Two decades ago Brazil and India opened up to foreign capital, creating new opportunities for investors. However, the economic crisis in Mexico in 1994 and the Asian crisis in 1997 uncovered several underlying issues of investing in these countries. Even though the regulations have been tightened which has helped to curb the blatant abuse of minority investors, the overall governance issues still exist. However, Brazil and India still continue to be strong investment prospects even now. Indias consumer market is especially huge and Brazils reserves of natural resources are an obvious delight to an investor. The purpose of this paper has been to analyze the various issues related to investment in developing countries. The core focus of the study are Brazil and India, and one of the main purposes of the paper is to compare and contrast there two countries in terms of their investment feasibility and decide which is the better country for investment among the two.
Brazil is one of the largest exporters of natural resources in the world. The period post-2003 saw its currency gaining against US dollar and reduction of its inflation. On the other hand, India has been among the top 10 highest growing economies for the past 2 decades, maintaining its GDP growth above 6 even in the face of the economic crisis. Both countries have their downsides too. In case of Brazil, it is the complex tax laws, corruption, severe income inequalities, and unavailability of skilled education for its citizens while India has serious battles with crippling poverty, rampant illiteracy, shortage of critical infrastructure and lack of sufficient energy resources in the face of rising oil prices. According to the detailed comparative analysis of the two countries done in this paper, India is a better place to invest in as compared to Brazil even in the face of challenges. The primary reasons for this is a very strong financial base combined with a young population, which means that the growth condition is likely to remain the same or even better in the coming few decades.
INTRODUCTION OVERVIEW (BACKGROUND INFORMATION)
BRIC economies
Emerging markets are of major interest because their stock markets have exhibited extraordinary outperformance versus developed countries over lengthy periods of time. In this context few economies have been at the forefront of investment decisions as much as what are known as the BRIC economies. Coined by Goldman Sachs in 2003, the term BRIC stands for Brazil, Russia, India and China. The term BRIC was used in the now famous BRIC report, officially known as the Global Economics Paper No. 99 titled Dreaming with BRICS The Path to 2050. (Skinner, 200715) Goldman Sachs focused on these four countries because they are the four largest of all emerging economies and, even on the basis of nominal GDP are already among the twelve largest economies in the world. Further, Goldman Sachs also forecasted that in less than 40 years, BRIC economies can be larger than the G-6 (US, Japan, Germany, France, Italy and UK) in dollar terms. (Gupta, Govindarajan and Wang, 2008241) It was specifically pointed out that by 2040 Chinas GDP should overtake that of the United States, while Indias GDP would be as large as 80 of United States GDP by 2050. Further, the GDPs of Brazil and Russia were forecasted to be larger than Germany UK, France and Italy, as well as equivalent to that of Japan by 2050. The most interesting this is however that the prediction was based on assumed growth rates of these countries, each of which have been consistently far higher than the assumed figures, post the year of release i.e. 2003. (Gupta, Govindarajan and Wang, 200814)
However, apart from the fact that the economies of all four of the countries have been growing the story of each of the four economies is very different. The growth shown by Brazil and Russia is very different from the growth that is seen in India and China. China has been increasing globally as a manufacturing economy, while Indias rise is primarily as a services economy. The situation invariably demands a huge influx of raw materials, which has translated into strong demand on Russias oil supplies and Brazils natural resources. It can hence be concluded that, the growth of India and China has resulted in demand for resources which has led to the growth of Russian and Brazilian economies. The scenario is however not as simple as this as other factors need to be taken into account too. First is that the India and China both have much larger populations that Brazil and Russia. Also workers in India and China are still heavily engaged in rural and agricultural locations even with their respective services and manufacturing strengths. In contrast, workers in Brazil and Russia are already heavily employed in service industry. (Skinner, 200715) The present research is focused on two of the BRIC economies Brazil and India.
Brazil India
There are several features common to both India and Brazil, and hence socio-economic comparison of the two countries is acknowledged as an established research field. Both Brazil and India had been closed economies until recently i.e. till 1990s, during which period both counties abandoned the last vestiges of their import substitution strategies and began to focus on greater access to industrialized markets for their exports. Both counties saw increased inflation in the mid 1990s. Following this, governments in both countries had to adopt macroeconomic policies that would reduce the chronic inflation. In Brazil, this happened by the government adopting a stabilizing plan for the real Brazilian currency which reduced the inflation and permitted a reduction in the countrys debt. In India, reforms were adopted in 1991 that reduced the average tariff barriers from as high as 200 percent to below 15 percent. The financial sector was also reformed so that he the banks operated under fewer restrictions. The deficit in government spending was reduced in both countries. Both the countries also saw a major privatization drive. In Brazil, this meant a massive sell-off of state-owned companies in sectors such as steel, mining petrochemical, telecommunications and energy. In India, this led to the presence of a formidable private sector, and in consequence the services industry that is the backbone of its growth.
The stability of the democratic government in both countries, responsible macroeconomic policies, the large potential size of the domestic market, and the countries success in increasing their exports have made the counties attractive sites for new investments. However, despite the major reforms that have seen the countries growth rate rise, both Brazil and India continue to be plagued from internal problems. (Inkpen Ramaswamy, 2006198) In Brazil, the problems are associated with low rates of savings and investment, low investment in public education, and high levels of crime and corruption. Some industries still have trade and investment barriers that have been erected decades earlier. Brazilian national champion firms like Petrobas and Embrarer continue to receive preferential treatment. While corporate governance reform has been occurring steadily in Brazil post 2001, the corporate sector has traditionally been controlled by large family-owned business groups such as Unibanco, Itausa, Aracruz, Brahma, and Trikem. Because of a large proportion of non-voting shares, acquisitions, especially hostile acquisitions, are rate in Brazil. Some economists have even gone as far as to suggest that Brazil does not have an equity culture as controlling shareholders do not seen minority shareholders are partners. The problem is even more magnified in view of the weal legal protection accorded to investors. Also domestic stock market plays a minor role as a source of capital for Brazilian firms. (Spero Hart, 2009281)
In India, the need for major legal and regulatory reforms in 1980s led to a movement closer to the Anglo-American model of corporate governance. The capital markets were liberalized, license-raj regulations eliminated, banking industry deregulated, private sector involvement increased and barriers to foreign direct investment were reduced. Among the more tangible outcome shave been the emergence of a small market for corporate control, greater control for small shareholders and an increasing willingness of foreign firms to invest in India. (Inkpen Ramaswamy, 2006198) That said, the results of Indias efforts at corporate governance have not been very successful. The presence of a rampant insider trading combined with massive corruption at all levels exacerbate the issue, which is further worsened in light of the fact that most of the corporate boards remain largely composed of insider and family members. Also while India was largely spared the Asian financial crisis of 1997, the present global crisis in 2008 has shown that the economy is now much more connected with global economic cycles, which means that Indias former isolation can no longer assure steady progress (Spero Hart, 2009281).
RESEARCH QUESTION
The present paper focuses on the Brazilian and Indian economies with a view to find the better investment site among the two. Several factors make this study an interesting as well as a pertinent issue. Brazil, amongst all the BRIC countries baring Russia, started out as a true developing economy well on the path of industrialization. Despite the Growth Commissions concern of unsustainability post 1970s, the economy of the country has seen more than 7 real economic growth for at least 25 years. The countrys focus on industrialization was mass-based which led to foreign investors being interested to be a part of the economy as cooperate closely with the existing business groups. Brazil also saw extremely efficient import-substitution industrialization which makes it a very attractive place for FDI. India, post the infamous license-Raj debacle, grew rapidly post 1990s though in a rather unconventional manner through services growth and services exports. Despite the impressive trade liberalization record over recent years, India is the least open economy amongst the BRIC states in trade terms and that likely contributes to the weak performance of the manufacturing sector. India faces daunting poverty issues exacerbated by policies that inhibit development of employment opportunities, including for low-skilled labour. (OECD, 20098)
This research paper seeks to answer the following three questions
What factors effect to equity investment
What are the similarities and difference of Indian and Brazilian economy
What conclusions can you draw on the equity investment side
Which among the two countries, Brazil India, is a better choice for international equity investment
RESEARCH OBJECTIVES
The importance of BRIC countries is because of the huge population base and a growing economy, which is reflected in the massive rise of the upwardly mobile middle class. This and many other factors make these countries attractive investment destinations. In fact, to take the huge investment potential in these countries, many countries have come up with a type of fund called BRIC funds, which invest primary in BRIC countries. (Raj, 20082.15) In accordance with the research questions, the objectives with which the present research is carried out are as follows
To compare and contrast the economies of Brazil and India to see how attractive they are in terms of equity investment.
To examine which economical characteristics positively impact and influence the growth of economy and level of equity investment.
To offer recommendations for suitable measures in order to enhance economical growth.
MOTIVATION FOR CHOOSING THE TOPIC
Emerging markets are of major interest because their stock markets have exhibited extraordinary performance versus developed countries over lengthy periods of time. The emerging markets today are not what they were in the past, however. Indeed the old emerging regime of vicarious policy error has been replaced with a new paradigm where stable macro foundations have been built especially in the BRICs. Chronic fiscal and trade deficits have largely been eliminated and replaced by surpluses. Foreign exchange shortages have also been universally accepted. Governments in the emerging markets, especially in the BRIC countries, have also universally accepted the role of markets as a resource allocation mechanism now that capitalist enterprise has unambiguously demonstrated its capability to generate great wealth and rapid economic growth. (Gregoriou, 200981)
The Goldman Sachs report introduced the attractiveness of BRIC countries as an investment destination and their potential to be strong economies in the next few decades. However, BRIC countries are not all alike and should not be regarded as a single economic entity. Each one offers unique possibilities for economic growth and has unique strengths and weaknesses. Event the BRIC theory points towards this difference by suggesting that China and India will become the worlds dominant suppliers of manufactured goods and services, respectively, while Brazil and Russia will become dominant as suppliers of raw materials. (Maeda, 2008124)
For decades, it was anticipate that Brazil would take measured to reach its full investment potential. But, until recently the country had consistently failed to achieve investor expectations. The country experienced a catastrophic sovereign debt fault in the 1980s followed by hyper-inflation in the 1990s. It has struggled paying down a large foreign debt ever since. Only in recent years, the country managed to establish a framework of political, economic and social policies that allow it to resume consistent growth with result that Brazil now has a booming stock market. Nevertheless, investors are worried about the sustenance of such policies especially in the face of political changes. In case of India, the predicted growth prospects are extremely bright. The government is more stable and is democratic in nature with institutions in place for nearly half a century. Its stock market also has a long history. However, the countrys political history backed by poverty, ignorance and high rate of illiteracy, has always been a concern among investors. India has been handicapped by an excessively socialist and anti-free market tilt with frequent government intercession. This has come with substantial bureaucratic bloat, importexport restrictions, price controls, and capital flow limits that have hindered development. The massive growth has been possible due to a small number of intellectuals, which makes the policy designing process extremely problematic, especially in face of crippling poverty and rampant illiteracy. The work of the governments in both these areas has not been enough to tackle these two major problems. Further, infrastructure investment is minimal in the country. The countrys relations with its neighbours, particularly Pakistan and Bangladesh are volatile at best, and Indo-Chinese relations are not too stable either. The frequent terrorist and other violent attacks at all the major cities have done precious little to raise the morale of foreign investors. (Raj, 20082.17-2.19 Gregoriou, 200981-82)
RATIONALE OF THE STUDY
Analyzing all the BRIC countries on a common scale has been the general trend post the Goldman Sachs report 2003. It is however extremely clear that all these countries are extremely different from each other. Further, it is logical to assume that none of the countries would like to remain in the niche that has been assigned to them, e.g. it is not accurate to assume that India would be in the services sector for the coming decades, not is it fair to assume that Brazil would be relying solely on its natural resources for growth. As such, there has to be a comparative analysis since the only mode of investment in these countries would not be the solely through the so-called BRIC fund. There have been studies conducted in the analysis of each emerging country for their investment attractiveness. One such study was conducted by the World Bank in 2007, the output report of which was Doing Business 2007. This report ranked Brazil and India to be 121st and 134th respectively out of a total of 175 countries, based on the extent to which the regulation negatively impacted the working of a firm, hypothetical for the purpose of the study. The results are extremely interesting in the sense that these two countries are supposed to be economic superpowers in the coming decades and yet are too far at the back and close to each other, in terms of the business operational environment provided by the government of the countries.
In addition to this observation, the economic crisis that has affected the world post 2008 has made a lot of differences in the way investors look at potentially risky investments. Hence, the impact of the risk factors affecting the investment decisions would be more, since the investors are now becoming extremely cautious. Nevertheless, both Brazil and India still continue to be at the forefront as investment destinations. A comparison between the two countries is hence extremely important and is the topic of research for the present thesis
LITERATURE REVIEW
International investing was once considered to be an exotic approach for investors willing to take large risks. It is now a common investment approach, used even by very conservative investors. The typical motive for international investment is to increase the return while maintaining risk at a tolerable level. In addition to the opportunities presented by the emerging market inefficiency, the advantage of investing in such economies is also the greater use of inside information and fewer disclosure requirements on financial information in foreign countries, which create more opportunities for investors who have access to information. (Madura, 19961-2) The comparison of countries based on their economies is a well documented task that has been undertaken by several reputed organizations including OECD, IMF, UN, etc. The literature review discusses the parameter used for the comparison of the economies of countries, which would be then used in the analysis section.
