The Indian BRIC is firm in the wall: Financial Express June 20, 2012

The Indian economy is going through tough times, and it is not surprising that the government has been held responsible for the current state, which appears to be the standard response to any negative economic stimuli. The latest is a view that the economy looks fragile enough to warrant a downgrade in future. While rating of countries is the prerogative of the rating agency which has its own criteria, it would be interesting to examine how India is faring vis-a-vis the other BRICS nations as the context has been against this background. This will show whether, objectively speaking, there is a case of under-performance of India vis-a-vis its peers. It is also acknowledged that the situation is nowhere as close to what it was in 1991 when the crisis set in. This calls for a comparison of economic indicators. One of the issues that have been raised is GDP growth. Using The Economist’s data on various variables (see table), India is to grow by 7.1% in 2012, which comes next only to China with 8.2% but faster than Brazil (3.3%), Russia (3.5%) and South Africa (2.8%). (South Africa, with a better rating, is a later addition to the concept of BRIC and is not part of the comparison drawn by the rating agency.) Clearly, despite the low growth scenario of India, things are not looking cheerful elsewhere. In fact, the rating agency also acknowledges that growth would be 6.5% this year for India, which implies at worst stagnation and not deceleration. Even the World Bank in its latest Global Economic Prospects talks of growth being 6.9% over 6.5% last year. Therefore, on grounds of growth, India is quite vibrant in relative terms. Inflation is higher in India at 7.7%, followed by Brazil and South Africa with 5.4% and 5.3%, respectively. The others have lower inflation numbers. This is not unsettling as it is not structural in nature and is more on food and fuel sides where extraneous factors have prevailed. Core inflation remains manageable around 5%, which would be of utmost concern. Clearly, this is not an important issue for looking at a downgrade. Third, the current account deficit is worrisome and is expected to be 3.1%, which is higher than Brazil at 2.7% but better than South Africa with 4.6%. China has a positive balance while Russia is in surplus due to the benefit of being oil-producing. The deficit has been driven by two factors: import of gold and crude oil. The former has been curtailed through taxation, while the decline in crude oil prices will provide a cushion to this account. This number will definitely improve. Fourth, if we look at the depreciation of currencies, the picture is fairly uniform across nations. While we do appear to feel the brunt, it is the same even in Brazil and South Africa and to a lesser extent in Russia. Globally, the decline in international trade has affected exports of most countries, which coupled with increasing oil prices exacerbated current account deficits. Global capital flows were tardier, which put relentless pressure on currencies. To top it all, the strengthening dollar against the euro, for reasons not linked to the dollar but more due to the weakness of the euro, has caused other currencies to take a hit. With the exception of China, all others have witnessed weakening of their currencies. Again, India does not fare too badly to be an outlier. Fifth, the size of forex reserves is another important factor that talks of the stolidity of the economy. Our forex reserves provide some cushion here though, admittedly, they are of a lower order than that of the others, except South Africa. But the import cover is still fairly comfortable at around 6-7 months, assuming imports of $40-50 billion per month. Last, the budget balance is lower than South Africa only, but given that all debt is internal, poses no risk to the outside world. The debt-to-GDP ratio is lower than most developed economies at just less than 50%. Therefore, based on pure objective economic indicators, India appears to be better on some parameters or on par with the other peer nations and, prima facie, there appears little reason for the country to stand out as a sore thumb within this group. The next issue pertains to the qualitative part on economic reforms, which has been a grievance even internally. To counter this argument, it could be said that all the reforms that are being spoken of are not new and have not been there even when the economy was rated better. Also while reforms may not have taken place at the desired pace, there has never been an instance when the government, irrespective of the political party in power, going back on such policies. Therefore, to assume that the government would be going back on reforms in the external and financial sectors is probably debatable. In fact, financial sector reforms have been only progressive, with the country now having one of the most robust systems that has remained unaffected by the two crises that have afflicted the world economy. All this means that, objectively speaking, the economy has been on par with its peer nations group, and while there is definitely discomfort since we have deviated from the high growth path, we are not alone in this state. This is the message that needs to be considered when making a comparison.