The ‘I’ Transplant At BRICS-India vs Indonesia

Posted in Finance Articles, Total Reads: 5133 , Published on 28 May 2012
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The Article written by Aditya Jandial from SIBM Pune is the Third Prize winner of the May 2012 Article Writing Contest

“Has Indonesia replaced India as the ‘I’ in BRICS”

“INDIA worst performing amongst BRIC nations, Indonesia overtaking the race”

“INDIA is the leader on charts for worst hit economy”

Some of the most glaring headlines in daily leading tabloids these days talk about below average past year trend and a dull outlook towards the once roaring Indian economy. Needless to say that there are apprehensions regarding the high aspirations tabled at the global desk by the world’s largest democracy. Through the article we would try to mention the facts and figures that have lead to these questions and try to verify their veracity.



Genesis

BRIC evolved as a famous acronym in the 2001 paper entitled "Building Better Global Economic BRICs" by Jim O'Neill, Chairman Goldman Sachs. The countries namely – Brazil, Russia, India and China were the rising superpowers leading the global growth on the back of strong infrastructure, required resources, the global confidence and above all a strong rising monetary muscle.  This evolution came at the time when the global economy was shifting poles from a unipolar U.S economy to a much diverse multi-polar world.

The group transformed into BRICS in 2010, with South Africa joining the elite group. The story of the BRICS since its inception has been built on the strong economic ties amongst the countries who lead the global table in terms of rising GDP and growth rate.

Following is the global ranking analysis of the BRIC nations in terms of some key indicators:


Brazil

Russia

India

China

South Africa

GDP (Nominal)

6

9

11

2

29

GDP (PPP)

7

6

3

2

25

GDP growth Rate

115

87

13

6

108

Population

5

6

2

1

34

Rail Network

10

2

4

3

12

Road Network

4

7

3

2

18

Literacy Rate

50

5

78

22

58

Labor Force

5

6

2

1

34

Electricity Consumption

10

5

3

1

16

Internet Users

5

7

4

1

44

Population growth Rate

107

221

90

167

158

Exports

22

9

19

1

41

Imports

20

17

10

2

41

FDI Received (2010 CIA)

12

16

22

8

39

External Debt

25

22

27

18

42

Military Expenditure

11

3

8

2

43

Current Account deficit

187

4

186

1

1771

























Data Cited from Reports of World Bank, CIA World fact book 2011, IMF 2011, SIPRI yearbook, International Union of Railways.

The Great Indian Rising:

Post liberalization in 1991, India had its eyes set on the world markets. By late 1990’s Indian markets were free totally prone to trade in the International circle. The advances made by India post liberalization are evident from the following facts:

Source: Data cited from Wikipedia article on Indian Globalization

The period between 2004 and 2008 is considered the golden age for Indian economy. An economist from CIA calls:

It’s a period for the economy where nothing can go back for the country.”

The high returns at the stock exchanges, backed by strong GDP growth forecasts (hovering at around 8%) pulled in money all over the globe. Apart from being a high return nation, the strong regulation of the Indian banking system also made it a haven for global currency during the 2008 subprime. Although the global economy was shrinking, India along with China had their GDP’s growing at a nearly double digit rate.

Post the 2008 crisis, a lot of the currency was pulled out of India back into Europe and United states. Some economists refer to this as the beginning of the decline of “The Great Indian Juggernaut”.

The end of the first decade of new millennium was marred by a number of global issues that saw the global markets plummet like:

  • The Euro Debt crisis
  • The U.S credit Degrade
  • The Jasmine Revolution in the middle east
  • Tsunami in Japan (leading to low production output)
  • Rising fuel prices

But for India, these global factors were aggravated with indigenous issues like:

  • High demand pull inflation aggravating to STAGFLATION
  • Flack on Political Decision Making structure and high corruption charges
  • Rising Trade deficit
  • Currency Depreciation
  • Credit Degrade of Banking system

All these factors have contributed in creating a negative sentiment amongst global investors regarding the safety of their money in India. As a result India started losing out the comparative edge it was supposed to have in the early 2000s to countries much smaller in size to India- one of them being Indonesia.