COMPARISON OF ECONOMIES OF DIFFERENT COUNTRIES
Investment in a country is closely dependent on the understanding of the countrys economy. Putting money into the stock or bond market when economic conditions are unfavourable or selling investments for the wrong reasons can destroy financial plans. Hence, all the investors before investing in a country begin with a forecast of the general economic climate, including interest-rate projections, currency forecasts, and estimates of domestic and foreign growths. It is true that over the past century, thousands of economic indicators have emerged, predicting everything from the demand for gasoline to the size of harvests. Over time, economists have weeded out the least successful indicators, based on the most dubious relationships to arrive at about fifty consistently reliable ones, which are must-haves in any analytical toolbox. These indicators too project a variety of conditions such as employment, inflation, manufacturing activity and consumer spending. (Yamarone, 20072-3) The indicators in the present thesis are limited to those that are most relevant to investment, though they go cover general aspect of a countrys economy.
An important concept while comparing the economies of two countries is the business cycle which can be thought of as a graphical representation of the total economic activity of a country. Business cycle is also known as economic cycle in some circles and represents the expansions and contractions in the economy. The economic cycle refers to the long-term pattern of the alternating periods of economic growth (expansion) and decline (recession), characterized by fluctuating leading economic indicators. (Argenti, 2002116) The classification of economic indicators is done based on their relationship of with the business economic cycle. Based on this, economic indicators can be coincident (i.e. reflect the present state of an economy), leading (i.e. predict the future conditions that might occur), and lagging (i.e. mention the occurrence of a turning in the economy in the past). (Yamarone, 20075-6)
Gross Domestic Product (GDP)
The initials GDP represent the best known initials in economics and stands for Gross Domestic Product. It is the most important statistic to come out in every given quarter and is the single most important measure of macroeconomic performance. Forecasting executives analyze the parameter in order to understand the current status of the economy and its future tendency and investors study it to refine their investment strategies. GDP and per capita GDP (i.e. per capital purchasing power) provide a standardized and useful method for measuring and comparing the economic outputs of nations. (Baumohl, 2008107) The GDP is deliberately designed to measure the annual economic value of all the final goods and services produced domestically within a nation in a single year. GDP measures the economic activity from the perspective of the total income generated by different entities within an economy as well as by measuring the total expenditures of those entities. (Argenti, 2002115) In fact, GDP sets up a fundamental macroeconomic equation, where the sum of income generated from domestic sources equals the sum of expenditures generated by the same domestic sources such that
GDP C I (X - M) G (Argenti, 2002115)
Where, C represents consumer goods, I represents investment goods, (X-M) represents exports less imports or net exports, and G represents government spending. GDP has many economic and business related implications. For instance, if GDP decreases two quarters of a year in a row, the economy is in recession. (Argenti, 2002116) GDP is classified into two types nominal GDP and real GDP. The former represents the GDP in current dollars while the latter refers to GDP in chained dollars that is adjusted for inflation and deflation this eliminating the effect of price increases or decreases form one period to the next. (Frumkin, 2000149) With respect to GDP, both India and Brazil have been in the top half of developing countries. However, while Indias GDP and growth of GDPcapita ranks have been constantly high, usually at the second place behind China, Brazil growth GDPcapita has been erratic over the past decade, even reaching negative values for the years 2002 and 2003. This is indeed a source of concern for this nation. (Jain, 200659)
Gross National Product (GNP)
GNP refers to the market value of all the goods and services purchased by households, by government, and by foreigner, in the current year. With a few exceptions, anything not purchased in the current year is not counted. GNP is an influential indicator. It is widely used to measure economic success its rate of growth is announced monthly and features prominently in news broadcasts and economic analysis. GNP is said to be the best starting point to measure economic performance, even if various subtractions have to be made from it. This is because GNP is a measure of income which is an importance component of any performance measure. However, several economists consider GNP, not GNP, to be more closely aligned with other economic indicators such as industrial production, employment, productivity, and investment in structures and equipment. In fact post 1991 GNPs popularity as a benchmark for all economic activity has been steadily taken over by GDP. However, GNP is preferable for analyzing the resources and disposition of income, because receipts from the payments to the remaining countries of the world, which are not part of GDP may be a relevant total. (Stilwell, Argyrous, 2003210 Tainer, 200638)
National Income
As production of goods and services is difficult to measure directly, an accounting system was devised National Income and Product Accounts (NIPA). This accounting systems measures GDP by goods and services purchased (the product side) or by income earned from the factors of production (the income side). National income may be complied as the sum of incomes received by factors of production, or the sum of spending from income, or the some of value added in each stage of production. Each approach uses data from different sources, but ideally each should arrive at the same total. Defining national income is easy, but compiling consistent, timely, and accurate national accounts is difficult and costly. (World Bank, 2003180 Tainer, 200623)
Gini Coefficient of Income inequality
In general, the Gini coefficient is a measure the index of dissimilarity between any two activities measured on a common base. A value of 0 means perfectly equal, while a value of 1 means perfectly unequal. In case of income, the Gini coefficient represents a measure of Human Rights Index, showing the state of income distribution in a country. The larger the Gini coefficient, the greater is the income inequality the smaller the Gini coefficient, the lower the income inequality. Although the degree in inequality in the income distribution can be known from the Gini coefficient, it can easily be misinterpreted, which is its limitation. (Arnold, 2008608) Both India and Brazil suffer from income disparities between different categories of population. However, the situation is better in India, whose Gini coefficient is 0.37 as compared to Brazil, whose Gini coefficient is 0.57. In fact statistics prove that 10 of the the population of Brazil control almost 48 of the wealth. (World Bank, 2010)
Education and Literacy
The more the number of literate men and women, the higher is the level of economic development in a country. The literacy rate refers to the percentage of a countrys population aged 15 and above who can read and write. In addition to this, some other relevant statistics are new enrolment rates in primary education literacy rate of those between 15 and 24 years primary school publicteacher ratio and gross enrolment ratio. The primary school pupilteacher ratio is found out by dividing the number of pupils who have been enrolled in primary schools of a country by the total number teachers working in a primary school regardless of their assignments. The gross enrolment ratio is defined as the total enrolment of students in a grade or level of education, regardless of age. It is expressed as a percentage of the corresponding eligible age group population in a given school year. (International Labour Office, 2003741 Capehart, 2007502)
EnergyPower Consumption
The very definition of prosperity is directly tied to energy use through commoditization. There is a direct relationship between per capital energy consumption and the measure known as Physical Quality of life Index, PQLI. This PQLI combines three measures that are often used as a way of quantifying the level of well being in a country infant mortality rate, life expectancy, and literacy. The electrical power consumption refers to the per capita electricity consumption. (Capehart, 2007501)
Poverty
The percentage of population existing below a designated poverty line is one of the most used indicators of overall economic development. Poverty standards are generally called absolute measures and are based on the assumption that there is some objective minimum level of either income of consumption such that if economic resources are less than this minimum standard, individuals and families do not have adequate resources to satisfy their basic need. The poverty line is the minimum subsistence level of consumption. This poverty line or the basic subsistence level is based on a food basket of 2500 calories for a working adult and excludes healthcare and educational expenses. An additional term is chronic poor who are the individual staying poor throughout the year i.e. who do not benefit from economic growth. (Ross, Harmsen, 200164)
Key indicators of development
Inflation Inflation is a major economic problem and can be defined as an increase in the general price level. However, inflation does not refer to the increases in prices of individual goods. Inflation can only be said to exist if the average level of all prices rises. That is to say inflation is a condition in which the economy experiences a continuous increase in the average price level of all goods and services. A one-time price increase does not constitute inflation. The primary statistic used to describe price changes, especially in United States, is the Consumer Price Index, CPI. CPI is a measure of the average changes in prices paid by consumers for a fixed market basket of goods and services. Another commonly used index is the Producer Price Index, PPI, which is the cost of raw materials required by companies to produce goods involves around 3400 commodities (Frumkin, 200048) Despite having better economic policies, Indias inflation rate continues to rise especially in the last 5 years, as compared to Brazil. The inflation rate in Brazil has continued to decline post 2003. (UNCTAD, 2010)
Fiscal Performance Fiscal deficit or surplus are calculated as the difference between total expenditure and the sum of revenue and capital receipts excluding borrowing. . The revenue includes grants, while the expenditure includes lending minus repayments. A deficit is an indication of how far is the government loving beyond its means and a large value also indicates large borrowing. A large fiscal deficit may also lead to pressures due to inflation. The Brazilian external financial need feel below the critical ratio i.e. 100 only post 2004, which helped the country rise up in terms of investor interest. The public debt of Brazil however is on a rise, though Indias public debt remains roughly the same, leading the analysts to conclude that Indian financial system is much more robust and better managed than that of Brazil. (UNCTAD, 2010)
Total Population This statistic counts all the people residing in a country. The statistic does not make any distinction between citizens and non-citizens and also does not bother about the legality of residency in a country. However, refuges who are not permanently settled in the place where they seek asylum are not considered to be the population of the host country, rather they are counted as the population of the country of origin. Population growth rate is generally calculated on an average annual rate which is the exponential rate of change of population for a year. (World Bank, 2006299) Indias population is the 2nd largest in the world as compared to 5th largest population of Brazil that is one-sixth that of India. The growth rate of Indian population has been brought down to a less rate, though it is still high. Yet economists consider that by 2050 Indian population is expected to stabilized, as opposed to Brazil, which still has one of the highest population growth rates. (CIA 2010)
Debt indicators Public debt is the total domestic and external holdings as percentage of GDP. External debt is the total private and public holdings as percentage of GDP. This statistic is useful since it relates the debt to resource base. Using these indicators, investors perform the debt sustainability analysis for the countries they are interested in investing. The concentration however is usually on external debt because of the importance of the transfer problem. The creation of debt is a natural consequence of economic activity. Debt sustainability refers to the possibility that a country can meet its debt obligation without unrealistically large corrections in income or expenditure and without hampering the economic growth of the country. Debt sustainability means that the overall debt burden on a country is consistent with the countrys overall capability to make payments. Also the payments on the debt structure have to be consistent with the countrys capacity to access market financing. (United Nations, 2008181)
Health status indicators Monitoring these indicators reflects one of the key indicators of progress of a country. The most important of these indicators is the infant mortality rate. Some other important statistics are under-five mortality rate, maternal mortality rate, life expectancy at birth, and the percentage of births attended by skilled personnel. Life expectancy refers to the number of years a newborn infant would be expected to live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life. (International Labour Office, 2003740) Healthcare both in terms of quality as well as expenditure is better in Brazil as compared to India, which has one of the poorest healthcare systems in the world. Indian situation is worsened in terms of the high infant mortality and higher prevalence of malnutrition among children below 5 years. Further, health reform is an issue, which despite the best efforts of the government continues to stagnate. (World Bank, 2010) The living conditions can also be gleaned from the infant mortality rate, which in case of India is more than twice of that of Brazil. This is also true for the population growth rate of India as compared to Brazil. The life expectancy at birth is also higher in Brazil (71.99 years) as compared to India (66.09 years). (OECD, 2000170)
EQUITY INVESTMENT COMPARISON PARAMETERS
Development finances of a country are mostly due to private financial flows. These can be divided into two broad categories equity flows and debt flows. The former comprises of the Foreign Direct Investment (FDI) and portfolio equity while the latter refers to the finances raised through bond issuance, bank lending and supplier credits. FDI inflows correspond to Direct Investment, which comprises of the capital provided (either directly or through related enterprises) by a foreign direct investor. Portfolio equity inflows are very similar to FDI inflows, only the relationships between exchange rates regime, capital controls, and portfolio equity are more complicated. This is surprising because portfolio equity is usually though to behave similarly to short-term debt. Countries with floating exchange rates and surrender requirements on export proceeds tend to have higher shares of portfolio equity. (Edwards, 200735)
Comparison with index benchmark
When investing in stock markets, it is natural to periodically assess the performance o such investments over time. The appropriate method for assessing the performance may vary with the investors objective. Most evaluations of investment performance involve some type of benchmark for comparison purposes. International investing can be assessed with different benchmarks. The performance may be compared to a U.S. index or a world index. The latter allows the evaluator to compare the performance of the foreign investment to an aggregate measure of all possible foreign stock investments. The country index benchmarks can also be compared. However, while cross-comparison of indexes, the market affects must be isolated from the currency exchange effects. (Madura, 1996143)
Economists have deemed India as a net importer and Brazil as a net exporter. Indias Forex reserves are much higher than Brazil, though the amount of FDI that India attracts is nearly half that of Brazil. The external debt of each country is similar and the value fluctuated between years 2007 and 2009. Both the countries managed to reduce their negative current account balances from the year 2008. While Brazil managed to bring the value down by 60, India managed to bring the value down by more than 70. (CIA, 2010)
Comparison of Profitability
Comparison of profitability across countries is notoriously difficult. Different countries have different accounting standards and therefore a direct comparison of profitability figures, even when it comes to comparing apparently the same measure e.g. return on assets, always carriers some danger. Industry-wise cross-country comparison of profitability gives better understanding of the business environment existing in the country. A comparison between Return on Equity i.e. net Profit after tax over Capital, between different countries gives an assessment of the profitability of domestic firms (Clarke, 200731) The analysis Indian and Brazilian stock performance shows Indian firms to be more profitable than Brazilian forms. The latest analysis performed by MSCI Barra showed that the returns provided by Indian firms were 113.58 in the fiscal year 2009-2010 as compared to Brazilian firm returns of 103 percent (Economic Times, 2010)
Country Risk Analysis
Country risk refers both to the possibility of default on foreign loans and to unanticipated restrictions of cash flows to the parent country. The country risk assessment is critical for commercial banks to safeguard their international loans against country risk. Country risk is nothing more than an assessment of economic opportunity against political odds. This, country risks assessment requires that the investment analysts analyze political and economic indicators. While political factors reflect a countrys willingness to pay its debt, economic indicators measure the countrys ability to pay its debt. This means that any rating system for the countrys risk must combine both economic and political risks. The term country risk is refined as the possibility that the borrowers in a country will not honour their past obligations. Country risk may be assessed by various debt rations, the general creditworthiness of a country, and sovereign-government bond ratings. (Kim, 2006309)
