This article was first published in the April 2016 international edition of Accounting and Business magazine.

When former Goldman Sachs chief economist Jim O’Neill devised the term BRIC – an acronym for Brazil, Russia, India and China – it was meant to link together a group of fast-growing emerging markets that were destined for economic greatness. But there has been nothing great about the recent developments in Brazil and Russia, both of which have suffered brutal recessions. Meanwhile, China’s economic slowdown has been unnerving investors around the globe. 

Yet one BRIC still seems worthy of the name. As the competition has fallen away, the ‘I’ in BRICs, India, has become the fastest-growing large economy in the world and the most dynamic emerging market. In the final quarter of 2015 India was growing at 7.3%, outpacing China for the first time in 16 years. 

Much of the credit has gone to India’s new president Narendra Modi, who swept to power in May 2014 promising an economic revival. In the media, Modi has been credited with a drive to trim the red tape that has long suffocated Indian businesses. But a closer look has caused some economists to claim that good fortune, rather than bold reforms, is behind the nation’s success. So is India doing enough to make sure it stays ahead of the emerging market pack? 

‘It is a bit easier to look good if your peers are messing up really badly,’ says Mark Williams, chief Asia economist at Capital Economics. ‘But there is rather a lot of hype about India’s economy and rather little meaningful economic reform.’ 

A brief look at the recent experience of the BRICs illustrates why economic stability alone has made India look so good by comparison. 

The magnitude of Brazil’s woes has taken most economists by surprise. Until 2010 the country was doing so well – largely on the back of strong prices for its main export, iron ore – that it overtook both the UK and France to become the world’s fifth-largest economy on some measures of GDP. 

Beneath the surface, however, all was not well. The government became too reliant on sky-high commodity prices and was allowing public sector spending to rise too fast. High commodity revenues also pushed the currency higher, making it harder for the manufacturing sector to compete with foreign rivals. 

No rainy-day plan

‘The government had no plan for a rainy day,’ says Win Thin, global head of emerging markets strategy at Brown Brothers Harriman. ‘When China slowed its purchases of commodities, the Brazilian economy tanked.’ GDP contracted by 3.7% in 2015 and is expected to fall by another 2.5% in 2016. Because the central bank ignored worryingly high inflation during the boom years, it has now had to raise interest rates – exactly the opposite of what you need during a deep recession. Brazil is now the world’s ninth-largest economy. 

Russia provides another lesson in how to waste a commodity windfall, emerging market analysts argue. The country derives almost 70% of its export revenues from oil and gas, and half of its government revenues. ‘The country did little to diversify the economy away from pure energy exports during the period of high oil prices,’ says Thin. A roughly 70% fall in the price of oil between mid-2014 and February 2016 has put acute strains on the economy. 

Russia made things worse through a diplomatic tangle with the US and Europe over incursions into Ukraine. Economic sanctions added to the strains. The upshot was an economic contraction of 3.7% in 2015, accompanied by a 9.5% slide in real wages. Two years ago, US$1 would have bought 35 Russian rubles; as of early 2016 it bought almost 80 – a roughly 55% fall in value.  

Even China, the flagship emerging market, has had a torrid year. The country is struggling to manage the transition from being a government-controlled economy to a market-driven one. ‘The government has appeared to be improvising policy – veering from a commitment to liberalise markets to a determination to impose the will of the state,’ says Williams. ‘That has confused investors and contributed to a flight of capital.’  

China has also been trying to manage the fallout from an investment boom in 2008. ‘The government directed capital towards old industry and infrastructure projects in order to stave off a recession,’ says Mark Zandi, chief economist at Moody’s Analytics. ‘Now it is trying to work off the excess capacity built up during this time.’ As a result, growth has slowed from 10.4% in 2010 to 6.9% last year – not a disaster, but a bit of disappointment and with no immediate hopes of an acceleration. 

Bucking the trend

So why has India been bucking the gloomy BRICs trend? 

