The fallacy of the India-decoupled theory

There are two reasons why this theory doesn’t pass a basic smell test. Let me offer the short reason first. In a world that is as integrated as it is, any global slowdown is bound to impact India or any other large economy for that matter. To put it simply, a part cannot be totally different from the whole.

Let’s look at the other reason. Since the beginning of the covid pandemic, large parts of the rich world have been experiencing a huge real estate bubble. As interest rates fell, a lot of speculative money moved into real estate looking for higher returns. The work-from-home dynamic also led people to look for bigger homes, which drove up prices.

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

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In fact, analysts Dylan Grice and Tim Bergin of Calderwood Capital Research make this point in the latest issue of their Popular Delusions newsletter, where they talk about a housing bubble in Canada and how an entire industry had come up to help people get fake documents that would help them get home loans. As they write: “Fake employment letters were provided by fake companies with fake websites which provided fake income slips and fake government tax documents."

This shows again that only when the going gets tough are the most basic questions asked. Charles Kindleberger and Robert Aliber make this point in Manias, Panics and Crashes: A History of Financial Crises: “The implosion of a bubble always leads to the discovery of frauds and swindles that developed in the froth of the mania." Indeed, the Canadian real estate bubble has started to implode. The Teranet-National Bank House Price Index, which tracks single-family home prices in the country, fell by 3.1% from August to September. This is the largest monthly fall the index has seen since it began in 1999.

The UK housing bubble has started to run out of fizz as well. As per the UK House Price Index, average house prices rose 0.9% between July and August. They had risen 3% during the same period a year earlier.

As per the Case-Shiller US National Home Price Index, US home prices in September fell by 1.1% in comparison to August and the prices in August had fallen by 0.5% in comparison to July. A similar story is playing across large parts of Europe and countries like Australia and New Zealand.

Other than the US, where a bulk of the home loans are fixed-interest rate loans, other parts of the rich-world largely have flexible interest rate home loans. As interest rates go up, home loan EMIs go up, making things difficult for current homeowners who need to spend more money to be able to service their EMIs. This impacts their spending on other things. Also, it makes things difficult for people who had bought homes to speculate and make quick money. Further, as interest rates go up, floating-rate EMIs go up, and so do fixed-rate EMIs for new customers. This dissuades prospective borrowers from buying newer homes and thus home prices start to fall.

A bulk of people’s wealth is in their homes. A recent estimate by The Economist puts the worldwide value of homes at $250 trillion and that of stocks at around $90 trillion. When the value of housing falls, people feel poorer and that impacts their general consumption decisions. At an aggregate level, when almost all of the rich world is going through this phenomenon, it is bound to impact consumption at a global level. This means it will impact India’s exports as well. 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 their own effects on India. With interest rates higher in these countries, there is less incentive for investors to invest their money in India, meaning foreign direct and institutional investment are both bound to be negatively impacted. One impact of this can be clearly seen in many start-ups having to fire people to simply remain in existence, as new capital is no longer as freely available as it was before. The pressure on the value of the rupee against the dollar is also likely to continue.

Further, domestic interest rates have also been rising, partly due to the Reserve Bank of India trying to control inflation and partly because global interest rates are climbing. This is bound to impact credit growth at some point. Credit growth in the recent past has been very strong, but some of it is a result of the base effect, with loan growth having stagnated through 2021 and much of 2020.

All these reasons clearly point out that the Indian economy cannot really be totally decoupled from the global economy; only marginally at best.

Vivek Kaul is the author of ‘Bad Money’.

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