It is generally expected that developing countries, facing a scarcity of capital, will acquire external dent to supplement domestic saving. The Debt burdens vary from one developing country to another. For some countries, external debt and debt-service payments are insignificant both in absolute amounts and in relation to gross national product (GNP) or exports of goods and services. In these countries, therefore, the burden of external debt does not cause hardship in the economy. For other countries, the debt burden is so large that it hampers growth-oriented policies. Developing countries that fall between these two categories are not seriously burdened by their external debt, but remain vulnerable. A heavy debt burden compromises the economic growth of a country. The is especially true for very poor countries, and emerging economies are generally seen to have higher debt sustainability because of their access to capital markets. (Kim, 2006310)
In India a state with a debt-service ratio exceeding 20 percent is classified as having debt stress, triggering the central governments close monitoring of additional borrowing. In Brazil, such an agreement of debt-restructuring was established recently between federal government at the states, establishing a comprehensive list of fiscal targets. Whole India has a higher debt to GDP ratio that Brazil, its external debt as a share of export is much lower. (Thomas, 200621-22)
Taxation Aspect
One of the most important factors that persuade a foreign investor to run the risk of investing capital in a particular country is the potential for profits in that country. As taxation involves a considerable cut in income or profit, it is in fact counted as an impediment to foreign investment. Taxation may operate in two ways. In the first place, it may be an impediment to foreign investment, though it is a normal business risk, secondly, it can be used as an effective incentive by taking certain measures. In this respect, taxation is the sole element of the investment climate which directly affects a basic economic factor, namely the investments rate of return. (Sheikh, 200372)
Taxation may operate as an impediment to foreign investment in either the two ways. In the first place, a foreign investor may be subject to international double taxation. On the other hand, he may be discriminated against or excessively taxed. International double taxation arises where various sovereign states exercise their sovereign power to subject the same person to taxes of a substantially similar character on the same subject. This usually happens when a person is subject to taxation both in the host and his home country. It may also arise when the tax system of each country adopts different criteria such as nationality, residence, domicile or the place where the property is situation, whereby a foreign investor finds himself subject to more than one tax system at the same time. This results from the absence of any customary international law limitation on the tax jurisdiction of s state. (Sheikh, 200373) Taxation also adversely affects foreign investment here there is discrimination against, aliens, excessive taxation and the imperfect functioning of the capital-importing countrys tax system. To attract foreign investment, discrimination and excessive taxation should be avoided. They cannot be challenged as unlawful in international law, except in so far as they become virtually confiscatory in character. (Sheikh, 200374) Brazil has an extremely complex taxation structure with many types of taxes, which makes it hard for the companies to comply to with the regulations. The tax levied on investment i.e. the STT also varies a lot sometimes changing multiple times in a year, due to the economic volatility and frequent government intervention. In contrast, Indian tax laws, especially those related to investment are defined extremely clearly and are expected to stay stable long-term, enabling interested parties to plan for a long-term stay in the market. The Indian financial laws are also deemed to be at par and based on international standards, which makes it easier for investors to enter the domestic market with ease. (Fan, Reis, Jarvis, 2008 76, 108)
Country Credit Rating
Credit rating usually refers to a symbol with a specific reference attached as an indicator representing the current opinion on the relative capability of an individual, a corporation, or a country to service its debt obligation in a timely fashion. Credit ratings are usually expressed with alphabetical or alphanumeric symbols. They are simple and easily understood which enables the investor to differentiate between debt instruments on the basis of their underlying credit quality. The main focus lies in communicating to the investors, the relative ranking of the default loss probability for a loan given to an entity, in comparison with other similar entities. In case of the entity being a country, the credit rating becomes sovereign rating. In some context, it is also known as country risk though both terms are different from each other. The feasibility study should identify the country risk, appraise of the risk and discuss how a project intends to avoid such risks. Sovereign risk differs from country risk in that it refers to the risk of a loan to a sovereign nation by a lender located in another country. This has application in project finance where the sovereign nation is one of the investors or joint ventures in the project a loan to the project is in part, at least, a loan to the nation. Financial advisers or lenders to a project can help sponsors to appraise and consider this risk. (Nevitt, Fabpozzi, 200022) These ratings are meant to capture the likelihood of default i.e. the debt is not repaid according to original terms. The credit rating system and criteria may be different for various evaluated object and purpose. The rating is intended as a grade and an analysis of the credit risk associated, but is neither a general-purpose evaluation of the issuer, nor an overall assessment of the credit risk likely to be involved in all the debts contracted by such an entity. Credit rating is merely based on the relative capability and willingness of the borrower to service debt obligations, both principal and interest, in accordance with the terms of the contract. It primarily aims at furnishing guidance to investorscreditors in determining credit risk associated with a credit obligation. The credit rating however, does not provide any sort of recommendation to buy, hold or sell a debt instrument, since it does not take into consideration, factors such as market prices, personal risk preferences and other considerations which may influence an investment decision. Ratings cover many different aspects prediction horizon, prediction method, object of rating, risk type, local and foreign currencies, and national ordering. The ratings can be stand-alone ratings or support ratings. Although the exact rating definitions differ from one agency to another, credit rating levels are considered in industry practice as more or less comparable. (Montford, Mulder, 200033)
Following the Asian financial crisis, the important of the strength of financial infrastructure has gained even more important in assigning credit ratings. These ratings represent a countrys relative credit risk and serve as an important guideline for foreign investments and financial decisions. There is a strong relationship between a sovereigns debt and its credit rating, which is well documented. When a countrys rating decreases, this is often also the case for the ratings of the countrys banks and companies. Moreover, sovereign credit ratings seem to have a correlation with national stock returns and firm securities. (van Gestel, Baesens, 2009141) Brazil was upgraded to an investment grade credit rating of BB in 2008 by Standards Poor, while India received an investment grade rating for the first time in the year 2009 by Standards Poor, with a rating of BBB-A-3. The local Indian currency too received similar rating in the year 2007. (Damodaran, 2009169)
Currency Risk
Currency risk arises from potential movements in the value of foreign currencies. This includes currency-specific volatility, correlations across currencies, and devaluation risk. Currency risk is measured in the form of positions per currency. Currency risk arises in the following environments
In a pure currency float, the external value of a currency is free to move, to depreciate or appreciate, as pushed by market forces. An exchange is the dollareuro exchange rate.
In a fixed currency system, a currencys external value is fixed (or pegged) to another currency. An example is the Hong Kong dollar, which is fixed against the U.S. dollar. This does not mean there is no risk, however, due to possible readjustments in the parity value, called devaluations or revaluations.
In a change in currency regime, a currency that was previously fixed becomes flexible or vice versa. For instance, the Argentinean Peso was fixed against the dollar until 2001, and floated thereafter. Changes in regime can also lower currency risk, as in the recent case of the Euro.
Currency risk is related to other related financial risks in particular, interest rate risk. Often, interest rates are raised are raised in an effort to stem the depreciation of a currency. This raise in interest rates usually leads to a positive correlation between the currency and the bond market. Currency risk is hedged through contracts that protect the home currency value of transactions denominated in a foreign currency, removing exposure the exchange rate fluctuations. The currency risk is transferred to another party who wants to take an exposure in opposite direction. The currency risk is perceived lower in fixed-currency regimes than floating regimes, but even in such cases devaluations or revaluations that change in the parity value of the currencies and changes from fixed to floating regimes represent currency risk. (Jorion, 2007270) Studies have found that currency appreciation in the Brazilian real has a statistically significant positive effect on Brazilian equity prices, while it has no statistically significant affect for Indian Rupee. In 2008, Moodys analysis report gave a rating of Ba1 for both local and foreign currency rating, while Indias rating for local and foreign currency was Baa3 and Baa2 respectively. This shows that the bonds issued by the Indian government are more at risk than the Brazilian government bonds. (Damodaran, 2009159)
INVESTMENT CLIMATE THAT ATTRACTS INVESTMENT
While creating an investment climate will attract investment depends on some explicitly economic factors, the investment climate actually refers to the quality of the ultimate non-tradable that makes a location competitive the shape of its social order. The economic factors include the following
Macroeconomic stability Macroeconomic stability remains crucial because the relative prices relevant for each investment must remain stable and predictable.
Openness to trade in tradable goods and services, particularly to inputs and intermediate goods An open trade regime is essential for integration in international chains of production.
Local managerial abilities Expatriate managers are expensive, so the availability of local managerial talent that can be trained to manage a proposed investment is a key element in investment decision,
Initiative and education of the population In an international economy progressively driven by the knowledge contents of products, the possibility of training the local labour force to work in sophisticated processes is a key factor in the decision about the location of investments.
Low telecommunication costs Telecommunications costs remain high in many developing countries, largely because local monopoles are controlled by state owned companies.
Low domestic and international transaction costs Transaction costs tend to be very high in developing countries. Their magnitude was not a problem in the world of protected economies. Today, however, they impose costs on enterprises that do not represent value-added and therefore represent an obstacle to investment.
Access to social amenities and facilities for expatriate and local personnel and their families In the globalized world, people with skills useful for worldwide production are in global demand. Both to attract international companies that would import expatriates and to retain local with global skills, countries must become attractive places to live in. Managers must have access to attractive residential areas with good educational, health, and recreational facilities for their families.
(Kochendorfer-Lucius, Pleskovic, 200598)
METHODOLOGY
This chapter describes the research methodology used in this study. The chapter starts a discussion of the research philosophy and then discusses the strategy used for the research. After this the various possible approaches are discussed for the research undertaken, and the most viable one is chosen. Following this the research sampling method and size are discussed which is followed by the research ethic considerations.
RESEARCH PHILOSOPHY
Descriptive analysis refers to the procedures that describe data. Descriptive analysis is primarily used in order to present information in a convenient, usable, and understandable form. It is used to describe the characteristics of relevant groups such as a consumer group, area of market, organizations etc, in order to estimate the percentage of units in a specified population that show a particular behaviour and hence determine the characteristics of the group. Some procedures that come under descriptive analysis in order to made the data more presentable calculating frequency, presenting data in a graphical form, measuring central tendency parameters (such as mean, median, and mode), calculating dispersion of the scores (such as variations and standard deviations), and identifying outliers in the distribution of scores (Runyon Haber, 19846). The research uses descriptive analysis compare similar economic parameters in order to understand the state of economy in both countries as well as make a judgement regarding the better place of investment by international investor.
RESEARCH STRATEGY
Data Gathering
The collection, organization, and presentation of data are basic background material especially for any statistics based research. There are two sources of data primary and secondary. Primary data are the data collected specifically for the study in question and may be collected from methods such as personal investigation or mail questionnaires. In contrast secondary data were not originally collected for the specific purpose of study at hand, but rather or a different purpose (Lee et al., 1998, p.14). A sample or a census may be taken from primary or secondary data. A census contains information on all members of population whereas a sample contains observations from a subset of it (Lee et al., 1998, p.15). This research uses secondary data for analysis
Primary Data Overview
Primary data consists of original research done to answer current questions regarding a specific operation. This type of data is pertinent of an individual operation but may not be applicable to other situations. The advantages of primary data include the following
Specificity The data is tailored to one operation and can provide excellent information for decision-making process
Practicality Primary data can provide solid real-life information and a practical foundation to be used in the decision-making process.
The disadvantages of using primary data include the following
Cost For an individual gathering primary data can prove to be extremely expensive. To gather primary data even from a city of 100,000 people is a monumental task for an operator and may cost too much time and money.
Time lag Marketing decisions often must be made quickly, yet it requires a good deal of time to conduct a thorough information gathering study. While a person is collecting the data, the data already collected may be irrevocably changed.
Duplication Although primary data are geared towards a specific operation, other sources of existing data may closely duplicate the information collected and would therefore be appropriate for decision-making purpose. The duplication of effort is very expensive, and primary data collection should therefore be undertaken only after all secondary data sources have been exhausted.
Secondary Data types
Survey-Based Secondary Data Survey data is the published or at least accessible results of survey in the form of quantitative, mainly questionnaire-based study done by other researchers. A national census is a good example of such a research. There are multiple sources of such type of data such as academic archives, government agencies, public opinion research centres, and any other organization that stores such type of data. The best pat of such a data is that the sample in this case is fairly large and in many cases it has been carefully selected to represent the population. (Quinton, Smallbone, 2006, p 68-69)
Documentary Secondary Data There is a great deal of information already published, which can be used without the researchers needing to collect data themselves. This is called documentary evidence. This type of data has been usually collected for a purpose other than evaluation of a particular project. Such material may not have been previously accessed for research purposes, and was not created specifically for such purpose. Hence, in such cases it is necessary to identify any biases or other factors that might limit the utility of some secondary sources (Sim, Wright, 2000, p. 60). Various forms of documentary data can be used for exploratory studies. This may be collected from a number of sources, and can be classified in terms of whether they were collected for formal or informal purposes, and whether they were intended for public or private consumption. Although documentary sources are usually textual, the term is also sometimes applied to oral narratives and certain non-textual objects, such as works of art. In case of exiting studies or datasets, a re-analysis is carried out often after they have been synthesized or aggregated. Documentary data is often historical i.e. they were created before the time at which the research is taking place (Sim, Wright, 2000, p. 61). The present study uses documentary secondary data for the purpose of analysis. The data has been gathered by various governmental, intra-governmental, cross-country, and non-governmental agencies for generating statistics. The original purpose of data gathering varies depending on the agencies. For instance, the World Bank and IMF data was gathered from a financial standpoint, while the statistics in CIA World Fact book has a knowledge perspective.
