Brazil has answers to India's biggest problem - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Brazil has answers to India's biggest problem 

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In this issue:
» Indian govt to miss fiscal deficit target by wide margin
» US Fed sets 2% inflation target
» Could austerity measures be making Europe's crisis worse?
» US to face three major financial challenges in 2013
» ...and more!


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00:00
 
What has been the main reason behind China's explosive growth rate over the past couple of decades? Why has India not been able to mimic that kind of growth? This is a question that we often confront. The answer is not very difficult to get. It is the nature of politics in both the countries that defines most of their dissimilarities. While China's economic surge has been propelled by aggressive central planning by an autocratic single-party regime, India's economic growth though appreciable, continues to suffer at the hands of a lousy democracy.

Does that mean autocracy is better than democracy for economic growth? Well, a country by the name of Brazil certainly chooses to differ. Brazil, which is the 6th largest economy today, has not only grown economically but has even become more socially equitable under a democratic regime since 1994. The country very clearly portrays the kind of phenomenal progressive change that can happen in a country if there are right leaders at the helm. Brazil was fortunate to have two visionary leaders. These leaders put their political careers at stake in order to implement some crucial public policies and structural reforms in the Brazilian economy. For instance, despite a strong lobby that preferred policies that would enable the wealthy few to corner the economic pie, President Lula da Silva (2003-11) expanded the social welfare and educational schemes and made sure they reached the real beneficiaries. What is commendable is that he did so while maintaining fiscal discipline.

Let us tell you that in the past, the rich-poor divide in Brazil was one of the worst in the world. But the economic inequality has consistently come down over the last two decades and is currently the lowest since 1960. Even more, as per Transparency International, Brazil is rated as the least corrupt among all BRIC (Brazil Russia India China) countries.

While both India and Brazil have emerged as powerful economies in the last decade, what differentiates Brazil is the fact that unlike India, the former's prosperity has indeed reached its millions of citizens. The main reason for this discrepancy is the stark difference in the leaders of both the countries. India's meek leadership is seldom successful in pushing much-needed strong reforms unless pushed to the brink of a crisis. We strongly believe our leaders have some serious lessons to learn from Brazil.

Do you think Brazil has the answers to India's problems? Share your comments with us or post your views on our Facebook page / Google+ page.

01:20  Chart of the day
 
The news just got worse for the Indian government. The fiscal deficit that has been worrying them has just burgeoned to Rs 1.5 lakh crores. This is nearly three times what was estimated just three months ago. Sluggish direct tax collections, mushrooming subsidy bills, and dismal disinvestment inflows have led to these fiscal troubles. The situation is so bad that the government is now counting on higher dividends from the cash rich PSUs to help bridge some of the gap. The combination of food, fertiliser and fuel subsidy has played havoc with the government's estimates since the budget was presented in 2011. It is no longer a question as to whether they will achieve the target but more a question of by how much will they miss the same.

Data source: The Mint
Target is 4.6% of GDP

01:50
 
If an entity improves its credit profile, the interest rate that it pays should fall, right? However, this does not seem to be happening with the Euro nations currently. The Economist points out how despite reducing their deficits, borrowing costs for countries like Germany, France, Spain and Italy have not gone down. This clearly indicates that investors seem to be focusing on short term rather than long term. As austerity is likely to hurt near term economic growth, people who are more interested in making money from speculation, will therefore focus on this near term trend and make their moves. From the economy's point of view however, this move is proving to be counterproductive. This is because an economy which is already under pressure from reduced Government spending will be hurt even more if its cost of financing goes up. Thus, going slow on fiscal tightening and not rushing things would be the way to go we think.

02:43
 
As the other major central banks do a better job of reining over macro-economic risks, the US Fed has consistently drawn flak for its myopic monetary policies. Printing money for short term benefits like liquidity and job creation has not brought in the desired results. On the contrary, the US faces the risk of unprecedented government debt to GDP and high inflation.

Hence, in a bid to soothe the nerves of economists and rating agencies, the Fed has diverted from its beaten track. It has now set an inflation target of 2%. This target will supposedly help the Fed keep its long term goals in line with the remedial measures needed to keep the US' debt burden in check. However, not everyone is happy with the set target. For many policymakers in the US believe that the inflation target will force the US Fed to put employment creation initiatives on the backburner. We are not sure if setting inflation targets are much of an achievement for central banks. Our very own RBI (Reserve Bank of India) has not had much success in meeting it over the past 12 to 18 months. Hence, what is important is that at least the US Fed recognises its mistakes.

