Why India is a shining star in BRICS?
The BRICS Summit is an international relations summit attended by the leaders of the five member countries, which comprise Brazil, India, Russia, China, and South Africa. This year's tournament was hosted by India; in 2022, it will be hosted by China. In the recently held meeting, the BRICS nations dialogue focussed mainly about terrorism, financial stability, and India’s objective of how to get attention of the other four countries towards promoting trade and investment for “Atmanirbhar Bharat”.
For the past two years, the focus of the BRICS, has largely been on the economic impact of Covid-19. The advanced economies' relative economic outperformance during the pandemic is largely due to unprecedented fiscal and monetary stimulus. Balance sheets at G4 central banks, for example, have increased six fold between 2007 and 2021. This frenzy of liquidity, however, cannot continue indefinitely without fuelling asset bubbles and severely distorting risk pricing.
The Taper Tantrum
Policymakers will have to cut back at some point, and the immediate focus is on when the US Federal Reserve will begin to taper its asset purchases. However, the prospect of any taper brings back painful memories for emerging markets. The 2013 “Taper Tantrum” triggered a multi-year trauma for these economies, with local bond returns contracting by 33% peak-to-trough over three years.
To be sure, markets appear more upbeat this time around, taking solace from a Fed that is taking great care not to deliver a negative surprise. However, we are entering uncharted economic territory. With a large amount of stimulus still in the system, supply bottlenecks persisting for longer, and schizophrenic US labour markets marked by vacancies and lower employment, the future trajectory of inflation remains the biggest known unknown.
It may only take a few more positive inflation surprises for markets to quickly rebalance. So, the question is whether another taper will cause another tantrum in 2021. It is hoped and expected that it will not. Nonetheless, emerging markets must be ready and prepared.
What is the Significance of this for BRICS Countries?
Because three of the “Fragile Five” – Brazil, India, and South Africa – were BRICS economies during the 2013 Taper Tantrum. The obvious follow-up question: How prepared are the BRICS this time? The good news is that BRICS appears to be much more fortified on the outside. With China and Russia typically running current-account surpluses, the focus shifts to the BRICS current-account deficit (BRICS-CAD) economies of Brazil, India, and South Africa.
Many of these economies were overheating in 2013, as evidenced by unsustainable external imbalances, which were frequently financed by volatile portfolio flows. When the Taper Tantrum caused a “sudden halt” in capital inflows, it exacerbated balance-of-payments pressures, wreaked havoc on their currencies, and forced an abrupt tightening that harmed growth.
On the surface, things appear to be much more secure this time. Many of these economies are benefiting from strong exports (India) and favourable trade terms (Brazil, South Africa, and Russia) because of strong global recovery.
Domestic demand, on the other hand, is recovering more slowly. As a result, the BRICS-Current Account Deficit weighted-average current account deficit is expected to be less than 1% of GDP in 2021, down from nearly 4.5 percent in 2013. Furthermore, after running huge deficits in 2013, all BRICS-Current Account Deficit economies will post “basic balance” (Current Account Deficit +Foreign Direct Investment) surpluses in 2021.
Similarly, inflation is significantly lower than it was in 2013, when it averaged 7% for years leading up to the taper. However, there is no room for complacency when it comes to inflation. With growth gradually resuming and global commodity prices remaining elevated, inflation is likely to rise. Brazil, for example, is experiencing high inflation amid lacklustre GDP.
Furthermore, while foreign debt has increased in several BRICS nations (Brazil and South Africa), susceptibility is also a consequence of Forex reserves accumulated. Reserve adequacy (the ratio of foreign currency reserves to short-term debt and current account balances) has improved in all BRICS-CAD economies since 2013.India has seen the greatest improvement, with reserves more than doubling and the current account deficit more than halving. To be true, gains in Brazil and South Africa are mostly driven by decreased current account deficits.
In contrast to the more optimistic external picture, several BRICS economies may face fiscal and public debt difficulties. In 2012, the BRICS fiscal deficit was only 2% of GDP. However, even before Covid, it had increased to over 6% of GDP and subsequently soared to 11% of GDP during the epidemic. As a result, public debt/GDP in Brazil has risen to about 100 percent of GDP, nearly 90 percent in India, 80 percent in South Africa, and 70 percent in China. Credible medium-term fiscal consolidation will thus be critical to macro-stability, without which pressures could build, as seen in Brazil.
Overall, the BRICS economies appear significantly more resilient to another Taper Tantrum on the external front.
Instead, the emphasis should be on resuming growth, which was already declining in some BRICS economies prior to the pandemic and could be exacerbated further by pandemic-induced scarring. China may have achieved upper middle-income status and may be able to widen its macroeconomic aims. However, raising growth potential must be the overarching aim for the remainder of the BRICS to create jobs, enhance livelihoods, and ensure debt sustainability in a post-pandemic world.
The issue, of course, is to do so without the sustained global boom of the early 2000s, while also pursuing medium-term fiscal austerity. This would entail, among other things, creating fiscal space to fund much-needed infrastructure, health, and education spending, developing a healthy and competitive financial sector to support the creative destruction spawned by Covid, diversifying exports, and increasing trade, and reforming the energy sector (a constraint across multiple BRICS economies).
The good news is that BRICS appear to be significantly more fortified than they were in 2013 to another Taper Tantrum. The potential and challenge for 2021: Realizing the medium-term growth promise that prompted their formation in the first place.
Where should be the focus on?
There is a need to prioritise economic growth. It was perceived as a slowdown prior to the epidemic, and it was exacerbated by the pandemic. China may have attained upper-middle-income status and may be able to widen its macroeconomic aims.
The other BRICS countries should prioritise increasing their economic potential. In a post-pandemic environment, there is a need to create jobs, enhance livelihoods, and ensure debt sustainability. As a result, there is a need to invest in infrastructure, health and education, the financial sector, diversifying exports and growing commerce and exports.
Pic Courtesy- MEA website
(The views expressed are those of the author and do not represent views of CESCUBE.)