Using Secondary Data
This research uses secondary data to make a competitive analysis of the Indian and Brazilian economy with the intent to find out the better country for equity investment. This data being inexpensive to obtain and easier to find, and hence was used as the sole source of information to assist in the decision making of the present research. The first step followed while search for the data was to ascertain if and where was the data available. The research done at the time of literature review helped to gather such resources, since a complete detailed study regarding brand ad brand extension was done. This included coming across the works, theories and studies done by previous researchers and their corresponding evaluations regarding various issues in brand research. The initial search for secondary data was the local University library where books, journals and periodicals were sought. The study was enhanced by the use of the University Library web archives, which proved invaluable for providing an abundance of academic articles and journals.
Advantages and Disadvantages of Secondary Data
The major advantages of secondary data are savings in time and savings in money. In addition to this, some of the available data is only in the form of secondary data. Also secondary data provides flexibility and great variety. Finally the amount of data available by secondary analysis is immense, which provides an opportunity for a greater depth of research by the analyst, which primary data cannot provide (Wren, Stevens, Loudon, 2002, p 65). A major disadvantage of secondary data is that the data may not be as recent as desired. In addition, since the data is meant for some other purpose, the relevance may also be less than ideal for the questions proposed by the current research. The accuracy of the data is also not known since it is not directly collected by the researcher hence authenticity of the data is always in question. The quality of data is similarly a moot point and the researcher must be extremely careful about the reputation and capability of the collecting agency, or at least the credentials of the past researcher (Wren, Stevens, Loudon, 2002, p 66).
Data Quality Issues
Data quality is particularly important when there is reliance on secondary data, especially when there are issues concerning data meeting acceptable standards. Data quality, in fact is always a concern with secondary data, even when the data are collected by an official government agency. The government actions may be influenced by political actions. Even inter-country organizations may succumb to international pressures, which might affect the quality of data. In addition, secondary data may not always give detailed information required that would enable a researcher to assess their quality or relevance. Some other quality issues affecting secondary data are completeness, accuracy, and lineage. (Schutt, 2006423) To eliminate quality issues relating to secondary data, the resources were gathered for several reputable resources like CIA World fact Book, World Bank, IMF and the online database maintained by the governments of Brazil and India. Each datum gathered for analysis was cross checked against different sources to see whether the validity as well as the trends matched. In addition, the past works of researchers on similar or related studies were also used to see whether the data gathered and conclusions gathered matched.
RESEARCH APPROACH
Positive Approach The approach is also known as objective approach to a research, and is considered to be a scientific approach to performing research. The base of the research is empirical analysis. The researchers following this approach start by stating one or more research questions outlining the objectives of the research. Following the research question, hypotheses are generated, as all possible solutions to the research questions. The research design is then performed to collect data, analyse and interpret it and then accept or reject a hypothesis based on the analysis carried out. This exercise gives a precise answer to the research question. As is clear from the explanation the approach taken during the research is quantitative in nature, while the reflections following the research would be qualitative in nature (Babbie, 200759).
Interpretative Approach Unlike positivist approach, interpretative approach does not predefine variables, dependent or independent. The phenomenon under study is explained by understanding the subjects of the study and their viewpoints. Needless to say, this requires that there is good understating between participants and the researcher. The focus of an interpretative research is on standards, norms, rules, and values of the people who are a part of the research. Hence, interpretative research does not merely state facts or solutions as per statistics, as the positivist research does it tries to go beyond the explanation part by including the viewpoints of the people involved in the study and tries to enhance their understanding of the meanings of the situation. (Schutt, 2008)
Descriptive approach Descriptive approach intends to describe and explain what is, rather than what should be. This theory is also known as positive theory, and seeks to explain why specific things occur, leaving individual theorists to make inferences about how things should be done (Babbie, 200769)
Normative or Prescriptive Approach Prescriptive approach can be viewed as the engineering side of pure theory. It deals with problems such as eliciting values and beliefs about uncertainties, confronting incoherencies, and deciding how to put it together to guide action (Babbie, 200769)
The present research uses positive approach for the research.
DATA ANALYSIS METHODS
Data Reporting
After gathering the data used for analysis, the researchers organize it in an understandable format and then analyze it using the theories developed at the time of literature review. The data has been collected in accordance with the principles discussed in the Literature Review in the previous chapter. All the factors that affect the economy of a country have been grouped in a separate section, while all the factors that affect the equity investment decision for an international investor are grouped in a different section.
Qualitative analysis
A unique aspect of qualitative research is that the analysis actually begins before data collection ends. That is to say, in qualitative research a project may be modified as it progresses. Qualitative data at the start appears unordered and phenomenological. Hence, a thorough analysis is needed to make sense of the disparate information. Otherwise subtle biases and selective attention may cloud the conclusions. Since, qualitative approach is highly individualistic and idiosyncratic there is no single way to perform the analysis. Some researchers use the data very meticulously and in fact come up with a semi-mathematical model out from the data they have collected, other researchers are more improvisational and use the data merely as a resource (Mariampolski, 2001, p. 255).
Quantitative Analysis
Quantitative techniques attempt to eliminate the subjectiveness of the qualitative methods. Quantitative analysis allow for statistical analysis that can help verify or provide confidences in the data. They include methods such as market tests, trend analysis and exponential smoothing. The first step in the quantitative analysis process is to count and rank the responses on the basis of frequencies. The second step is to calculate percentages. The processes and concepts include raw data, frequency, measures of central tendency, normal distribution, asymmetric distribution, spread of distribution, variances, the standard deviation, inferential statistics, bivariate statistics, testing techniques, regression analysis, multivariate analysis, multiple regression, factor analysis, cluster analysis, and discriminant analysis (Nykie, 2007102).
The analysis performed in the present research report is basic quantitative, where simple comparisons of number and trends are done. In addition, some part of the analysis is also qualitative in nature, for instance the nature of tax exemption rule in both the countries Brazil and India. However, the aim in both the types of analysis is merely to find which is the better among both the countries.
INVESTING IN BRAZIL AN ANALYSIS OF VARIOUS ISSUES
Brazil is the largest economy in South America. The country is increasingly becoming a force in the world markets, thanks to rising exports and progressive trade and fiscal policies. The main parts of the economy are agriculture, mining and manufacturing. Brazils young and growing population and large consumer markets have attracted significant inflows of foreign investment in recent years. Brazils prospects as potentially a major foreign investment are analyzed in the following subsections
Demographics Neutral
Brazil has the fifth largest population in the world and is also one of the fastest growing. The composition of its populace gives this factor a neutral ranking. The youth population is 25 of the total population which is fair but well below the proportion of youth in India. In addition, the percentage population above 60 years is also higher than that of India, which leads to conclude that the Brazils population is relatively aging in comparison to that of India. Further, its population rise is also expected to continue till 2050, by which time the population in countries like China and India are expected to stabilize. Brazils businesses are set to expand along with an accelerated growth in personal savings, leading to a stronger economy. However, the population of Brazil is something of a double sword. That is, the improvements that the country expects to gain can offset the stress placed on the economy due to an increase in its population. (Tiku, 200841-44 United Nations, 2010)
Economic performance Neutral
Brazil has a large working population, but it is primarily employed in low-wage, labour-intensive jobs such as agriculture, retail sales and construction brazils per-capital GDP has grown about 1.5 percent per year in absolute terms, however, during the past several decades it has declined relative to other emerging economies such as Korea, India, and Russia, whose GDP gains are between 6 and 9 percent every year. In comparison, Brazils economy registers as anaemic, with real growth rates often falling below 3 percent. Indias per capita GDP is expected to surpass Brazil, although a decade ago Brazils was nearly twice that of Indias. Most experts point to the poor productivity as the main culprit behind Brazils slow GDP growth. About 20 percent of the population is employed in low-wage agricultural jobs, an industry that represents just 8 percent of the economy. Brazil also has an enormous informal economy comprised of workers who do not hold regular jobs with benefits. Many individuals and companies operate in this gray economy to avoid taxes. According to McKinsey, this segment accounts for 55 percent of the total employment, and more than 80 percent of new job growth. According to World Bank, this segment of the labour force represent 40 percent of the Brazils GDP, compared with about 10 percent for the United Staes and less than 15 percent for China. These factors are also responsible for Brazils standing as having one of the worlds least equitable income distributions. (Tiku, 200844 McKinsey, 2010 World Bank, 2010)
Open trade Favourable
Brazils open trade is considered favourable for economic development. Its trade policies are liberal as compared with some of its neighbouring countries. Such open policies are attractive for investors interested in investing in developed countries, whose main source of frustration is the openness to foreign trade. According to IMF, Brazils average export tariffs were only slightly more than China. While both imports and exports are rising, export growth is outpacing imports, resulting in major trade surpluses. The countrys main exports include metals used in airplanes and other transport applications, such as aluminium, titanium, and magnesium alloys, metals, oils and fuels, soybeans, and grains. Growing demand for basic materials in other fast-growing emerging countries is a positive sign for Brazil. Its exports of heavy manufacturing inputs such as iron ore could grow rapidly for years to come. Agricultural exports are also significant parts of the countrys exports and are central to the Brazilian economy, which is responsible for 20 percent of Brazils labour force. in recent years, prices have risen for corn and sugarcane commodities as they are increasingly being used as biofuels and feedstock in foreign markets, consequently driving higher export revenues. In other respects, Brazil is less open than its neighbours. For instance, several agencies like World Bank rate Brazil as one of the most difficult countries in the world in which to start a business. The investment in the country is definitely impeded by such obstacles, though the country is more open to foreign trade than most BRIC nations. Thus, its foreign trade appears to be a profitable investment opportunity. (Tiku, 200844 IMF, 2010 World Bank, 2010)
Infrastructure Development Neutral
Infrastructure in Brazil is uneven and merits a neutral ranking. Brazil claims one of the worlds largest aerospace companies and admirable cell phone internet penetration rates, yet its interior regions are virtually trackless. In the year 2006, WEF ranked Brazil as 8th out of 12 Latin American countries in terms of infrastructure quality. A major hurdle is the dismal quality of the countrys roadways and ports, which ranked 12th i.e. the last place and 10th i.e. near to the last place, respectively on the WEF scale. Offsetting these factors, however, are the adequate supplies of electricity, high-quality air transportation, and the underdeveloped miles of navigable river that could help speed transportation of fresh agricultural products from interior regions to urban international markets. Roughly 56 percent of Brazilians enjoy advanced telecommunication systems by four large mobile operators. (Tiku, 200848 WEF, 2010 CIA, 2010)
Transparency and Rule of Law Unfavourable
While Brazils financial and economic prospects have gradually improved in recent years, its scores in the area of openness and rule of law have declined and are considered unfavourable. Transparency International is an independent organization that surveys business executives worldwide about their perceptions on the level of transparency in legal and business transactions and the enforceability of laws and contracts. In its 2009 Corruption Perceptions Index, Brazil ranked 75th among all the countries with a score of 3.7, representing a cumulative drop of ranking of 42nd over the last seven years, and has consistently been ranked below its last years ranks for the past 5 years. In addition, the WEF assessments show an inefficient legal system as a major factor that could contribute to poor rule of law scores and in turn low levels of capital investment in Brazil. The allegations of corrupt political practices in the highest levels of countrys administration have become routine, and many Brazilians view bribery as a normal course of business, thus leading to this unfavourable ranking. if business contracts cannot be enforced cost-effectively, people would be less willing to invest in ventures that could put their intellectual property and other types of assets at risk. (Tiku, 200848 WEF, 2010 Transparency International, 2010)
Education and Training Unfavourable
Education and training in Brazil have done little to contribute to the nations recent economic growth, and, as such, it has been given an unfavourable ranking. Though Brazil has a high level of literacy, with 88 of the population able to read and write, formal education at the primary and secondary levels is failing to produce students capable of competing in math and science with students from other regions of the world. Moreover, low levels of public funding for college-level programs makes it more difficult for poor students to attend institutions of higher education. United Nations data ranks Brazil at 75th out of 125 countries based on the number of students enrolled in post-high school-level programs. Continued efforts may help slow the widening gap between Brazilian students and those in countries that have historically made more investments in education, including India and Korea. Stronger economic growth would mean higher tax revenue for Brazils government and more money to spend on education. This likelihood of increased tax returns should please investors, many of who remain apprehensive about the nations poorly funded education infrastructure. (Tiku, 200851 United Nations, 2010)
Financial systems and Policies Favourable
