Post Cold War Geopolitics Keeps Indian Economy Afloat

[Riaz Haq]

India runs massive current account deficits. Its imports far outstrip exports year after year. According to the Reserve Bank (RBI) data, in the April-December 2014 period of last fiscal, India's current account deficit stood at $31.1 billion or 2.3% of GDP.

In spite such large recurring deficits, India has built up over $300 billion in foreign exchange reserves. How does it do it? The simple answer is: Foreign money inflows in the form of debt and investments mainly from the West keep the Indian economy afloat.

Sources of FDI in India Source: Financial Express

These inflows have dramatically increased with western support for India in the post Cold War world. Here's how Indian journalist Pankaj Mishra explains the larger western interest driving this phenomenon:

"Seen through the narrow lens of the West’s security and economic interests, the great internal contradictions and tumult within these two large nation-states (India and Pakistan) disappear. In the Western view, the credit-fueled consumerism among the Indian middle class appears a much bigger phenomenon than the extraordinary Maoist uprising in Central India".  

Here's how the Asian Development Bank (ADB) describes the rising inflows of foreign, mainly western, capital into India:

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much of the increase in financial integration occurred between 2003-04 and 2007-08. Given the impressive economic performance indicated by close to 9% growth rate, higher domestic interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007. Furthermore, this period was associated with favorable global conditions in the form of ample liquidity and low interest rates in the global markets—the so-called period of Great Moderation."

Many other economies have been growing faster and producing higher investor returns than India. So the returns do not justify the increased capital flows. Such flows are driven much more by the changing geopolitics of South Asia region and the world since the end of the Cold War in early 1990s. Without these inflows, Indian economy would collapse and India would be at IMF's door seeking last resort loans.

Lesson: Geopolitics drive economy. It's the reason for over a trillion dollars of western capital flow into India since the end of the Cold War. It also explains China's massive $46 billion investment commitment in Pakistan agreed during President Xi Jinping's state visit to Islamabad.

Related Links:

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Is India Fudging GDP to Show Faster Growth Than China?

[Riaz Haq]

Last week’s stellar revival in Adani Group stocks has helped India reclaim its position among the world’s five largest stock markets.

https://qz.com/adani-put-india-back-in-top-five-stock-markets-list-1850484425

India lost its fifth position to France after the US-based Hindenburg Research in January, accused the country’s ports-to-power conglomerate Adani Group of “brazen stock manipulation” and “accounting fraud,” Bloomberg reported today (May 29). The allegations triggered a sell-off in Adani stocks, dragging the indices sharply lower.

However, as of May 26, stock market capitalization stood at $3.3 trillion in India, driven by foreign fund inflows into Indian shares—and a sharp recovery in Adani stocks. 

Foreign investors bought shares worth $4.5 billion in May so far, a little more than a two-fold increase from last month, according to India’s National Securities Depository. Adani’s listed entities added around $15 billion to their market value last week, recovering some of their post-Hindenburg losses.

Now France has been pushed out of the top-five list again after the country’s stock indices lost more than $100 billion in market value last week. This was caused by a sell-off in shares of luxury goods companies such as LVMH Moet Hennessy Louis Vuitton and Vivendi, due to fears of a slowdown in China and the US.

Investors are choosing India over China

India’s prospect as one of the world’s fastest-growing economies is alluring. 

Rival China, on the other hand, seems to have taken a backseat due to a stuttering economy. Beijing’s isolationist Covid-19 policies, turmoil in its real estate industry, and a harsh anti-trust campaign against the country’s valuable tech firms have crushed sentiments for Chinese assets, economists say.

Mark Mobius, founder of Mobius Capital Partners and a market expert, also sees India as a viable alternative. “You’ve got a billion people (Indians), they can do the same thing that the Chinese do. They can do the same kind of manufacturing and so forth,” Mobius told Fox Business in March.

Last week, Christopher Wood, strategist at Jefferies Financial Group, increased the weight of Indian stocks in his Asia Pacific portfolio, excluding Japan, Bloomberg reported. This reflects the dismay among investors when it comes to the Chinese stock market.

[Riaz Haq]

From Google Gen AI

India's current account deficit widened to $13.4 billion in Q4FY22, which is 1.5% of GDP. The capital account deficit was $1.7 billion in Q4FY22, which was the first deficit since the Taper Tantrum episode in September 2013.
The current account tracks the flow of imports and exports.
A current account deficit occurs when the inflow of foreign currency from exports is less than the outflow of foreign currency from imports.
The capital account tracks the flow of assets and liabilities.
A capital account deficit occurs when the debit items are more than the credit items. This indicates a net outflow of capital from the country.
The sum of the current and capital accounts is always zero. This means that when a country has a deficit in its current account, it necessarily has a surplus in its capital account and vice versa.
India generally has a capital account surplus because it attracts a large share of foreign investments.

https://prepp.in/news/e-492-capital-account-indian-economy-notes