Country Profile: Brazil

• Brazil is the 8th largest economy in the world according to PPP (Purchasing Power Parity) and 9th on nominal basis.
• Newly elected president Jair Bolsonaro is attempting various stimulus measures to revive the economy, suffering from the impact of the recession in 2015-16.
• India’s exports to Brazil reached an all-time high in 2014 at US$ 7.1 billion, after which Brazil was hit by the recession that impacted exports.
• Brazil is signalling an openness to free trade of late, and it is an opportune time for both countries to explore and exploit complementarities in the relationship. Expansion of the India-MERCOSUR PTA needs to be expedited.

Brazil is the 8^th largest economy in the world according to PPP (Purchasing Power Parity) and 9^th on nominal basis. GDP reached US$ 2.31 trillion in 2018 (World Bank, constant 2010 US$), growing by 1.1% YoY. Simultaneously it is also recovering from the recession that hit the economy in 2015 and 2016, and is ranked as the worst in its history. GDP shrunk by 7% during that period.

The risk continues to persist, as Brazil’s economy contracted by 0.2% in the first quarter of 2019. Plummeting commodity prices, reduced export revenues and investment have enervated Brazil’s real (the country’s currency) revenues. The weaker real made existing public debt, which was largely denominated in foreign currency, more expensive. Lower tax revenues strained the government budget.

Sanctions against some of the largest firms post-2015 in Brazil have limited their business scope and opportunities. In addition, foreign investment in these companies has declined because of the scandals.

Under its new president President Jair Bolsonaro who is a passionate advocate of free markets, Brazil is trying various stimulus measures including a US$ 11.2 billion injection for workers in the form of a severance fund. Employers pay into this fund, and workers will be permitted to withdraw upto 500 reais or US$ 133 per year.

Brazil is a member of the Common Market of the South (Mercosur), a trade bloc including Argentina, Paraguay, Uruguay, and Venezuela. After the Asian and Russian financial crises, Mercosur adopted a protectionist stance to guard against exposure to the volatility of foreign markets.

Brazil and its Mercosur partners have pledged to open the bloc to more trade and investment, but changes require approval of all five members, which makes policy adjustments too difficult to enact. Recently, the bloc signed an agreement with the EU and Bolsonaro is now looking optimistically towards a MERCOSUR-US trade deal.

Macroeconomic Snapshot of Brazil

Coffee carries a special place in Brazil’s economic history. Brazil benefitted from swift growth of coffee consumption in the late 19^th century, with the country producing nearly 75% of all coffee produced globally around the turn of the century. It made the country very reliant on this sector. It is evaluated that coffee exports were equal to more than 10% of Brazil’s GDP. But, due to overproduction and a fall in demand due to the global recession, the coffee prices fell 50% in past century.

Engineering a tough comeback

Lowering trade barriers remains a priority for Brazil to increase exposure to international competition and strengthen incentives for productivity improvements. More educated workforce, less tax distortions and better infrastructure would support productivity improvements. To reconcile the need for further reductions in income inequality with diminishing fiscal space, social expenditure should focus more on most efficient policy instruments, particularly conditional cash transfers. This would accelerate the decline in income inequality without increasing spending.

In the absence of a strong labor market revival, consumer spending is not expected to pick up sharply in the near term. After declining for the last three quarters of 2018, unemployment has been edging up this year with the number of unemployed at around 13 million. Low consumer demand is, in turn, weighing on production and investments.

Consumer sentiment in Brazil continues to be impacted, as they are in a low-growth environment with not much to show for earnings and employment growth. Naturally, in such a scenario characterized by weak demand, businesses have not filled the gap with higher capital spending, especially as there is still quite a bit of room to utilise excess capacity.

Source: ITC Trade Map       

Table 1: Trade flows and partners of Brazil

India and Brazil share amenable and multifaceted relationship at bilateral level as well as in plurilateral platforms such as BRICS, BASIC, G-20, G-4, IBSA, International Solar Alliance, and in the larger multilateral bodies such as the UN, WTO, UNESCO and WIPO. The decade long bilateral strategic corporation is based on a common global vision, shared democratic values, and a commitment to bolster economic growth with social inclusion for the welfare of the people of both countries.

Source: ITC Trade Map

India’s export to Brazil reached all-time high in 2014 at US$ 7.1 billion, after which Brazil was hit by the recession. Exports reached US$ 3.8 billion in 2018-19 compared to imports of US$ 4.4 billion, leading to a deficit of US$ 605.9 million. India’s top exports to Brazil include insecticides and fungicides, synthetic yarns, accessories for automobiles, medicaments, waste oils, heterocyclic compounds, carbonic acids. On the other hand, Brazil’s exports to India consists of petroleum oils, sugar, soya-bean, unworked gold, iron ores, copper ores and ferro alloys.

India and Brazil are key signatories under the India-Mercosur trade agreement. In 2017, the agreement initiated an expansion by including eclectic tariff lines but it is yet to be finalized. The expansion of the agreement is expected to enhance trade relations between the countries involved with a major share belonging to India-Brazil, and the trade volume target is set to reach US$ 30 billion in 2030. India is keen to export a wide range of pharmaceuticals, engineering goods and processed foods.

At present, India has preferential access in the MERCOSUR for essential oils, electrical machinery and equipment, organic chemicals, pharmaceuticals, plastics & articles, rubber and rubber products, tools and implements and machinery items. India has a trade deficit with MERCOSUR worth of US$ 9.3 billion, which is expected to get narrower after expanding the India-MERCOSUR PTA.

With Brazil under MERCOSUR, India has exchanged a list of 484 tariff lines (products) for expanding the trade agreement and a similar list was received from Brazil as well. Delay in expansion of the agreement is costing Indian exports for the mentioned sectors.

India and Brazil have identified complementarities and share perceptions about the evolving international order. However, the two economies have not yet developed clear strategies towards bilateral relations. As Brazil and India elected their new leaders recently, they are presented with an opportunity to review the mechanisms that can take bilateral relations to a new high.

India-Brazil cooperation needs to involve greater engagement with business people, scholars, and scientists through creating networks to identify new opportunities for collaboration and confirm or redefine priority areas of mutual interest. PM Shri Narendra Modi’s visit to Brazil on the occasion of the 11^th BRICS Summit in November 2019 provides a vital opportunity in this direction.