Brazil has made enormous strides in improving its financial position in the past decade, and has received a favourable ranking for the same. The countrys reserves have more than doubled since 2000, providing the government with a cushion to help absorb changes in the global economy. In fact, Brazil is one of the very few nations that have had a positive impact post the economic crisis of 2008-2009. The floating exchange rate, lower inflation rates, and tight fiscal policy are yielding good results for the company with budget surpluses exceeding 4.5 percent of GDP. On the negative side, Brazil has very high levels of public debt, close to 72 percent of the GDP. A large chunk of public spending is allocated to particular projects or categories that limit the governments ability to spend on investment that could help spur faster economic growth. Interest rates are also quite high, ranging in the 17 to 19 percent range during much of the past decade, with occasional spikes above 20 percent. These rates have helped keep the inflation low, but also made it costly for companies to borrow to fund business start-ups or expansion. This in turn limits that economys growth, as small and mid-sized business typically create most the new jobs in an economy. Further, Brazils financial services sector is considered underdeveloped by international standards. Equity markets account for only about 60 percent of the GDP, a low level suggesting that many more firms could potentially access equity markets as a source of capital. Bank deposits are also low relative to GDP, at 32 percent compared with 66 percent in India. This, banks and investment firms can play a bigger role in helping the countrys domestic business tap into much-needed financing. (Tiku, 200851, 54)
INVESTING IN INDIA AN ANALYSIS OF VARIOUS ISSUES
India suffered from misplaced priorities in its immediate post-independence period. Further, the closed economic system resulted in a stagnant economy barely averaging a 3 growth. On top of it, the Indian population more than doubled during the first 50 years of self-governance. The result of all this was entrenched poverty and neglect that persisted until recently. This all changed in the late 1980s, and the country saw an even more dramatic transformation of its economy in the 1990s. Today, India promises to have one of the fastest-growing economies in the next half century. It has achieved a good, though short history of strong growth, with emergence of world-class companies in many cutting-edge industries. Indias prospects as potentially a major foreign investment are analyzed in the following subsections
Demographics Favourable
India has the second largest population in the world with a growth rate that has been curbed but is still on the higher side. However, the population of the country, in conjunction with a large number of working-age adults makes the demographics favourable. India is known as one of the worlds youngest countries with over half its population under the age of 25, while those over the age of 65 account for less than 6 percent of the total population. Combined, these two variables portend an unstoppable forward motion in the coming decades. In terms of demographic boom, India does lag behind China currently. However, it is already experiencing declining fertility rates as its national income is increasing. Meanwhile, its working age population is expected to grow by approximately 150 million in the next decade, a number equal to the entire working population of the United States, up from 58 percent in 2000 to a peak of 64 percent in 2035. Hence, Indias growing population can be a strong positive force provided the nation succeeds in nurturing and educating its youth and achieves a broad distribution of wealth and sources. Indias enormous potential, if properly cultivated, can transform into a major surge in growth and innovation. (Tiku, 2008111-113 United Nations, 2010)
Economic performance Favourable
India ranks favourably in terms of economic performance because of its expanding middle class, robust GDP growth and greater productivity. Several estimates judge Indias middle class to be 25-30 percent of the total population. The middle class on the basis of purchasing power represents 250 to 300 million people, equal to the entire population of the United States. These consumers are moving rapidly up the consumptions scale which has led to a fast-growing consumer market that is attracting investment from multinational firms such as Wal-Mart. The middle class comprises of about 30 million households, with another 75 million households that come under the aspiring class, poised to embark on a wave of consumption. The trend of growth in consumer class has strong reasons to propel it forward. The indicators of the size of a nations middle class include per-capital income and the ratio of richest to poorest individuals, reflecting on whether the wealth is concentrated among a small subset of the population or is distributed more equitably. The growth in Indias middle class depends on the higher rates of GDP growth and engaging more of the population in productive employment. (Tiku, 2008113-114)
Open trade Favourable
Indian foreign direct investment (FDI) totals are quite low because of past restrictions. Indias largest source of FDI is the European Union (EU), but India has only 1.3 of the EUs worldwide direct investments. But the liberalization of Indias markets is paving the way for larger FDI inflows from other regions in addition to EU. The FDI confidence index had rated India as the second most popular destination in the world for FDI. Though India slipped one rank, losing out to US, in the year 2010, it is still considered to be one of best FDI destinations. Indias attractiveness factors include the upswing of sentiments by foreign companies, the establishment of fast-track approvals that reduce the need to interact with Indian bureaucracy, increases in FDI caps, and the availability of favourable financing terms. These are the signs of openness that are likely to encourage foreign forms to increase their expansion in India and profit from investment opportunities made available to them. The current policy allows FDI up to 100 percent in many sectors, including power, mass transit, airports, oil and gas exports, drugs and pharmaceuticals, mining construction, houses and infrastructure. In addition to all this, India has also embarked aggressively on a plan to privatize its large stakes in public enterprises, from steel to energy to banking. However, there are still entrenched interests resistant to changing the status quo. These range from leftist elements to labour unions that see privatization as a diminution of control and a source of lost jobs and benefits. However, governments continuing need for capital to spend on poverty-eradication projects and to develop infrastructure will likely results in the reduction of its ownership, causing higher efficiency, more open competition, and greater opportunity for increased FDI. Privatization of state-owned enterprises has been received with great enthusiasm by both domestic and foreign investors. The pace of such privatisation is likely to increase in the future, creating even more opportunities for investors. (Tiku, 2008123-124)
Infrastructure Development Unfavourable
India lags behind severely in terms of infrastructure and the investment and interests of the government to support the same. There are problems on several fronts including basic utilities, sanitation, ports, urban and freight transport, and rural roads. These drawbacks directly affect the efficiency and quality of production as well as quality of life, which in turn influence a nations economic success. Despite serious attempts to improve in this category, this continues to be a major challenge, given the massive amount of resources needed to complete the task at hand. Thus, India receives an unfavourable rating in this segment. A significant caveat on Indias growth potential is its dependence on imports of energy supplies. The lack of internal energy resources is likely to keep the growth in check, particularly if energy prices continue to rise. Energy generation and distribution, oil refining, and various infrastructure projects are priority areas for new investments. Today, India imports 70 percent of its oil and derives 30 percent from internal reserves the reverse was true in 1980. Greater energy efficiency and new investments in nuclear power are seen as possible ways to ease the energy crunch. Currently, India consumes about 1.5 barrels of oil per 1,000 increase in GDP triple that of Italy, France, and Germany and about twice the U.S. ratio. (Tiku, 2008124-126)
Transparency and Rule of Law Neutral
Indias judiciary is fiercely independent and relatively free of political oversight. It has at times raised eyebrows and ruffled feathers by handing out verdicts against the government or powerful elite. At the same time, according to some sources, bribes are not uncommon in day-today operation of the judiciary or even the general operations. Transparency International reported in 2007 that 77 percent of Indias citizens described the judicial system as corrupt, and that 36 reported paying bribes. The countrys judiciary also has an enormous back log of over 20,000,000 cases. Nevertheless India is improving its ranking in Transparency Internationals Corruption Perception Index, though it is still ranked behind Brazil at 84 with a score of 84. (Tiku, 2008126-128, Transparency International, 2010)
Education and Training Favourable
Despite Indias enormous rural population and lack of infrastructure, the country boasts a highly educated workforce that makes it a formidable presence in the world market for skilled labour. While India lags in secondary education levels on a percentage basis from its more developed peers such as China, the country on an absolute basis has among the largest number of science, technology, and engineering graduates in the world. India produces 400,000 graduate engineers, second only to Chinas 490,000. It boasts of more than 6000 PhDs a year only China and Japan produce a larger number. The graduates of Indian colleges and science and technical schools are fully fluent in English, enabling them to collaborate efficiently with U.S. corporate customers. Thanks to the minuscule telecommunication costs, this competitive workforce is able to work at a fraction of cost of similarly skilled workers in developed countries. These factors are strong enough to offset Indias still low levels of per capita income, lack of widespread technology, and low literacy level about 40 percent of Indias population cannot read or write. (Tiku, 2008128)
Financial systems and Policies Favourable
Indias financial standing has improved substantially since 2000 because of recent growth in exports and greater productivity, and due to this it has been ranked as favourable. The national governments budget deficits have declined as the GDP has increased, falling to 6 percent of GDP in 2007, compared to more than 10 percent of the GDP in 2002. The currency account deficit is being used to finance infrastructure investments that are essential. India has liberalized its rules dramatically by allowing an easier registration process for foreign financial services companies and thereby allowing foreign investors to participate in the securities market. Financial services companies in India represent enormous potential as per capital income increase. Many domestic banks and brokerage firms are small by international standards, limiting the side of deals that they can manage. Well-capitalized domestic banks, and the entry of Western Banks, are helping to fianc Indias growing business (many of which are still substantially state owned) as they expand the services offered to urban populations and expand into rural areas. (Tiku, 2008128-132)
COMPARISON OF BRAZILIAN AND INDIAN ECONOMIES
GDP Statistics Comparison
CountryItem200720082009Brazil EMBED PBrush GDP (PPP)1.924 trillion2.022 trillion2.024 trillionGDP Per capita PPP9,90010,30010,200GDP Real growth rate6.15.10.1The world ranking for GDP (PPP), GDP Per capita PPP and GDP real growth rate for the year 2009 were 10, 104, and 104 respectivelyFor the year 2009, the GDP composition by sector stood at 6.5 for agriculture, 25.8 for Industry and 67.7 for services sector.India
EMBED PBrush GDP (PPP)3.113 trillion3.344 trillion3.561 trillionGDP Per capita PPP2,8002,9003,100GDP Growth rate97.46.5The world ranking for GDP (PPP), GDP Per capita PPP and GDP real growth rate for the year 2009 were 5, 164, and 13 respectivelyFor the year 2009, the GDP composition by sector stood at 15.8 for agriculture, 25.8 for Industry and 58.4 for services sector.Table 4.1 GDP Statistics Comparison (Data Source CIA World Fact book HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html)
Looking at the data presented in the table 4.1 above, it can be seen that Indias GDP (PPP) has been consistently higher than that of Brazil. The real growth rate of the GDP has been much higher for India as compared to Brazil. The figures are extremely important since the data depicts the crucial pre- and post- recession economic conditions of the country. The year 2009 saw the real rate of Brazilian GDP to shrink to an extremely low rate of 0.1 from a fairly healthy figure of 5.1. During this period, Indias GDP too decreased, but the value stood at a respectable 6.5. The most surprising aspect of the GDP figures given is however the per capita GDP (GDP). Brazilian figures are more than 3 times that of Indian data, showing that the economic condition per person is much better for a person residing in Brazil than for a person residing in India. The per capita figures for both the country increased consistently for the last 3 years. Further, the GDP distribution across agricultural, industrial and services sector is also different for both countries. Indias GDP from agricultural sector is 2.5 times that of Brazil, because India is predominantly an agricultural country. On the other hand, the industrial sector for both countries accounts for the same percentage of GDP. The services sector has the highest proportion of GDP for both countries.
Geography and People
CountryItem200720082009Brazil EMBED PBrush Population190.12 million190.17 million198.73 millionPopulation growth rate111.199Brazil is the fifth most populous country in the world, and the population growth rate is 110th in the world. The male-female ratio is 0.98 (2009)The birth rate is 18.43 births1000 population infant mortality rate is 22.58 deaths1000 live births, life expectancy at birth is 71.99 yearsBrazil is the 5th largest country in the world with an area of 8,514 thousand sq. Km. 86 of the population is urban, the rate of urbanization is 1.8India
EMBED PBrush Population1,124. million1,139.9 million1,156.9 millionPopulation growth rate1.31.31.407India is the second most populous country in the world, and the population growth rate is 93rd in the world. The male-female ratio is 1.06 (2009)The birth rate is 21.72 births1000 population infant mortality rate is 50.78 deaths1000 live births, life expectancy at birth is 66.09 yearsIndia is the 7th largest country in the world with an area of 3,287 thousand sq. Km. 29 of the population is urban, the rate of urbanization is 2.4Table 4.2 Geography and People, Data Sources CIA World Fact book ( HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html), World Bank
The table 4.2 above, showed a comparison of the geography and people of the country. The population data shows clearly the per capita GDP differences. The population of India is roughly 6 times that of Brazil, while its area is about a third of that of Brazil. Further, more than 88 of Brazils population is urban as compared to 29 of Indian-urban population. The living conditions can also be gleaned from the infant mortality rate, which in case of India is more than twice of that of Brazil. This is also true for the population growth rate of India as compared to Brazil. The life expectancy at birth is also higher in Brazil (71.99 years) as compared to India (66.09 years). All these factors lead one to conclude that the living conditions in Brazil are better than that in India.
Economic Social Conditions of the People
CountryItem2009Brazil EMBED PBrush Labour Force95.21 million (World Rank 6)Labour force by occupationAgriculture 20, Industry 14, Services 66Unemployment rate7.4 in 2009 and 7.9 in 2008Population below poverty line26 in the year 2008Literacy rate88.8 (Adult literacy 15 years)Education Expenditure5.05 of GDP in the year 2005India
EMBED PBrush Labour Force467 million (World Rank 2)Labour force by occupationAgriculture 17.5, Industry 20, Services 62.6Unemployment rate10.7 in 2009 and 10.4 in 2008Population below poverty line25 in the year 2007Literacy rate61 (Adult literacy 15 years)Education Expenditure3.2 of GDP in the year 2005Table 4.3 Economic and Social conditions of People, Data Source CIA World Fact book
Table 4.3 above, describes the socio-economic conditions of the people living in Brazil and India. The labour population is more than 4 times larger in India, which comes as no surprise given its population. As a percentage of the population, about 40 of the population of India forms the labour force as compared to 48 of the population of Brazil. The literacy rate is extremely high in Brazil at 88.8, as compared to a worrying 61 in India. Indeed, literacy is one of the crippling factors affecting the economic conditions of people in India. The percentage of population below poverty line is similar, though when this figure is converted into the numbers, the Indian figure is almost 6 times that of Brazil another of the major drawbacks of the Indian economy. Indian government in the year 2005 spent approximately 3.7 of the nations GDP on education, while Brazil spent 5.05 of the GDP on education. This is problematic for India since high illiteracy is one of its major problems.
