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India Vs Brazil

A macro-economic view on the past,


present and future of the two countries

Table of Contents

Introduction..........................................................................................................2
How similar are Brazil and India in the present context?.....................................3

A look at their not so similar economic aspects...................................................4

Brazilian Political System: A brief historical overview..........................................5

Brazilian Political System: The Present................................................................5

Brazilian Political System: Its role........................................................................5

Brazilian Political System: Under Luiz Inacio Lula da Silva...................................6

After Monetary and Fiscal Stimulus: The Trade....................................................7

Brazilian Governance: The Not-so Positives.........................................................7

India Vs Brazil: A Comparison..............................................................................8

India Vs Brazil: Political structure and Policies: Similarities and Dissimilarities


(1950-2003).........................................................................................................8

Gross Domestic Product.....................................................................................10

India Vs Brazil: Sector-wise breakup of GDP contribution..................................11

India Vs Brazil: Comparison of key macro-economic indicators.........................13

Demographics....................................................................................................16

References:........................................................................................................19

References:

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Introduction

In the present text, we attempt to understand the similarities and dissimilarities


between the two BRIC Nations: Brazil and India with respect to their respective
economic growth- the past, the present and the future.

Both the nations are strikingly similar in many aspects. They had similar policies
between 1950-1980 (Import Substitution, trade barriers, etc.), started their
liberalization process at approximately the same time (early 1990s) and both of
them, for a very long time, have had a stable democratic form of government.

So why has Brazil, historically, not been able to clock similar GDP growth rates as
that of India? Well, the political policies adopted in the 90s were similar yet different
in the ways the two countries went about implementing the guidelines. We explain
this in the first part. We also explain some of the major steps taken by the Brazilian
government during its democratic regime (under Fernando Henrique Cardoso (1990
-2003) and Lula da Silva (2003 – present)) to solve some of the most recurrent
problems faced by the Brazilian economy (high inflation, high inequalities, etc.)

What is the current state of economic well-being in the two countries? We take a
look at some of the macro-economic factors for both the giant economies and
understand their respective strengths and weaknesses. (Ex: Brazil’s GINI index is
very high implying an economic growth with large inequalities in the society)

Which amongst the two nations is better placed in the future- India or Brazil? We
finally end our discussion by taking a look at one of key drivers of economic growth:
Demography: The quality of Labor force in both these countries. This shall allow us
to take a quick look at what does the future hold in store for the two countries.

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How similar are Brazil and India in the present context?

According to the latest Mckinsey Quaterly report, Brazil and India have both
managed to revive most of the Macroeconomic and Financial parameters in
the wake of the Global Financial Turmoil.

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A look at their not so similar economic aspects
Brazilian Economy in Numbers

Vs
Indian Economy in Numbers

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Brazilian Political System: A brief historical overview

Brazil gained its independence in September, 1822 from Portugal and ever since the
monarchy rule was overthrown in 1889, Brazilian political system has swayed
between military dictatorship which can be traced back, as recently as, to 1985 and
Democracy which has had a continuous run of success only after the civil rule
returned in 1985.

The re-election of Luis Inacio Lula Da Silva in 2006 has finally proved that Brazil has
succeeded in achieving its long sought political stability.

Brazilian Political System: The Present

The current form of government is that of a democratic republic, with a presidential


system. The president is both head of state and head of government of the Union
and is elected for a four-year term, with the possibility of re-election for a second
successive term.

Brazil has a federal character based on the union of three autonomous political
entities viz. the States, the Municipalities and the Federal District. The Constitution
has defined explicit roles for the three branches of the government: executive,
legislature and judiciary.

Brazilian Political System: Its role


Now having dealt with the facts let us turn our attention to the role played by the
Brazil’s political system so far in its economic growth.

Much of the country’s current success was due to the good sense of its recent
governments, in particular those of Fernando Henrique Cardoso from 1995 to 2003,
which created a stable, predictable macroeconomic environment in which
businesses could flourish.

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During 1990s as the then FinMin, he controlled the inflation which was hovering
around 764% by introducing a new currency –the current Real- in 1994. In 1999,
during his presidency the exchange-rate peg was abandoned, the currency was
allowed to float and the central bank was told to target inflation.

Both federal and state governments now have to live within their means. A
requirement to run a primary surplus (before interest payments on the public debt)
was introduced in 1999, and the federal government has hit the target for it every
year since. This has allowed Brazil to get rid of most of the dollar-denominated
foreign debt that caused such instability every time the economy wobbled. Now
international creditors trust the government to honor its commitments. Moody’s, a
rating agency, elevated Brazil’s government paper in September to investment
grade just as the governments of many richer countries fretted about being able to
meet their obligations.

