Let me start my discussion with a simple statement that was there in The Economist. It goes like this:
“Many nasty words begin with the letter D: death, disease, depression, debt (when you drown in it) and deflation. “Decoupling”, on the other hand, has a nicer ring to it, even if it is the source of a great deal of controversy.” What is decoupling and why is it causing so much controversy? Well… Decoupling basically states that emerging economies in Asia and Europe have broadened to the point (backed by domestic demand) that they no longer depend on United States for their growth.
It all started with the financial crisis that hit the world recently. It was believed that as United States went in to recession the whole world will follow suite. It was thought that developing economies will be hit very badly and will take longer time to recover. This was more importantly thought so because of globalization. It is true that there is more global interdependence than ever before which was evident from the fall of BSE SENSEX which at the end of 2008 had lost 52% and had fallen 10,640 points. SENSEX which had hit record high of 21,206.77 on January 10 was at 9647.31 at the end of the year. On the other hand inflation was also on the higher side. At this point of time it was not thought of that India would even get a near close growth of 9% in which they were growing previously. But on the contrary Indian economy expected to grow at near 7 percent went on to grow at almost 8 percent backed by robust industrial growth and within 23 months again SENSEX hit record breaking heights. At one point of time even RBI commented that they were no longer worried about recovery but were worried about controlling the rate of recovery. Though Japan and some Asian countries hit recession along with US but India and China showed strong resilience. One main reason for this fact is the strong domestic demands in India and China. In US consumer spending is a big factor to their growth but with recession this fell big time. This is because the US consumers depend to a large extent on foreign goods available there. So a fall in exports was inevitable which eventually happened.
Exports to America stumbled while because of strong domestic demand in emerging economies it surged. One important factor to note is even though there is large dependence of emerging nations on US market there is also interdependence among countries in the Asian region. This is why during the period of US recession even though exports to US by China slowed drastically, exports to India, Brazil and Russia was up more than 60% and to oil exporters by 45%. Similarly, South Korea’s exports to US fell by 60% but overall exports rose by 20% during the period due to trade to other developing countries. Another important factor is that countries like India and China have large scope of infrastructural development. Because of this fact large amount of money could go into government spending in terms of building new roads, highways, housing and other infrastructure helping them to grow. Therefore, it is believed that indeed the emerging economies to certain extent have decoupled from the West.
But then what will explain the fall in the stock market? Though stock market is not a perfect economic indicator it does to certain extent explain one thing. Most of the investment in our country is through FDI’s and FII’s. Thus, a global downturn and bearish market would most definitely draw out most of the money from the market causing a sharp fall in the market. Thus this has let to a belief of a new concept: Coexistence of globalization and decoupling simultaneously.
This concept is natural to understand if the simple flow is understood:
Liberalization of emerging economies à globalization à interlinking of economies à interdependence of economiesà higher fund flows à helping faster growth for emerging economiesàfaster growth of emerging economies has led them to boost domestic income and savingà leading to development of higher domestic demand à eventually this has lead to higher consumer spending in domestic economies for developing countriesà thus making domestic economies self sustained à making them decoupled from the west.
The concept of decoupling has become ever clear in the present time when US is still battling low consumer spending, high unemployment rate with higher priority to make sure that their recovery does not falter, India is trying curb the effects of fast recovery. RBI at the moment is battling with three headed monster of interest rate, inflation and the currency.
Due to overheating of immense amount of foreign fund inflow the Indian currency has strengthened against the dollar causing the exports to take heavy toll.
On the other hand is the inflation. If RBI intervenes in the foreign exchange market to buy back dollar and purposefully devalue rupeesà more money in our marketsà rise in inflation
If the reverse repo rate (the rate which banks get to park their money with RBI) is increased à banks might put more money with RBIàless amount of money to loan out à corporate who are expected to take more funds due to strong growth will not be able to get loans à will not have enough funds to invest à lower growth for the country.
After all this discussion… is decoupling good or bad? Only time will tell. But one thing is for certain…WE ARE NO LONGER SLAVES OF THE WEST. There is definite shift of power taking place and INDIA is undoubtedly is a recurring force.
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