Countrys Economy
CountryItem200720082009Brazil EMBED PBrush Inflation rate3.75.94.2Imports (goodsservices)120.6 billion173.1 billion136 billionExports (goodsservices)160.6 billion197.9 billion158.9 billionMarket value publicly traded shares1,370 billion589.4 billion976 billionInvestment ( of GDP)17 in the year 2009Public Debt ( of GDP)46.8 (2009)38.8 (2008)Central bank Discount Rate8.75 (31 Dec. 2009) 20.48 (31 Dec. 2008)Stock of Money (in Billions)125 (30th Nov. 2009) 95.03 (31st Dec. 2008)Stock of Quasi Money (in Billions)645 (30th Nov. 2009) 724.5 (31st Dec. 2008)India
EMBED PBrush Inflation rate4.97.310.7Imports (goodsservices)230.5 billion322.3 billion253.9 billionExports (goodsservices)151.3 billion200.9 billion165 billionMarket value publicly traded shares1,819 billion645.5 billion1,301 billionInvestment ( of GDP)32.1 in the year 2009Public Debt ( of GDP)59.6 (2009)79.6 (2008)Central bank Discount Rate4.75 (9 Dec. 2009) 6 (31 Dec. 2008)Stock of Money (in Billions)278.8 (30th Dec. 2009) 239.9 (31st Dec. 2008)Stock of Quasi Money (in Billions)853.4 (30th Dec. 2009) 687.7 (31st Dec. 2008)
Table 4.4 Countrys Economy, Data Sources CIA World Fact book ( HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html), Nation Master ( HYPERLINK httpwww.nationmaster.comindex.php httpwww.nationmaster.comindex.php)
Table 4.4 gives a general picture of the economic conditions prevailing in Brazil and India. Comparing these figures, the first aspect that comes up is the inflation rate. Brazils inflation rate as remained more or less steady in the period between 2007 and 2009. The rate increased in 2008, but 2009 saw the rate coming down. Whereas in India, the inflation rate almost doubled in the year 2008, and also doubled that of Brazil, and in 2009 also the inflation further increased. The 2009 inflation rate for India is also more than double that of Brazil. The investment rates of India, as a percentage of GDP, is also double that of Brazil, showing a healthy interest of both domestic and foreign investors in the country. The stock of money available in India is more than twice that of Brazil, which reduces its risk due to public debt somewhat. The public debt increased in 2009 in Brazil, while reduced in India. However, the public debt in India is much more than that of Brazil even after a 20 reduction. India managed to keep its Central bank discount rate steady, while the Central bank interest rate in Brazil reduced by almost 4 times in the year 2009. The export figures of both countries are similar, but India imports double of what it imports and double that of Brazils exports also. The conclusion that can be drawn is that India is a net importer while Brazil is a net exporter (as its exports are higher in value than imports). A reliance on imports to fulfil its requirements is always a risk. The market value of publicly traded shares is higher in India by 50 as compared to Brazil, which is in tune with its investment percentage.
Countrys Global Links
CountryItem200720082009Brazil EMBED PBrush External Debt237.4 billion262.9 billion216.1 billionExchange Rates per USD1.85 BRL1.8644 BRL2.0322 BRLCurrent Account Balance- 11.28 billion (2009)- 28.19 billion (2008)Foreign exchange Reserve 238 billion (2009) 193.8 billion (2008)FDI Stock (Domestic) 318.5 billion (2009) 294 billion (2008)FDI Stock (Abroad) 124.3 billion (2009) 127.5 billion (2008)Export partners (2008)Largest is US (13.7), followed by Argentina (8.7), China (8.1), Netherlands (5.2) and Germany (4.4)Import partners (2008)Largest is US (14.9), followed by China (11.6), Argentina (7.9), and Germany (7)India
EMBED PBrush External Debt220.9 billion232.5 billion223.9 billionExchange Rates per USD46.78 INR43.319 INR41.487 INRCurrent Account Balance- 8.399 billion (2009)- 30.41 billion (2008)Foreign exchange Reserve 287.5 billion (2009) 354 billion (2008)FDI Stock (Domestic) 161.3 billion (2009) 123.4 billion (2008)FDI Stock (Abroad) 77.42 billion (2009) 61.77 billion (2008)Export partners (2008)Largest is UAE (12.3), followed by US (11.7), China (5.4), and Singapore (4.5)Import partners (2008)Largest is China (10.8), followed by Saudi Arabia (6.9), US (6.7), UAE (6.7), and Iran (4.2)Table 4.5 Countrys Global Links, Data Sources CIA World Fact book, Nation Master.
As seen in the earlier section, India is a net importer, while Brazil is a net exporter. The main import as well as export partner for Brazil is US, followed by Argentina and China (for both exports and imports). For India, the main export partner is UAE, while the main import partner is China. US is the second largest import as well an export partner for India. Indias Forex reserves are much higher than Brazil, though the amount of FDI that India attracts is nearly half that of Brazil. The external debt of each country is similar and the value fluctuated between years 2007 and 2009. Both the countries managed to reduce their negative current account balances from the year 2008. While Brazil managed to bring the value down by 60, India managed to bring the value down by more than 70. The figures combined with the cash and Forex reserve values show that India has more ability to accumulate capital than Brazil
Countrys Development Indicators
CountryItemYear indicated in bracketsBrazil EMBED PBrush Gini Index56.7 (2005)56.99 (2004)Starting a Business (2009)120 days (Brazil)13 days (OECD average)Malnutrition (2007)2.2 ( of children under 5)People living with HIVAIDS730,000 (2007, 16th highest in the world)Health Expenditure (2006)7.5 ( of GDP), 427 (per capital)Market Capitalization (2008)For all listed companies 36.6 of GDP ( 589 million)Telephone (Main lines 2008)41,141 million (World Rank 6)Telephone (Mobile 2008)150.641 million (World Rank 5)Internet Hosts (2009)15.929 million (World Rank 5)Internet Users (2008)64.948 million (World Rank 5)Electricity production438.8 billion kWh (2007, World Rank 11)Electricity consumption404.3 billion kWh (2007, World Rank 10)Electricity imports42.06 billion kWh (2008, Supplied by Paraguay)Electricity exports2.034 billion kWh (2009)India
EMBED PBrush Gini IndexNot available36.8 (2004)Starting a Business (2009)30 days (Brazil)13 days (OECD average)Malnutrition (2006)43.5 ( of children under 5)People living with HIVAIDS2.4 million (2007, 4th highest in the world)Health Expenditure (2006)3.6 ( of GDP), 29 (per capita)Market Capitalization (2008)For all listed companies 53 of GDP ( 645 million)Telephone (Main lines 2010)36.76 million (World Rank 7)Telephone (Mobile 2010)545 million (World Rank 2)Internet Hosts (2009)3.611 million (World Rank 22)Internet Users (2008)81 million (World Rank 4)Electricity production723.8 billion kWh (2007, World Rank 6)Electricity consumption568 billion kWh (2007, World Rank 6)Electricity imports5.27 billion kWh (2009)Electricity exports810 million kWh (2009)Table 4.6 Countrys Development Indicators, Data Sources CIA World Fact book, Nation Master, World Bank
Economy is not merely confined to the monetary aspect, it also comprises of the people living the country, their living conditions and the facilities available to them. Looking at the table above, it can be clearly seen that Brazil surpasses India in all these aspects. While, the Gini index that signifies the income distribution is better in India, which leads to better social inclusion, and also it is much faster to start a business in India, as compared to Brazil which takes more than 5 times the number of days taken in India. Further, the market capitalization of all the listed companies is more than 50 of that of the GDP in India, which is 15 higher than that of Brazil. Also, in terms of US dollars, the market capitalization in India is 50 million higher than that of Brazil. However, the situation starts to deteriorate, when health expenditures, facilities and problems are considered. The statistics are merely selective, but they give enough of an indication to show the true state of healthcare in both countries. The first issue is the health expenditure in India which is lower than that of Brazil in terms of GDP. However, as the Indian GDP is extremely higher compared to that of Brazil as is the population, the statistic by itself does not give any useful insight. But when the per capital expenditure is compared, Indias expenditure is merely 29 as compared to a whopping 427 spent by Brazil. The malnutrition prevalence shows the quality of basic living in the countries. The figures show that almost half of the children under 5 may be malnourished, as compared to 2.2 of the children under 5 in Brazil a very disturbing aspect. Further, the number of people living with HIVAIDS is also extremely high in India. In India, the number of telephone main lines is less than that of Brazil but India has the 2nd largest number of mobile phone users in the world. Also, while the number of Internet host in Brazil is much higher than that in India, the number of Internet users is higher in India. Finally, the electricity consumption and production is higher in India. Indian electricity exports are half that of Brazil, but the export values are very also low as compared to Brazil (one eighth).
EQUITY INVESTMENT DECISION ANALYSIS
Equity Price Indices
The figure below shows the equity price indices of both the countries for the period between January 2007 and January 2009. The period is important since it covers the economic crisis completely. It can be seen that the equity indices of both the countries started increasing post October 2007. While Brazils indices doubled, Indias indices increased by 60-70. During in the economic crisis however, the indices of both the countries fell sharply to 50, in the last quarter of 2008 the change being more severe for Brazil, considering its high-value before falling. The year 2009 saw the Brazilian index rising rapidly than the Indian indices which continued to fluctuate slightly above the plummeted value. The changes in asset equity indices are important for developing countries as it has a direct effect on their asset prices. Brazilian index is based on the Ibovespa, while Indias indices trends can be found by following either the Sensex or Nifty. Nifty is similar to Ibovespa since they the same total market cap weighted method index measurement, while the sensex uses the free-float market cap weighted method.
The analysis of the latest MSCI Barra indices showed that Indian stocks are the best performers among those of the BRIC nations. The returns given by the stocks were nearly 113.58 in the fiscal year 2009-2010. The comparative emerging market index that covers all the developing countries was 77.26 gain. In addition to this Indian stocks also outperformed similar stocks from countries like US, UK and China during this period. MSCI Barra Indices are a measure of returns from the stock markets across the world. Brazilian stocks too performed extremely well giving an extremely high return of 103 percent in the fiscal year 2009-2010. (Economic Times, 2010)
Taxation aspect
In India, capital gains on sale of equity shares are subject to various tax rates depending on whether they are short-term or long-term, listed or non-listed. Short-term listed shares are subject to 10, whilst long-term listed are exempt. Short-term unlisted shares are subject to 30 (FII), or 40 (FDI), whilst long-term unlisted shares are subject to reduced tax rates of 10 (FFF), or 20 (FDI). Despite such facilities, however, many investors use some other specific tax routes to penetrate the Indian market such as Cyprus and Mauritius. (Lessambo, 200932-33) Further, dividends are taxed at 12.5, but are not taxed as income for the recipient. In addition, transactions in securities listed on a recognized stock exchange attract taxes of between 0.017 percent and 0.25 percent. India introduced its first STT in October 2004. Finally, India has signed comprehensive double taxation avoidance deals with many countries. There are area-specific agreements too, relating to aircraft profits, and so on. The Brazilian tax framework parallels OECD tax country systems. Under the Brazilian domestic law, there is no participation exemption or relief from investment. However, dividends are exempt from IRPJ and CSL irrespective of the percentage or value of the participation, the holding period, or the type of entity distributing such dividends. (Lessambo, 200957) The Financial Operations tax (IOF) is levied on selected financial transactions, insurance contracts and securities transactions. The rates vary considerably and change frequently.
As compared to India, Brazils tax system is not very progressive. While both India and Brazil do not yet have a tax on long-term capital gains tax, there is a Securities Transactions Tax (STT) levied in both countries for portfolio investments. The rates in India fall under a pre-specified limit which is reasonable and also in tune with the taxes in most OECD countries. This is not true for Brazil, whose taxes are mostly indirect in nature. While the portfolio investment currently attracts no STT, known as IOF in Brazil, the IOF rates are entirely dependent on the governments decision on how the economy should be revamped, regardless of the interest of foreign investors. (OECD, 200980-84)
Risk due to currency movement
The figure below shows the currency movement for the five year period between 2005 and 2009 for Brazil and India, including the percentage change each year,
The figure shows that India has seen a sharper trend for change than Brazil during the period. However, the year 2009 did show an upward surge in currency exchange, but in case of Brazil, the value has been steadily decreasing post a high in the year 2006. Nevertheless, a steadier currency movement is always deemed better than a sharply fluctuating one, since the investors can have a long-term hedging strategy to counter the currency changes if they are steady. Thus, from an long-term investing stand point Brazil would be a better place, for investors since they can design long-term hedging strategies to save their investment.
Effect of Economic Crisis
The economic crisis has forced many countries to face the possibility of deleveraging. The term deleveraging means, reducing the lead of debt service to a level that can be supported by the available cash flow. This may involve writing down principal or cutting the coupon, or both. (Fledsteing, Fabozzi, 2008786). McKinsey states that it is seen historically that deleveraging for a long period of time is often a consequence of a financial crisis. Further, McKinsey also adds that the phases have been painful, usually lasting for 6-7 years, a reduction in GDP and the reduction in the debt to GDP ratio by as much as 25 percent. To analyze the possibility of deleveraging, McKinsey conducted a worldwide study of the economies that would be most vulnerable to this trend. Both Brazil and India, showed the least possibility of deleveraging showing that their economy was healthy enough to withstand the financial crisis, and would not face any major risk of governmental intervention in the near future. This bodes well for the investors who are interested in investing in these countries. Comparatively, Brazil showed a lower possibility of deleveraging as compared to India, the differentiating sector being the government. This is a bold assumption to make since the governmental inefficiency is equally prevalent in both the countries. The figure 4.3 below shows the results of the survey conducted.