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

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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 Trade


The 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.

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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 46.3 36.8
Index)
HDI Rank 75th 134th
Exports (Rank) 21st 23rd
Imports 27th 16th
Received FDI (2008) 16th 29th
Foreign Exchange 7th 6th
Reserves (2008)
Public Debt 47th 29th
Cultivated Land 5th 2nd
Forest Area 2nd 10th
Rail Network 10th 4th
Road Network 4th 2nd
Electricity 10th 7th
Consumption
Number of Mobile 5th 2nd
Phones
Number of Internet 5th 4th
Users

India Vs Brazil: Political structure and Policies: Similarities and


Dissimilarities (1950-2003)
Brazil India
(1950-1985): Democracy/Military 1950+: Democracy
Dictatorship
1985+:Democracy
Multi-Party System Multi Party System
(1950-1980): Import Substitution (1950-1980): Import Substitution
Policy, Policy,
Liberalization started in 1990 Liberalization started in 1991
National Development Plans-led National Development Plans-led
Industrialization; Industrialization;

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Development Plans structure: Development Plans structure:
discontinuous continuous
No Industrial Licensing License Raj Era:
mechanism adopted Average Import Tariffs: 128%
Average Import Tariffs: 40%
Quality of Institutions of Quality of Institutions of
technical education low; Stress technical education high; Stress
on R&D-High on R&D-low
(1950-1980): Many severe BoP (1950-1980): No severe BoP
crisis, crisis,
Inflation high; External Debt/GDP Inflation low; External Debt/GDP
ratio: High ratio: Low
1990+: Liberalization policies 1991+: Liberalization policies not
based on Washington Consensus based on Washington Consensus
Rapid tariff cuts; Gradual Decrease in trade
Privatization too rapid and on a barriers;
large scale Privatization excessively prudent
hence fails to attract Private
sector to provide basic services
in infrastructure systems
Liberalization of Financial Again, steps taken were more
System accompanied by the prudent in this regard.
opening of short-term capital 2003:
Account - cited to be one of the FDI Flows/Gross Capital
most controversial steps in Formation = 4%
exposing Brazilian economy to FDI flows/GDP = 5.4%
the instability of the world
economy and for rendering its
fiscal and monetary policies
ineffective to sustaining
economic growth
2003:
FDI flows/Gross Capital
Formation = 11.4%; FDI
flows/GDP = 25.8%

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Gross Domestic Product
Gross domestic product (GDP) means the market value of all the services and goods
that are manufactured within the territory of the nation during the specified period
of time.3 Sectors constitute the GDP which are the Agricultural Sector , Industrial
Sector and Services Sector.

Country India Brazil


Agriculture 17.6% 6.7%
Industry 29% 28%
Services 53.4% 65.3%

Now we will look at the scenario of each sector in both India and Brazil and show a
comparison between the two countries with parameters of economic growth,
inequalities, ease of finance and infrastructure.

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India Vs Brazil: Sector-wise breakup of GDP contribution

India
Agriculture

Agriculture has always been one of the mainstays of the Indian Economy. If you
consider agriculture and its allied sectors, then the contribution of Agriculture to
GDP would go up to 22 %. 65-70 overall population is dependent on agriculture for
their livelihood .The Agricultural output is heavily dependent on the monsoons that
hit the country during the summer period. The low productivity prevalent in the
Agricultural sector in India is due to large amount of agricultural subsidies which are
hampering the productivity enhancing investment. Overregulation of agriculture has
increased costs and farmers across the country are still using out dated methods for
cultivation. Water allocated is inefficient and only around 55 % of all farm land has
suitable irrigation. Therefore the Agricultural sector is heavily dependent on the
monsoons.

Industry

The Industry Sector in India is the 14th largest in the world with regard to factor
outputs. The sector is made up of manufacturing, mining, quarrying, electricity,
textiles, water supply and gas sector and employs over 17 % of the overall
workforce. 1/3rd of the labour force in the Industry sector deals with simple
household manufacturing only. One of the main reasons the Industry Sector has
begun to thrive is due to the consumption of goods increasing greatly within the
country, with more and more companies growing and expanding therefore needing
higher consumptions. Industrial goods are being exported in huge quantities as well.

Service Sector

Service sector contributes the highest to the Indian GDP with an overall
contribution of 53.4 % and provides employment to over 23 % of the overall
workforce. In 1950, services would contribute only 15 % of the Indian GDP hence
the service sector in India has increased significantly. The industries coming under
the service sector in India are construction, trade, hotels, transport, restaurant,
communication and storage, insurance, banking, business services and real estate.
The reason the Service sector has increased rapidly in India is because many
foreign consumers have shown interest in the country’s service exports. This is due
to the fact that India has a large pool of highly skilled, low cost, and educated
workers in the country. Therefore all the services available in the country of the
best quality. Foreign companies have seen this and started outsourcing their work

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to India. There has been a considerable growth in the business process outsourcing
and information technology services.

