Fragile Five

“While the Indian economy was recovering from the twin shocks of demonetisation and the GST roll-out, a combination of an elevated crude oil price and a weak Indian rupee has given rise to jitters in the Indian economy. However, the agency believes that the Indian economy is in a much better shape than it was in 2013, when taper tantrums triggered by the US Fed’s decision to wind down its bond-buying programme led to a sudden, sharp depreciation of the Indian rupee,” said India Ratings and Research (Ind-Ra) on Monday. A free fall of the rupee also resulted in India’s inclusion in the club of fragile 5, along with Brazil, Turkey, South Africa and Indonesia.

The US Federal Reserve’s reversal of its zero-interest rate monetary policy in 2013 caused volatility in the currency market, pushing up rupee and consequently current account deficit (CAD).  A free fall of the rupee also resulted in India’s inclusion in the club of fragile 5 in 2013, along with Brazil, Turkey, South Africa and Indonesia. 

The term 'Fragile Five' was coined by a research analyst at Morgan Stanley which identifies Turkey, Brazil, India, South Africa and Indonesia as "economies that have become too dependent on skittish foreign investment to finance their growth ambitions." There were widespread fears of a broader emerging markets rout, propelled by runs on the Turkish lira, Brazilian real and South African rand. The lack of new investment also made it impossible to finance many growth projects, which contributed to slowdown. Indian central government’s fiscal deficit hovered over 5% mark while consolidated fiscal deficit averaged about 7% in the fiscal years 2012 and 2013. 

Immediate course correction by the then Congress government, by tightening its belt and initiating reforms like deregulation of fuel prices helped the matters. The next government headed by BJP is only building upon the UPA government measures.  By October 2014,  India's CAD was brought down from 4.7 per cent of the GDP to 1.7 per cent. The IMF raised its 2014 India growth forecast to 5.6 per cent (from 5.4% in April), even as it cut world GDP growth projection to 3.3 per cent.  IMF even predicted India would see India can see a growth of 7 per cent, which it did in later years.