Debt and deleveraging have been shown to be interlinked hence it is logical to simultaneously understand the debt position of Brazil and India. The figure 4.4 below shows the corresponding survey results. McKinsey found that the emerging markets had much lower level of debts as compared to the mature markets. In case of both Brazil and India, the prevalent debt was close to each other at about 150 of the GDP. The corresponding figure for developing countries was 300 of GDP having grown by more than 65 in a decade. The scenario for future is hence one of hope for both the countries for the investors considering to invest in the two economies. Brazil was a better choice here, since the country actually managed to reduce its debt in the period 2000-2008, which shows the commitment of the government towards economic reforms that would bring financial stability to the countrys economy.
FDI inflows assessment
A.T. Kearney regularly conducts a regular survey to determine the confidence in FDI from various investing agencies worldwide. The 2010 survey ranked India as the 3rd best country and Brazil as the 4th best country with a confidence index of 1.64 and 1.53 respectively. The top two investing destinations were China and United States with confidence indexes of 1.93 and 1.67 respectively. China maintained its rank, while both United States and Brazil moved up in their ranks. India, however, moved down from its previous world rank of 2. Investors have significantly been positive about Brazil since 2004 state that has not changed even during and post the economic crisis. The country reached the top five rankings for the first time since 2001. The previous survey in 2007 had ranked Brazil at the 6th position. (Kearney, 20103-4)
The figure below shows the historical trends of the Global FDI inflows as a percentage of the total FDI inflows throughout the world.
Looking at the figure 4.5 above, it is clear that the India has seen a steady increase in the FDI inflows in the past 3 decades. Whereas, in 1980, the FDI inflow was barely 0.1, in 2008 the figure stood at 2.4. However, as compared to China, which also started similarly in 1980, and in the year 2008 had 6.4 of the total FDI inflows, the effort seems lacking. India also fell behind Brazil consistently throughout the 3 decade period, except in 1990, when there was no FDI inflow in the country. Brazil initially had a healthy inflow of FDI but has to start again from scratch from 2000. The increase in the 8 year period has been merely 1 of the total FDI inflow, but the consistent belief in investors as demonstrated by the confidence survey shows that the country is on an upward path as far as the investor willingness is concerned.
Global Competitiveness Ranking
Data by the World Economic Forum demonstrated that for the year 2009-2010, both Brazil and India improved their competitiveness rankings. India moved up by one rank from 50 in 2008-2009 to 49 in 2009-2010, while Brazil moved up 8 ranks from 64th in 2008-2009 to 56th in 2009-2010. Brazil, followed by India also occupied the top choices of economists across the world who considered that the economic crisis had positively affected the competitiveness of the countries. Indias financial markets are considered to be extremely sophisticated, while Brazils technological readiness was formidable. Both countries macroeconomic fundamentals were also considered to be extremely strong, which was another reason why the financial crisis did not affect the countries. (Schwab et al., 200934)
India is a country of many anomalies. The country possesses some of the best universities in the world, but technologically the country lags behind most of its counterparts. While GDP per capita is decent, and the overall GDP is the fifth highest in the world, the gap between rural India, where majority of population resides, and urban India is immense, bringing as much as 26 of the countrys immense population below the poverty line. In fact 42 of the population survives on less than 1.25 dollars a day, while one the other hand, a large number of Indian companies are global players and even leaders in their field. The business sophistication of the country is ranked 26th in the world, financial markets are ranked at 16th, banking sector at 25th and its domestic market is the 4th largest in the world. However, the other main aspects of competitiveness are severely lacking. For instance, the health and education rank at 101st, economic stability rank 96th, though it is improving, and infrastructure ranks at 76th in the world. In addition, mobile penetration rates rank at 116th, Internet penetration ranks at 104th and personal computer penetration ranks at 96th all of which are the among the lowest in the world. These factors severely cramp the competitiveness edge of the country. (Schwab et al., 200932)
The economic downturn has least affected Brazil, which is known as the Latin American giant. The countrys government has taken multiple steps since the 1990s in order to bring sustainability in the financial sector. In addition, the government also tool several initiatives to open up the economy. Both these initiatives have increased the competitiveness of the country to a major extent providing a better environment for private-sector development. Some major aspects of competitiveness in Brazil are its growing domestic market ranked 9th, its financial market ranked 51st in the world and the most developed in Latin America, a sophisticated and diversified business sector ranked 32nd and a significant potential for innovation that is ranked 43rd in the world. There are some factors that hamper the competitiveness of Brazil. The major problem is its macroeconomic stability ranked 109th, the institutional environment ranked 93rd, the efficiency of goods ranked 99th and the labour markets ranked 80th all of which are among the lowest end the world and are poorly assessed, regardless of the improvement initiatives of the government. Also, while the health and education sector is better than India, ranked at 79th and 58th for health and primary education, and higher education and training respectively, they are in need of a major overhaul. This is due to the large number of dropouts and the regional disparities in the quality of education provided, which also need to be addressed. (Schwab et al., 200934)
CONCLUSIONS
Results of comparison of Brazilian and Indian Economy
The first part of the data analysis compared the Brazilian and Indian economies. The detailed comparison consisted of a study of the GDP statistics comparison, geography and people, socio-economic conditions of people, economy of the countries, global links and the development indicators of the economy. Examining all these aspects in detail, it can be said that the Indian economy is stronger than that of Brazil and offers more scope for development. Majority of the problems are a result of high-population, rampant illiteracy and poor health conditions. These issues are mostly a result of the poor governance and corruption. The problems are not so big in Brazil, because of its proximity to US and lower population levels, but the mis-governance and corruptions is still rampant in the country.
The strength of economy is not merely the problems faced currently by the country, but how well it has faced these problems against odds. In this respect, India has been much better since it emerged from being an extremely closed economy to a fairly open one in less than 25 years and has managed to be one of the top most countries in terms of many sectoral developments. The success has been in spite of the several regional tensions prevailing in the surrounding South Asian nations that have affected the country directly. Brazil too has been growing extremely rapidly following a lull in its growth and is an economy to watch out for considering the source of large natural resources which will always be in demand. However, in this case governance is extremely important, since the national resources need to be guarded closely and managed extremely well in order to gain long-term benefits from them.
Results of comparison of Brazilian and Indian Equity Investment climate
The equity investment climate of both countries has been analyzed in the second part of the data analysis section. The factors that were analyzed were equity price indices, taxation aspects, currency movement, affect of economic crisis, FDI inflows, and global competitiveness ranking. Following the analysis, it can be concluded that both the countries India and Brazil are similar in terms of investment climate. The global competitiveness ranking demonstrates these results, which are echoed by the investor sentiments. India is consistently ranked above Brazil in all these aspects, though the differences between the ranking and the corresponding indicator values are not very large.
The present thesis too would echo a similar result as far as the investment climate is considered. The first research question, What factors effect to equity investment has been answered in detail in the data analysis and literature review sections. The second research question, What are the similarities and difference of Indian and Brazilian economy is also answered in detail in the Data Analysis section. Economists always recommend a mixed approach while investing in emerging economies. That is to say, it is recommended that investors should some amount in each country. The similarities and differences between India and Brazil can be summarized as follows. Brazil is essentially a commodity player. That is to say, the economy is affected by commodity prices and they account for forty percent of the total exports from the country. In the long-term India presents the investors with one of the largest bull markets of the 21st century. However, the country faces daunting challenges too especially related to infrastructure finance given its high debt levels and ambivalence towards foreign investment and privatization. Both India and Brazil put greater emphasis on containing inflation, though Brazils success is more marked as compared to India. India has liberalized outflows, and selectively restricted inflows, while Brazil increased outflows by expediting external debt repayments, and then liberalized some outflows. Brazil and India provide some incentives to selected sectors including through import tariff exemptions and subsidized credit. With respect to Indias fiscal policy, staff expects higher revenues to be fully spend, while Brazil is taking advantage of revenue over-performance to achieve better-than-budgeted fiscal balances. With respect to currency exchange regimes, Brazil can be said to be an independent floater, while India is a managed floater with no predetermined path. India sterilizes its foreign exchange intervention, while in Brazil the intervention is fully sterilized consistent with its inflation target. Brazil, followed by India also occupied the top choices of economists across the world who considered that the economic crisis had positively affected the competitiveness of the countries. Indias financial markets are considered to be extremely sophisticated, while Brazils technological readiness was formidable. Both countries macroeconomic fundamentals were also considered to be extremely strong, which was another reason why the financial crisis did not affect the countries.
The primary research question prompting the present research to be undertaken was Which among the two nations Brazil India, is a better choice for international equity investment The answer to this question would be India. The country has better financial infrastructure and despite the rampant corruption has a much better industry record and is at par with most of the global standards. The problems of the country are no doubt major, but are by no means insurmountable. The government too is taking a much more active role in making the socio-economic conditions better which is the root cause of the problems in the country. Further, the diplomatic ties that the country has with other countries, the regional tensions that it faces with aplomb on a daily basis, as well as the immense potential of the population of the country as demonstrated by the existence of numerous world-class institutions, gives it a definite edge over Brazil. The country still needs to battle issues such as corruption and terrorism, in addition to the socio-economic issues, before it can rise more significantly in investors esteem as a better place of investment. India has seen a steady increase in the FDI inflows in the past 3 decades. Whereas, in 1980, the FDI inflow was barely 0.1, in 2008 the figure stood at 2.4. However, as compared to China, which also started similarly in 1980, and in the year 2008 had 6.4 of the total FDI inflows, the effort seems lacking. India also fell behind Brazil consistently throughout the 3 decade period, except in 1990, when there was no FDI inflow in the country. Brazil initially had a healthy inflow of FDI but has to start again from scratch from 2000. The increase in the 8 year period has been merely 1 of the total FDI inflow, but the consistent belief in investors as demonstrated by the confidence survey shows that the country is on an upward path as far as the investor willingness is concerned.
RECCOMENDATIONS FOR FUTURE RESEARCH
The present study was based on the results of data taken from IMF and the data was analyzed using simple comparative means. This may be one of its drawbacks, since financial ratios were not used to analyze trends of individual stocks. This may not cause any difference in the conclusion arrived at, but it would definitely cross-check the data and assumptions taken by the various agencies. Further, there was no primary data used for the research. That is to say, a real interviewquestionnaire with some investment analysts would have further strengthened the conclusions of the study. Again, as the data used was secondary and from an extremely reputable source, the results and conclusions might not have varied a lot.
REFLECTIVE ANALYSIS
The present thesis was an experience that brought together several aspects of practical learning for me. Even before the research, I had been aware of several concepts of learning such as the famous David Kolbs model based on Experiential Learning Theory, Honey and Mumfords model, Anthony Gregorcs model etc. However, the theories had been abstract concepts for me. Based on the way I conducted the research, I would consider myself to be a assimilator, according to Kolbs model, at least for the present project. I had chosen reflective observation to observe the data trends from different resources, and abstract conceptualization for visualizing impact of the changing trends of various related parameters on the investment attractiveness of the country (BrazilIndia).
Country analysis reports, and facts based on them are one of the most seen reports by any average financial person in the present times. Having to actually write a report, by compiling information and analysis made me look at the theoretical concepts in more depth than what I did earlier. Hence, while the information covered in the Literature Review consists of general terminology, the number of bookspapersjournals I scoured for the information has given me a better understanding of the topic. The Methodology chapter was an eye opener, since I had to select one from several possible methods for conducting the research. In doing so, I had to extrapolate the types of errors that would be possible if I selected a particular data selection research approach. This has made me more aware of the issues that surround the statistical agencies such as the recentness of the data, the authenticity, the cross-references with other statistical agency data etc.
Performing the analysis was a good exercise in improving my practical analytic skills. While the analysis itself was uncomplicated and consisted of either observing comparative trends or merely comparing values, drawing conclusions was an interesting experience since it was dependent on multiple factors apart from merely a parameter showing a better trend for one country rather than other. The Education Literacy aspect of Brazil and India is an apt case in point. At the first glance, Brazil seems way better than India since over 88 of Brazils population is literature, as compared to 61 in India. Even considering the number of illiterate people, which depends on population, Brazil scores much better than India. However, the government of Brazil does not focus on education too much, and while many people can read and write, the level of skilled education is woefully lacking, as compared to India, where the educational institutions are at par with the best in the world.
The research project, in my view has honed my analytical abilities as well as inculcated a habit of performing extensive groundwork before approaching the actual problem, so that every aspect and requirement is clear before tackling the problem. The project could have been improved, however, by talking to analysts regarding their opinions on the research problem, which could have given the results more authenticity in addition to learning the actual standards and processes followed in the industry.
Brazil is one of the largest exporters of natural resources in the world. The period post-2003 saw its currency gaining against US dollar and reduction of its inflation. On the other hand, India has been among the top 10 highest growing economies for the past 2 decades, maintaining its GDP growth above 6 even in the face of the economic crisis. Both countries have their downsides too. In case of Brazil, it is the complex tax laws, corruption, severe income inequalities, and unavailability of skilled education for its citizens while India has serious battles with crippling poverty, rampant illiteracy, shortage of critical infrastructure and lack of sufficient energy resources in the face of rising oil prices. According to the detailed comparative analysis of the two countries done in this paper, India is a better place to invest in as compared to Brazil even in the face of challenges. The primary reasons for this is a very strong financial base combined with a young population, which means that the growth condition is likely to remain the same or even better in the coming few decades.
