Explained | How recession in Germany will impact the Indian economy

New Delhi, India

Germany, long touted as Europe’s growth engine and the world’s fourth largest economy, entered recession as its Gross Domestic Product fell 0.3 per cent in the first quarter of 2023. This follows a decline of 0.5 per cent in the fourth quarter of the last year, effectively pushing the country into a recession. Germany’s economy minister Robert Habeck blamed the country’s previous high dependency on Russian gas for the prevailing economic crisis. Speaking at an event in Berlin on Thursday, Habeck said, “We're fighting our way out of this crisis."

While two consecutive quarters of contraction fulfil the common definition of a recession, economists on the euro area business cycle dating committee employ a broader range of data, including employment figures, to assess economic downturns.

Why is Germany facing an economic crisis?

Germany is the worst-performing economy among G7 nations. Experts believe massive inflation has paralysed consumption growth in the country, which coupled with the persistent energy crisis has spelt doom for the economy. 

Germany’s Federal Statistical Office noted, “The persistence of high price increases continued to be a burden on the German economy at the start of the year.”

“This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023,” it added.

The country has also failed to sustainably serve the energy needs of its industrial sector, which is designed to produce the best output only when provided with Russian fuel. The political and business class of the country has failed to accommodate new challenges even as Russian fuel supplies remain throttled. 

To solve the energy crisis, Berlin resorted to imposing a power price cap for some energy-intensive industries. However, that is also poised to further exacerbate the country’s inflation problem.

It is believed that the subsidies in fuel prices to some industries could cost taxpayers as much as $32 billion in the next seven years. The country has already shut down its nuclear power reactors, and plans to shut down its coal-fired power plants by 2030; however, its transition to cleaner modes of energy production has been very slow.

Although the Scholz administration has devised plans to install 625 million solar panels and 19,000 wind turbines by 2030, it fails to cope with the rising demand since almost everything in the country is being electrified, from heating to transportation.

How the recession in Germany will impact India

The recession in the German economy is definitely going to hit Indian exports, particularly in sectors such as apparels, footwear, and leather goods destined for the European Union's largest economy. 

Exporters are expressing concerns about the repercussions this downturn will have on Indian exports, not only to Germany but also to other European countries experiencing a recessionary period. 

Sharad Kumar Saraf, Chairman of Technocraft Industries and a Mumbai-based exporter, was quoted by Indian Express as saying that the long-term recession in Germany will likely result in a decline in Indian exports, with leather products, chemicals, and light engineering items being the most affected sectors.

In the 2022-23 fiscal year, India's exports to Germany amounted to USD 10.2 billion, and this figure is expected to dip as a result of the ongoing recession.

Watch: German economy shrinks over the last 6 months

Ajay Srivastava, the co-founder of the economic think-tank GTRI, warned that the recession would adversely impact India's exports worth at least $2 billion, including smartphones, apparels, footwear and leather goods. During a recession, daily-use products are typically the first to be affected. Furthermore, the soon-to-be-imposed carbon border tax by Germany will also impact the export of iron and steel products.

Narendra Goenka, Chairman of the Apparel Export Promotion Council (AEPC), raised concerns about the recession in Germany affecting order flows into India. He predicted that business would decline by a minimum of 10 per cent, leading to a definite impact on investment flows from Germany. 

However, Saraf mentioned that German investments in India may not be significantly affected, as German companies often seek cheaper alternatives during recessionary conditions.

Also Read | Germany, world’s fourth-largest economy, enters recession

Yogesh Gupta, Regional Chairman of the Federation of Indian Export Organizations (FIEO) in the Eastern Region, noted that Germany serves as the primary growth driver for the European Union. Therefore, a recession in Germany is expected to have an impact on purchasing activities within the European nation. However, Gupta cautioned that it is still too early to accurately determine the extent of the recession's impact on Indian exports.

What does India export to Germany?

In the 2022-23 fiscal year, India's exports to Germany spanned several sectors, from machinery and electronics to footwear and auto components. India’s exports to Germany included machinery worth $1.5 billion, electronics worth $ 1.2 billion, smartphones worth $458 million, apparels worth $990 million, organic chemicals worth $822 million, footwear worth $332 million, leather goods worth $305 million, articles of iron and steel worth $474 million, and auto components worth $406 million. So, India’s exports to EU nations could take a hit for the aforementioned sectors.