US Full-Speed Tapering, Europe & US Aggressive Rate Hikes

As we enter September, the global financial environment is deteriorating rapidly. The Federal Reserve began to reduce its balance sheet in June of this year, but the first three months of balance sheet reduction were more of a trial nature. Starting in September, the Federal Reserve will enter full-speed balance sheet reduction, with the scale of reduction after September being twice that of June.

At the same time, the Bank of Canada has already announced a rate hike of 75 basis points, and it is expected that the European Central Bank and the U.S. Federal Reserve will also implement significant rate hikes in the coming period.

Affected by the above factors, emerging economies in Asia are facing the dilemma of capital outflows.

India, as the country with the second-largest population in the world and having recently risen to the 5th position in GDP, will it become the next country to fall like its neighbors Pakistan and Sri Lanka?

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Looking back at the world GDP rankings in previous years, we can see that India's progress is quite obvious. Ten years ago, India was not even in the top ten.

However, in 2017, India surpassed France to rise to the 6th position.

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Now, a few years have passed, and India ranks 5th, this time surpassing the United Kingdom.

Some Indian officials even believe that if this pace continues, it is possible to surpass Germany and become the fourth-largest economy by 2027.However, it is quite evident that in the current global economic environment, India also faces significant challenges.

In the past few years, Indian Prime Minister Modi has promoted the "Make in India" initiative. Due to the ultra-loose monetary policy of the US dollar, market liquidity became very abundant, with the dollar overflowing and flowing into emerging economies in Asia, Africa, and South America. India has also received substantial foreign investment support during these years, which has indeed led to significant growth in its manufacturing industry.

Since the new government led by Modi took office, India's economic growth rate has been maintained at 7-8%, while the British economy has not exceeded 2% annually during the same period. Under these circumstances, India has finally surpassed the UK.

However, surpassing Germany in the next step will be difficult.

India gradually surpassed France and the UK because its economic size is similar to these two countries. However, Germany's economic size is twice that of India, and it may take a considerable amount of time to surpass Germany.

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In the past year, India has taken many industrial orders from China, leading some Indian entrepreneurs to believe that India's manufacturing industry can fully compete with China.

The US hopes to court India to encroach on China's development market, which has led many Indians to believe that their country's opportunities have arrived.

Under the Russia-Ukraine conflict, India has also seized the opportunity to turn unfavorable factors into favorable ones, making India one of the winners in the international situation.

However, India's economic structure is still relatively singular and fragile. Looking at the performance after the outbreak of the COVID-19 pandemic, the Indian economy experienced a downturn, shrinking nearly 7% between 2020 and 2021, and later improved, ultimately due to the US's excessive money printing.Now the United States has begun to tighten monetary policy and withdraw liquidity, India's economy is about to face a harsh winter.

Currently, India's population ranks second globally, so even though its GDP has surpassed that of the United Kingdom, the actual per capita calculation is quite low. Comparing a country with a population of over 1 billion to the United Kingdom, which has a population of less than 100 million, does not hold much significance.

However, if utilized effectively, India's demographic dividend could become a favorable factor for the country's further development.

Nevertheless, India has started to impose various strikes and interferences on foreign enterprises, leading to a decline in the confidence and willingness of foreign businesses. Many multinational companies have expressed their disappointment in the Indian market, choosing either to exit the market or to reduce their investment and production scale in India.

Taking Chinese mobile phone companies as an example, the current investment trend has reversed, which is not a good sign for India, a country heavily reliant on foreign capital.

The US dollar's interest rate hike will inherently lead to capital outflows, and India is actively "taking action" to make industrial funds deliberately stay away. It seems that India has made a blunder.