Battle of the BRICs: India vs. Brazil, Russia and China

Is clubbing India together with China, Russia and Brazil the right thing to do? Can India decouple more or less than these other countries can from a US-Europe slowdown? Many analysts say that because exim trade contributes less to India's GDP than China, India is relatively more shielded. I am not sure that is the case.

I think a very important question when one thinks about growth is - how is the growth financed? Here, I think India is in a much poorer position (this is still a theory, I need to get the hard numbers).

a) Current account deficit - India has a current account deficit. As oil and fertilizer prices go up, this deficit is increasing. BRC run a massive current account surplus which they can use to finance growth, India relies on capital flows - FDI and FII. In the 1990s, east Asia financed its growth through capital flows. Because they didnt have forex reserves, they were hurt badly. India is not in that bad a situation today - forex reserves are high and FDI flow remains strong. Still, it is something to watch out for.

A benefit of having current account surplus is that forex can be used to contain domestic inflation. So China can led yuan appreciate to control inflation because there is a massive current account surplus, India can't.

b) Fiscal deficit - With pay commision award and subsidies on oil and fertilizer, the fiscal position of India can become very bad very soon. If high oil and fertilizer prices for another year, govt will need to cut down on its spending. Whether that will be subsidies or investments is anybody's guess. Most likely, it will be a mix of both.

To do: I need to collect some hard numbers around this.

There is now an inconsistency in the way commodites are priced and the assumption that Chindia can keep growing at 8%+ to support these commodity prices and to also power US out of its slowdown - at least India cant. If Fed is betting on export growth, it should help Chindia tackle inflation by supporting the dollar.

There are two major wildcards now. First, the average price of the US home, and how low it goes. Second, the price of oil, and how high it goes.

Any recession requires multiple shocks - the US economy is extremely resilient. In 2001, there was tech meltdown, Enron-Worldcom-junk bond blowup, and 9-11. This time, we had subprime blowup and the credit crunch. Now, we might be at the onset of an oil shock.

Comments

[Brahm:]

Some of the issues you have made are valid considerations in support of your thesis. A few others you have failed to menttion, but should be factored into an analysis of the type cited. India produces a relatively larger impact on its GDP growth rate through a smaller reinvestment rate vis-a-vis China. India's private sector is a more significant generator of investor funds than China's state enterprise sector. With regard to minerals and agricultural produce India is much better situated relattively than China. Thus its need for hard currency funds on this count are more modest. India's economy has lesser energy intensity than that of China. Significant growth capital investment flow for India is accounted for more and more now by the Persian Gulf region and Southeast Asia. This appears to promise a healthier trend than in the past.

2008 Apr 28 02:39 PM

[adventure62:]

You are making hand waving arguments and saying I have to get hard numbers. you should write an article with hard numbers or data that supports your statements. You are making open ended statements and everyone knows the impact of oil. Oil prices imapact the whole world and not just India.

No one has commented on the savings of middle class and how capital inflows from these people will impact the economy.

2008 Apr 28 07:13 PM

[obo:]

let's see the numbers to back up your hunches

2008 May 02 01:32 PM

[enagar:]

crappy article. it has no data to back the big claims it is making

2008 May 07 07:38 AM

[rPavan:]

India's saving rate is around 35-36% which can finance the required investments for maintaining the high growth.

2008 Jul 06 08:37 PM