03:15
 
If the world doesn't actually end in 2012, the US may have a tough battle ahead of itself in 2013. Three major events can actually spell the end to America's recovery efforts since the dawn of the financial crisis. By early 2013, the Congress needs to address critical legislation on Bush-era tax cuts, defense spending as well as raising the debt ceiling once again. Raising this level once again can further impact the giant's credit ratings. But it's not just the US that is expected to face a triple threat in 2013. According to renowned economist Nouriel Roubini, the world economy is also on shaky ground. A US double-dip recession, a Chinese slowdown and a European meltdown may take place in 2013. The pressure is on. Governments can either make it or break it come 2012-13. Going on a debt diet and having strong fundamental reforms are the need of the hour.

03:46
 
If the auto industry in India does well, the auto ancillaries sector is bound to be impacted positively. So it is no surprise that in a scenario where the e-commerce market in India is growing by leaps and bounds, e-commerce ancillaries should also find favour. E-commerce companies burn cash due to procurement, warehousing, logistics and delivery costs associated with every transaction. And many of them are shifting attention to providers of the above mentioned support services. E-commerce has seen growth explode in recent times. Online shops have been posting monthly revenue growth of 40-50% in a country with 100 m Internet users. Investors pumped at least US$ 500 m into the online shopping space across 68 firms in 2011.

And while many of these e-commerce companies found private equity funds or venture capitalists to fund their operations, the latter are also beginning to take an interest in companies providing support functions as well. So you have many companies which have sprung up and which offer services like payment platforms and solutions or courier services that are able to handle cash on delivery. All of this because the potential growth for the e-commerce industry is huge. But it must be noted that all e-start ups do not necessarily hold potential however big the opportunity and that is where the challenge lies. Indeed, the dot-com boom and bust is a painful reminder of the fact.

04:20
 
In the meanwhile, the Indian stock market shed some gains but still traded in the green. BSE Sensex was down up 100 points (0.6%). Barring banking, FMCG and realty stocks, all sectoral indices traded in the positive. Among the Asian stock markets, Indonesia (down by 0.2%), Singapore (down by 0.1%) and Japan (down by 0.1%) were on the losing end. All other indices displayed positive investor sentiment.

04:45  Today's Investing Mantra
"The fact that people will be full of greed, fear or folly is predictable. The sequence is not predicatable." - Warren Buffett

Click here to read our series on 'Lessons from Warren Buffett'
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11 Responses to "Brazil has answers to India's biggest problem"

Tikam Patni

Jan 28, 2012

There is nothing wrong in adopting democracy as a system of forming a government. The problem is in the way this system is practiced in India. A system that puts MMS, Deve Gowda, Chandrasekhar, Charan Singh as PM; Lalu, Malu, Yedi, Rabri , Maya, Mamta as CM; that allows Sonia, Rahul to own absolute power tells the story of it's misuse. And how many people in India voted for them to take these positions of power ??. May be a few lacs at best in a country of over one billion. Where is democracy????

Like 

R.Chandrasekaran

Jan 27, 2012

The basic principle of Human mind "explained by Psychological text"
is Hedonistic in nature, which is very much transparent and show as
a living example in our country`s politicians`attitude towards
grabbing wealth for feeding their own self.Till now we are longing
for a genuine leader, who is really an able person by all the spear
of, leading the nation to a harmonized & happy status.

Like 

PM MENON

Jan 27, 2012

Good point. Sure Brazil has some guidelines which India could emulate. However the answers to India's problems lie within India. The problems were created by few at the cost of many. Now the many have to find the solutions to solve these FEW.
Firstly corruption- Here the media and corporate leaders should show the moral courage to speak and do the truth and only the full truth, Bare facts verified . Not their take on issues. They should refrain from compromising on this for the sake of personal/company 's short term eprofits.( eg. much hyped anchors like in NDTV professing anti corruption stances while being themselves involved in scandals like NIIRA GATE, quite shamelessly?)
Second- people at large should spread information and enlightenment to lesser privileged around us. Start with the house maids, dhobi etc. dont tread on their rights for measly self gain. Inform them about what they can do to elect honest people.Let every one who employs a maid take a stake in educating one child of that maid so that he/she can have a chance to be something better equipped in life.
Third-Let us all start by being clean: mentally and physically. Keep ourselves clean, our surroundings clean. automatically the Nation becomes clean. After all WE ARE THE NATION.
Fourth- name and shame: All the big so called leaders/corrupt high society get away because they can hide in anonymity. The media should do clinical research into facts/statements and expose people for what they are.Do the bosses of these media houses have the guts? Why is only the lowly free lance reporter who digs into these and gets killed by the people who they try to expose?
The answers to India's problems lie within India. In the Billion plus, not elsewhere.

