India Vs Brazil - a Macro-Economic View on the Past, Present and Future of the Two Countries

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Brazilian economy, in spite of its current successful growth story, has always been associated with the following three characteristics:

a) A suspicion for free markets (trade accounted for a modest 24% of GDP in 2008)

b) A faith in the wisdom of government intervention in business and finance;

c) A persistently high interest rates because of its bad tryst with inflation on two accounts. (The central bank’s headline interest rate is 8.75%, one of the highest real rates anywhere in the world)

Brazilian Political System: Under Luiz Inacio Lula da Silva

It seems now that Lula da Silva’s government is turning around the Brazilian economy with his impressive policies. Under his presidency, Brazil has not had to choose between infrastructure and the well-being of its people: it has made progress on both.

The success of his Bolsa Familia welfare programme has lifted more than 11 million families out of poverty in Brazil. At the same time, since 2007, Brazil has been pursuing what it calls the Programme for the Acceleration of Growth (PAC) which entails a public investment worth $290 billion and includes more than 100 ambitious infrastructure projects to fight ‘years of stagnation’

Mr. da Silva has been able to combine low inflation with sustainable growth. He has achieved that by increasing wages (minimum wage by 25%), providing social safety net programs, paying off external debt, promoting Brazilian exports and building large external reserves, investing in large infrastructure programs, and using state-owned companies such as Petrobras, Banco do Brasil and BNDES as instruments to keep investment and credit available while private companies keep their aversion to risk.

Several steps have been taken by the government to minimize the impact of the current crisis, including injecting more than U.S. $100 billion of additional liquidity into the local economy, providing tax cuts to manufacturers, and reducing Central Bank interest rates.

After Monetary and Fiscal Stimulus: The TradeThe Lula administration is also seeking expanded trade ties with developing countries, as well as a strengthening of the Mercosul (Mercosur in Spanish) customs union with Uruguay, Paraguay, and Argentina.

In 2004, Mercosul concluded free trade agreements with Colombia, Ecuador, Venezuela, and Peru, adding to its existing agreements with Chile and Bolivia to establish a commercial base for the newly-launched South American Community of Nations.

In 2008 Mercosul concluded a free trade arrangement with Israel. Mercosul is pursuing free trade negotiations with Mexico and Canada and has resumed trade negotiations with the EU. The trade bloc also plans to launch trilateral free trade negotiations with India and South Africa, building on partial trade liberalization agreements concluded with these countries in 2004.

In July 2006, Venezuela officially joined the Mercosul trade bloc; its full membership is pending ratification by the Brazilian congress. China has increased its importance as an export market for Brazilian soy, iron ore, and steel, becoming one of Brazil's principal trading partners and a potential source of investment.

Brazilian Governance: The Not-so Positives

- Productivity growth is sluggish.

- Government spending is growing faster than the economy as a whole, but both private and public sectors still invest too little, planting a question-mark over those rosy growth forecasts. Too much public money is going on the wrong things. The federal government’s payroll has increased by 13% since September 2008. Social-security and pension spending rose by 7% over the same period although the population is relatively young. Despite recent improvements, education and infrastructure still lag behind China’s or South Korea’s

- The legal system is dysfunctional. The crime rate is still high.

- There is a wide gap between the rich and poor. Much of the arable land is controlled by a handful of wealthy families, a situation which the Movement of Landless Rural Workers (MST) seeks to redress by demanding land redistribution. It uses direct protest action and land occupation in its quest. Social conditions can be harsh in the big cities of Rio de Janeiro and Sao Paulo, where a third of the population lives in favelas, or slums.

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India Vs Brazil: A Comparison

Parameters

Brazil

India

Government

Presidential Federal Republic

Federal Republic, Parliamentary Democracy

Population Rank

5th

2nd

GDP

$1.984 trillion

$3.298 trillion

GDP (per capita)

$10,465

$2,780

Gini (Inequality Index)

46.3

36.8

HDI Rank

75th

134th

Exports (Rank)

21st

23rd

Imports

27th

16th

Received FDI (2008)

16th

29th

Foreign Exchange Reserves (2008)

7th

6th

Public Debt

47th

29th

Cultivated

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