2012

Symbiosis Institute of Business Management Pune Aditya Jandial MBA I Finance

THE I TRANSPLANT AT BRICS

MBA skool May 2012 Contents Introduction............................................................................................................. 3 The Great Indian Story:............................................................................................4 The Rise of a new I - Indonesia...............................................................................5 Counter Point........................................................................................................... 6 Conclusion............................................................................................................... 7 Annexure:................................................................................................................ 8 Credit Suisse Comparative analysis:......................................................................8 India Performance: 2011 v/s 2012 as compared to Indonesia:...............................9 ............................................................................................................................. 9 BRICS v/s Indonesia..............................................................................................9 Works Cited............................................................................................................... 10

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Introduction
BRIC countries or the BRIC nations, evolved as a famous acronym in the 2001 paper entitled "Building Better Global Economic BRICs" by Jim O'Neill, Chairman Goldman Sachs. The acronym was first used to signify a set of countries that had the capability of being the next superpowers by 2050. The countries namely Brazil, Russia, India and China were the rising superpowers which had the 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. Another addition came to the group transforming it to 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. The driving forces for a strong BRICS cooperation were similar cultural and economic factors: Higher performing markets Availability of low cost resources Oppression during the pre-independence periods Rise of the middle class High Foreign inflows (FDI/FII) Huge demand at their backyards Changing demographics Shift from Agricultural society

Following is the global ranking analysis of the BRIC nations in terms of the factors considered during BRIC formation, based on 2011 data: Brazil GDP (Nominal) GDP (PPP) GDP growth Rate Population Rail Network Road Network Literacy Rate Labor Force Electricity Consumption Internet Users Population growth Rate Exports Imports FDI Received (2010 CIA) External Debt Military Expenditure Current Account deficit 6 7 115 5 10 4 50 5 10 5 107 22 20 12 25 11 187 Russia 9 6 87 6 2 7 5 6 5 7 221 9 17 16 22 3 4 India 11 3 13 2 4 3 78 2 3 4 90 19 10 22 27 8 186 China 2 2 6 1 3 2 22 1 1 1 167 1 2 8 18 2 1 South Africa 29 25 108 34 12 18 58 34 16 44 158 41 41 39 42 43 1771

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

MBA skool May 2012 The Great Indian Story: Post liberalization in 1991, India had its eyes set on the world markets. By late 1990s 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:

The period between 2004 and 2008 is considered the golden age for Indian economy. An economist from CIA called it as a period- Where nothing could go back for the country. The Indian economy was booming and this created ripples throughout the globe. The high returns at the stock exchanges, backed by strong GDP growth which was hovering at around 8%, pulled in money all over the globe and this was at a time when real INDIA shining came in front of the globe. The strong regulation of the Indian economic 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 GDPs growing at a nearly double digit rate. Post the 2008 crisis, a lot of the currency was pulled out of India which was where the decline of the great Indian story started. The recovery was back on track with the end of 2009 with the global economy once again on the cross roads of progress. The end of the first decade of new millennium was marred by a number of issues that saw the global markets decline: 1) The Greek and Euro Debt crisis 2) The U.S debt ceiling
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Data cited from Wikipedia article on Indian Globalization

MBA skool May 2012 3) 4) 5) 6) The Jasmine Revolution in the middle east Tsunami in Japan, leading to interruption in output Rising petroleum prices that shook up to $125/barrel The loss of confidence in markets because of Credit degrades

These global factors were further coupled with indigenous issues back home: 1) High demand pull inflation leading to STAGFLATION 2) Political limbo on decision making 3) Global stress on Corruption 4) Rising Imports and falling output 5) Currency Depreciation 6) Credit Degrade of Banking system 7) High exposure to European unions All these factors have contributed to creating a negative sentiment amongst global investors regarding the growth of their money in India. As a result India is losing out the comparative edge it was supposed to have in the early 2000s. The Rise of a new I - Indonesia Post 2010, if we have a look at the comparative analysis of the BRICS, India has 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 have also struck down its position in the global market. Following the lean patch there have been talks of India losing down its position amongst its peers at BRICS. One such headline is the rise of a fellow South Asian neighbor- Indonesia which has been a favorite with the global investors because of the following factors: 1) The Bombay Stock Exchange Sensex (BSE) has fallen by around 25%, the steepest for a BRICS country whereas the Jakarta exchange grew by over 3%. 2) The Rupee slid around 20% compared to foreign currency since August 2011. 3) The Indian growth rate has slipped to below 7%. Lowest in 3 years while Indonesia has also entered the 6% growth window 4) India has the widest fiscal deficit target of above 5% amongst BRICS, while Brazil has just 1.2% 5) Around $403 million have been pulled out of Indian equity markets in April, according to Reuters 6) Indonesia`s current account deficit in 2012 will be 0.8% of GDP, while India`s will come in at around 3.9%.2 7) 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. 8) 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 Moodys. 9) The confidence of global leaders on BREAKOUT nations including Indonesia, Poland, Thailand etc.
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CLSA economic report 2011

MBA skool May 2012 10) The Bond Yield on the Indonesian benchmark bonds and equities have rallied across the Indian counterpart throughout 2011. ( Refer Annexure A) 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 rise 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:

Mumbai Consumer Prices Rent Price (1 BHK in city centre) Internet Prices (6MBPS, unlimited data, Cable ADSL) Cost of Living index $509 $19 38.2

Jakarta Higher (by 65%) $715 33.35 64.3

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

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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 ( Refer Annexure B) 10) Compared to other BRIC countries, the level Income levels in Indonesia are far below the Indian levels. (Refer to annexure C)

Conclusion

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

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Annexure:
Credit Suisse Comparative analysis:

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

MBA skool May 2012 India Performance: 2011 v/s 2012 as compared to Indonesia:

BRICS v/s Indonesia

Citi Research Analysis Unit http://www.globalsherpa.org/bric-emerging-market-research-china-brazil-india

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Works Cited
1) 2) 3) 4) 5) 6) 7) 8) http://www.imf.org/external/pubs/ft/ar/2011/eng/index.htm https://www.cia.gov/library/publications/the-world-factbook www.wikipedia.org/wiki/BRIC www.moneycontrol.com https://www.cia.gov/library/publications/the-world-factbook/geos/iz.html www.business-standard.com/india/news/falling-bric/463828 www.globalsherpa.org/bric-emerging-market-research-china-brazil-india. http://blogs.ft.com/beyond-brics/2011/05/19/india-vs-indonesia-which-is-more-at-riskfrom-inflation/

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