New Delhi: Why don’t we have the 9% plus annual rates of growth we saw during 2004-07? We all know the answers, don’t we? The policy paralysis of a lame duck government bears a large part of the blame, interest rates are too high, the government’s fiscal deficit is a scandal, too much is spent on populist programmes, the current account deficit is not sustainable and political uncertainty is a bugbear.
It’s undeniable that all these factors have hobbled growth. The International Monetary Fund predicts that GDP growth this calendar year for India will be a mere 6.9%, a far cry from the 9.99% notched up in 2007.
Well, that’s only to be expected, given the multiple headwinds the Indian economy has to battle, right? Surely no country in the world suffers from the same set of pernicious factors that inhibit growth?
But consider China, a country whose rulers have been feted far and wide for their policies that have transformed their economy. Well, here’s the IMF data: in 2007, China’s GDP expanded by 14.16%; in 2012, it’s expected to grow by a mere 8.2%.
But maybe China faces another unique set of challenges that have constrained their economy.
What about Brazil? Has its economy been able to do better? Not at all—while it grew by 6.09% in 2007, the IMF thinks its growth this year will be a measly 3.02%. So let’s take a look at how Russia is doing---with all that oil wealth, it should be prospering, right? Once again, not really. In 2007 the Russian economy expanded by a huge 8.5%; in 2012, IMF estimates peg growth at 4%.
That wraps up the BRIC economies, those wunderkinds of the noughties. Sometimes, however, the BRIC acronym is expanded to include South Africa, becoming BRICS. Well, South Africa is very much in the same boat, with growth expected to slump to 2.65% in 2012, far below 2007’s 5.54%.
That all the BRICS countries have rates of growth well below those reached in 2007 is quite a coincidence. Could it be that external factors common to all of them are at least partially behind the slowdown?
True, it would be silly to say the Indian economy hasn’t been hurt by the myopia of its policy makers, or that its outsize fiscal deficit and high inflation isn’t making matters worse. And the other BRICS countries probably have different problems. All that we can say is that whatever the issues, the final result is that growth is much lower for each of the BRICS economies after the financial crisis and this is at least partly the result of the after-effects of the crisis. In fact, compared to the other BRICS countries, India hasn’t done badly at all.
What about the rest of the developing world? According to the IMF, ‘emerging and developing economies’ grew at 8.7% in 2007 and are expected to grow by 5.7% this year. Growth has fallen by 3 percentage points, which is exactly equal to the fall in growth in India.
India’s share of world GDP (based on purchasing power parity) has risen from 4.66% in 2007 to 5.6% in 2011. Over the same period, China’s share has gone up from 10.98% to 14.32% and Brazil’s from 2.78% to 2.9%. Russia and South Africa’s share of global GDP, however, have fallen a bit. Clearly, the performance of the Indian economy, despite the policy paralysis, the high interest rates, the fiscal deficit et al, compared to the BRICS has been rather good.
How has the performance of these economies been reflected in the stock markets? Well, the MSCI emerging markets index has given an annualized return of 1.5% (in local currency terms) over the last five years. MSCI India has given annualized returns in local currency of 3.7% in the last five years, compared to 2.5% for MSCI China, 2.4% for MSCI Brazil, 3.9% for MSCI South Africa and -8% for MSCI Russia. It’s a terrible performance, with returns far below inflation, but the Indian market hasn’t done badly when compared to the other BRICS markets, or to emerging markets in general.
Is there an economy which has seen economic growth recover to almost the 2007 level and where markets too have rallied?
Indonesia is one such wonderland: GDP growth in 2007 was 6.3% and the IMF estimates growth in 2011 to have been 6.4%. This year growth is expected to fall to 6.1%, but will bounce back to 6.6% in 2013, according to IMF projections. Unlike the BRICS economies, growth in the Indonesian economy has not really been affected at all after the financial crisis in the West. Investors have warmed to the economy’s resilience and MSCI Indonesia has returned, in local currency, an extraordinary 13.6% annualised over the last five years. Indonesia is a country blessed with natural resources, but it must also be doing a lot of things right.
It’s not as if the BRICS economies have crumbled. But their earlier performance had set the bar high and had raised investor expectations. Their inability to return to the earlier high growth rates has therefore been a disappointment. In contrast, Indonesia has done much better than expected and the markets have rewarded it accordingly.