delusions of the India-disintegration theory

There are two reasons this theory doesn’t pass the basic smell test. First let me give a brief reason. In a world that is so integrated, any global slowdown is bound to affect India or any other major economy. To put it simply, a part cannot be completely separated from the whole.

Let’s look at another reason. Since the start of the Covid pandemic, large parts of the rich world are facing a massive real estate bubble. As interest rates fell, a lot of speculative money went into real estate in search of higher returns. The work-from-home dynamic has also led people to look for bigger homes, which has pushed up prices.

The situation is changing, as central banks in the rich world are raising interest rates to control decadal high inflation. Last week, both the US Federal Reserve and the Bank of England raised rates by 75 basis points. These high rates are causing the rich world’s real estate bubble to burst.

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In fact, Calderwood Capital Research analysts Dylan Grice and Tim Bergin make this point in the latest issue of their popular Delusion newsletter, where they talk about the housing bubble in Canada and how an entire industry is involved in obtaining fake documents. He came forward to help people. They will be helped in getting a home loan. As they write: “The fake employment letters were provided by fake companies with fake websites that provided fake income slips and fake government tax documents.”

This again shows that only when things get tough are the most basic questions to be asked. Charles Kindelberger and Robert Aliber make this point in Manias, Panics and Crashes: A History of Financial Crises: “The bursting of a bubble always leads to the discovery of frauds and hoaxes that develop into a froth of hysteria.” In fact, the Canadian real estate bubble has begun to burst. The Teranat-National Bank House Price Index, which tracks single-family home prices in the country, fell 3.1% from August to September. This is the biggest monthly decline since the index has been seen in 1999.

The UK housing bubble is also starting to end. According to the UK House Price Index, average house prices rose by 0.9% between July and August. They had risen 3% during the same period a year earlier.

According to the Case-Shiller US National Home Price Index, US home prices fell 1.1% in September compared to August, and August prices were down 0.5% compared to July. A similar story is playing out in large parts of Europe and in countries such as Australia and New Zealand.

Apart from the US, where a large proportion of home loans are fixed-interest rate loans, other parts of the wealthy-world largely have flexible interest rate home loans. As interest rates rise, home loan EMIs tend to rise, creating difficulties for existing homeowners who need to spend more money to be able to repay their EMIs. This affects their spending on other things. Also, it makes it difficult for those who bought the house to speculate and make quick money. Moreover, as interest rates rise, the floating-rate EMIs tend to rise, and so does the fixed-rate EMIs for new customers. This prevents potential borrowers from buying new homes and thus home prices tend to fall.

A major portion of people’s wealth is in their homes. A recent estimate by The Economist placed the worldwide value of homes at $250 trillion and stocks at approximately $90 trillion. When housing prices fall, people feel poorer and this affects their general consumption decisions. At an aggregate level, when almost all of the rich world is going through this event, it is bound to affect consumption globally. This means that it will also affect India’s exports. In fact, India’s non-oil goods exports have fallen from $34.7 billion in March to $28.2 billion in September.

Also, higher interest rates in the rich world will have its own impact on India. Due to higher interest rates in these countries, investors have less incentive to invest their money in India, which means both foreign direct and institutional investment will be negatively affected. One effect of this can be clearly seen in the many start-ups that fire people just to exist, as new capital is no longer as freely available as before. The pressure on the rupee against the dollar is also likely to continue.

In addition, domestic interest rates are also rising, partly due to the Reserve Bank of India’s attempt to control inflation and partly due to the rise in global interest rates. This is bound to affect credit growth at some point. Credit growth has been very strong in recent times, but some of it is a result of the base effect, with credit growth stagnant for much of 2021 and 2020.

All these reasons clearly indicate that the Indian economy cannot really be completely decoupled from the global economy; Only marginally the best.

Vivek Kaul is the author of ‘Bad Money’.

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