Should Indonesia be the I in Brics?

BBC News, Karishma Vaswani, Jakarta, 27 March 2013

Both India and Indonesia are growing fast, but lately the smaller of the two
has seen its economy expand the fastest

Related Stories

• Brics nations meet to cement relations
• India lowers growth forecast to 5%

Entry into the Brics club is a seen as a sign of success - a statement that you have made it as an emerging economy.

When the phrase was first coined back in 2001 by Jim O'Neill from Goldman Sachs he intended it to encompass just four fast growing emerging-market countries - Brazil, Russia, India and China.

South Africa was added in 2011 - despite protestations from Mr O'Neill.

Being a part of Brics means you are instantly branded a sure bet - or at least that is the perception among investors.

Economists say the Brics make up approximately 20% of global gross domestic product (GDP), and by 2030 could possibly rival the combined economies of the G7 countries (the US, Canada, the UK, France, Germany, Italy and Japan).

But already there are concerns that the fast growing economies of the grouping are seeing some trouble ahead.

'Policy paralysis'

Take India, which once saw its economy growing at a rate of 9%, but is now suffering from "policy paralysis", caused by a combination of stalling economic reforms and political haggling, according to Ajit Ranade, chief economist with the Aditya Birla Group.

Corruption and political inefficiency are
often  cited as reasons why India's
growth rate is slower than it was

"The government has had a lot of political dramas, with corruption scandals unfolding over the last few years, and opposition parties stalling economic reform at every juncture," he says.

"But fundamentally, India's economy is still stable, its medium-term growth drivers are intact. Some policy momentum is visible these days."

The Indian government says it expects the country to grow between 6.1% and 6.7% this year, faster than in 2012, when GDP grew by 5.3%.

Middle class

The slowdown in economic growth in India lies behind the suggestion that perhaps Indonesia should be the "I" in Brics instead.

On the face of it, India and Indonesia's economies have a lot in common - certainly more than just their first initials.

Both have large and young populations in fast growing economies driven mainly by domestic consumption.

But India's economy is six or seven times the size of Indonesia's, and it has many more mouths to feed, with a population of more than 1.2 billion compared with Indonesia's 240 million.

While India has seen its economy stumble recently after many years of strong growth, Indonesia's strengths have made it the darling of international investors - although it too has also seen economic growth decline moderately.

The two nations also face many of the same problems, with their messy political systems, shoddy infrastructure in desperate need of upgrading, corruption and crippling poverty.

Open economy

One of the comments you always hear about Indonesia's potential is the rapid emergence of its affluent middle class, which is set to almost double by 2020 to 141 million people, the Boston Consulting Group forecasts, which means more than half the population would be classified as middle-income class or richer. Domestic consumption helps power the economy and attracts plenty of foreign companies into this relatively open economy.

India has a large domestic market too, but restrictions on foreign ownership make it difficult for foreign firms to get involved.

Leaders of the Brics group of emerging
market  economies are meeting in
Durban

So last year, the global cosmetics giant L'Oreal chose Indonesia when it invested some $130m (£86m) in a state-of-the-art factory just outside Jakarta to produce 700,000 products per day, ranging from whitening creams to shampoos for both the domestic market as well as for exports to neighbouring countries.

The company has also opened a research and development facility in India and now sees both markets as equally important, according to Vismay Sharma, L'Oreal's president in Indonesia, who has also worked in India.

Bricsi?

Indonesia's growing importance relative to India has done little to remove some of the real challenges for retailers and distributors doing business here, however, such as the fact that it is made up of islands.

"You can't use road or rail everywhere, so you end up using ships," says Mr Sharma.

"You end up depending on ports, and that starts to put a lot of strain on the infrastructure."

Neither India nor Indonesia have good infrastructure, and both governments have pledged to spend billions of dollars to improve it.

But such lofty ambitions do not always deliver results. Last year, a much-lauded land acquisition bill was passed in Indonesia, but it has failed in its ambition to make it easier for the government to push ahead with infrastructure projects.

Obstacles such as these have resulted in analysts dismissing the idea that India should be replaced by Indonesia in the Brics grouping.

"You can add it as a sixth Brics, perhaps, making it Bricsi," says PK Basu, regional head of Maybank in Singapore.

"But replacing India doesn't make sense from any perspective. It's the first year in the last 15 years that Indonesia's real GDP grew faster than India. There's a dynamism in the Indian economy - in manufacturing, agriculture, services - that just isn't there in Indonesia."

HS Dillon, Indonesia's special adviser on poverty alleviation, agrees.

Each nation has moved into fast-growing economy status, each taking its own path to get there, but neither country has "made it", he says, insisting that "the rate of growth means nothing without the quality of growth".

Widespread poverty is there for all to see just a few kilometres outside of Jakarta's fancy financial district, where urban slums have cropped up in many parts of the city, as migrants from other parts of the archipelago have come here to find work. India's big cities too have seen mass migration into fast-growing cities that are becoming increasingly densely packed.

The poor in both countries are prone to avoidable diseases, resulting from poor sanitation, regular flooding and a lack of affordable healthcare.

"People say all the time we are one of the largest economies in the world, we are in the G20, we are this, we are that," says Mr Dillon.

"But what," he asks, "does that mean for the poor?"

Related Articles:

BRICS Wrangle Over New Development Bank