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A macro-economic view on the past, present and future of the two countries
Table of Contents
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:
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.
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.
A look at their not so similar economic aspects Brazilian Economy in Numbers
Vs Indian Economy in Numbers
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. 6
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
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 stateowned 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. 8
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.
India Vs Brazil: A Comparison Parameters Government Population Rank GDP GDP (per capita) Gini (Inequality Index) HDI Rank Exports (Rank) Imports Received FDI (2008) Foreign Exchange Reserves (2008) Public Debt Cultivated Land Forest Area Rail Network Road Network Electricity Consumption Number of Mobile Phones Number of Internet Users Brazil Presidential Federal Republic 5th $1.984 trillion $10,465 46.3 75th 21st 27th 16th 7th 47th 5th 2nd 10th 4th 10th 5th 5th India Federal Republic, Parliamentary Democracy 2nd $3.298 trillion $2,780 36.8 134th 23rd 16th 29th 6th 29th 2nd 10th 4th 2nd 7th 2nd 4th
India Vs Brazil: Political structure and Policies: Similarities and Dissimilarities (1950-2003) Brazil (1950-1985): Democracy/Military Dictatorship 1985+:Democracy Multi-Party System (1950-1980): Import Substitution Policy, Liberalization started in 1990 National Development Plans-led Industrialization; India 1950+: Democracy Multi Party System (1950-1980): Import Substitution Policy, Liberalization started in 1991 National Development Plans-led Industrialization;
Development Plans structure: discontinuous No Industrial Licensing mechanism adopted Average Import Tariffs: 40% Quality of Institutions of technical education low; Stress on R&D-High (1950-1980): Many severe BoP crisis, Inflation high; External Debt/GDP ratio: High 1990+: Liberalization policies based on Washington Consensus Rapid tariff cuts; Privatization too rapid and on a large scale
Development Plans structure: continuous License Raj Era: Average Import Tariffs: 128% Quality of Institutions of technical education high; Stress on R&D-low (1950-1980): No severe BoP crisis, Inflation low; External Debt/GDP ratio: Low 1991+: Liberalization policies not based on Washington Consensus Gradual Decrease in trade barriers; Privatization excessively prudent hence fails to attract Private sector to provide basic services in infrastructure systems Again, steps taken were more prudent in this regard. 2003: FDI Flows/Gross Capital Formation = 4% FDI flows/GDP = 5.4%
Liberalization of Financial System accompanied by the opening of short-term capital Account - cited to be one of the most controversial steps in exposing Brazilian economy to 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%
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 Agriculture Industry Services India 17.6% 29% 53.4% Brazil 6.7% 28% 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.
India Vs Brazil: Sector-wise breakup of GDP contribution
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.
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 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
to India. There has been a considerable growth in the business process outsourcing and information technology services.
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.
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.
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.
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%.
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.
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
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.
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
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.
Age Structure (2007) Popul ation Growt h Rate .98% Birt h Rat e 1.6 % Dea th Rat e . 622 % Sex Ratio Infant Mortal ity Rate 2.67% Life Expecta ncy Total Fertili ty Rate 1.86 Litera cy
0-14 years: 26.7% 15-64 years: 66.8% 65 years and over: 6.4%
1.05m/f em (at birth)
0–14 years: 30.8% 15–64 years: 64.3% 65+ years: 4.9%
. 1.12m/f 64% em (at birth)
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 21
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.
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.
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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