CASE STUDY ON BRIC ECONOMY

THE world has been seeing a refreshing reversal of roles. The developing countries are increasingly playing an important role in the global economy. Far from stories of gloom and doom about countries like China and India, we are hearing stories of their successes, their rising reserves, their technological and economic prowess, which are seen as a threat by the richer nations. Instead of stories that predict these countries being consigned to the scrap-heap, they are becoming objects of envy and attack. Now, China has done the ropetrick by its magnificent space mission. It is being advised that it should spend its resources better by directing them to repair its roads and waterways advice that can also be proffered to the world's richest economies, such as the US, which have also many black holes to fill in their infrastructure. Now, the attention of the world's economic media has been temporarily transfixed by a report issued by Goldman Sachs, the well-known investment bankers, forecasting an even brighter future for the "deprived" nations of the world. In the recently published report, Goldman Sachs has forecast that Brazil, India and China together with Russia (a group called "BRIC"), will grow to outstrip the currently dominant members of the global economy, G-6, (US, Britain, France, Japan, Germany and Italy) within half a century. It estimates that BRIC will eventually overtake the economic output of G-6. China itself is likely to be bigger than any of the current members of G-6. . This is a considerable change from a situation in which these BRIC economies account for only one-eighth of the output of G-6. Its startling forecast is a result of the faster rate of growth of BRIC, combined with the slowing down of the currently richer nations. Further, economies like China can go overboard with their exuberance, overstraining their financial system. Above all, the scenario of richer countries tolerating the growth of poorer nations depends on the continuance of an open trading system in which the US and Europe accept the growing inroads of China's manufacturers (and India's software warriors). Protectionism is still a dangerous portent, which has to be avoided. It is futile to try to obstruct the coming of a WTO accord by the economically weak combining against the currently strong. Such alliances can be easily breached by tempting offers of aid and trade.

"Try to get the maximum advantage out of agreeing to WTO" may be a sensible policy option. But, that requires unravelling the many strands of policy that have been painstakingly woven together into our stand at Cancun. But, the reality is that some sort of give-and-take is needed if the US is not to retreat into a protectionist shell. The Goldman Sachs' forecast obviously assumes that BRIC still steer clear of political implosions and economic indiscretions. Currently, the trend of India's stock markets seems to be a vote cast in favour of India reaching higher rate of growth. But stock markets have not been reliable indicators of the trend of economic fundamentals. India's rulers need to take a more realistic view of the genuine strengths and weaknesses of the economy and nurse the prevailing mood of optimism with strong pro-growth actions. The weather-gods seem to be favourable and the economy stems set to reach the higher trend rates of growth. India seems poised to return to the high rate of growth it saw in the 1980s and the mid-1990s. Investment flows into the economy both domestic and forex should be sustained. One of the highest rates of growth of the Indian economy took place in the late 1980s, when public investment was high and credit flows robust. Public investment in infrastructure has a tendency to "grow" manufacturing, especially in steel, cement and capital goods. Public investment in infrastructure does not "crowd out" but "crowds in" private investment. This is already happening, thanks to Government's initiatives in road building and railways. This effort needs to be sustained. While all efforts should be made to raise tax revenues, investment outlays in the public sector should not get derailed by fiscal imbalance. The best cure for fiscal imbalance may be the speeding up of the economy, which will itself "grow" tax revenues. A shortsighted view of fiscal consolidation and credit flows may prove to be the poison pill for the economy. Given the good monsoon and comfortable forex resources, the economy should be able to avoid inflationary shocks by imports of essential goods, including food-grains and edible oil, if need be. On no account should we risk choking off the embryonic signs of resurgence of growth of the economy by contra-cyclical policies, be they monetary or fiscal. If Goldman Sachs is right, BRIC seems all set to be the G-4 of the future. But the ways of the global economy are difficult to predict, even in the short run. Predictions over fifty years are more difficult. Given all their limitations, the Goldman Sachs' forecasts are a reminder of how changeable the global economic scene can be. The dominant powers of today may well turn out to be the supplicants of the world 50 years from now. Whether or not the forecasts turn out to be true, they serve to remind us that the future can be very different from the present and holds both risks and rewards

. Whether BRIC will reign or turn to ruin is very much in its own hands. Let us remember that at the turn of the twentieth century, the Argentine economy was almost as large as America's and look at how it declined over the century.

Dramatic reversals are quite on the cards in the global economy. Much will depend on how policy and economic circumstances will work. Proper governance and appropriate economic management hold the key to the brave new world of BRIC.
Lest we forget, we should recall the earlier optimistic forecasts. Earlier stock market booms had led inevitably to Japan's bitter experience after the stock market boom of the 1980s. This is still fresh in our memory. So too, the recent dotcom boom and the irrational exuberance, that Greenspan warned against, left the US in the grip of a deflationary trend. The economies of East Asia and the Pacific had also their brief encounter with dreams of glory in the 1990s. The growth of nations and economies is often subject to unexpected implosions, often least expected and with varying degrees of intensity. Forecasts are only linear extrapolations of economic trends of the present. They can go wrong. The path of wisdom is not to believe blindly in prophecies, either of boom or doom, but beware of dangers, which exist in the unpredictability of human behaviour. Growth is, ultimately, a game of patience, of economies trying to beat the odds which Nature places in their path. Let us hope that the 21st Century will truly be an age in which nations of the BRIC group come into their own, albeit not at the expense of the current occupants of the high ground in the global economy. There is scope for both groups to co-exist and flourish, given the extent of global deprivation and leeway to make up in many areas of the world. It will be truly heartwarming if the nations that belong to the BRIC group turn out to be affluent in the manner in which the forecast delineates. May the Goldman Sachs report be a harbinger of a golden age to come in the world economy The Goldman Sachs global economics team released a follow-up report to its initial BRIC study towards the middle of last month.Just as the initial report focused on the growth potential of the socalled four BRIC (Brazil, Russia, India, China) economies, the new report takes the analysis one step forward and focuses on the impact the growth of these four economies will have on global markets.

