Perpetual reform required
Brazil’s turmoil underscores the impact of slow reform and weak institutions in emerging economies
India should look at the crisis engulfing Brazil and recognise that if its own 2014 election had not produced such a lopsided mandate, it could have experienced its own version of what Dilma Rousseff’s government is going through. The combination of irresponsible fiscal spending, the resulting damage to foreign investors and a corruption scandal have made Brazil the worst performing emerging economy. The country’s GDP may contract as much as five per cent even while inflation remains in double digits. The country’s economic woes could be at least partially resolved if there was political leadership to carry out the necessary reforms. Instead Rousseff is fighting off an impeachment drive which she may not overcome. The lower house of the Brazilian legislature voted to impeach her and the process will work its way through the upper house over the next few months. Rousseff, whose popularity has fallen to less than 10%, is being abandoned by her own political allies.
India was never likely to be in such extremis. But there were echoes of this visible by the last years of the Manmohan Singh government. Government ministers were being jailed, the rupee was in free fall and the banking system had become the plaything of the rich and politically connected. Rousseff ’s problems in fact began with her “borrowing” of nearly $16 billion from public sector banks to spend on unaffordable welfare programmes. The budget deficit nearly multiplied fivefold. When the courts and government regulators began investigations, Rousseff ’s regime began falling apart.
India perhaps fortunately experienced the consequences of the Singh government’s failings — including high food inflation partly fuelled by excessive fiscal spending and a number of scandals — before the polls. This provided Narendra Modi the extra fillip and gave him a mandate that has helped stabilise both the polity and economy. Brazil’s experience and what India just about avoided is a reminder that emerging economies, however wonderful their GDP growth figures, suffer from weak institutions and immature political rulers. Errors of policy are not only possible they are also likely — and the consequences can erase the gains of a decade swiftly. Reforms are therefore a permanent and never ending requirement for such economies.