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BRAZIL

Agriculture

The agriculture business accounts for around 37 % of the brazil workforce and is a
large exporter of sugar and ethanol .Soybean and maize are the primary crops
produced .The government plays a very significant role in assisting farmers by
providing them with credit , research and extension programs.

Industry sector

Brazil has the third most advanced industrial sector in the Americas and accounts
for almost 1/3rd of the GDP. It also provides jobs for more than 27 % of the overall
population. Brazil’s diverse industry ranges from automobiles, steel and
petrochemicals to computers, aircraft and consumer durables .Brazil has a large
amount of proven mineral resources with large iron and manganese reserves.
Minerals like nickel, tin, chromite, uranium etc are present in great quantity but one
of the shortcomings of the industry is the shortage of high quality grade coal
required.

Service Sector

The Service Sector accounts for 65.3 % of the gross domestic product .The
government have participated in this sector greatly with interests in land, air, and
water transportation. Around 42 % of the workforce is employed in this sector
.Although the services sector has been growing , sectors like Information
technology are heavily regulated to protect the interest of the domestic producers .
This is indirectly hampering growth and not only is subsidies being provided to
these IT companies but there is a lack of competition in the economy.

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India Vs Brazil: Comparison of key macro-economic indicators
Economic Growth

Brazil grew rapidly to middle-income status with dramatically high rates of


economic growth in the late 1960s and early 1970s. However, it has experienced
extreme macroeconomic volatility and, over recent years, has recorded negligible
rates of economic growth.

India, on the other hand, has a relatively low level of per capita income and due to
the high level of FDI’s and FII’s exiting the market, the Indian growth has reduced to
around 6%.

Inequality

Brazil has some of the highest levels of economic inequality in the world, a fact that
is reflected in substantial disparities between regions in per capita income and
economic growth. Brazil’s richest area, the Federal District in south-east Brazil, has
a per capita income that is some seven times greater than that of the poorest state,
Maranhão which is in the north east.

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In India as well, the economic inequality is seen as the Per capita income in
Maharashtra is triple that of Bihar and the rapid growth rates of prosperous states in
the far north and south have fast outstripped the negligible improvements of poorer
states such as Madhya Pradesh, Orissa, and Rajasthan

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Taxes

Between India and Brazil, the administrative and financial burden of taxation rates
in Brazil are much more serious .The burden of taxation on firms in India is in line
with international norms and India could work to lessen the number of tax payments
made by firms.

The Brazilian tax system is complex and burdensome. The tax burden reached
almost 40 % of GDP last year hence a disproportionate proportion is raised through
taxes.

In India recent reforms have attempted to simplify tax registration procedures,


although the administrative and financial burden of tax payments is still slightly on
the higher side.

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Ease of Finance

In Brazil, three-quarters of managers cited the cost of finance as a constraint on the


growth of their business. Over 50% of Brazilian firms which claim to need loans opt
not to apply, citing reasons such as complicated application procedures, high
interest rates, and strict collateral requirements. Lending rates in Brazil remain
above 50 % even though they have come down in the recent past. 75 % of small
businesses have bank credit lines and overdraft facilities.

In India, the corresponding figures are just 16%. Access to external financing is a
cause for concern for small firm’s as only 54 % have bank credit lines and overdraft
facilities. SMEs in India also lack access to credit due to the absence of reliable
credit information.

INTEREST RATES BY FIRM SIZE

Infrastructure

In Brazil, while it seems clear that the quality of transport and electricity provision is
negatively affecting firm performance, firms do not cite infrastructure as an
important obstacle to growth.

Firms in India, on the other hand, are very concerned about the effect of deficient
infrastructure on productivity. Power supply is identified as the most problematic
element, with nearly a third of businesses rating it as a major or severe bottleneck.

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Demographics
Age Popul Birt Dea Sex Infant Life Total Litera
Structure ation h th Ratio Mortal Expecta Fertili cy
Growt Rat Rat ity ncy ty
(2007) h e e Rate Rate
Rate

Bra 0-14 years: .98% 1.6 . 1.05m/f 2.67% 72.24 1.86 88.6
zil 26.7% % 622 em (at %
15-64 years: % birth)
66.8%

65 years and
over: 6.4%

Indi 0–14 1.55 2.1 . 1.12m/f 3.15% 69.89 2.72 61%


a years: 30.8% % % 64% em
15–64 (at
years: 64.3%
birth)
65+
years: 4.9%

The BRIC countries share certain characteristics, such as large populations, swiftly developing economies
and, for some, high levels of natural resources on which to draw. Rapidly increasing incomes and huge
consumer numbers offer consumer goods company’s ample business opportunities. The BRIC countries are,
however, set to diverge both in terms of economic development and demographic make-up, two of which are
India and Brazil.

