Preface

"The economy is like the sea, with waves and storms that can arise at any time, and the true strong always find their own direction amidst the chaos."

Recently, the United States has turned its financial sword towards India, with trillions of dollars in funds rapidly withdrawing, causing the Indian economy to face unprecedented turmoil and challenges. The massive sell-off and divestment by the United States have not only cast doubt on India's economic growth miracle but may also set this emerging market back by 20 years.

I. Global Financial Turmoil in the Context of U.S. Divestment

Recently, a tough move by the "big brother" of the Federal Reserve, Powell, instantly attracted global attention: interest rate cuts? No way! He went straight for a "steady yet tough" approach, causing the market to wail in despair.

This is like the whole class waiting for the teacher to announce the cancellation of an exam, only to hear the teacher say: "Not only is it not canceled, but the questions are also going to be more difficult." The investment magnates on Wall Street have taken out their cheat sheets and are studying them, with mixed feelings in their hearts—interest rate cuts have fallen through, high interest rates continue, and the assets in their hands are no longer as valuable.

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Then a series of data, like a snowball, grows larger and larger. Deutsche Bank's forecast is not good news: by 2025, a wave of corporate bankruptcies will surge, with default rates soaring to historical highs, 8% of high-yield bonds defaulting, and 11.5% of loans defaulting. This is really going to test the strength of investors' hearts.

Adding to this, the major strike at U.S. ports, the paralysis of the supply chain, and the turmoil in oil prices—all negative factors are piling up, as if stepping on the gas pedal for the economy to rush straight towards the cliff.

And Goldman Sachs' analysis did not bring much comfort either. The price of the five-year credit default swap (CDS) has soared to 30 basis points, the highest level since June last year. What does this mean? It means that the risk of debt default has increased, investors are afraid of losing their money, and they have started to take "protective measures."Ironically, the Federal Reserve was originally trying to lower interest rates to save the market, but the market simply didn't buy into them; why wouldn't the cost of borrowing decrease? Where was the promised "loosening"? Instead, while crying out for rate cuts, the tension in the bond market swelled like a balloon about to burst.

Clearly, this American maneuver is both headache-inducing and alarming. Under Powell's insistence, the U.S. economy is going through a "hardcore mode," and in this game, it's not just the U.S. that's affected; the entire international market is starting to tremble.

Naturally, the next focus turns to other places that are easier to "harvest," and India just happens to stand the firmest on the edge of this storm.

II. How India Became America's "Harvest Target"

While the U.S. is busy "fishing for itself," poor India has been pushed to the forefront. As soon as the dollar interest rates are raised, money in the capital markets starts to run around, and the speed of India's capital outflow is like a rabbit seeing a wolf—funds flee without looking back.

Lo and behold, India's foreign exchange reserves have plummeted from $675 billion in August of last year to $615 billion, a shrinkage of 9.1%. It's like a "great economic slide" mode in a game—once able to buy a lot of equipment, now there's only a handful of change left in the pocket.

At such times, India can't even stop the decline of its own currency and has to bring back 100 tons of gold from the UK to save face. There's a strong sense of "holding onto some gold in one's hand, at least not falling into a pit."

The impact of this dollar effect is most severely felt in the "tough old problems" of India's economy, with inflation being a headache. When oil prices in the Middle East rise, India's prices follow suit, and inflation is like a roller coaster, with moods changing day by day.

The Reserve Bank of India also has to grit its teeth and raise the repo rate, hoping to tighten the money in the market a bit and control the rise in prices. But this has brought side effects, with financing costs soaring and corporate loan rates climbing steadily. Small businesses and traders cry out, "Borrowing money is much harder than before." The result is that economic vitality is slowly squeezed under the pressure of high financing costs, and growth appears to be struggling.

Under this pressure, India has no choice but to start thinking about its finances. However, the U.S. is also shifting the blame to India, which makes the Indian economy even more breathless. It has to deal with high external debt pressure and face the dollar's "scythe," and the economic growth miracle is becoming precarious.India today is like a person at a crossroads, unsure of what to do, with wolves in front and tigers behind, under immense pressure. What challenges will Indian businesses, investments, and manufacturing face next?

