India: The lone shining star of the BRICsMar 02, 2015(18:07)
BRICs stand for Brazil, Russia, India and China. This acronym has become popular since 2001. The concept behind this acronym is that these four emerging countries have the potential to become a strong economic group. These four countries were thought to have both the potential to become very important in the global economic scenario and also have good chances for turning dreams into reality. China and India were considered mainly due to their large population numbers. Brazil and Russia were included because they were thought to be very interesting economic and investment stories.
BRICs strong performance can be attributed to strong macro-fundamentals: in terms of saving and investment rates. China and India are two competing economies which have the potential to become the most dominant economies in the global scenario. Till recently, China was known to be the most dominant of the BRICs with highest saving and investment rates. China is also known as the factory of the world. Since 1980’s, China has been growing at a rate of 10% per year. This success can be attributed to major reforms, and adjustments of policies with changing conditions. China’s GDP in 2013 was 4.5 times of Indian GDP. However, recent forecasts suggest that this situation may be turned in India’s favour. This turn in events has come about post the Indian elections (May, 2014). The World Bank also supports this switch with its estimates showing India’s growth will be faster than China by 2017.
Chinese economy, last year, reported its lowest growth rate in 24 years. GDP grew 7.3% in Q4 of 2014 and 7.4% over the year, the slowest rate since the 90’s and also below the 7.5% target. The pressure on the economy is mainly coming from the real estate sector- weakest link of the Chinese economy. Sales and new construction, both were reported to have contracted in 2014: thus offsetting labour market confidence. The other factor contributing to the slowdown was the below 4% drop in annual growth in electricity demand. The effects of weakening electricity demand have also spilled into the coal industry, tipping it into distress. The Chinese economy slowdown has also led to the fall in commodity prices. Exports-only bright spot during the slowdown have also dropped facing uncertainties and weaker imports are indicative of sluggish domestic demand, thus, solidifying the economy’s fragility. In response to the slowdown, government has adopted measures such as reduced spending and tightening credit. The World Bank expects the growth rate to fall to 6.9% in 2017.
The Russian and Brazilian economies are highly dependent on oil. Russia accounts for 17% of the world’s total oil production. The country relies heavily on oil revenues to finance its budget. The sharp fall in crude oil prices led to exhausting the nation’s economy of foreign money. Political instability also hurt the economy (Russia’s annexation of Crimea and hostilities with Ukraine), leading to crippling economic growth. The fall of its currency (the rouble) has also been swift. The rouble touched an all time low of 80 per dollar in December 2014, recovering slightly at the year end, however, steadily falling since the beginning of this year. Inflation rate also spiked due to the fall in currency. Therefore, there is a possibility of Russia slipping into recession.
Brazil’s economic outlook has worsened for 2015. Brazil’s struggling economic situation is confirmed through weak consumption, stagnating household consumption, and fall in consumer confidence. There was zero economic activity growth in November, 2014. The continuous fall in crude oil prices is hurting the long-term plans for expansion of Petrobras (state owned oil and gas giant), also restricting funding for exploration projects. In addition, the prices for iron-ore (key raw material in making steel) collapsed due to weakening demand in China. This fall leads to trimming of budgets. Inflation through mid-January was reported to be 6.69%, exceeding the upper target range of 6.5%. Brazil’s Real has also been falling making it less attractive for investors.
India is the best bet among the BRIC economies. With the new calculation basis, Indian GDP growth is expected to be 7.4% for the FY2014-15. Further, the Indian GDP size is expected to cross US$ 2.1 Trillion in FY 2014-15. Post-election in May, 2014, confidence of the investors, households and corporate was lifted, rescuing the economy from a further downward spiral. The new government was indicative of political stability. In spite of macro-economic troubles over the years, the economic situation in India has turned tables mainly owing to the excellent discipline on fiscal side, intelligent monetary policy and supply side responses to combat inflation. Raghuram Rajan- Governor of RBI, who took office in September 2013, can be credited for this fight against inflation. Inflation indicators (CPI and WPI) have started posting good numbers indicating downward trajectory. The Foreign Direct Investment (FDI) has also increased showing the overseas investors’ faith in Indian economy. Global developments such as the drop in oil and commodity prices have quickened and strengthened improvements on the macro side. India imports 80% oil from foreign countries. Therefore, the drop in crude oil prices was very beneficial for the economy. This also helped in shrinking the Current Account Deficit (CAD). Over the long run, Indian economic growth rate will overtake China’s. India has a better outlook in terms of demographics- workforce age is also increasing. It will also be a better base for entrepreneurs with its secure property rights and overall stability.
It’s time to take notice of India, being the lone shining star amongst BRICs at the moment.