Brazil and India are both important members of the BRIC quartet offering high
consumer potential and could overtake economies of the developed world by 2050.
Brazil and India are experiencing a demographic shift, which will affect the
development of consumer trends in each.

Rate of Population Growth

Both the countries have a large and varied labour force and consumer market.
India’s population stands at 1.2 billion and Brazil’s at 196.6 million.

India’s population grew by 1.4% annually in 2009, while Brazil’s population grew by
1.2%. Over the 2009-2020 periods India’s population will grow by 1.2% and Brazil
by 1.0%.

Therefore both countries are striving towards lower growth rates, which may be
construed as necessary for India due to its already large population size, but for

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Brazil this might turn out to be anti-productive, due to the relatively smaller size of
its population, resulting in lesser number of people in the labour force.

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Demographic/Population Dividend

Dependency ratio is the total number of individuals above 64 years of age or below
15 years of age, divided by the population in the age group of 15-64 years of age
(working class). For India the ratio is approximately 0.6, compared to Brazil’s 0.5.
But what makes India’s position more favourable is the expectation of this ratio
falling considerably over the next 30 years. This is due to the fertility rate falling
from 3.8 in 1990, to 2.9, and is expected to fall further. Since women had high
fertility before, there is a sizeable chunk of the population in the 0-15 age group,
once this bulge moves into the working age category, the relative number of
children should be small, and this is what is called Population dividend.

In 2020 the average age of an Indian will be 29 years, compared to 37 for China,
and 48 for Japan; and 2030; India’s dependency ratio should be just over 0.4.
Therefore giving India the following benefits,

1. Rise in the relative number of bread winners


2. With fewer children being born, more women will join the work force
3. Rise in savings rate (current 30%), due to lesser children, and more working
class

Shifting Demographics

As the population grows in each country, the population makeup will experience a
change as well. This will have a tremendous impact on each country’s economic
growth and consumer spending pattern.

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Among all the BRIC countries, India will have the largest percentage of its
population falling into the <15 age group by 2020. 26.7% of its population will be
under 15, as a result of high population growth.

The youth can be considered as potential labour force, as well as a potential


consumer market as they begin working life. Compared to Brazil, India has a lesser
percentage of the population in the >65 bracket, as well as a greater percentage in
the <15 bracket.

Leveraging the Colonial Past

India has another distinct demographic advantage over Brazil, the population’s
comfort level with the English language. This can be attributed to its colonial past.
British India left behind an education system with emphasis on the English language
– resulting in the creation of a vast pool of English speaking middle class. Today this
has translated into a business environment which is conducive for MNC’s, therefore
encouraging investments in India, as well as employment of Indians.

GDP per capita (purchasing price parity)

In 2008, GDP per capita in Brazil was $5,962 as compared to $2,829 for India. By
2020 this is forecast to rise to $17,563 for Brazil and $7,129 for India. Here Brazil
has a distinct advantage due to a smaller population, putting less burden on the per
capita income.

Consumer Spending

Private final consumption expenditure totaled 60.7% in Brazil compared to 55.7% in


India. Suggesting potential room for more growth. This points at greater
consumption growth in India, due to a larger savings rate than that of Brazil. MNC’s
and local businesses alike would consider this as an incentive to set up shop in
India.

Conclusion

In Many area’s India and Brazil see eye to eye from a demographic stand point.
Both countries have a diverse population, with varied cultures and languages. But
India has one particular USP, it’s potential population dividend, which if reaped
successfully by the Indian government, can allow the country to race ahead Brazil.

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References:
https://www.mckinseyquarterly.com/Americas/Whats_ahead_for_business_in_Brazil_
1967

http://www.economist.com/countries/Brazil/

http://www.unctad.org/en/docs/osgdp20073_en.pdf

http://www.economist.com/opinion/displaystory.cfm?story_id=14829485

http://en.wikipedia.org/wiki/Brazil

http://www.economist.com/opinion/displaystory.cfm?story_id=14845197

http://www1.american.edu/initeb/js5518a/Country-analysis-brazil.html

http://www.ssb.no/voorburg2009/documents/papers/The_service_sector_in_Brazil.pd
f

http://www.economiaetecnologia.ufpr.br/textos_discussao/texto_para_discussao_an
o_2008_texto_05.pdf

http://business.mapsofindia.com/india-gdp/sectorwise/

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