Booming BRIC, blessed Brazil?

The land of soccer and samba is sizzling and how. Currently hosting the biggest sporting spectacle in the world – the FIFA World Cup 2014 – and all set to host the Summer Olympics in 2016, Brazil is making all the right noises about its arrival as a sporting and economic superpower. Not that it had to ever prove anything to anyone. Home to over 200 million people (which makes it the 5th most populated country in the world) and spread over 8.5 million square kilometers (which makes it the 5th biggest nation), it’s a $2.5 trillion GDP – the 7th largest economy in the world. Brazil has long been a modern, vibrant and cosmopolitan republic. But unprecedented growth in the 2000s, thanks to a global commodity boom, all of a sudden, has catapulted it to rock star status.

Recalling memories

Following more than three centuries of Portuguese rule, Brazil gained its independence in 1822. The country maintained a monarchical system of government until the abolition of slavery in 1888 and the subsequent proclamation of a republic by the military in 1889. Brazilian coffee exporters politically dominated the country until populist leader Getúlio Vargas rose to power in 1930.

By far the largest and most populous country in South America, Brazil underwent more than half-a-century of populist and military governments until 1985, when the military regime peacefully ceded power to civilian rulers, which continues without hiccups. Exploiting its vast natural resources and a large labour pool, Brazil today continues to pursue industrial and agricultural growth and is not only a regional powerhouse, but also a global leader.  

Traffic on Avenida Paulista, one of the most important avenues in São Paulo, Brazil. The 2.8 kilometre thoroughfare is known for head-quartering a large number of financial and cultural institutions 

A neighbour’s envy

With abundant natural and human resources, Brazil is today one of the most promising emerging markets in the world. It is the seventh-largest economy both in terms of nominal GDP and purchasing power parity. Characterised by moderately free markets, the Brazilian economy grew at a brisk pace during the first decade of the current century but has been plagued by a bit of a slowdown since 2010.  However, it has steadily outpaced many other countries in terms of GDP growth and might soon be ranked the fifth largest economy in the world.

The Brazilian labour force is estimated at 100.77 million, 16% of which is involved in agriculture, 13% in industry and 71% in the services sector. This presents a far more balanced picture than India where agriculture contributes about 13-14% to the GDP, while its share in employment is almost 50%.

Split and double

The only time a country hosted a soccer World Cup and Summer Olympics back to back earlier, like Brazil is doing now, was USA in 1994 and 1996. But those were the roaring 90s. Then, the US economy was on a roll, it had necessary infrastructure already in place, and hence, the cost of hosting the two events was just $30 million and $1.8 billion for the World Cup and the Summer Olympics respectively. As compared to that, Brazil has already spent $11 billion on just the FIFA World Cup, with multiple cost overruns that are likely to continue. While the twin events will do their bit for the Brazilian GDP, with tourism getting a boost, they are likely to be a major drain on an economy that is nowhere close to its glory days yet.

People walking on Santa Efigenia Viaduct in São Paulo, Brazil. The downtown area offers a valuable history lesson of the city

Brazil bid for the 2014 FIFA World Cup in 2007 – a time when the economy was growing at a rate of knots. Then the global financial crisis struck and Brazil’s economy went into a tailspin. While there was an immediate rebound in 2010 and Brazil’s GDP (at current prices) crossed the $2 trillion mark for the first time, it has been a laboured progress since then, with several quarters of negative growth.

But since then, matters have worsened so much that the Brazilian real (its currency) has lost half its value in the last three years and Standard & Poor’s has cut Brazil’s sovereign rating to BBB minus – the lowest investment grade. In this kind of an environment, the lavish spending on the World Cup has not gone down well with the masses (and media). There have been widespread protests against the event – something unthinkable in the football-hungry nation. But as the World Cup progresses, football magic is in the air again, and not in Brazil but all across the globe.

Brazilian fans during the 2014 FIFA World Cup opening ceremony at São Paulo. According to E&Y, the event may result in an increase of 79% in the tourist inflow to Brazil in 2014 

The numbers

Brazilian merchandise trade has grown more than three-fold over the last 10 years. Although it has maintained a trade surplus right through this period, flat to negative exports growth coupled with continuously rising imports in the last four years mean that a surplus of close to $34 billion in 2004 has now been reduced to just $3 billion. Being the two pillars of the BRIC, India and Brazil have engaged increasingly in bilateral trade. The numbers

Brazilian merchandise trade has grown more than three-fold over the last 10 years. Although it has maintained a trade surplus right through this period, flat to negative exports growth coupled with continuously rising imports in the last four years mean that a surplus of close to $34 billion in 2004 has now been reduced to just $3 billion. 

Being the two pillars of the BRIC, India and Brazil have engaged increasingly in bilateral trade. The numbers have grown exponentially over the last decade. Less than $1.5 billion worth of merchandise trade in FY2005, had skyrocketed to over $10 billion by FY2013, before mildly dropping in FY2014. India almost always has had a trade surplus with Brazil, except for FY2010, when a three-fold surge in imports (because of a 24x surge in import of mineral fuels), temporarily turned the tables against India. At the same time, India has managed to end FY2014 with an all-time high trade surplus of over $1.7 billion with Brazil.

Demand-supply gap analysis: Indian exports – Brazilian imports  

Broad summary of Brazil’s top 20 imports show that Indian exports are non-existent in 12 of them

While the Indo-Brazil trade has grown manifold over the last decade, it remains abysmally low in absolute terms. For example, trade between Brazil and China was worth over $83 billion in 2013 – 800% more than that between Brazil and India. Similarly, of the 20 top items that Brazil imports, India’s name (as the origin of the import) is virtually non-existent in half of the items on the list.