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manoharkantak

Jan 27, 2012

Brazil is a small country compared to India. India apart from being a huge country, has different religions, castes and cultures, which are highlighted by political parties for personal gains. Above all our politicians lack honesty, integrity, discipline and patriotism. They operate only to win elections and ruin the nation. Our problems are complex and complicated.

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Piyush Singh

Jan 27, 2012

There is one thing that appears to be common in almost all 'to-be-developed' countries: they all have a young middle class that was willling & ready to work; a massive bourgeois that longed for a fancier lifestyle; & a decent population size.

Brazil on the other hand, like India, also came out with flying colors; only, on a different trajectory. Their growth has been far more poised than India's - mainly in terms of wealth distribution. While industries flourished, they, unlike India, strikingly affected the lower & lower middle class - which composes the majority. Moreover, Brazil's story has one distinct dimension: it has been harbored by visionary leadership. Lula da Silva is accredited for bringing in the social reforms, & compassing more social & monetary equity in the country.

So, is India really lacking good leadership? Are most of us good only at doing jobs at night that no American would do for the same pay - even in the day-time? Are we a country that will always be known to supply cheap & trained labors?

I am not a cynic ridiculing every single effort made by every politician, or policy-maker, or enterprise owners, for that matter. Rather, I think it is our generation of Entrepreneurs - whose endeavors has, actually, manifested 'India's Growth Story'.

The essence of the this growth lies in the us - the Indians. But the big questions is: would we become libeled by what have we witnessed in the transition of a majorly undeveloped country to what it is, today; or do we try & build a nation whose spirit would be unfazed by the disruption of a saturated West.

We'd like to be a country which would work for itself, and care it's people!

Dont' we?

Like 

P.R.Chari

Jan 27, 2012

An apocryphal story has it that when the reforms of 1991 were being implemented Manmohan Singh usedto say, " I am only as powerful as my Prime Minister." Now that he is the Prime Minister, he cannot use that excuse. The problem with the Good Doctor is that he is a permanent number two, with none of the qualities required of a number one like courage of conviction and tenacity to stay the course. It is futile, therefore, to expect India to emulate Brazil--India can only emulate India.

Like 

Kalyan Ghosh

Jan 27, 2012

Although I agree that Brazil has done fairly well in many areas, I beg to differ that Brazil has answers to many of India's problem. I have been to Brazil many times.Their businesses are not competitive. Their tax structure is as lousy , if not more lousy, than in India and USA.Brazil protects its domestic industry through high tariffs.I can tell you that many of their industries will close , if the customs duty is brought down in Brazil.Also Brazil has a big advantage - raw materials , oil etc. India does not have that.In areas they are very good are their treatment of environment, management systems (copied from the Japanese)etc. but if you give them a situation which is not factored in their management systems , they are at a loss, unlike Indians, where we are best in abstract/lateral thinking.There is corruption in Brazil but I agree not as corrupt as in India. But their management teams are intellectually as corrupt as Indians are.Further, they are extremely nationalistic. They believe everything in Brazil is best, which is not correct.

Like 

Suresh Kumar

Jan 27, 2012

India is faced with a difficult combination of not-so-aware voters, immature coalition politics and poor leadership across political parties. Perhaps a national government would have been a better alternative if any single party had a single tall leader. Some of the better leaders like Nitish Kumar have very narrow support base.
One thing is certain that the electorate will value performance. The second, we need leaders with vision and passion to make a difference. Unfortunately, we can't find such a person among 1.3 billion people. Lulla invested in infrastructure, energy and simplified the tax structure. That made a huge difference in the Brazilian economy. We find this impossible to achieve.

Like 

Rajesh Menon (Guru30)

Jan 27, 2012

Brazil and India share democratic attitude in common, but Brazil is not into bureaucracy as much as India is. Hope that we in India unwind the procedures and become an equal opportunity country for everybody.

Like 

Arvind

Jan 27, 2012

There is no party in India which is not corrupt.Let us await for Lord Krishna's rebirth.The existing government will also blame him corrupt to make him run away!!!!!!!!!!!!!!
SOLUTION:AS IS SAID,CHARITY BEGINS AT HOME. ONLY EACH & EVERY INDIVIDUAL SHOULD TRY TO BE CORRUPTION FREE INSTEAD OF BLAMING OTHERS.

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