic downturn. In fact, speculative bets on a market crash are gaining momentum. With billions of dollars being wagered on a slump in the U.S. stock market, Indian investors would do well to take note. Experts have warned that a crash in the American market could have a direct and adverse effect on Indian markets.
A recent survey covering the period from 2000 to 2024 revealed that the Indian Nifty index registered a decline on 21 separate occasions when the U.S. markets fell. Analysts contend that a recession in the U.S. would have broad ramifications for India. Given the surge in new retail investors in Indian equity markets, the effects of any global shock could be even more pronounced.
One of the defining trends in recent years has been the unprecedented rise in participation by Indian retail investors. Over the past three years, more than 100 million new demat accounts have been opened. These investors have helped to insulate Indian markets from major global shocks. Over the past five years, Indian investors have infused ₹4.4 lakh crore into equities. For instance, in October, when foreign institutional investors (FIIs) pulled out $11 billion from the Indian market, the Nifty fell by a modest 6.2%—a relatively minor correction by global standards. In that same period, domestic investors injected $27 billion, effectively stabilizing the market.
Nonetheless, concerns persist. Western analysts believe that should U.S. markets take a significant hit this year, Indian equities will not remain untouched. The recent Economic Survey also flagged this risk, noting that U.S. stock valuations have reached their third-highest levels in history. A correction appears imminent. Last week, fears triggered by reports of a breakthrough in Chinese deep-tech led to a $1 trillion loss in the valuation of U.S. tech companies. In comparison, Indian markets remained relatively unscathed—a testament to their resilience.
Meanwhile, the U.S. Federal Reserve, which had earlier indicated a potential 100 basis points cut in interest rates, is now expected to reduce rates by only 50 basis points. This lower-than-anticipated cut may have limited impact, particularly on market sentiment. Domestic investors continue to shield Indian markets from such external volatility, helping maintain market stability.
India’s macroeconomic fundamentals remain sound. The country is projected to grow at 6.8%, and despite a slight market correction last month, Indian equities have outperformed many global peers. The recently announced Union Budget has provided a fillip to the manufacturing sector, with targeted allocations for the ‘Make in India’ and ‘Atmanirbhar Bharat’ initiatives. The Centre has also extended tax incentives to boost domestic production. With 31% of the population constituting a burgeoning middle class, robust consumer demand is expected to drive production and insulate the domestic economy from global shocks. India’s fiscal deficit stands at a manageable 4.4%, signaling a stable macroeconomic outlook.
By contrast, the outlook for the U.S. remains far more uncertain. Persistently high inflation has forced the Federal Reserve to adopt an aggressive rate hike strategy. Higher interest rates increase the cost of borrowing for both businesses and consumers, potentially slowing economic growth and corporate profitability. Investor expectations regarding future earnings have already diminished, leading to a revaluation of stock prices. Hedge funds have begun short-selling in anticipation of a downturn—betting on price declines to generate profits.
Financial institutions have been raising the alarm over the risk of a U.S. recession since 2022. Former President Trump has now begun outlining new policies aimed at reviving the U.S. economy, but the success of these measures remains uncertain. A recession in the U.S. would inevitably reduce demand for Indian exports, especially in key sectors such as information technology, textiles, and pharmaceuticals. A decline in exports could, in turn, marginally slow India’s GDP growth. Moreover, risk-averse global investors may opt to exit emerging markets in favor of the relative safety of developed economies, placing downward pressure on the Indian rupee.
In such a scenario, India must boost domestic demand to offset declines in exports and foreign capital inflows. The Reserve Bank of India may need to revise its monetary policy and reduce interest rates to stimulate borrowing and investment. Structural reforms aimed at improving the ease of doing business and expanding infrastructure could further enhance India’s resilience. Strengthening trade ties with regions such as Europe, Southeast Asia, Africa, and Latin America would reduce India’s dependence on the United States and compensate for reduced U.S. demand.
Targeting rapidly growing economies in these regions could open new avenues for Indian exports—particularly in pharmaceuticals, textiles, and IT services. Even during a global slowdown, India has the potential to attract investment in areas like renewable energy, technology, and manufacturing. Increased investment in agriculture, agri-tech, and food processing could also enhance domestic output and ensure food security.
By adopting a comprehensive strategy focused on diversification, resilience, and domestic growth, India can significantly mitigate the potential fallout from a U.S. recession. Such an approach would not only safeguard the Indian economy from external shocks but also lay the groundwork for sustainable, long-term growth.