India is a small player since imports and exports combined generate just about 2-3 per cent of global trade. But China is huge, generating even more trade than the US although it is a smaller economy. China alone would contribute about 14-15 per cent of world trade, while Germany and the US also contribute large chunks. Korea is also export-oriented. If there is an overall shrinking in the trade volumes of these nations, global trade volumes are indeed shrinking.
Part of this is a denomination effect caused by a strong dollar. Over 60 per cent of global trade is actually dollar-denominated. But this sort of shrinking of global trade is also invariably associated with recessive conditions.
When this happened in 2008 and 2009, the world's central banks responded with a massive infusion of liquidity, called a "quantitative expansion". Essentially, the central banks printed money. That expansion of money supply was backed up by "accommodative policies" from sundry governments (including India), which spent money on programmes designed to impart stimulus.
The QEs stayed alive because a second crisis arose in Euro zone when Ireland, Iceland, Greece, Spain, etc, all successively went into crisis or near-crisis. The Bank of Japan increased its QE commitments and so did the European Central Bank, even as the US Federal Reserve cut back on its QE.
As a result, there is not much in the way of policy ammunition left around the world at the moment. Money supply is high across most regions; most governments are already immersed in deficit spending. It would be dangerous to open the taps even wider. Economic activity will recover, as and when it does.
Globally, liquidity continues to be high. This has an interesting effect. There's a lot of money chasing relatively few assets with growth prospects. Hence, equity values are inflated around the world. India is a relative outlier in that it is growing faster than most economies. Low commodity prices - especially cheap crude, coal and gas have actively helped the Indian economy as well.
Money has come in, with foreign portfolio investors (FPI) chasing that growth. However, by analogy with 2008, if there is a full-blown global recession, the money will dwindle, or move out, heading for safe assets such as dollar treasuries.
The next three months may be crucial in this regard. If the data suggests that the global economy is getting worse, there could be bursts of panic. Conversely if there's a suggestion that things are improving, big bursts of money could flow in. This might have very little to do with India's domestic economy. If you're a short-term trader or investor, watch global macro-economic developments like a hawk and be prepared to react quickly to changes in sentiment in Shanghai, New York, Chicago or Frankfurt.