Impeachment in Brazil

Budget fudges in the Latin American country raise questions

At a time when emerging economies, India included, are caught between perennial hard budget constraints and slowing growth, the Brazilian Senate's vote to impeach President Dilma Rousseff for fraud in government accounting will be instructive. The principal accusation against Ms Rousseff is that she used loans from public banks to the Treasury to meet budget surplus targets set by the Congress. This is roughly equivalent to an Indian prime minister ordering, say, the State Bank of India to transfer a part of its earnings to the government to fulfil fiscal deficit targets under the Fiscal Responsibility and Budget Management (FRBM) Act. The result of Ms Rousseff's move was serious: it created an impression that the Brazilian economy was in better shape than it actually was and provided the leeway for her to make even more populist commitments that played a role in her re-election in 2014.

Ms Rousseff claims she only did what previous regimes had done before her without being punished and had the Brazilian economy not contracted as a result of the global commodity price crash, the issue may never have reached this stage. The truth of her assertion is yet to be established - the Senate will shortly take the next step and vote on whether to launch an impeachment trial, a resolution that requires a simple majority to pass. But Ms Rousseff's problems - which also involve a massive case of fraud in state-owned petroleum major Petrobras under her predecessor and mentor Luiz Inacio Lula da Silva - reflect a key dilemma for economies in which the state exercises overweening powers over the country's largest banks and corporations and is committed at the same time to vast entitlement spending. Latin America is particularly vulnerable to this variety of socialism, one which explicitly leverages booms in commodity prices to finance welfare spending - Venezuela under Hugo Chavez, Argentina, Ecuador and Peru are all examples.

In that sense, politics apart, an impeachment process for budget fudges sets a new standard of fiscal accountability, though its usefulness in developing economies like India and even developed countries would be debated. The country's ever-burgeoning subsidies on food, fertiliser and, till recently, fuel have encouraged "off balance-sheet" techniques, such as issuing oil bonds to companies to defer fuel subsidies or simply rolling over expenditure from one year to another. These techniques have the benefits of a cash accounting system that masks real expenditure. The arrears on fertiliser subsidies running to Rs 30,000 crore - now almost an annual feature - are an example. The principal problem, perhaps, is that there is nothing in the existing rules that can prevent governments from indulging in such practices. An officials committee has been entrusted with the task of recommending a range of fiscal deficit that the government should stay within in the coming years. Perhaps, the scope of the committee's role could be expanded so that it could also explore the need for imposing necessary conditions on the Centre so that it cannot use questionable practices to hide the real expenditure of the government.