India's Economy Need Closer Ties With The World - Connect2ConnectOnline June 18, 2025

There’s a common belief that India tends to focus inward when it comes to its economy. Indeed, agriculture constitutes one-fifth of the economy, and India relies more on domestic demand compared to some of its export-driven Asian neighbours.

Nevertheless, it is observed that India has experienced its most rapid growth during times of increased integration with the global economy.

We look at the rolling correlation between India’s growth and global growth to gauge how integrated India is with the world. From 2000 to 2010, it was a notable time for increasing global integration. During that time, India was cutting down on import tariffs and getting more involved in global trade networks, which led to a bigger slice of global exports and a boost in GDP growth. However, in the next decade, 2010 to 2020, India took a more protectionist stance and began to raise import tariffs. This shift resulted in a decline in the country’s share of global exports and a slowdown in GDP growth.

In recent years, especially after the pandemic, we’ve noticed a shift back towards stronger global integration.However, it still feels a bit lopsided there’s more financial integration happening than trade integration.

Some might say that increased global integration makes a country more vulnerable to global volatility, which could hinder growth. But we believe that the benefits of being more connected to the world far outweigh the downsides of facing global shocks. Overall, having deeper ties with the global economy has resulted in higher growth, more than compensating for the increased volatility.

Subsequently, we examine the influence of India’s global integration on various sectors. Our analysis reveals that consumption is the most closely linked to global growth, accounting for 95 percent, followed by investment at 70 percent, and exports at 35 percent. This is unexpected, as one might assume that exports would exhibit the highest degree of global alignment.

One possible reason for this is that India has stronger global ties in finance. Over the past twenty years, Indian equity markets have become much more in sync with global equities. This, in turn, affects consumption. However, trade integration is still weaker, which has an effect on exports and investments.

We take a closer look, dividing consumption into two categories discretionary and essentials and discover that discretionary spending is much more closely linked to global growth. This makes sense. If financial integration has indeed been robust, it’s likely to have influenced the incomes of those at the top. High-end consumers, who usually earn higher incomes, are often more connected to financial markets. On the other hand, individuals in sectors like agriculture and small businesses,where income levels may be lower, typically focus on essential consumption. This group of consumers may not have any extra cash to invest in financial markets.

In terms of investment, we observe that corporate investment shows a stronger correlation with global growth than household investment.This finding is not unexpected. We see that corporate capital expenditure worldwide tends to move together, influenced by shared factors like risk sentiment that affect foreign direct investment (FDI) flows. In contrast, household investment, which constitutes a larger portion of total investment and includes real estate and small business investments, is not as globally integrated.

We also examine the surprisingly low degree of integration between India’s export growth and global growth. The decline in integration was particularly noticeable during the decade when India increased import tariffs, which we think negatively impacted export performance, especially in a world characterized by value-added supply chains.

We categorize exports into high-tech exports such as electronics, pharmaceuticals, and automobiles and labor-intensive mid-tech exports like textiles, footwear, furniture, and toys. Our findings indicate that while high-tech exports have experienced robust growth, mid-tech exports have been stagnant for a decade. This leads us to conclude that India’s trade integration with the global market has been weak, primarily due to the sluggishness of mid-tech exports.

When we consider all sectors together, we can identify two distinct groups within the economy one that has “stronger financial integration” with the global market, and another that exhibits “weak trade integration”.

Those who have benefited from financial integration have witnessed an increase in incomes and discretionary spending. Many of these individuals are linked to large companies or emerging businesses (like the rapid growth of professional services exports).

On the flip side, the lower global integration in mid-tech exports accounts for the sluggish growth and income levels, explaining why people in these sectors mainly focus on buying essentials, leaving little room for investment. We believe that initiatives aimed at increasing mid-tech labor-intensive exports could enhance India’s trade connections, boost mass consumption, and drive GDP growth. There’s an opportunity to strengthen trade ties right at our doorstep.

If supply chains are reshuffled during the next Trump presidency due to increased tariffs on major exporters, and the world is on the lookout for new producers, India might find a chance to connect more deeply with global value chains. If industries like electronics, textiles, furniture, and footwear are where the global opportunities from potential supply chain adjustments lie, as we’ve seen with Vietnam making significant strides during the first Trump presidency, it’s important to note that India is already in the game, with plenty of room to expand, especially with advantages like low wage costs.

However, India must initiate changes first. The good news is that potential US tariffs might serve as a trigger for external reforms, such as reducing the import tariffs India imposes on others and speeding up trade agreements. Some domestic reforms are also in the works, like a deregulation push across both central and state governments, which could enhance the ease of doing business.

India’s Economy Need Closer Ties With The World

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