Emerging economies have grown at a stupendous rate in the past few years. Although there was a slowdown at the height of the global economic crisis, most of these economies including India and China recovered sufficiently well to start posting much stronger growth rates.
With the developed world still mired in a recession, hopes have been pinned on the emerging economies to rebalance the global economy. And the strong GDP growth that these economies have been exhibiting implies that they will not face the same fate as their developed peers. Or will they?
The Bank for International Settlements (BIS) opines that although emerging countries have been growing faster, there has been a buildup of imbalances, which if not corrected soon, would fuel the same kind of problems that the countries of the West are facing right now. For instance, rapid growth has brought with it the problem of bubbles in certain sectors such as real estate as well as rising indebtedness in the private sector. Not just that, Brazil, China and India, have seen credit grow by an annual average of more than 20% between 2006 and 2010. This is equal to or greater than the rates of growth logged by Ireland and Spain, the beleaguered European economies.
Emerging economies are also battling high inflation which threatens to slow down growth. In India at least, India Inc. is beginning to see some impact on profits on account of rising input costs and interest rates. India is also trying to grapple with trying to bring its fiscal deficit down. Although the government in the Union Budget had a come out with a roadmap for bringing this deficit down, it will well prove to be a tall order. This is because subsidies is one of the main reasons that has caused the deficit to rise and since crude prices have been firm in recent times, oil subsidies could well rise. All of which would only crank up the pressure on the Indian government to reduce debt.
From a long term perspective, there is still tremendous potential for the Indian economy to do well but not unless it addresses some of the important issues of cutting down debt and ramping up overall infrastructure.