A case in point is cars. Brazil imported over $9 billion worth of cars in 2013, most of them from Argentina, Mexico and Germany. But India didn’t cater to even 0.01% of this demand. 

While Indian automakers have been talking about tapping the Brazilian market for a long time, not much has materialised yet. The scenario is not much different when it comes to some of the other top Brazilian imports as well, be it electronics & electrical equipment or medicaments. In fact, the only major Brazilian import, which India caters to in a significant way is mineral fuels like diesel oil; all thanks to a company popularly known as Reliance Industries.

Panorama of the Copan Building in São Paulo. Copan is one of the largest buildings in Brazil and has the largest floor area of any residential building in the world

The next best thing

Brazil is the most important member of MERCOSUR – South America’s leading trading bloc formed by Brazil, Argentina, Paraguay, Uruguay and Venezuela, with Bolivia recently becoming an acceding member. While it has never got the kind of attention it deserves, particularly in India, MERCOSUR currently is the third largest such bloc, after the EU and NAFTA. As a result of a plethora in Paraguay. The aim of this framework agreement was to create conditions and mechanisms for negotiations by granting reciprocal tariff preferences and negotiate a free trade area between the two parties in conformity with the rules of the WTO. As a follow up to the agreement, a Preferential Trade Agreement (PTA) was signed in New Delhi on January 25, 2004. The aim of this PTA is to expand and strengthen existing relations between MERCOSUR and India and promote the expansion of trade by granting reciprocal fixed tariff preferences.

Itaipú hydroelectric power plant located on the Brazil-Paraguay border 

The PTA consists of a list of 452 Indian products, which get tariff concessions in MERCOSUR (a list of 450 MERCOSUR products get tariff concession in India; the PTA comprises rules, safeguards and dispute settlement procedures). The major products covered in the Indian offer list are meat and meat products, organic & inorganic chemicals, dyes & pigments, raw hides & skins, leather articles, wool,cotton yarn, glass and glassware, articles of iron and steel, machinery items, electrical machinery & equipment and optical, photographic & cinematographic apparatus. The major product groups covered in the offer list of MERCOSUR are food preparations, organic chemicals, pharmaceuticals, and electrical machinery & equipment. The India-MERCOSUR PTA came into effect in 2009 and has just completed five years.

Nellore cattle being herd through a field in a farm in Magda county of São Paulo. Nelore cattle originated from Ongole cattle brought to Brazil from Nellore in Andhra Pradesh, India 

While the India-MERCOSUR PTA is, no doubt, a great initiative to boost trade ties between India and Brazil, if one takes a closer look at the list of items in which Indian products get a margin of preference in MERCOSUR member countries, one can’t help but feel disappointed.

For instance, two items included in the offer list of MERCOSUR are instrument panels (HS Code: 87082995) and steering boxes (HS Code: 87089493). Therefore, when an Indian manufacturer exports either of these two items to Brazil, it gets a 10% margin of preference. So far so good. The trouble starts when one tries to find out what value of these two items were exported from India in the recent past. For, not only has India never ever exported a single penny worth of these two products to Brazil, it has never ever exported a penny worth of these two products to any other country either! This means Brazil essentially gives preferential treatment in terms of duties to an item produced in India, which has never been exported by India! 

What’s worse is the fact that this is not limited to just the two products mentioned above, but a host of other products mentioned in MERCOSUR’s offer list to India. 

Low hanging fruits

While Indian exports may be negligible in half of Brazil’s top 20 imports, The Dollar Business Intelligence Unit analysis shows there are 14 items, where at least a billion dollar worth of exports are there for the taking for Indian exporters. To arrive at this list, we analysed all items (broken down to 4-digit HS codes) with three necessary prerequisites: (i) Items that Brazil imported in excess of $1billion in 2013; (ii) Items that India exported in excess of $1 billion in the same year, and (iii) Items that presented an opportunity of over $1 billion for Indian exporters. At the top of this list is petroleum oils (HS code 2710), $17.75 billion of which was imported by Brazil and $67.07 billion of which was exported by India in 2013. But India’s exports to Brazil were just $3.36 billion, thereby presenting a potential of $14.39 for Indian exporters. At the second spot in this list is cars (HS code 8703) – $9.08 billion worth of imports by Brazil in 2013, $5.55 billion worth of exports by India in 2013, but virtually no exports from India to Brazil.

Items imported by Brazil in large numbers, exported by India in large numbers but still offering billion dollar opportunities.

Other such billion-dollar ideas include wheat and meslin, medicament mixtures, insecticides (including fungicides & herbicides), pneumatic rubber tyres, refined copper & related alloys, taps (including cocks, valves for pipes, and tanks), electrical transformers, static converters, electrical apparatuses for line telephony, auto parts, and aircrafts and spacecrafts (and related parts). Add potential export opportunities for Indian exporters in just these 14 product categories and you end up with a figure in excess of $56 billion – nearly 20% of India’s total exports to the world in FY2014! To imagine that serving a single overseas market can be so lucrative an exercise –  and in just about a dozen-odd product categories – is eye-opening. It’s a “pop” sound you can’t miss if you have your eyes and attention on the business of foreign trade.

Bottomline – don’t take your eyes off Brazil even after the FIFA jamboree gets silent. [We’ve left the soccer balls for Pakistan to export anyway.] There is a massive market to tap and we’ve only scratched the surface. There’s a Summer Olympics scheduled for 2016. And things are just warming up. If you’re an exporter, make Brazil count. It’s a $2 trillion economy, mind you! And one with the hallowed ‘BRICS’ tag. 

(Dr. A. K. Sengupta is a former Dean of the Indian Institute of Foreign Trade (IIFT), New Delhi)