The Rise of a new ‘I’ – Indonesia

Post 2010, the comparative analysis of the BRICS show India to have suffered the most severe blows in terms of currency decline, market returns, FDI/FII inflows, crowding out of private companies, declining IIP, the widening current deficit .

Following the lean patch there have been talks of India losing down its position amongst its peers at BRICS. This is where a fellow South Asian neighbor has hit the sweet spot with the global investors. Other reasons include:


India

Indonesia

Market Index

-25%

3%

Currency vis-a-vis U.S $ (2011)

-20%

4%

GDP Growth Rate

7%

6.20%

Fiscal Deficit Target

5.10%

0.60%

Current Account Deficit

3.90%

0.80%

Technology Quotient

0.21

0.26

1) Around $403 million  have been pulled out of Indian equity markets in April, according to Reuters

2) Net Foreign Direct Investment (FDI) will offset the current account deficit while in India`s case, an estimated net FDI inflow of USD 15-20 billion will be well short of the current account deficit.

3) The investment grade given to India in 2007 by credit agencies is under threat, while Indonesia has been awarded the investment grade last December by Fitch and Moody’s.

4) The Bond Yield on the Indonesian benchmark bonds and equities have rallied across the Indian counterpart throughout 2011.

Source: http://blogs.ft.com/beyond-brics/2011/05/19/india-vs-indonesia-which-is-more-at-risk-from-inflation/

So, it is clear from the facts disclosed above by some of the leading economists and credit agencies, that no doubt India has been hit deep by the ongoing crisis as compared to the rest of the world while Indonesia has made it up the ladder

Counter Point

Although there have been suggestions of Indonesia overtaking the Indian juggernaut, there are factors that point that the Indian tiger is there to stay. The points mentioned here show that may be India has been a bit slow in the recent phase but it is still beyond the reach of Indonesia at least in the near future.

1) Size does matter, a 7% growth rate for $1.67 trillion economy is a much stronger sign that a$840 billion economy.

2) India is much ahead of Indonesia in terms of population which acts as a source of labor as well as demand.

3) The Indian market is far different than the Indonesian market, while the former is a service economy latter has a domination of commodities.

4) The cost of living index in Indonesia is far higher than in India, as seen in the data below:


India

Indonesia

Consumer Prices


Higher (by 65%)

Inflation Rates

6.63%

4.60%

Rent Price (1 BHK in city centre)

$509

$715

Internet Prices (6MBPS, unlimited data, Cable ADSL)

$19

33.35

Cost of Living index

38.2

64.3

5) The investment horizon for investors in BRICS is 20 years which is sufficiently large for a country like India to make up.

Source: Inflation Rates of India v/s Indonesia :Credit Suisse Report

6) The tighter monetary regulations have been the stand out point amongst both countries.

7) Indonesia needs to root out corruption, since a country with pervasive corruption cannot hope to become a dynamic and prosperous country.

8) Indonesia needs to works on building a world class infrastructure which seems missing from the picture.

9) The projections for India in 2012 are much better than 2011 and compared to 2011.

Source: Citi Research Analysis Unit, BRICS v/s Indonesia growth Forecast

10) Saving rates in India are highest amongst the BRIC countries with only 2% respondents not saving as compared to 50 and 72% in Brazil and Egypt.

11) Compared to other BRIC countries, the level Income levels in Indonesia are far below the Indian levels.


Source: http://www.globalsherpa.org/bric-emerging-market-research-china-brazil-india

Conclusion

Considering the analysis and future forecasts given above, we can confidently say that No doubt that the year 2011 has gone all out in the favor of the Indonesian economy but it would be too soon to state anything regarding the mighty Indian muscle because year 2011 has been of considerable decline for most of the BRICS economies, but considering the huge workforce, higher demand and rising income in the Indian household there seems to be a long route ahead for the Indonesian economy.

This article has been authored by Aditya Jandial from SIBM Pune.


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