III. The Impact of International Investment Withdrawal on India

Starting from 2022, investors in India have become restless, especially those from multinational corporations. The withdrawal of foreign capital seems to have hit the fast-forward button, with one company after another leaving India, at a pace that makes one wonder if there's a race to see who can run the fastest.

Foxconn, Tesla, Disney - the names are getting louder, all saying goodbye to India. In 2023 alone, nearly 2,800 foreign-funded enterprises withdrew from the Indian market, accounting for one-third of the total foreign investment.

This "farewell show" has also directly hit the development of India's manufacturing industry. The growth of the industrial chain, which was originally expected to be driven by foreign investment, can now only watch opportunities slip away, leaving behind a sense of investment disappointment.

There are many reasons behind the withdrawal of foreign investment, but one thing is important - India's investment environment is truly not satisfactory. The uncertainty of policies, the "aggressive operations" of government departments, such as the sudden announcement of a ban on the import of laptops, caught everyone off guard. Before businesses could prepare, the policies had already changed.

Imagine manufacturers who were ready to go all out, only to suddenly find that the rules of the race were being changed at any time, causing a collapse of morale. Foreign-funded enterprises are also very realistic; they are here to make money, not to be experimental subjects for policies. In such an environment, what else can they do but withdraw?

Especially for those who were hoping for the "Make in India" initiative to take off, it now seems like a mirage. Factories have opened, but supporting policies, infrastructure, and the skills of the workforce are all essential elements that must keep up. Unfortunately, "Make in India" has frequent problems in these areas, and foreign companies are withdrawing one by one, both dissatisfied with the environment and pessimistic about the future.

As the tide of foreign capital withdrawal continues to intensify, the dream of India's manufacturing industry seems to be getting further and further away from reality. What's worse, this wave of capital withdrawal may only be the beginning. In the future, what choices will India's manufacturing industry and investors face?

IV. Will India's Economy Go Back 20 Years in the Future?India's current situation is somewhat akin to being in a battle against a monster only to realize that your health bar is nearly depleted, and to make matters worse, you've encountered a formidable boss. The Indian government's debt-to-GDP ratio rose to a heart-racing 78.2% in the third quarter of the fiscal year 2024, a figure that is far from exhilarating.

Debt has been soaring, fiscal deficits continue to swell, and these liabilities have not brought about any substantial economic improvements. It's like using a credit card to overspend on luxury gear, only to find that before the gear is even ready, the debt has become so overwhelming that it's hard to catch your breath.

Meanwhile, the Indian government is also attempting to stimulate the economy by increasing spending, planning to invest billions of dollars to create job opportunities. This sounds determined, but against the backdrop of a mountain of debt, these investments seem like a desperate "sell the family silver to start a business" scenario, with the risk of ending up with "no pot to cook in and the business hanging by a thread."

Moreover, the increase in fiscal spending has not brought the expected growth; instead, policies that increase taxes have been like a bucket of cold water, causing many investors to retreat. These measures are more like a game of robbing Peter to pay Paul, leading to leaks everywhere and the economy catching a chill as well.

In this context, India's economy seems to be genuinely on the brink of regression. Private investment is dwindling, domestic demand is sluggish, the exodus of manufacturing industries adds insult to injury, and the high level of non-performing loans makes the entire financial system appear extremely fragile.

At this time, the Federal Reserve is still "wielding the sickle," continuing to reap the remaining value of the Indian economy. Signs indicate that India could indeed "regress by 20 years," especially in the manufacturing export sector—a sector that was once a pillar of hope for the economy and is now the biggest risk point being dragged into the abyss.

If these issues continue to be unaddressed, India will not only fail to join the ranks of global economic powers but may also completely lose its competitiveness, returning to an even more disadvantageous position.

In conclusion, whether India will find a way to break through adversity or be completely crushed by these heavy burdens will depend on its ability to decisively carry out economic reforms and structural adjustments. Of course, a bit of luck and strategy will also be indispensable.