Indian economy will be marked by contradictions

A conflicting sign is already staring us in the face: globalization’s predictably doomed future. After Brexit, the Covid pandemic and the Russia-Ukraine conflict, there are many signs indicating the retrenchment of globalization. The collapse of global supply chains due to economic lockdowns has shifted the focus towards near-shoring or on-shoring. In a related move, nations have erected protective trade barriers; Both the US and the EU are using climate schemes to renege on free trade promises. End result: reduction in global trade.

Various financial institutions around the world are trying to wrap their heads around this phenomenon. According to BlackRock Investment Institute’s 2023 Global Outlook, “we see geopolitical cooperation and globalization developing in a fragmented world with competing factions.”

At the same time, somewhat counter-intuitively, some other aspects of globalization will continue to accelerate, unleashing their devastating effects on the global economy. As US employment numbers and demand data continue to remain elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unrelenting in its effort to bring the inflation rate back to 2%. The Fed’s action will undoubtedly strengthen the dollar further, forcing many central banks in the global economy to raise interest rates in tandem. Interestingly, central banks in emerging economies today face threats to their independence from an external agency, not from the domestic political system.

Beyond interest rates, inflation also moves easily across national borders, particularly through food and fuel trade. Fragmented supply chains and war in Europe have ensured that the damaging effects of inflation could last until 2023; Political scientist Ian Bremer writes in the January 16 edition of Time magazine, “It (inflation) will be a major driver of global recession, increase market volatility and financial stress, and have disruptive effects on politics in every region of the world. ,

Another undesirable effect of globalization could be the permanent effect of Omicron variants that have traveled seamlessly from one corner of the world to another. The Indian government has been forced to resume random screening of passengers arriving from different parts of the world to test for the many Omicron variants that have seen a resurgence in recent times.

It goes without saying that India will be adversely affected by both the trends. Interestingly, several conflicting signals also exist at home and have the potential to provide destabilization to growth impulses and financial sector stability. Here’s an example.

Indian equity markets have been on the rise since the beginning of 2020, once the initial shocks of the Covid pandemic were dealt with. A cross-country comparison across emerging markets by various valuation indices currently shows the Indian market at a much higher price than its past performance as well as the rest of the world. Interestingly, the market held its ground despite foreign portfolio investors (FPIs) pulling out money in the last few months. Domestic investment institutions and retail investors are believed to have overvalued the market. But beneath this happy face lies a bitter reality.

Sectoral credit deployment data from the Reserve Bank of India (RBI) shows credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer credit. Given the sluggish industrial credit demand, a major portion of NBFC lending was also on lending to retail borrowers. RBI data for commercial banks shows consumer loans in four categories—advances against fixed deposits, advances against shares or bonds, loans against gold jewelery and other personal loans—increased by nearly 71% between April 2020 and November 2022. Hui.

It is quite likely that a substantial portion of these loans have found their way into the stock markets; The Nifty-50 index gained close to 118% between April 2020 and November 2022, when only net inflows were seen in FPI investments during the same period 1,464 crores. This position may become unviable during a rising interest rate regime. The RBI’s Financial Stability Report for December 2022 acknowledges this: “The impact of the increase in policy rates and pass-through on overall asset quality, however, requires closer monitoring.” Its latest report on banking trends and progress in India also echoes this: “Empirical evidence suggests that the build-up of concentration in retail loans can become a source of systemic risk.”

It will be a pity if banks face rising retail loan defaults at the same time when demand for corporate credit picks up in response to the Centre’s continued thrust on capex. It would be a terrible blow to growth and stability.

Rajrishi Singhal is a policy advisor and senior journalist. His Twitter handle is @rajrisisinghal.