Can India lead transformation of ‘Fragile Five’ to ‘Fantastic Five’?

Ever since Jim O’Neill, who was working as an economist with Goldman Sachs, came up with the phrase BRICs in late 2001 as 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, which 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% while Turkey followed with a return of 25%. Even, South Africa, the laggard among Fragile Five, returned a still respectable 10%. 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 the 2014 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% from 5.4% previously. It also said provided the Modi government sticks to its reforms agenda, the country’s growth is likely to surge to 7-8%.

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’.