Bric nations rocked by aftershocks of eurozone crisis

The devastating slowdown in the European economies has shown that 'decoupling' – the idea that developing nations would go on growing despite problems in the west – is a myth

Indians shop for vegetables at a market in Ahmedabad, India. Even essentials are becoming hard for many Indians to afford. Photograph: Ajit Solanki/AP

Sitting in an office cluttered with assorted Hindu deities, tea exporter Anurag Gupta does not look like a man too worried about the nosediving rupee. On Friday, the Indian currency plunged to a record low against the dollar, prompting worries about a further slowdown in the once dynamic economy. But Gupta sells his luxury tea to countries such as the US and the UK, and for now, he's reaping the benefits of a cheaper currency.

"At the start of the week, there were 55 rupees to the dollar; today, there are 57," he says, smiling. A box containing 10 of his Sunshine Tea Sticks(a patented twist on a conventional teabag) wholesale at $2.50, so the more rupees in the dollar, the bigger his profit margins.

Nevertheless, Gupta is expecting hard times ahead. "The recession has not hit us yet, but it is around the corner," he says, the orange bindi on his forehead crinkling as his brow furrows. "We see the turmoil in Greece and the crisis in Europe, and need to prepare for that to affect us," he says, adding that he is considering lowering his prices as a pre-emptive move.

Currently, Gupta sells 100,000 boxes a month, almost all overseas. He hopes the high-end market he targets will be recession-proof: any Americans who can afford to pay $8 for 10 teabags are, he believes, not the demographic worst hit by the global financial crisis.

After the Lehman Brothers collapse in 2008, demand for his tea sticks did dwindle, he concedes, but it bounced back. And, anyway, he is not overly concerned about the foreign market when there is so much potential at home.

There was an outcry earlier this month when the latest data showed the Indian economy had expanded just 5.3% in the three months to March, the slowest pace in nine years – but Gupta insists this is still a country on the up.

"Just a few years ago, no Indian would imagine going to spend 50 or 60 rupees on a cup of tea or coffee," he says. "But with Costa Coffee and other chains opening up, Indians are prepared to spend that and more." Currently, less than 5% of Sunshine Tea's sales are domestic, concentrated in luxury Indian hotels and food stores.

Plunging demand from the markets of Europe, many of which remain deep in recession, and collapsing global confidence in politicians' ability to stop the rot, has ruthlessly exposed the weaknesses of emerging markets – including the so-called Brics of Brazil, Russia, India andChina.

Rakesh Shah, co-chairman of the foreign trade committee of theFederation of Indian Chambers of Commerce and Industry, says exporters whose customers are primarily in the eurozone have already been hit. "I know of many small textile exporters who sold clothes to Europe which have already closed down as a direct result," he reports. He says figures show Indian exports were down 3% between May 2011 and May 2012 – "particularly problematic when you consider the target was for 15%-20% growth".

But businesses that rely on imports are those which, arguably, are suffering the most, he adds, giving as an example the Indian gem and jewellery industry, which relies on importing precious stones and gold from abroad. "These raw materials cost 20% more now than they did a year ago."

With the economy slowing sharply, and the rupee plunging as investors take flight and head for the safety of the US dollar, the Indian authorities are wrestling with a dilemma: if they cut interest rates to kickstart growth in the face of the eurozone crisis, they risk unleashing inflation, which is already running at 10%, making life hard for ordinary families struggling to afford essentials. "In a nation of 1.2 billion people, a government can fall on inflation," says Shah.

India has domestic problems of its own – much of its public infrastructure remains in a parlous state, and businesses complain of being hamstrung by corruption and bureaucracy.

But like its fellow Brics, India is also facing up to a new world in which demand from the rich west is likely to be weak for a prolonged period – and as a result, these countries are unlikely to maintain the rampant growth rates of the past decade.

Consumer goods giant Procter & Gamble told an investor conference last week that it would focus its attention on its core markets, including the US and UK, admitting that it had devoted too much of its resources to emerging economies. "We will continue to expand our developing market portfolio, but we will do it on a more balanced pace," said P&G's chief executive, Bob McDonald.

As in 2008, when the sub-prime crisis was raging, many experts began 2012 pinning their hopes on a "decoupling" of the tired economies of the old world and the rampaging Asian tigers of China and India. But just like last time, when the collapse of Lehman Brothers helped to prompt a worldwide recession, the slowdown in the eurozone has had knock-on effects thousands of miles away.

Neil Shearing of Capital Economics says: "Decoupling is a bit of a myth: you either believe in globalisation, or you believe in decoupling. The eurozone looks like it's sliding into recession, and that's bound to have an impact. It's just a natural function of greater trade and capital integration."

He adds that each of the major emerging economies also has its own specific problems to deal with. China's growth has been extremely investment-dependent in recent years, and became even more so after Beijing unleashed a spending spree in 2008-09 to offset the downturn in the rest of the world.

Total investment was an extraordinary 49% of Chinese GDP in 2010-11. High investment levels are not unusual in rapidly developing economies, but few analysts believe China can keep building roads, airports and high-rise apartments at such a stunning pace. Many fear there has been an unsustainable building bubble that is about to pop.

"The big problem is that their recovery programme concentrated on this gigantic investment surge," says Charles Dumas of consultancy Lombard Street Research. Growth this year is expected to be closer to 8% than the 10% that has been the norm over the past 10 years.

There is also a deliberate effort by the Chinese authorities to shift the balance towards domestic consumption and away from exports. "It's not just about growth, it's about the structure of growth," says Shearing.

Commodity prices, including the cost of oil, have already begun to decline on world markets as a response to fears that China's apparently insatiable appetite for raw materials could start to slow – just as growth also declines in the rich world as a result of austerity and financial turmoil.

That could create problems for Brazil, which is heavily dependent on trade with China – now its largest export market, having been hoovering up raw materials such as iron ore and copper. One recent estimate suggested 8% of the world's entire production of copper was going into buildings in China.

Brazil also has its own domestic worries – it has experienced a rampant property boom in recent years, with house prices in Rio trebling since 2008, and mortgage borrowing soaring, and that raises the spectre of a potential crash. Shearing says: "They've had a credit boom, which has left some households looking overstretched."

Kevin Dunning, global economist at the Economist Intelligence Unit, warns that Brazilian growth could slow dramatically this year, to 2.2% – a rate more familiar in developed western economies.

In the medium term, most analysts expect the radical shift of economic power from the west to the emerging markets to continue, and India and China to lift millions more out of poverty. But the decision by China and India last week to contribute tens of billions of dollars to the International Monetary Fund's war chest for tackling the eurozone crisis underlined how nervous they are about their own vulnerability. As Europe and the US turn inwards to tackle their own crises, it could be a tough couple of years for the Brics.

For Gupta, the answer may be to target the growing middle-class at home – and expand beyond his traditional customers in the west, turning instead to India's emerging market rivals. "We've just sent some tea samples to China," he grins.