Most economists believe Modi can claim little of the credit so far. Good fortune has played a bigger role, says Devesh Kapur, director of the Center for the Advanced Study of India at the University of Pennsylvania in the US. ‘India has enjoyed its share of good fortune,’ he argues. ‘It has not been going through a painful economic transition like China and, unlike Brazil or Russia, India is a big winner from falling commodity prices.’ 

As a large net importer of oil, cheap crude has been a bonanza for India in several ways. Most directly, the country’s import bill has fallen sharply. In 2013 India spent around 8% of national income (GDP) importing oil. Capital Economics expects that it will have to spend just 3% in 2016, a massive net gain. In dollar terms the net import bill fell from US$15bn a month in 2013 to about US$4.5bn a month in the first half of 2014. 

Second, the falling oil price also benefits government finances. India has been able to put up taxes on oil without angering consumers. The extra revenue has made public finances look better – in marked contrast with Brazil. Finally, cheaper oil has helped alleviate India’s longstanding problem with excessive inflation. ‘The sliding oil price has helped keep inflation under control and made it possible for the Reserve Bank of India – the central bank – to cut interest rates, which supports economic growth,’ says Thin. Inflation has fallen from double digits to less than 6% in just two years. A jubilant Raghuram Rajan, India’s central bank governor, described the oil price slump as a ‘US$50bn gift’. 

But strip away the cheap oil, and the performance of the Indian economy looks not much better than before, economists warn. Meanwhile, the contribution of government-led economic reform has been less inspiring, argues Kapur. ‘If you compare India to how it was doing a few years ago it’s better; if you compare India to other emerging markets it’s also doing well; but if you compare it to expectations it’s doing less well,’ he says. 

Among the major tasks the Modi administration has set itself is to boost India’s structurally weak manufacturing » sector. ‘India badly lags far behind most other Asian nations in this regard,’ says Williams. Currently manufacturing accounts for just 16% of the economy, considerably less than other Asian countries. 

The Modi administration aims to lift this share to 25% by 2022. This would also help India make the most of its expanding working age population – a potential advantage at a time of shrinking workforces in much of Europe and Japan. But to have much chance of achieving this goal, the government will need to address several impediments to growth. 

‘Labour laws remain extremely strict, making it hard to fire workers,’ says Kapur. Modi has been pushing for reform but progress has been slow. A convoluted tax structure is also a brake on economic growth. ‘Each state has its own tax regime for companies,’ says Kapur. ‘This means that it can be difficult for Indian firms to sell their goods unimpeded throughout the whole country and so benefit from economies of scale – a major barrier to business.’ 

Political barriers

Modi has attempted to push through a common goods and services tax to overcome this problem. But there have been political barriers. The government needs a constitutional amendment – including a super-majority in the legislature and two-thirds approval from the states. Since Modi’s party lacks a majority in the upper house, this reform has stalled. 

Added to this, the previous administration made it harder for companies to acquire land, limiting the space available for factories. It also made it harder for the government to acquire land for necessary roads and other infrastructure projects. ‘The goal was to protect poor farmers from being displaced from their land,’ says Williams. ‘It has proved too restrictive.’ 

The World Bank’s Doing Business survey illustrates how slow the pace of progress has been. India still ranks 130th out of 189 in the bank’s evaluation of the overall business climate, up just four places compared with 2015. For comparison, Russia ranked 51st and Brazil 116th. Neither country is famed for a business-friendly regulatory framework.

‘The problem is that India is not doing enough to fix the roof while the sun shines,’ says Thin. ‘It can sustain a reasonable rate of growth under current conditions. But not enough is being done to really take the economy forward.’ 

Profound economic reform in India would not have been easy for any Indian leader. ‘It is much harder for Modi than it was for great economic reformers like Margaret Thatcher in the UK or Deng Xiaoping in China,’ says Kapur. ‘Thatcher did not have to cope with reforming a federal system with powerful states and Deng Xiaoping did not have to deal with a democracy.’ 

Modi is still relatively new to office and still has time to prove his reforming credentials. But many economists are starting to doubt his commitment to overhauling India. As Arun Shourie, a former Indian minister from Modi’s party, recently suggested: ‘When all is said and done, more is said than done.’ 

James Briscoe and Christopher Fitzgerald, freelance journalists