The report focuses on the impact of these economies on global commodities (using oil as a proxy), demand for consumer goods (using automobile sales to make the point), and the impact on global capital markets.

While the main conclusions of the report are quite dramatic, one must keep in mind that these results ultimately depend on these economies delivering the high growth rates projected in the first report published about 12 months ago. The main conclusions of the report are as follows: Over the coming years the strong growth profile of the BRIC economies and their increasing importance will push up trend global growth to over 4 per cent, compared to the trend of the past 20 years of 3.7 per cent. An increase in the global trend growth rate of this magnitude has enormous positive implications for the entire world. The BRIC economies' share of world growth could rise from 20 per cent in 2003 to more than 40 per cent in 2025. Their total weight in the world economy will also rise from approximately 10 per cent today to more than 20 per cent within 20 years. As the centre of global economic activity continues to shift towards the developing world, all market participants, whether they be investors or corporates, need to put together a coherent

strategy to address this shift.

The number of people with an income over $3,000 (approximation of middle class) should double within three years in these economies, and within a decade over 800 million people will have crossed this threshold. Never before has this type of scale been observed in terms of gross addition of numbers to the ranks of the consuming class. In terms of sheer numbers, it is equivalent to the addition of a new America and Europe to the global consumer class. Within 20 years, there could be approximately 200 million people in these economies with incomes above $15,000 (as a point of reference that is more than the population of Japan). Therefore, the huge pickup in demand will not be restricted to basic goods but impact higher-priced branded goods as well. Despite the balance of growth swinging so decisively towards the BRIC economies, the average wealth level of individuals in the more advanced economies will continue to far outstrip the BRIC economy average. Goldman Sachs estimates that by 2025 the income/capita in the G-6 will exceed $35,000, only about 24 million people in the BRIC economies will have similar income levels. China and India will emerge as the world's largest car markets over time. Within 20 years, China most probably will have overtaken the US as the world's largest car market. India will also displace the US about 10-15 years later. Highlighting India's greater inefficiency in energy use, the data indicate that within 15 years India's contribution to global oil demand growth will overtake China's. India's share of actual global oil demand will also peak near 17-18 per cent, similar to China's. The report makes the point that the emergence of the BRIC economies has already had an impact on global commodity markets, namely the impact of China. The huge price run-up in most industrial commodities is attributed to strong Chinese demand. The next stage will be the impact of the huge emerging middle class in the BRIC economies on consumer goods demand, and finally longer term will be the impact on financial markets.

The interesting aspect brought out by the Goldman Sachs report and one which you increasingly hear spoken by global asset allocators, is the dramatic under-representation of these economies in the global capital markets. The share of these economies in global capital markets is currently 3.5 per cent, and depending on the extent of capital market development, they could account for anything between 10 and 17 per cent of global equity markets by 2020. Market capitalisation in the BRIC economies could increase by a factor of four times or $4 trillion (source: Goldman Sachs). While these markets will still remain dwarfed by the huge size and liquidity of Wall Street (despite such rapid growth), they will come close to approximating the size of Europe within 15 years. If either of the above assertions is correct, then this should have huge implications for global capital flows and asset allocation trends. In the world of low nominal returns I expect for the capital markets of the advanced economies over the coming decade, a large percentage of the incremental wealth created globally will occur in the stock markets of the developing world. Imagine if in 15 years the stock markets of the BRIC countries really approximate Europe in size.Is there any global portfolio investor positioned adequately to handle such a seismic shift in index weightings? Europe currently accounts for approximately 15-20 per cent of most global stock indices, compared to 3-3.5 per cent for the BRIC markets. As the size of these markets converges over time, so too should their index weightings (some differences may persist for liquidity and free float reasons). Can global long-only investors, wedded to relative performance, profit from this inevitable directional move, or will only the hedge funds (with no index fixation) benefit? Given all the data above as well as the conclusions of the first BRIC report, can any asset allocator really justify having only about 3 per cent of his/her equity assets in stocks of emerging market countries? Money has to move in this direction; the hedge funds, being more nimble and less constrained, have already begun to appreciate this fact. The huge flows to Asia and more broadly emerging markets over the last 18 months, to me at least, are just the beginning of a multi-year trend. There will obviously be cyclical ups and downs in these flows, but the secular trend is clear. More money has to flow into this region to properly represent its growing economic clout. Q 1 Do you think that continuous downfall in the US $ will help BRIC or it is for the time being? Q 2 Devaluation of US $ is an attractive option for America to borrow its own currency? Q 3 how BRIC dream can be made true? Give answer with support. .