Global Geopolitical Series: No respite for India as troubles brew on all front

Troubles continue to brew for India on all sides; be it economical, be it social, or be it geopolitical. In some areas, the trouble is nearing the boiling point.

Economic:

India’s economic turmoil, first came under global scanner back in 2013, when Indian rupee suffered massive depreciation in its value against the USD and majors. Back in 2013, the focus was on India’s twin deficits (both current account and fiscal account), which led to severe bleeding into the country’s forex reserves and depreciation in the rupee from 50 per USD to almost 70 per USD.

5 years on, we are witnessing similar crisis; more likely 2013 PART- 2 but in a more sustaining form and that is because, since 2013, despite having a 5-year relief period, India failed to reign on the problems.

• In August, India’s trade balance reached $17.39 billion, which is the highest level since 2013.
• India also failed to make a big shift as promised alternate energy sources since 2013 (especially during the period of lower oil price) and now, the higher oil price, for which India is a major importer (accounting 28 percent of its total imports) is biting again.
• At the same time, India’s banking system, which was not that of a high concern back in 2013 are in the worst conditions probably since the 1990s, when the country suffered a major balance of payments crisis leading to more than 100 percent depreciation in the rupee. Since the end of 2013, bad loans at Indian banks as of 1st quarter of 2018 grew from INR 2 lakh crore to INR 10.25 lakh crore. Instead of countering the corporate defaults in the harshest and smartest way, the Indian government brought in state-owned banks and the life insurance giant LIC to bail in those companies.
• The above is one of the ways, the government has done long-term damage to Indian middle class. The other being demonetization and rushed implementation of Goods and Services Tax system, which just destroyed many in the SME sector. Demonetization has done more harm to India than can ever be described. It played a massive role in changing people’s attitude (good to bad) towards the banking sector.
• India registered a sizable GDP growth this year, which reached 8.2 percent y/y in the second quarter, the highest since 2016. But optimism is marred by stagnant employment conditions and opportunities.  

The symptoms of these myriad issues have been quite visible in the market pricing in 2018. Since last month, India’s benchmark stock index has declined 12.3 percent, erasing earlier gains in the year. At the same time, the Indian rupee has declined almost 16 percent breaking the bottom of 2013.

Geographical:

India had a China problem and it still has it. The problem is both geopolitical and economical.

• Despite oil accounting for almost 28 percent of India’s total imports and 17 percent of net mineral fuel imports, India runs its biggest trade deficit with China, which accounts for almost third of its total deficit. As of now, with Indian manufacturing devastated by cheap Chinese alternatives, there are no plans or efforts to turn this around.
• On the geopolitical front, while India astonished the world making a stand against China militarily in the Doklam standoff in the Sikkim region to counter China’s development along the Bhutan-Sikkim region, in reality, China’s geopolitical presence is being felt ever than before. Chinese naval ships are regular visitors in the Andaman Sea near islands claimed by India, which are strategically positioned. China has replaced India as major trading partners for India’s neighbors and asserting its influence in the region. As a part of the ‘Belt and Road’ initiative, China has taken control of a key port of Srilanka in the Indian Sea. In Nepal, the government now favors China to India.
• To makes matter worse, Trump has arrived on the scene aiming to reduce India’s surplus with the United States or demand more economically and geopolitically using his tariff stick. India runs its biggest surplus with the United States, accounting for 31 percent of its total exports.

Social:

India is the world’s largest democracy of 1.2 billion. It is the most diverse country in terms of ethnicity, religion, and languages. While at times, it creates its own issues, in soft diplomacy, its power is immense.

• At a diplomatic table with other countries India aspire to differentiate itself from the rest of the world, describing it as the oldest most diverse living civilization. That is why India is a diplomatic friend to both the USA and Russia, as well as North Korea and the Arab countries, which are predominantly Muslim. India is home to the world’s second largest Muslim population.
• But the current Hindu nationalist government have caused immense harm to these very social fabrics by taking an unnecessary hard stance towards the Muslim community of India using old Hindu religious rules of the past.

I have been warning to readers about the fragility in India’s economy and tough position in the geopolitical arena, the financial markets have finally have started pricing it.