Decoupling Theory

Has the Indian Economy decoupled from that of the US? Will a probable economic recession in the US affect India?

We are quite distant from answering these questions certainly. A justified and informed answer would probably be yes as well as No.

Let’s investigate:

The Indian economy has decoupled from that of the US and will not be affected by the economic recession because:

1. The exports to the US are relatively less and constitute a mere 2% of the GDP. So, a decrease in overseas demand will not spell doom to the economy.
2. The Indian economy is mainly driven by domestic demand and the sound fundamentals of the economy will drive the domestic demand further up.
3. The economy has substantial scope of growth in many domestic sectors like Agriculture, which requires investment and is isolated from the global scenario.


Decoupling is a myth and the Indian economy is bound to be affected by a US recession because:

1. As the global trade becomes more and more integrated, the affect one country has on the other increases significantly. Hence, an open country cannot be isolated from a global recession.
2. As the US inches towards the recession, the FIIs try to go for safer investments and the selling in the financial markets increases causing a downturn of the financial market.
3. India’s growth rate for the year to March 2008 will be 8.7 per cent, down from 9.6per cent the previous year, according to the government’s statistics office, reflecting the dual impact of an appreciating rupee and sharp monetary tightening.

We might say that the Indian economy has not decoupled from that of the US, while the fear of such an economic slowdown in the US is much lesser than it used to be previously. This is primarily due to the self sufficience of the Indian Economy in the recent times. However, no global economy can remain isolated from a US slump as majority of the exports of growing economies remain to be the developed economies like the US.