Business Standard

<b>Deepak Bhojwani:</b> Brazil's crisis and India

Brazil is a regional power and a member of the BRICS grouping. India has a major stake in Brazil's stability and prosperity, and will watch closely as the tussle for legitimacy plays itself out in tha

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Deepak Bhojwani
Brazil is in the news for the wrong reasons. On May 12, President Dilma Rousseff stepped down from her post after the 81-member Senate voted 55-22 to impeach her. Vice President Michel Temer took over as President. If she is exonerated, or not convicted by a two-thirds majority of the Senate within 180 days, she can return to office.

The political soap opera began in October 2014 with revelations of massive corruption in Brazil's national oil company Petrobras. Several political and business leaders who had colluded in inflating construction contracts by billions of dollars were tried and imprisoned. Ms Rousseff's fate is collateral damage.

On April 17 the lower house of Brazil's Congress voted to impeach Ms Rousseff for the 'crime of responsibility': showing loans from state-owned banks and other fiscal manoeuvres to disguise the size of the budget deficit. The Senate concurred that this violated the constitution and Brazil's Fiscal Responsibility Law.

On May 5 the Supreme Court unanimously removed lower house Speaker Eduardo Cunha, third in line to succeed President Rousseff, who had presided over the April vote, from his post. He was the first Brazilian lawmaker to be punished for corruption in the ongoing Petrobras scandal. Senate leader Renan Calheiros, of the same (PMDB) party, who presided over the May 12 vote, took his place in the succession line-up, but is also under investigation by the Supreme Court. President Temer, head of the PMDB, faces charges of exceeding campaign donation limits in 2014 and allegations of corruption.

Ms Rousseff's Worker's Party (PT) has lost most of its support in Congress. There was widespread political and popular support for the removal of Ms Rousseff, the only major politician not accused of enriching herself.

The political crisis is compounded by economic calamity. Brazil's economy will contract 3.5 per cent in 2016 and inflation will hit 6.6 per cent (Brazil Central Bank, March 31). The economy contracted 3.8 per cent in 2015, the worst downturn in the past 25 years. The fiscal deficit stands at 10.8 per cent and the public debt close to 70 per cent of GDP.

Brazil's economy has been rentier-based. There is no statutory land ceiling. Agri-business thrives on large plantations of soya, sugar, cattle-rearing and poultry, and has led to excessive dependence on the vagaries of climate and market. India's Shree Renuka Sugars, which invested around $600 million in Brazilian sugar plantations a decade ago, filed for bankruptcy protection in September 2015. The iron ore mining business has been hit by the global downturn.

Petrobras's discovery of 60 billion barrels of light oil in pre-salt layers off the southeastern coast in 2006 was a game changer. Majority-owned and controlled by the government, it also has stakes in power generation, petrochemicals and ethanol. In 2008 it was worth $310 billion, making it one of the world's largest companies. Overdependence on this bonanza, combined with tight official control over this cash cow, took its toll. Low oil prices and the devaluation of Brazil's currency, the real, left it with about $130 billion in debt.

Production has fallen, targets and investment plans drastically revised. Petrobras may pull out of entire market segments. Congress is moving to reduce or eliminate its monopoly as operator in the pre-salt offshore. This year the company has taken Chinese loans of $11 billion to service its debt. These factors may affect investment and commitment by Petrobras in fields where Indian companies have interests.

India's ONGC (Videsh) Ltd. and Bharat Petroleum have invested over $3 billion in Brazil, with more in the pipeline, for significant participating interest in several oil blocks. India's crude oil imports from, and diesel exports to, Brazil constitute 40-50 per cent of total bilateral trade but have fallen in value and volume. Exports fell to well below $3 billion in 2015-16 ($6 billion in 2014-15) because of a steep fall in export of petro-products.

Several leading Indian companies - Tatas, Aditya Birla, Mahindras, UPL, Shree Renuka, Torrent, Cipla - have extensive investments and a business presence in Brazil, as do important Brazilian companies in India. Currency volatility has further impacted the economic relationship.

Brazil has to repair its badly damaged political system. The credibility of leading politicians has been compromised. Widespread outrage is being expressed at the parliamentary coup against Ms Rousseff. Brazil came back from the economic precipice in 2000 to grow at 4.5 per cent annually for over a decade.

The economy seems to have touched bottom and is expected to do better. The real has begun to strengthen and the stock exchange is expected to follow suit. Mr Temer had proposed 'A Bridge to the Future' in October 2015, a plan advocating austerity, "structural reforms" and avoiding tax increases, except in emergencies. It refers to 'excesses (by the Rousseff government) in creating new programmes and expanding existing ones,' though Mr Temer has stated publicly he will not cut back on existing social programmes.

A congressional majority has now deposed a legitimate president who many see as less corrupt than her successor or accusers. Without constitutional recourse to the option of fresh elections, power has passed to a politician who would never have been directly elected to the presidency.

Brazil is a regional power, member of the BRICS grouping and vies for a permanent seat on the UN Security Council alongside India. It has demonstrated institutional strength. India has a considerable stake in Brazil's stability and prosperity, and will watch closely as this tussle for legitimacy plays itself out.
The writer is former Ambassador to Colombia, Venezuela and Cuba, and Consul General Sao Paulo
 

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First Published: May 14 2016 | 9:49 PM IST

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