Wednesday, February 24, 2016

India's exports to Brazil fell by thirty five percent in 2015

India's trade with Brazil was expected to decline in 2015 in the wake of the Brazilian recession and the fall in commodity prices. But the 30% percent fall in the trade and 35% drop in India's exports have come as a surprise. 

The trade was just 7.9 billion dollars in 2015 (January to December), dropping from 11.4 bn in 2014. Before 2015, the bilateral trade had been growing by 20 percent annually from 2010 to 2014 despite the steady slowdown of the Brazilian economy after its peak growth of 7.6% in 2010.

India's exports had decreased by 35% to 4.29 billion dollars in 2015 from 6.64 bn in 2014. This was caused mainly by the 54 % fall in export of diesel to 1.58 billion from 3.5 billion in 2014. The other major items of export were: insecticides-121 million dollars, polyester yarn-113 million and ceramic tiles-55 m, besides chemicals and pharmaceuticals. 

Despite the fall in exports, India retained its position as the number one supplier of diesel to Brazil (with 46% share, as against the US share of 39.6%), polyester yarn (with 57% of total Brazilian imports while China's share was 27%) and of ceramic tiles and insecticides.

India's imports had decreased by 24% in 2015 to 3.61 billion dollars. Main imports were: crude oil- 1.1 billion dollars, soy oil- 552 million dollars, raw sugar-457 m, gold-280 m and Copper concentrates and sulphate- 250 million.

India's import of crude oil from Brazil had deceased by 52%, mainly due to fall in crude prices. However India had increased its soy oil imports by 50% in 2015. 

The decrease in India's trade with Brazil should be seen in the context of the overall fall in Brazil's global trade by 19% to 363 billion dollars and 25% drop in Brazilian imports in 2015, reaching 171 billion. It is important to note that even after the 30% fall in 2015, India remained as the tenth largest  trading partner of Brazil.

The decline in trade in 2015 was part of the overall worsening of the economic situation of Brazil which suffered a GDP contraction of 3.5% in 2015. Inflation was high at 10.6 %. Fiscal deficit reached 10%. The currency had depreciated by over 30%. Industrial production had gone down significantly. Global prices and demand for Brazil's export commodities had fallen. Brazil lost its investment grade rating and was moved down to junk status by the rating agencies. The cut in public spending and other austerity measures as well as the high interest rates have brought down consumer demand, which was one of the main drivers of growth earlier.

Many of the economic problems of last year are likely to continue and the GDP is projected to shrink by 2.5 to 3% in 2016. But there is no need for alarm. The economic problems are short term in nature and manageable. The Brazilian economy has sufficient resilience and depth to recover on its own. It has more than adequate foreign exchange reserves (357 billion dollars in January 2016) to deal with emergencies.There is no danger of hyper inflation nor debt default. Brazil's external debt is just 15% of its GDP. It does not need a IMF rescue as some European countries such as Greece needed. Brazil had bounced back from bigger crises in the past. The latest was the spectacular growth of 7.6% in 2010 after the GDP contraction of 0.2% in 2009 caused by the global financial crisis.

The economic difficulties were aggravated by the uncertain political situation caused by the moves to impeach President Dilma Rouseff and the massive Petrobras corruption scandal in which top businessmen, political leaders and members of the Congress besides the senior executives of Petrobras have been jailed and are being investigated. More evidence might come up in the ongoing investigations which are coming closer and closer to ex-President Lula as well as to the current President Dilma. The bribery scandal has felled Brazilian icons such as Petrobras,Odebrecht and even Lula. It has impacted adversely and paralyzed the ongoing and planned infrastructure projects and extension of credit to corporate sector by public sector banks. Many companies including Petrobras have drastically cut down their investments. 

The political situation could get worse. Seeing an unmissable opportunity to put an end to the rule of Workers Party which has been in power since 2002, the opposition will make the Dilma government bleed by resisting and refusing to cooperate in the Congress on urgent legislative reforms needed. In any case, it seems that the Workers Party has very little chance in the next elections in 2018, after having been discredited so badly. But there is an upside to the corruption scandal. Both the politicians and businessmen have learnt a historic and painful lesson in the Petrobras case. They have realized that they would not be able to continue with impunity their old practice of crony capitalism and free for all corruption. Independent and crusading prosecutors as well as the assertive civil society have come to be an effective check on the system of corruption.

The year 2016 is not likely to see any significant increase in India's trade with Brazil, given the projection of continuation of low prices for crude oil and diesel which account for one third of the total bilateral trade, as well as the Brazilian recession. If at all, the trade might increase only marginally. However, this is a good time for acquisition of assets and companies in Brazil, taking advantage of lower prices and weaker currency. Foreign Direct Investment was an impressive 42 billion dollars in the first half of 2015 and 96 billion in 2014. These figures represent 50% of the total FDI in Latin America. It shows not only the investment opportunity but also reflects the long term confidence in the business potential of the country among foreign investors. The Indian business should not be deterred by the current downturn of Brazil and should keep the bigger picture in mind. Brazil has the economic resources and potential as well as the political maturity and resilience to emerge stronger in the coming years.