BRIC by BRIC: Thankfully India is following the right examples

BRIC is an ensemble of unlike nations; the only likeness stems from the prospects of growth (or the erstwhile growth) it exudes. If the last decade is the yardstick, this ensemble added to 50% of the world’s growth engine and one of them China, alone added 35% of the world’s growth.

The task was no less daunting and at the dawn of the new millennium, resource related capacities were stretched in China and Russia, while India took to the mixed approach of services and core sectors that replaced much of agricultural growth that it had depended on for a long time.  

In China investment was the driver of growth, fixed asset investments alone contributed to more than 50% of the GDP. This came from savings and there were not much of external borrowings, in fact China had more in its external account accruing excess reserves in dollars (U.S. Treasury holdings were amassed at a brisk pace).

The current account surplus, which became a much talked about subject, actually helped to create an extended period of favorable exchange rates that helped its exports. Export was another great driver of growth.

Then the 2008-09 crises struck and the exports led growth model hit a road block in China, temporarily.

India on the other hand remained unscathed as its domestic economy was resilient enough to withstand the effects of the financial crisis when most of the developed economies got affected which impacted the emerging economies as well.

China had no other option but to embark on a fiscal expansion, the likes of which no other nation had seen and it was on a gigantic scale.

The fiscal expansion of China in the post crisis period was one of Yuan 4 Trillion that added new cities and new infrastructure and replaced existing ones that were only recently built in various local provinces. This was orchestrated locally than nationally. Fiscal expansion of this kind that needed capital infusion at a short burst created enormous pressure in the banking system and the recent paper by Brookings Institution shows that much of this was off balance sheet, to the extent of 5% of the GDP.

More importantly such off-balance sheet transactions took off 7% of the current account surplus that China was enjoying. While local governments were not allowed to run deficits, this meant that the expansion could only be financed by companies that were not directly appearing in the bank balance sheet transactions, but off it. Allocating loans to projects had the biggest focus in the areas like “railway, roads, airports, water conservancy, and urban power grids”, as the paper describes.

The result of this was that the Chinese banking system, that was so famous for bringing back through reforms, starting from 2003, a transparent system of banking with controls and oversight, a new spate of risks that put pressure on lending for banks as non-performing assets started to surface once again.

The Indian story could have turned this way, with a large fiscal stimulus, for which India did not have the wherewithal. And Rajan in his short tenure influenced policy in a manner that NPAs became the cynosure of all eyes and risks were therefore tamed very early.

India has so far done everything without the stretch of a large fiscal stimulus like China or even Russia.

There are some more good examples that India followed, like balancing credit between the rural and urban sector, policy focus on infrastructure, especially rail and road as China did, but with public and private partnerships. The financing for India was never an issue but the execution had been, as land acquisition remained a contentious issue.

Could India have taken the China way on land acquisition, leaving that to the local governments that obviously left a lot to be desired? The results could have been quicker, but the consequences could have been disastrous for a democracy that depended on its only strength, the voice of everyone in deciding what is good for all.

Among the BRIC, Russia remains an enigma as its growth faltered but recovered as it continued to rely on commodity led operations. The commodity busts and associated cycles did some damage surely but yet Russia survives as the only hope of energy supplies to much of Europe and the region. Russia also has some other thriving industries and the exchange rate helps export as costs in dollar terms have remained very low thanks to depreciation of the currency.

The first of the BRIC, Brazil had a story line that lacked sustainability, something that India should be proud that its model is sustainable, thanks to democracy. The rule of law also applies to the people who rule and Brazil has learnt it the hard way; the consequence for the country has been significant.

The person who coined BRIC, Jim O’Neill, wanted to draw attention away from G7 and this was at a time when world’s growth engine was shifting to other places from the West. The attention deservedly was right, but we now know that the original four at best could eclipse the G7 in 2050 and that too if Brazil recovers and China continues to re-balance as it is never possible to have an infinite capacity for fixed asset investments that would drive growth forever. Growth needs to be sustainable as well.

Out of the many ifs, India does not have any “if”. On the contrary for India, growth is a no-brainer, as Rajan said. With demographics and savings on its side, India needs to follow reforms single-minded, so that infrastructure becomes its only driver.

For execution on the ground (outside of the land issues), China is a good model to replicate, where infrastructure projects get completed in short years.

India has just only started to follow that example, recently.