Brazil's long shadow

THE EARLY NINETIES WERE NO CARNIVAL for India and Brazil. While India was smarting from the shame of having to pledge gold for loans from the International Monetary Fund (IMF), Brazil was coming to terms with the fact that its president, Fernando Collor de Mello, had resigned to avoid impeachment for corruption. It fell upon two wise and able men, a Brazilian sociologist and an Indian economist, to restore their countries to stability. They were Fernando Henrique Cardoso, and, of course, Manmohan Singh.

Today, both countries’ fortunes are resurrected. Brazil is Latin America’s rock star, and India’s No. 1 position in South Asia is unchallenged. Both economies are vibrant enough to attract the attention and investment of the world.

Their trajectories over the past two decades have striking similarities. But it’s the differences that India needs to pay attention to. While India remains smug about its growth, the land of beautiful beaches, football legends and samba dancers could pip it to become the most important BRIC (Brazil, Russia, India and China) economy after China.

“Right now, Brazil’s GDP growth rate is closer to China’s, and has surpassed India’s,’’ says Marcelo Neri, chief economist at the Centre of Social Policies, affiliated to the Getulio Vargas Foundation, in Rio de Janeiro. “I bet Brazil will tie for first place with China in 2020.’’ In the last decade, India’s growth rate has been higher. But Brazil crossed the 8% mark for the first time in the first quarter of 2010.

IT’S BEEN A LONG JOURNEY. Singh is still in the saddle, his second stint as prime minister. In Brazil, Cardoso made way in late 2002 for Luiz Inácio Lula da Silva, who will leave office this year after two successful terms as president.

In the early 1990s, when Singh and Cardoso were both first-time finance ministers, the mandate from their party bosses was clear: turn around the battered economy as painlessly as possible at a time when the morale of citizens had hit rock bottom and the financial situation was precarious.

Fortunately, the two men’s prescriptions were just what their economies needed. Cardoso, as Brazil’s finance minister (1993-94) and president (1995-2002), not only reined in hyperinflation—around 764% when he took over—but also pushed through policies that fostered economic stability. He converted the fixed exchange rate into a floating rate that better reflected the realities of the global economy, and introduced the new Brazilian currency, the real. The New York Times lauded him as “Brazil’s great stabiliser’’, who linked neo-liberal policies with social reform.

Similarly, Singh’s market-friendly reforms of 1991 opened up the Indian economy, reduced state intervention in domestic policy and made much-needed structural changes.

DESPITE SIMILARITIES—a stable multi-party democracy, left-of-centre ideology, a multi-ethnic and unequal society, rampant poverty, poor infrastructure, and similar ambitions—Brazil hardly figures on India’s radar.

China’s decades-long red-hot economic growth, and strategic and diplomatic leadership have contributed to what some Indian scholars call the “China obsession’’. There’s also an emotional angle: The scars of 1962, when India lost 90,000 square kilometres of territory to China, have yet to heal. With its focus on China, India has ignored the rise of Brazil. The prospect of the South American nation outscoring India and matching China’s growth is not a figment of Neri’s imagination. The numbers bear him out. In the first quarter of 2010, Brazil’s GDP growth was 10% higher than the first quarter of 2009. This is the highest since 1995.

To outperform Brazil, India needs to grow at a steady 8.5% a year (as it did in 2004-05 and 2008-09). For now, it can breathe easy: The IMF estimates that India will grow by 9.5% in 2010 and Brazil, 7.5%. Still, economic greatness is about more than just growth rates. It’s the size of the economy, GDP per capita (loosely defined as the average income of people), fiscal and primary deficit, debt-to-GDP ratio, and ease of foreign investment. India falls short on most counts.

Brazil’s GDP per capita is three times India’s. It is financially fitter, with a lower debt-to-GDP ratio of 60 (India’s has risen to 72 in 2010), says Daniel Tenengauzer, head of global emerging markets economics and fixed income strategy, Bank of America Merrill Lynch, London. That means India has a greater debt burden—and more repayment problems—than Brazil. As for other fiscal indicators, the less said the better. The Indian government runs a high combined fiscal deficit (the total expenditure of the states and the centre exceeds their revenue) of 11% and current account deficit. Brazil has a primary surplus and manageable current account deficit. What this means is that India’s defence against a downturn is weaker than Brazil’s, because it will need to borrow more for day-to-day functioning. And that crowds out the private sector, pushes up interest rates and increases the probability of a credit rating downgrade.

