Ever since Jim O’Neill, who was working as an economist
with Goldman Sachs, came up with the phrase BRICs in late 2001as a way to
highlight the long-term growth potential of large emerging market economies
Brazil, Russia, India, China and South Africa, the term found wide
acceptability among policy makers, business honchos and politicians who tried
to bifurcate the world into ‘growing’ and ‘slumping’ regions to spot where
growth and investment opportunities are headed. Another term ‘Fragile Five’
coined by a little-known research analyst at Morgan Stanley in late 2013 which
indentified Turkey, Brazil, India, South Africa and Indonesia as the weaklings
among emerging markets following a turmoil in these markets (triggered by concerns
over the Fed turning off liquidity taps), seemed to equally strike analysts’
fancy as a way to express fears that these economies became too dependent on
skittish foreign investment to finance growth than the strength of
fundamentals.
The Morgan Stanley report, that came out in August 2013,
followed reports that the Federal Reserve would soon reduce its bond-buying
programme, allowing a section of investors to give voice to fears of an
emerging markets rout, triggered by runs on the Turkish lira, Brazilian real
and South African rand. These countries had large current account deficits
(CADs), which made them vulnerable to a withdrawal of foreign capital in an
environment of tighter liquidity. Especially, the reliance of Turkey on
short-term investment from foreigners to finance widening CAD had led to a
sharp overvaluation of lira. Similar weakening of currency was witnessed by
other countries in the group too.
However, like most terms that tries to capture financial
market trends, ‘Fragile Five’ soon proved to be inadequate to describe the fast
changing dynamics of emerging economies as these countries were among the top
league in terms of investment returns for 2014. Indonesia, for instance, was
ranked first by Merrill Lynch with a return of 30 per cent while Turkey followed with a return of 25 per cent. Even,
South Africa, the laggard among Fragile Five, returned a still respectable 10
per cent. In Indonesia, the turnaround followed the election of Jakarta
governor Joko Widodo, who is known for his pro-reforms stance, as the president
in the third presidential election in the country, after incumbent president
Susilo Bambang Yudhoyono was constitutionally barred from seeking a third term
in office. In the case of Brazil and Turkey investors have learnt to accept the
risks that the countries still present: stagnant growth, high levels of private
debt and high inflation.
The turnaround was especially emphatic in the case of
India after the resounding victory of Narendra Modi-led NDA in general election
in India which brought the momentum back to the domestic market, dramatically
turning around the negative perception that hampered investments into the
country in the preceding years.
A few months after the polls, International Monetary Fund
(IMF) said among BRICS countries and emerging markets, India managed to clearly
turn around its macro economy after Fed began to reverse its zero-interest
rates monetary policy and that the country is an odd one among what once called
Fragile Five economies. Subsequently it raised the growth forecast for India
for 2014 to 5.6 per cent from 5.4 per cent previously. It also said provided
the Modi government sticks to its reforms agenda, the country’s growth is
likely to surge to 7-8 per cent.
In a short span of nine months since coming to power, the
Modi government has unveiled a slew of policy initiatives—allowing FDI in
railways and defence sectors, launching labour reforms, deregulating diesel
prices and easing of FDI rules in construction—in a bid to send a strong
message that the government is focused on pushing its reforms agenda.
Jury is still out if the forthcoming budget help India
lead the transformation of the ‘Fragile Five’ to ‘Fantastic Five’.
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