This article is part four of a five-part series examining parallels between BRIC countries (Brazil, Russia, India, China) and the "emerging markets" of the MINT community (Mexico, Indonesia, Nigeria, Turkey). This article looks at the rapid inflation plaguing both India and Indonesia and why this may break both markets.
Beyond sharing a continent, beyond both being "developing markets," India and Indonesia were both seen as the most promising market within their respective acronyms. Even more so, both suffer from the same problems, and both may benefit from the same solution.
Highlighting the issue
India has been in the news a great deal recently due to currency devaluation in relation to the U.S. dollar, especially with the ongoing U.S. taper. What has not been understood is that this devaluation has been ongoing largely since the mid-1990s. Averaging about 7% per annum and hitting highs in excess of 13%, inflation and currency devaluation have long been a symptom of Indian instability.
This instability was already in place by the time the Indian economy was included in the BRIC listing back in 2001. While the middle class of India was booming alongside an economy growing at 6% per year, India's boom is also the reason for its troubles.
Labor is still concentrated in agriculture, which, while supportive of domestic food stocks, has led to a market glut for those same agricultural products. Although this has driven prices down in some areas, gradual fuel price increases have pushed food prices artificially higher than they would otherwise be.
With foreign investment falling off over the course of the past few years, Indian government officials have been forced to cut subsidies. This has only decayed the economic situation further, leading to a downward spiral as general mistrust has reinforced increasing amounts of government paralysis. Interest rates rising have done little more than reinforce the situation.
This inflation could mean the beginning of the end for India, with domestic finances expected to only get tighter as foreign investment continues to drop off. The eventual result? A broken market that cannot be fixed by a government committed to inaction.
Indonesia can be different, can't it?
Already ahead of India in politics, Indonesia has been highlighted as the most politically stable of the new MINT countries. Voted least likely of the MINTs to experience social unrest (although this seems a simple title considering the other members), the Indonesia economy has grown an average of 5% every fiscal quarter since 2007. Highlighted as the most rapidly urbanizing population in the world, the economy has nevertheless concentrated on natural resource extraction and export.
It is this economy that is now going to force Indonesia into the same trap as India. Over-reliance on primary resources as income has left the country unable to develop alternative markets for a growing middle class. While a lower percentage of workers are employed in Indonesian agriculture then Indian, the Indonesian economy is still stuck in the same "middle income trap," unable to transition to higher income industries. Like India, Indonesia's growth is curtailed as incomes stagnate while inflation continues to rise.
There has been cautious optimism as Indonesia ran a trade surplus last November, but inflation has ballooned to eclipse growth and continues to trend in excess of 8% per quarter. Although the country is least likely to experience unrest, it is still a possibility with a president stepping down in the coming months and a central government ceding influence to strong regional administrations.
In the end, Indonesia seems to be following India's footsteps too closely for comfort.
Same path, same solution?
Both countries have a possible way out, but most investors cannot easily encourage it. Skilled workers must be created to inspire domestic infrastructure development. India, despite investing in the expansion of domestic and foreign institutions, has not made meaningful strides in this area.
While the causes of this inaction are difficult to pinpoint, many blame the lack of standardized education reform, which has led to a breakdown in training newer generations of Indian industrial workers. Indonesia faces a similar lack of education reform, which has in turn caused a mistrust to form between domestic businesses and newly trained personnel.
Yet, if both economies manage to increase skilled worker numbers, there could be some unique investment opportunities as both states become more self-sufficient in the workforce. Indian markets have the potential to expand rapidly in energy and (further in) technology markets. Indonesia is slightly harder to judge, due to the current underdeveloped infrastructure, but economists are anticipating surges in maritime trade.
Unfortunately, to manage this positive outcome, both states will need to overcome government paralysis. This seems unlikely given India's diverse population and Indonesia's weak central government. The only path left leads to unbearable inflation and economic strain. Incomes will stall against growing living costs and domestic markets could fall out under the strain.
The other parts in the series:
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