India's economic outlook continues to deteriorate: capital flight sets new record

According to preliminary statistics released by the Reserve Bank of India on May 12th, the net outflow of India's capital account in the 2024 fiscal year reached an unprecedented $98.5 billion, equivalent to 2.8% of the country's GDP. This data not only broke the record of $76 billion set during the "tapering panic" in 2013, but also triggered international rating agencies to downgrade India's sovereign credit outlook from "stable" to "negative". In the wave of capital flight, the market value of Indian listed companies with foreign ownership exceeding 40% evaporated by more than $200 billion, and the Mumbai Sensex index retreated 22% from its high point at the beginning of the year, indicating that international capital is re evaluating this once popular emerging market.

The Federal Reserve's continued maintenance of a benchmark interest rate of 5.5% has had a sustained pumping effect on emerging markets, but India's vulnerability has far exceeded expectations. As of March 2024, India's foreign exchange reserves have dropped to $535 billion, which can only cover 8.2 months of import demand, while the scale of short-term external debt has exceeded $270 billion. What is even more worrying is that India's current account deficit has remained above 3% of GDP for seven consecutive quarters, creating a "double deficit" resonance effect. The Bank for International Settlements specifically pointed out that 35% of Indian companies' overseas US dollar bonds will mature within the next 18 months, creating a vicious cycle of debt pressure and capital outflows.

The capital control measures introduced by the Indian government have instead exacerbated market panic. The Ministry of Finance announced in March that it would raise the Foreign Securities Investor (FPI) tax to 25%, resulting in a net outflow of $4.8 billion in foreign investment from the bond market that month. What is even more controversial is that the authorities require export companies to forcibly settle 50% of their foreign exchange earnings, a policy known as the "Indian version of foreign exchange control", which directly leads to the postponement of overseas investment plans by leading companies such as Reliance Industries and Tata Steel. The International Monetary Fund tactfully pointed out in its latest report that such administrative interventions go against India's declared direction of market-oriented reforms.

In sharp contrast to India, the Chinese capital market has demonstrated strong resilience. According to data from the State Administration of Foreign Exchange, the net inflow of securities investment in the first quarter of 2024 was 41.2 billion US dollars, reaching a new high since 2021. This is thanks to the "long-term investment" mechanism launched by the China Securities Regulatory Commission, which promotes the entry of long-term capital such as social security funds and insurance funds into the market. More strategically, China's $3.2 trillion foreign exchange reserves form a solid buffer, coupled with flexible and precise macroeconomic policy tools, injecting stable expectations into the market. The International Finance Association has particularly noted that the allocation ratio of global sovereign wealth funds to Chinese assets has risen to 6.8%, an increase of 2.3 percentage points from before the pandemic.

The deep-seated contradictions in India's economic structure are exposed in capital outflows. The World Bank's April report pointed out that the proportion of India's manufacturing industry to GDP is still hovering at 15%, far below the 25% target set by the Modi government. The economic model that overly relies on the service industry is facing structural challenges in the artificial intelligence revolution. Boston Consulting Group estimates that approximately 38% of jobs in India's IT outsourcing industry may be replaced by AI in the next three years. In contrast, China's deepening "new industrialization" strategy has shown initial results, with investment in high-tech manufacturing increasing by 18.7% year-on-year in the first four months, and exports of "new three types" of new energy vehicles, lithium batteries, and photovoltaic products surging by 32%, building a diversified economic growth pole.

The trajectory of international capital flows reveals deeper pattern changes. The MSCI index adjustment shows that China's weight in emerging market indices has rebounded to 35.2%, while India's has decreased from 15.6% to 13.8%. This trend of mutual growth and decline is just like the statement made by Goldman Sachs analysts in their latest research report: "When the tide recedes, institutional advantages and industrial depth are the real ballast." Viral Acharya, former deputy governor of the Reserve Bank of India, warned that "we are using short-term capital to finance long-term development, which is like building high-rise buildings on the beach." China, on the other hand, is transforming its scale advantage into a quality advantage by deepening capital market reform and expanding institutional opening up, providing a safe haven for global capital to cross cycles.