The Samba connection

Does the Leftist government in Brazil hold any lessons for India?

As the markets fret about the influence of the Left on the current central government, many commentators have pointed to Brazil as an example of a Left-wing government that has been able to calm the fears of foreign investors and earn their confidence.

The idea is that a Leftist government, if it acts in a responsible manner, can actually drive markets up. But how closely does the Brazilian experience match our own?

In October 2002, Brazil's Workers Party candidate and former trade unionist Lula da Silva won the presidential elections. Unlike in India, opinion polls had correctly predicted his victory, leading to a sharp fall in the currency, in bonds and in stocks.

In the month before the election, the currency plunged 22 per cent. Brazil's stock market hit multi-year lows in October, because Lula had opposed economic reforms of the previous conservative government"" and around $6 billion fled the country in the three months before the election.

But soon after coming to power, Lula set out to soothe the markets. He pledged to keep spending in check, guaranteed the central bank more autonomy and promised to reform the pension system.

He agreed to the terms of a standby loan from the IMF, appointed a former executive of Fleet Boston Financial as head of the central bank and appointed a "sound finance" man as his finance minister. He passed tough tax reform laws and increased the budgetary surplus.

By January 2003, as investors sensed that Lula would continue to pursue sensible economic policies, Brazil's stock market index rallied 44 per cent from its October lows, while its currency firmed up by 20 per cent from its lows. The stock market index went up from 8600 in October 2002 to a stratospheric 22,200 by December 2003.

Does that mean that all the Congress-led government has to do is follow Lula's prescription and the markets will roar their approval? Well, the appointment of Manmohan Singh as Prime Minister and Chidambaram as finance minister are indications that the markets are being reassured. The finance minister's visit to Mumbai was supposed to be another source of comfort. And probably the budget will carry the soothing process forward.

But consider where Lula stands today. His erstwhile Left-wing supporters are accusing him of treachery, his plans for reform have hit a roadblock in the Brazilian Congress, and foreign investors are once again jittery.

The currency has fallen sharply in the past month , the stock market is down 10 per cent this year, and interest rates are edging up. Does this mean that a Left-leaning government can only go so far without alienating its support base? Perhaps.

But the more important fact to be reckoned with is that Lula started his term at a time when conditions were very favourable for emerging markets, with interest rates at record lows in the developed markets and a flood of liquidity engulfing emerging markets. Those conditions no longer hold.

As a matter of fact, why look at Brazil alone? Even the Venezuelan stock market, with a maverick left-wing anti-American President in charge, went up by two and a half times last year.

Simply put, ideology didn't matter when a rising tide lifted all boats. Now that the tide is ebbing and flows to emerging markets are reversing, a Left-leaning government may be a luxury the markets cannot afford.

Indian Oil

Indian Oil Corporation (IOC) sprung a positive surprise when it reported that operating profit in the March quarter was flat at Rs 2,573.4 crore.

Crude prices had skyrocketed during that period, but oil marketing companies such as IOC weren't allowed to raise retail prices. Marketing margins were obviously under pressure, because of which analysts expected a drop in profit.

But IOC made up by posting strong volumes. Marketing volumes rose 10.33 per cent last quarter compared with a flat trend in the first nine months. Besides, its refineries' throughput increased 11.5 per cent, higher than the 5 per cent growth recorded in the nine months till December.

Even pipeline revenues grew at a higher rate of 12.8 per cent compared with 8.86 per cent in the first nine months. Also, analysts' estimate of refining margins in the March quarter are as high as $6.25 per barrel, much higher than expected and the $5.3 margin reported for the full year.

Refining margins are expected to improve, because of an improved demand-supply situation and buoyant crude prices. Another comforting factor is that operating profit from pipelines amounted to Rs 2,400 crore or almost a fourth of the total operating profit.

Especially since this segment is practically immune from the vagaries of government policy and crude prices. Marketing margins, of course, would depend on what policy the new government takes.

With contributions from Mobis Philipose