BRICS economies are in a rut. Is it time for India to go it alone?

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BRICS economies are in a rut. Is it time for India to go it alone?

The opinion

  • Uday Kotak, executive V-C of Kotak Mahindra Bank, feels India should quit the BRICS coalition
  • He says the story of the five emerging countries' coalition is over because of slowdown in four of their economies
  • Many international experts have raised similar concerns in the past

The facts

  • The economies of Brazil, Russia, China and South Africa are indeed facing slowdowns
  • India and China are the only two BRICS members who are on a solid footing for the future
  • On some parameters, the other four countries fare much better than India

More in the story

  • Why BRICS is still relevant, and why India must stick by it
  • BRICS's New Development Bank, and how it can benefit India

Uday Kotak, the executive vice-chairman of Kotak Mahindra Bank, recently proclaimed that the BRICS story was over. And that India should look for glory alone, rather than continue as part of this group of emerging countries which also includes Brazil, Russia, China and South Africa.

While Kotak is the first prominent voice from corporate India to suggest this, many international experts have raised similar points in the past.

Also read - All you need to know about BRICS

Are they right? Should India go it alone? To answer this, we must understand the reasons why BRICS was founded and why is its viability now suspect.

Brazil's debt trouble

At the start of the 21st century, the world was looking at BRIC (initially, South Africa was not a part of the group) with expectation. These were the countries that had the geography, population, technology as well resources to provide a new economic world order at a time when western economies were losing steam.

Together, the four original BRIC countries made up over 40% of the world's population (with nearly 2.8 billion people), covered more than a quarter of the world's land area over three continents, and accounted for more than 25% of the global GDP.

But today, Brazil is battling a high amount of public debt. Its economy is projected to shrink 2.5-3% in 2016. It suffers from a combination of a primary budget deficit, high public debt, high interest rates, a weak job market and sluggish demand for its commodities - soy and iron ore in particular.

The low global demand for these commodities has made its debt rise to 70% of its GDP. Thanks to this, Brazil is not even in a position to repay interest on the debt, let alone the debt itself.

Russia slipping on oil

The crash in crude oil prices has troubled most economies in the world. But Russia, with energy exports accounting for 68% of its foreign trade, has been hit the hardest.

Oil and gas revenues provide about half of Russia's official budget. The country loses about $2billion in revenue for every dollar that the price of oil falls.

Uday Kotak of Kotak Mahindra Bank feels the BRICS story is over and India should walk alone

And if this was not enough, the country is also facing sanctions from the European Union and the US for the government's decision to attack Crimea.

All in all, the Russians are no longer the force they were during the oil price boom. Their economy is projected to grow by a meagre 1.5-2% in 2016.

China's exports collapse

For 30 years, through 2011, the Chinese economy grew at an average of 10.3%. No other country in modern history experienced this kind of growth.

But being an economy dependent on exports to the world, it started losing steam with the fall in the demand in Western countries, which were hit by the global recession in 2009.

To deal with the falling demand, the Chinese government gave a stimulus to its economy by unleashing a mammoth investment spree.

However, that has left the economy with a debt trap that, by some counts, has touched more than 250% of its GDP. Such a high amount of debt has lead to a crisis in economies like Japan and Spain in the past.

Also read - Declining exports, few jobs, falling rupee: Is this 7.5% growth, Mr Jaitley?

South Africa's struggles

The most advanced economy on the African continent, South Africa's economy contracted 1.3% in the second quarter of 2015. In the third quarter, it grew by a mere 0.7%. Just two years before, the plan had been for a 7% growth.

South Africa, which joined the BRIC group in 2010, suffers from issues like power outages, electricity tariff increases, labour unrest and weak consumer and investor confidence. The country, which was finally freed from the regime of apartheid only in 1994, faces a huge challenge to manage social as well as economic inequality in society, which has worsened the labour unrest in the mining sector.

