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A recession is defined as two consecutive quarters of negative GDP growth, leading to reduced economic activity, declining industrial production, and rising unemployment. When a global recession occurs, its effects ripple across economies worldwide. For India, a global recession can impact key sectors such as trade, remittances, and foreign investments, leading to reduced export demand, fluctuating stock markets, and challenges in maintaining economic stability.

Impact of Global Recession on India’s Trade:

• Decline in Export Demand: India’s exports, especially to the US and Europe, are vulnerable to reduced demand during a global recession, leading to trade deficits.
  For example: India’s trade with the US totaled $128.78 billion in FY 2023, and any contraction in US consumption can reduce demand for key exports like engineering goods and pharmaceuticals.
• Reduction in Manufacturing Output: With lower international demand, industries such as textiles, gems, and electronics face production cuts, impacting employment in these sectors.
  For example: India’s manufacturing exports face a slowdown, particularly in industries dependent on US and EU markets, leading to reduced factory output.
• Pressure on Current Account Deficit (CAD): A decrease in exports combined with stagnant imports exacerbates India’s current account deficit, impacting foreign reserves.
  For instance: A global slowdown in demand for Indian goods during the 2008 crisis increased India’s CAD, forcing the government to reassess trade policies.
• Impact on Service Exports: The IT sector, which provides outsourced services to developed economies, can see reduced contracts and job losses during recessions.
  For example: The IT sector, which contributed over $180 billion in service exports, may experience contract cuts during a prolonged US recession.
• Withdrawal of Foreign Direct Investment (FDI): Global uncertainty discourages investors from entering new markets, affecting FDI inflows and growth in key sectors.
  For instance: Foreign investments in sectors like infrastructure and manufacturing may witness a decline as recession-hit investors prefer safer assets.

Impact of Global Recession on Remittances:

• Decline in Remittances: With reduced employment opportunities in countries like the US and the Gulf, remittances from the Indian diaspora could drop, affecting household incomes in rural areas.
  For instance: India received around $100 billion in remittances annually, and a global recession could reduce this inflow directly impacting rural consumption.
• Job Losses Among Migrant Workers: Indians working abroad, especially in sectors like construction and services, face job cuts during recessions, reducing remittances.
  For instance: During the 2008 recession, thousands of Indian workers in the Middle East lost jobs, leading to a significant drop in remittances.
• Pressure on Foreign Exchange Reserves: Reduced remittances lead to a dip in foreign exchange reserves, which are essential for stabilising the rupee and funding imports.
  For example: A drop in remittances can put pressure on India’s forex reserves, affecting the balance of payments.
• Impact on Rural Economies: Remittances are a major source of income in many rural households, and their reduction leads to lower spending on education, healthcare, and small-scale investments.
  For example: Rural areas, which are heavily dependent on remittances for household expenses, face economic stress during periods of global downturn.
• Return of Migrant Workers: A global recession could force migrant workers to return to India, adding pressure to the domestic job market.

Impact of Global Recession on Stock Market Performance:

• Stock Market Volatility: A global recession leads to heightened market volatility, with investors pulling out from emerging markets like India.
  For example: The BSE Sensex fell during the 2008 financial crisis, as global investors withdrew capital.
• Foreign Portfolio Outflows: Global economic downturns trigger foreign portfolio investors (FPIs) to shift capital from riskier markets like India to safer assets, leading to a stock market slump.
• Loss of Investor Confidence: Market uncertainty during a global recession causes a drop in investor confidence, leading to reduced trading volumes and market instability.
• Depreciation of the Indian Rupee: With foreign investments decreasing, the rupee often depreciates, making imports costlier and widening the current account deficit.
  For example: The rupee weakened significantly against the US dollar during the 2008 global recession, increasing import costs and inflation.
• Delayed Economic Recovery: Stock market instability delays economic recovery by affecting capital flows into critical sectors like infrastructure, slowing long-term growth.
  For example: Delayed investments in sectors like real estate and infrastructure post-recession slow India’s economic growth trajectory.

A global recession poses significant challenges for the Indian economy, especially in trade, remittances, and stock market performance. However, by leveraging domestic consumption, promoting local industries, and maintaining financial discipline, India can cushion the impact of external economic shocks. A long-term focus on economic diversification and resilience will be key to ensuring sustainable growth in an interconnected global economy.

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