Stock markets—a good indicator of a country’s future health—favour Brazil as well. The Bovespa in São Paulo, with a market cap of $1.5 trillion (Rs 69.3 lakh crore) from 450 companies, is slightly ahead of the Bombay Stock Exchange (market cap: $1.03 trillion, but from about 5,000 companies). However, this is not the only reason why Brazil is the new darling of foreign investors. “It’s far more open to foreign capital than India, despite a flat 2% tax on capital inflows,’’ says Tenengauzer, who tracks both India and Brazil.

India’s restrictions on foreign investment in the corporate bond market and in government securities and treasury bills are grit in the shoes of global fund managers. Offshore investors can’t put more than $5 billion totally in Indian government securities and treasury bills, and $15 billion in corporate bonds. But Brazil is open, as long as foreign fund managers pay the 2% tax. “You just open an account in Brazil and start trading,’’ says Tenengauzer.

The ease with which foreign capital can flow in means that Brazil, despite its low savings rate—around 16.7% of GDP compared to India’s 33%—can hope to grow at 6% to 7% without funding issues. Deficits can be made up with funds from abroad. “Our economy, based on rising employment and income, expansion of credit and increasing production, has started a virtuous cycle of foreign investment,” says Marco Brandão, Brazil’s ambassador to India. “As the economy grows, the savings rate will grow.’’

The perception outside Brazil is similar. In its 2009 report, Ignore Brazil At Your Own Peril, global investment firm Goldman Sachs notes that, in addition to having a young and rapidly expanding population, Brazil is in the throes of a commodity boom. It’s already self-sufficient in oil and its recent huge offshore find makes it more attractive—some 12.6 billion barrels of proven oil in 2007, according to an Oil and Gas Journal report. The reserves, to be developed by oil major Petrobras, will make Brazil an exporter by the end of the next decade. Brazil is already a leading exporter of coffee, sugar, beef, orange juice, soya, iron ore, Embraer aircraft, auto parts, ethanol and so on. Diversified exports to many countries have helped Brazil emerge faster from the global downturn than most countries.

Goldman Sachs’ report also says the government is likely to pour money into the 2014 FIFA World Cup and the 2016 Olympics in Rio. Emerging economies use international sports events to show they have arrived: Brazil has the mandate for two of the most watched global sporting events, something India can only wish for.

The report adds that valuations and risks in Brazil are low compared to other markets after its rating was raised to investment grade in 2009. It expects the Bovespa to rise 30% by end-2010. Tenengauzer concurs that while Indian stocks are fairly valued, Brazilian stocks are still undervalued. It’s the sort of thing that attracts investors in droves.

Brazil’s growth creates opportunities for India Inc. Brandão highlights information technology and pharmaceuticals in particular. Early birds such as Tata Consultancy Services, Dr. Reddy’s Laboratories and Ranbaxy Laboratories are already reaping the benefits, but there’s room for more. Lula’s universal health care plan will create opportunities in generic drugs. “There aren’t many generic players in Brazil, so Indian companies have a great opportunity,’’ says Brandão.

Brazil’s large-scale sugarcane cultivation and success in ethanol production have attracted attention here. Shree Renuka Sugars, a leading Indian exporter, made two acquisitions—Vale Do Ivai S.A. Açucar E Alcool for $82 million and Equipav S.A. Açucar e Alcool for $250 million—in three months up to February 2010. “Unlike India, foreign ownership of farmland is allowed in Brazil, so supply is assured,’’ says a senior official at Renuka Sugars. Other advantages in Brazil include large farm sizes, a high level of mechanisation, and easy availability of land and water—Brazil has the world’s largest freshwater reserves. More important, waterways and roads allow easy access to ports.

Indo-Brazilian trade has grown steadily from $1.98 billion in 2005-06 to an estimated $6 billion this year, and likely to cross $12 billion by 2012, says Roberto Paranhos do Rio Branco, president, Brazil-India Chamber of Commerce. India enjoys a trade surplus, which has risen from $462 million in 2006-07 to $1.5 billion in 2008-09. But, Branco adds, awareness about Brazil is still low. He points to opportunities for Indian businesses in edible oils, pulses, wheat, sugar, metals and minerals, and crude oil. India already imports many of these commodities, and demand is likely to rise. Opportunity knocks, but is India Inc. listening?