The economies of Brazil, Russia, China and South Africa are all suffering from a slowdown

The failure of South Africa's education system has ensured the there is no availability of skilled labour for the industry and services sector to flourish. This puts a big question mark over the country's ability to grow in the medium term, even if the commodity market picks up in the future.

The political significance of BRICS

The state of the economies under the BRICS umbrella suggests that only India and China are currently standing on a strong platform. And given that even China is expected to slow down further in the coming years, wouldn't it be better for India to walk the path of economic development alone?

Experts are not in favour of this approach. Biswajit Dhar, trade expert and professor at Jawaharlal Nehru University, says: "At the moment, India may be doing better. But that does not mean that India can go it alone. The coalition of BRICS nations was formed not just for economic cooperation among themselves, but to also further their interests at various social and political forums."

Dhar says developed nations have always had different forums, but emerging countries never had a strong voice until the formation of BRICS, despite the fact that they accounted for a significant amount of the world's GDP.

BRICS nations are ahead on certain parameters. All four have more purchasing power-parity than India

He adds: "For a long time, the emerging nations were asking for a larger quota in the International Monetary Fund (IMF). The hold that the developed nations enjoyed at the IMF was far more than the emerging nations."

Dhar feels that while BRICS countries may have slowed down at the moment, they are ahead of India in various parameters.

For example:

- The nominal (calculated at current prices without subtracting inflation) GDP of China is 5.06 times that of India.

- In purchasing power-parity terms, India's per capita income in 2014 was the lowest among the BRICS nations at $5,855. For China, the number stands at $12,880, Brazil at $16,096, Russia at $24,805 and South Africa at $13,046.

"If India moves out of the BRICS coalition, I don't think it would have any negative impact on China. But if China moves out, that would spell trouble for us. India needs a huge amount of money to be invested in its infrastructure, and that money can come from the financing facility of China," says Dhar.

Spirit of cooperation

A criticism of BRICS nations has also been that they have not done much even when the economies of the member countries were doing well.

However, Oliver Stuenkel's book, The BRICS and the Future of Global Order, throws light on how silently the BRICS countries have forged an alliance on many international issues.

The book points out that on issues like agriculture and food security, the BRICS nations have met several times to come up with a common action plan that seeks to promote the food security needs for the most vulnerable population of the member countries.

Then, in July 2015, the BRICS countries launched their most ambitious plan, which had been in the making for years. The New Development Bank was launched, with a view to challenge the hegemony of the International Monetary Fund and the World Bank, which does not give enough power to the emerging countries.

"BRICS led to a new economic order for the first time since WWII": Jayant Dasgupta, ex-envoy to WTO

Headquartered in Shanghai, the bank has started out with a capital of $50 billion, with an aim to double its capacity to $100 billion within two years.

Being the world's second largest economy, China will contribute $41 billion while India, Brazil and Russia will each pump in $18 billion. South Africa's contribution is to be $5 billion.

India requires Rs 26 lakh crore ($39 billion) for its infrastructure projects till 2020. So, the success of this bank can provide a long-term financing facility for Indian infrastructure projects.

Why India shouldn't abandon BRICS

It's important to remember that despite the slowdown in the BRICS economies, the size of their markets and the available demographic dividends make these nations more promising than the rest of the world.

Even for Western countries, the survival and growth of this bloc is important. Where else would they find a consumer market of over 3 billion people?

Jayant Dasgupta, India's former ambassador to the World Trade Organisation, believes it would be foolhardy to make a decision to leave the group on the evidence of just two or three years.

"The current economic crisis in the BRICS nations cannot be the basis of being a part of this group. Economies do can see ups and downs over a period of time. But the interests of the involved nations go beyond these economic cycles. These countries can increase trade among themselves to provide support to each other. This will take time. It would be very hasty to say that the era of BRICS is over," Dasgupta says.

"For the first time since the Second World War, a new economic order is getting established. There should not be any looking back."

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Neeraj Thakur

Neeraj Thakur @neerajthakur2