Arcadia Political Review

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India: In the Eye of the Hurricane

Source: Anadolu Agency

In the complex world of geopolitics and globalized economies, four pillars determine a nation's success in this era: energy security, a stable political and social environment, strict avoidance of major conflict, and access to liquidity

To produce the traits of a “developed” nation, access to three of these pillars is necessary (e.g. United States, France, Germany, and Great Britain). Access to two pillars often correlates to the governments and economies in emerging markets (e.g. Brazil, China, and India). Nations that only have one pillar suffer considerably (e.g. Iran, Sri Lanka, Venezuela). 

Within the last year, the real exposure of nations to these four elements has been clarified. Western Europe’s energy security has been jeopardized by Russia, and social and political unrest has plagued countries like Iran, Sri Lanka, China, and Italy; liquidity has dried up leaving behind empty markets across Africa and Central America. The story of the year has been the Ukraine conflict, threatening to rope in all the world's major powers. Countries that have been spoiled by the rewards of maintaining their three pillars have looked to weaponize their economic security for their personal and political beliefs. Russia gambled its access to liquidity and relative peacetime to defend its anti-NATO position. The United States is edging closer to conflict with either China, Russia, or both. Western Europe put its energy security on the line to defend NATO interests and carry out its “Green'' agenda. China may sacrifice its political and social stability with its Zero Covid policy and is increasingly threatening peace with military action against its Taiwanese neighbors. These players have amassed a stack of chips over the last few decades of incredible growth, and now they are betting aggressively. While this high-stakes game is determining the globe's fate, India is playing conservatively, toeing the line between the players, developing profitable, non-committal, relationships to pass the night away. 

India has executed their geo-political strategy with a steady hand. Through their shallow “condemnation” of the invasion of Ukraine, they appeased the West but continued to nurture their economic ties with Russia. As a result of this effectively neutral position, India has secured increased energy flows (See Figure 1) at a heavily discounted price. Hungry for infrastructure and rapid growth, cheap oil is a crucial element of their projected 7.3% GDP growth in 2022-2023 (S&P Global). This India-first mentality when confronting major international conflicts has led the country to take advantage of an energy market inefficiency caused by Western political objectives. The markets have seen this political ingenuity, and have been aggressively offering the well-positioned nation capital.                         

Peter Marber, a Columbia professor and a top emerging markets fund manager, labeled India as “The last great opportunity.” Needless to say, India has not suffered from a lack of liquidity in its markets. As for their social and political environments, the nation is not plagued by excessively violent internal demographics. The Hindu – Muslim conflicts that do arise are often heavily publicized in Western media; despite the 1.4 billion person population, volatile and deadly conflict is not a societal threat. The murder rates in the United States contextualize the prevalence of extreme violence in Indian society. With 2 murders per 100,000, India pales in comparison to America’s 7 per 100,000 (World Bank 2020). On the economic front, the controversial Prime Minister Modi has exposed the nation to incredible sums of foreign capital with his pro-business political agenda. Since taking office in 2014, India has received 523 billion in foriegn direct investment. The annual inflow of capital is up 65.3% from the seven years preceding Modi’s rule (Invest India). By lowering corporate taxes and pioneering successful manufacturing initiatives (ie. Make In India), Modi has set up India’s economy for continued record growth. India has thus far negotiated energy security, avoided contagious conflicts, and built a fruitful democracy on the back of their growth-oriented economy. While the global macroeconomic environment has rapidly deteriorated, India has found itself in a geopolitical gold mine.

There is a plausible doomsday scenario where India suffers alongside the rest of the world. In a highly interconnected economic landscape, once the major powers fall, it is difficult to not get dragged down with them. As the Federal Reserve of the United States hikes interest rates, the dollar has become a safe haven in international foreign exchange markets. The rush of capital into the US dollar has led to a rapid decrease in the purchasing power of alternate currencies. At a rapid clip, we’ve seen currencies from the Yuan (CNH -10.71%), and Japanese Yen (JPY -23.24%), to the British Pound (GBP -22.38%), and Euro (EUR -18.13%) experience significant drawdowns as the dollar roars. These decreases in purchasing power historically result in economic hardships due to increased import costs. In the commodity cycle that we’ve seen this year, already extreme prices are therefore accentuated by a devaluation of foreign exchange rates. With economic hardships on the horizon, social and political issues often arise as politicians and citizens alike become increasingly fearful. Following the volatility in these crucial aspects of society, capital dries up domestically and abroad, as investors reign in their foreign, risky assets. This cycle is the downfall of developing and established international powers alike. 

The Indian Rupee (INR) is down roughly 10% vs. the US Dollar (USD) since September of 2021. India’s Nifty 50 index, an aggregate of large-cap public equities, has experienced -3.52% drawdown this past year, dramatically outperforming historic America’s indexes (S&P 500/ Nasdaq) which are down over 25%. India is weathering the storm. The Indian government has aligned the four pillars of succeeding as a state, in a world where the most powerful countries have two or three. If the world powers stay focused on their proxy wars, and a neutral India continues to leech off of their irrationality, they will be a highly successful nation. 

The noise will not stop. The great reckoning on speculation will not happen. The band will keep playing the tune they know so well. Most importantly, there will never be a silent moment when our world recognizes the lessons of the present. We will be so enamored by tomorrow’s chaos that we will not appreciate the triumphs of societies other than ours. This article serves as nothing more than a reminder – a pause from the noise, to recognize a rational, independent nation, and the principles that helped them attain tomorrow’s success.  

References

Kuijs, Louis, and Vishrut Rana. “Economic Research: Economic Outlook Asia-Pacific Q4 2022: Dealing with Higher Rates.” | S&P Global Ratings, September 26, 2022. https://www.spglobal.com/ratings/en/research/articles/220926-economic-research-economic-outlook-asia-pacific-q4-2022-dealing-with-higher-rates-12506628.

Intentional homicides (per 100,000 people) - India. The World Bank . Accessed October 4, 2022. https://data.worldbank.org/indicator/VC.IHR.PSRC.P5?locations=IN.

Intentional homicides (per 100,000 people) - United States. The World Bank . Accessed October 4, 2022. https://data.worldbank.org/indicator/VC.IHR.PSRC.P5?locations=US 

Marber, Peter. “While the West Boycotts Energy from Russia, the Eastern Pacific Pipeline (ESPO) Has Led to Increased Sales to China and India.” Web log. Twitter (blog). State Street Global Markets, PriceStats, Bloomberg. Accessed October 4, 2022. https://twitter.com/PeterMarber/status/1569657209495093249?cxt=HHwWgoCw8cy6xcgrAAAA.  

“FDI in India: Foreign Direct Investment Policy of India: Inve...” FDI in India: Foreign Direct Investment Policy of India | Invest India. Invest India, July 28, 2022. https://www.investindia.gov.in/foreign-direct-investment.