Brazil's big fall

The country's crises offer a cautionary tale for India

Till a few years ago Brazil, the world's seventh-largest economy, was a star among emerging markets. Fuelled by a global commodities boom, the economy grew seven per cent-plus in 2010, and under the charismatic President Luiz Inácio Lula da Silva, social policies combined with market-friendly economics saw a sharp reduction in poverty. In 2008, Standard & Poor's (S&P) first awarded Brazil investment-grade status, a remarkable turnaround for an economy that suffered a debt crisis in the 1980s and hyperinflation in the 1990s that required a bail-out by the International Monetary Fund. Yet, last week S&P downgraded Brazil's credit rating to junk status; the economy is expected to shrink three per cent in 2015; inflation is in double digits; and the Budget deficit is nearing nine per cent of gross domestic product or GDP.

Much of this is the result of waning demand from China, the principal buyer for Brazil's oil, ores and soya. But a large part of its problems is due to mishandling by the government of President Dilma Rousseff, Mr Lula's hand-picked successor, and the political instability surrounding a series of corruption scandals. Ms Rousseff was narrowly re-elected this October, after the economy grew just 2.2 per cent during her first term in office (2011-2014). This was far worse than other BRICS peers - or Nigeria and Indonesia, both comparable commodity-driven economies. Slowing growth, however, was not offset by the necessary fiscal discipline. As a result, the government's debt to GDP stands at 66 per cent - nowhere near Greece, but vastly problematic for an economy in which interest rates hover at 14 per cent. Several sharp cutbacks have been made in the past year on welfare spending, and utility prices have been raised. But a severe drought and the slowdown have constrained tax collection. All of this has reduced the government's room to manoeuvre - already narrow, since the bulk of government spending requires congressional approval or even constitutional change. Ms Rousseff's ability to focus on fixing the economy is also seriously curbed by the impeachment proceedings she faces. Her personal involvement in a bribes-for-contracts scandal of epic proportions involving state-owned oil producer Petrobras is unclear - there are accusations that the kickbacks were channelled to campaigns by the ruling Workers' Party - but she did chair the mammoth corporation that accounts for 10 per cent of Brazil's GDP during the period. This has raised questions.

Brazil's rapid descent into a slowdown and crisis represents a cautionary tale for India of the twin dangers of careless government spending combined with unchecked corruption. True, India does not suffer the same problems today as its South American BRICS peer: its economy is among the fastest-growing in the world. But it has also been experiencing a windfall gain of low oil prices, a counterpart of Brazil's commodity-driven crisis. And the confusions and paralysis brought on by scandals in telecom spectrum and coal mine allocations remain a stark reminder of the toxic effects of corruption.