Standard and Poor's (S&P) published a report Monday that said India is in danger of losing its investment-grade rating if the country continues on its current economic course. The validity of ratings agency evaluations of nations is a controversial subject, alongside more general doubts about the agencies. But regardless of their accuracy, ratings agencies provide a measure of the conventional wisdom, in which the threat to India's credit rating represents a dramatic shift.
India is one of five so-called BRICS (Brazil, Russia, India, China and South Africa) countries that have nothing in common except a cool name. The Goldman Sachs economist who first coined the term BRIC in 2001 (South Africa wasn't added until 2011) saw the countries as a collective set of new economic -- and potentially political -- powers that were challenging the existing order. Their emergence represented a significant shift in how the global economy worked.
But enthusiasm for the original BRICs shifted from regarding their arrival as a notable event to treating them as ever-expanding economies without limits or flaws. Russia has remained in the BRICs (otherwise it would be the BICs), but its flaws have been obvious for quite a while. The other three original countries, however, continue to be treated with unbridled enthusiasm. They are characterized by accelerating growth, particularly China, which is expected to surpass the U.S. economy in size in a matter of years.
The problem with this enthusiasm is that it assumes that these countries have abolished the business cycle and that limits on trained labor, infrastructure and competition from other newly emergent countries would slow dramatic expansion without negatively impacting the health of their economies.
No economy enjoys permanent growth. More important is the fact that the longer an economy grows without the discipline of a recession, the more inefficient it becomes. Moreover, the faster an economy grows, the more constraints it encounters. However extraordinary the growth of Brazil, India and China might have been, it was precisely the rapidity of the growth that generated its own limits. This isn't to say that Brazil, India and China won't remain significant economies. Japan grew extraordinarily fast for more than thirty years before hitting the limits of its growth in the early 1990s. It is still the third largest economy in the world (or second if you are skeptical of China's numbers). Thus, the end of a growth cycle does not mean that an economy has lost its significance. What it does mean, however, is that irrational expectations may cause disappointment for their fans.
That's what is important about the S&P announcement. India is now the second of the original BRICs to be formally identified as troubled. China's struggle to control inflation while maintaining growth is a sign of an aging expansion. Brazil is also facing the limits of growth in this cycle. The enthusiasm for these countries was not misplaced; it was merely overstated. But in that overstatement rested a misreading of how rapidly the world was changing.
No society can live up to the expectations that were set for the BRIC countries. India grew substantially despite serious infrastructure issues, an impenetrable bureaucracy and persistent massive poverty. The miracle of India -- as with China and Brazil -- was not that it grew, but that it grew fast and long despite its intrinsic challenges.
The S&P's warning simply reflects conventional wisdom catching up with the reality of constraints. The economies of Brazil, India and China are facing challenges that will force them to slow down; the issue is how slow and for how long. Now, the conventional wisdom will likely begin to swing toward the other extreme as it did with Japan, marked by talk about lost decades and generations. Neither exuberance nor despair is appropriate. It is simply the normal cycle of economics -- and the human condition -- at work.