BOTH BRAZIL AND INDIA have preserved and built on the foundations laid by Cardoso and Singh. S.P. Ganguly, professor at Jawaharlal Nehru University’s centre for Latin American Studies, says Lula’s reforms have been even more wide-ranging than those of his predecessor. “Not only did he strengthen market-friendly policies, he co-opted the labour force into the production process, maintaining the fine balance between labour- and capital-intensive industries.” Adds Brazil-India Chamber of Commerce’s Branco: “Today, there are no strikes in Brazil.’’ That’s something neither India nor China can claim.

Lula has also focussed on measures to reduce poverty and income inequality while continuing with the reform process, says Brandão. The innovative Bolsa Familia programme provides 12.5 million of the poorest families a maximum monthly stipend of 200 reais ($111 or Rs 5,200)—the world’s biggest conditional cash transfer programme. “It has helped reduce poverty and brought some semblance of equality to a notoriously unequal society,’’ says Brandão.

India’s Bolsa Familia—the Mahatma Gandhi National Rural Employment Guarantee Act, which provides 100 days of work a year to each rural household—has similar intentions. But the results are mixed. “The leakages in the Indian system are far greater than in Brazil. Accountability is much higher there,’’ says Ganguly.

There’s no question that Brazil is ahead of India in improving social conditions. The number of people below the poverty line has dropped from 49.5 million (28.5% of the total population) in 2003 to 29 million (16%) in 2008—and life expectancy is relatively high, ­says Neri. A recent study by the Brazilian Institute of Applied Economic Research, titled Poverty, Inequality and Public Policy, shows that from 2003 to 2008, the rate of extreme poverty (the proportion of people earning a quarter of the minimum wage or less) fell by an average of 2.1% a year. Absolute poverty (people earning half the minimum wage) fell by 3.1% a year.

Income inequality, too, is declining. Between 2003 and 2008, says Neri, the per capita income of Brazil’s richest 10% grew 3.9% per year, while the income of the poorest 10% grew at a remarkable 9.6%. India is still debating the numbers of its poor. Suresh Tendulkar, economist and former chairman of the Prime Minister’s Economic Advisory Council, says that 37% of Indians are below the poverty line—more than the Planning Commission’s estimate of 26%. Whatever be the case, Brazil has a smaller absolute number of poor people than India.

And Brazil’s rising middle class—a global phenomenon also seen in India and China—is more willing to revel in its successes. As R. Viswanathan, India’s ambassador to Argentina, Uruguay and Paraguay and former consul general in São Paulo, wrote in the Latin American Business Chronicle last December, the city with the most private jets and helicopters is not New York or Tokyo, but São Paulo. “Tiffany and Bulgari have more stores in São Paulo than in any other city. São Paulo has the largest Ferrari sales and the second-largest Lamborghini and Porsche sales in the world.” What business ignores people who spend like that?

A strong consumption-led middle class is a buffer in a global recession. Importantly, most middle-class Brazilians work in the organised sector, where jobs have doubled since 2004. Inequality in schooling is declining, says Neri. Brazil benefits, too, from the overall rise of Latin America, where it enjoys amicable ties with neighbours. (Its last fight was with Paraguay 140 years ago.) Latin America is its biggest trade partner. “In the first quarter of 2010, sales to Latin America increased by 42.8%, placing it in the first position as a buyer of Brazilian products,’’ says Brandão.

For sure, Brazil has its share of serious problems: one of the highest taxation rates in the world, an unequal society, inadequate infrastructure and corruption. But these are internal problems that can be fixed by a strong government.

For India, the big picture is sobering. Goldman Sachs, whose economist Jim O’Neill coined the acronym BRIC, has created a measure to monitor the growth environment of countries. The parameters include fiscal policy, education, political stability and use of communications technology. According to a 2008 report by O’Neill and his colleague Tushar Poddar, India’s overall score was the lowest among the BRIC nations. On seven of 13 parameters, India was below the developing-country average.

India, of course, has some strengths. It has a high savings rate, which makes for more sustainable growth. Its lower tax rates provide greater incentives for entrepreneurship. With a strong legal system and innovative companies, India has proven it can do business. Now, it just needs to show the world that it can also throw a good party.