INTRODUCTION OVERVIEW (BACKGROUND INFORMATION)
BRIC economies
Emerging markets are of major interest because their stock markets have exhibited extraordinary outperformance versus developed countries over lengthy periods of time. In this context few economies have been at the forefront of investment decisions as much as what are known as the BRIC economies. Coined by Goldman Sachs in 2003, the term BRIC stands for Brazil, Russia, India and China. The term BRIC was used in the now famous BRIC report, officially known as the Global Economics Paper No. 99 titled Dreaming with BRICS The Path to 2050. (Skinner, 200715) Goldman Sachs focused on these four countries because they are the four largest of all emerging economies and, even on the basis of nominal GDP are already among the twelve largest economies in the world. Further, Goldman Sachs also forecasted that in less than 40 years, BRIC economies can be larger than the G-6 (US, Japan, Germany, France, Italy and UK) in dollar terms. (Gupta, Govindarajan and Wang, 2008241) It was specifically pointed out that by 2040 Chinas GDP should overtake that of the United States, while Indias GDP would be as large as 80 of United States GDP by 2050. Further, the GDPs of Brazil and Russia were forecasted to be larger than Germany UK, France and Italy, as well as equivalent to that of Japan by 2050. The most interesting this is however that the prediction was based on assumed growth rates of these countries, each of which have been consistently far higher than the assumed figures, post the year of release i.e. 2003. (Gupta, Govindarajan and Wang, 200814)
However, apart from the fact that the economies of all four of the countries have been growing the story of each of the four economies is very different. The growth shown by Brazil and Russia is very different from the growth that is seen in India and China. China has been increasing globally as a manufacturing economy, while Indias rise is primarily as a services economy. The situation invariably demands a huge influx of raw materials, which has translated into strong demand on Russias oil supplies and Brazils natural resources. It can hence be concluded that, the growth of India and China has resulted in demand for resources which has led to the growth of Russian and Brazilian economies. The scenario is however not as simple as this as other factors need to be taken into account too. First is that the India and China both have much larger populations that Brazil and Russia. Also workers in India and China are still heavily engaged in rural and agricultural locations even with their respective services and manufacturing strengths. In contrast, workers in Brazil and Russia are already heavily employed in service industry. (Skinner, 200715) The present research is focused on two of the BRIC economies Brazil and India.
Brazil India
There are several features common to both India and Brazil, and hence socio-economic comparison of the two countries is acknowledged as an established research field. Both Brazil and India had been closed economies until recently i.e. till 1990s, during which period both counties abandoned the last vestiges of their import substitution strategies and began to focus on greater access to industrialized markets for their exports. Both counties saw increased inflation in the mid 1990s. Following this, governments in both countries had to adopt macroeconomic policies that would reduce the chronic inflation. In Brazil, this happened by the government adopting a stabilizing plan for the real Brazilian currency which reduced the inflation and permitted a reduction in the countrys debt. In India, reforms were adopted in 1991 that reduced the average tariff barriers from as high as 200 percent to below 15 percent. The financial sector was also reformed so that he the banks operated under fewer restrictions. The deficit in government spending was reduced in both countries. Both the countries also saw a major privatization drive. In Brazil, this meant a massive sell-off of state-owned companies in sectors such as steel, mining petrochemical, telecommunications and energy. In India, this led to the presence of a formidable private sector, and in consequence the services industry that is the backbone of its growth.
The stability of the democratic government in both countries, responsible macroeconomic policies, the large potential size of the domestic market, and the countries success in increasing their exports have made the counties attractive sites for new investments. However, despite the major reforms that have seen the countries growth rate rise, both Brazil and India continue to be plagued from internal problems. (Inkpen Ramaswamy, 2006198) In Brazil, the problems are associated with low rates of savings and investment, low investment in public education, and high levels of crime and corruption. Some industries still have trade and investment barriers that have been erected decades earlier. Brazilian national champion firms like Petrobas and Embrarer continue to receive preferential treatment. While corporate governance reform has been occurring steadily in Brazil post 2001, the corporate sector has traditionally been controlled by large family-owned business groups such as Unibanco, Itausa, Aracruz, Brahma, and Trikem. Because of a large proportion of non-voting shares, acquisitions, especially hostile acquisitions, are rate in Brazil. Some economists have even gone as far as to suggest that Brazil does not have an equity culture as controlling shareholders do not seen minority shareholders are partners. The problem is even more magnified in view of the weal legal protection accorded to investors. Also domestic stock market plays a minor role as a source of capital for Brazilian firms. (Spero Hart, 2009281)
In India, the need for major legal and regulatory reforms in 1980s led to a movement closer to the Anglo-American model of corporate governance. The capital markets were liberalized, license-raj regulations eliminated, banking industry deregulated, private sector involvement increased and barriers to foreign direct investment were reduced. Among the more tangible outcome shave been the emergence of a small market for corporate control, greater control for small shareholders and an increasing willingness of foreign firms to invest in India. (Inkpen Ramaswamy, 2006198) That said, the results of Indias efforts at corporate governance have not been very successful. The presence of a rampant insider trading combined with massive corruption at all levels exacerbate the issue, which is further worsened in light of the fact that most of the corporate boards remain largely composed of insider and family members. Also while India was largely spared the Asian financial crisis of 1997, the present global crisis in 2008 has shown that the economy is now much more connected with global economic cycles, which means that Indias former isolation can no longer assure steady progress (Spero Hart, 2009281).
RESEARCH QUESTION
The present paper focuses on the Brazilian and Indian economies with a view to find the better investment site among the two. Several factors make this study an interesting as well as a pertinent issue. Brazil, amongst all the BRIC countries baring Russia, started out as a true developing economy well on the path of industrialization. Despite the Growth Commissions concern of unsustainability post 1970s, the economy of the country has seen more than 7 real economic growth for at least 25 years. The countrys focus on industrialization was mass-based which led to foreign investors being interested to be a part of the economy as cooperate closely with the existing business groups. Brazil also saw extremely efficient import-substitution industrialization which makes it a very attractive place for FDI. India, post the infamous license-Raj debacle, grew rapidly post 1990s though in a rather unconventional manner through services growth and services exports. Despite the impressive trade liberalization record over recent years, India is the least open economy amongst the BRIC states in trade terms and that likely contributes to the weak performance of the manufacturing sector. India faces daunting poverty issues exacerbated by policies that inhibit development of employment opportunities, including for low-skilled labour. (OECD, 20098)
This research paper seeks to answer the following three questions
What factors effect to equity investment
What are the similarities and difference of Indian and Brazilian economy
What conclusions can you draw on the equity investment side
Which among the two countries, Brazil India, is a better choice for international equity investment
RESEARCH OBJECTIVES
The importance of BRIC countries is because of the huge population base and a growing economy, which is reflected in the massive rise of the upwardly mobile middle class. This and many other factors make these countries attractive investment destinations. In fact, to take the huge investment potential in these countries, many countries have come up with a type of fund called BRIC funds, which invest primary in BRIC countries. (Raj, 20082.15) In accordance with the research questions, the objectives with which the present research is carried out are as follows
To compare and contrast the economies of Brazil and India to see how attractive they are in terms of equity investment.
To examine which economical characteristics positively impact and influence the growth of economy and level of equity investment.
To offer recommendations for suitable measures in order to enhance economical growth.
MOTIVATION FOR CHOOSING THE TOPIC
Emerging markets are of major interest because their stock markets have exhibited extraordinary performance versus developed countries over lengthy periods of time. The emerging markets today are not what they were in the past, however. Indeed the old emerging regime of vicarious policy error has been replaced with a new paradigm where stable macro foundations have been built especially in the BRICs. Chronic fiscal and trade deficits have largely been eliminated and replaced by surpluses. Foreign exchange shortages have also been universally accepted. Governments in the emerging markets, especially in the BRIC countries, have also universally accepted the role of markets as a resource allocation mechanism now that capitalist enterprise has unambiguously demonstrated its capability to generate great wealth and rapid economic growth. (Gregoriou, 200981)
The Goldman Sachs report introduced the attractiveness of BRIC countries as an investment destination and their potential to be strong economies in the next few decades. However, BRIC countries are not all alike and should not be regarded as a single economic entity. Each one offers unique possibilities for economic growth and has unique strengths and weaknesses. Event the BRIC theory points towards this difference by suggesting that China and India will become the worlds dominant suppliers of manufactured goods and services, respectively, while Brazil and Russia will become dominant as suppliers of raw materials. (Maeda, 2008124)
For decades, it was anticipate that Brazil would take measured to reach its full investment potential. But, until recently the country had consistently failed to achieve investor expectations. The country experienced a catastrophic sovereign debt fault in the 1980s followed by hyper-inflation in the 1990s. It has struggled paying down a large foreign debt ever since. Only in recent years, the country managed to establish a framework of political, economic and social policies that allow it to resume consistent growth with result that Brazil now has a booming stock market. Nevertheless, investors are worried about the sustenance of such policies especially in the face of political changes. In case of India, the predicted growth prospects are extremely bright. The government is more stable and is democratic in nature with institutions in place for nearly half a century. Its stock market also has a long history. However, the countrys political history backed by poverty, ignorance and high rate of illiteracy, has always been a concern among investors. India has been handicapped by an excessively socialist and anti-free market tilt with frequent government intercession. This has come with substantial bureaucratic bloat, importexport restrictions, price controls, and capital flow limits that have hindered development. The massive growth has been possible due to a small number of intellectuals, which makes the policy designing process extremely problematic, especially in face of crippling poverty and rampant illiteracy. The work of the governments in both these areas has not been enough to tackle these two major problems. Further, infrastructure investment is minimal in the country. The countrys relations with its neighbours, particularly Pakistan and Bangladesh are volatile at best, and Indo-Chinese relations are not too stable either. The frequent terrorist and other violent attacks at all the major cities have done precious little to raise the morale of foreign investors. (Raj, 20082.17-2.19 Gregoriou, 200981-82)
RATIONALE OF THE STUDY
Analyzing all the BRIC countries on a common scale has been the general trend post the Goldman Sachs report 2003. It is however extremely clear that all these countries are extremely different from each other. Further, it is logical to assume that none of the countries would like to remain in the niche that has been assigned to them, e.g. it is not accurate to assume that India would be in the services sector for the coming decades, not is it fair to assume that Brazil would be relying solely on its natural resources for growth. As such, there has to be a comparative analysis since the only mode of investment in these countries would not be the solely through the so-called BRIC fund. There have been studies conducted in the analysis of each emerging country for their investment attractiveness. One such study was conducted by the World Bank in 2007, the output report of which was Doing Business 2007. This report ranked Brazil and India to be 121st and 134th respectively out of a total of 175 countries, based on the extent to which the regulation negatively impacted the working of a firm, hypothetical for the purpose of the study. The results are extremely interesting in the sense that these two countries are supposed to be economic superpowers in the coming decades and yet are too far at the back and close to each other, in terms of the business operational environment provided by the government of the countries.
In addition to this observation, the economic crisis that has affected the world post 2008 has made a lot of differences in the way investors look at potentially risky investments. Hence, the impact of the risk factors affecting the investment decisions would be more, since the investors are now becoming extremely cautious. Nevertheless, both Brazil and India still continue to be at the forefront as investment destinations. A comparison between the two countries is hence extremely important and is the topic of research for the present thesis
LITERATURE REVIEW
International investing was once considered to be an exotic approach for investors willing to take large risks. It is now a common investment approach, used even by very conservative investors. The typical motive for international investment is to increase the return while maintaining risk at a tolerable level. In addition to the opportunities presented by the emerging market inefficiency, the advantage of investing in such economies is also the greater use of inside information and fewer disclosure requirements on financial information in foreign countries, which create more opportunities for investors who have access to information. (Madura, 19961-2) The comparison of countries based on their economies is a well documented task that has been undertaken by several reputed organizations including OECD, IMF, UN, etc. The literature review discusses the parameter used for the comparison of the economies of countries, which would be then used in the analysis section.
COMPARISON OF ECONOMIES OF DIFFERENT COUNTRIES
Investment in a country is closely dependent on the understanding of the countrys economy. Putting money into the stock or bond market when economic conditions are unfavourable or selling investments for the wrong reasons can destroy financial plans. Hence, all the investors before investing in a country begin with a forecast of the general economic climate, including interest-rate projections, currency forecasts, and estimates of domestic and foreign growths. It is true that over the past century, thousands of economic indicators have emerged, predicting everything from the demand for gasoline to the size of harvests. Over time, economists have weeded out the least successful indicators, based on the most dubious relationships to arrive at about fifty consistently reliable ones, which are must-haves in any analytical toolbox. These indicators too project a variety of conditions such as employment, inflation, manufacturing activity and consumer spending. (Yamarone, 20072-3) The indicators in the present thesis are limited to those that are most relevant to investment, though they go cover general aspect of a countrys economy.
An important concept while comparing the economies of two countries is the business cycle which can be thought of as a graphical representation of the total economic activity of a country. Business cycle is also known as economic cycle in some circles and represents the expansions and contractions in the economy. The economic cycle refers to the long-term pattern of the alternating periods of economic growth (expansion) and decline (recession), characterized by fluctuating leading economic indicators. (Argenti, 2002116) The classification of economic indicators is done based on their relationship of with the business economic cycle. Based on this, economic indicators can be coincident (i.e. reflect the present state of an economy), leading (i.e. predict the future conditions that might occur), and lagging (i.e. mention the occurrence of a turning in the economy in the past). (Yamarone, 20075-6)
Gross Domestic Product (GDP)
The initials GDP represent the best known initials in economics and stands for Gross Domestic Product. It is the most important statistic to come out in every given quarter and is the single most important measure of macroeconomic performance. Forecasting executives analyze the parameter in order to understand the current status of the economy and its future tendency and investors study it to refine their investment strategies. GDP and per capita GDP (i.e. per capital purchasing power) provide a standardized and useful method for measuring and comparing the economic outputs of nations. (Baumohl, 2008107) The GDP is deliberately designed to measure the annual economic value of all the final goods and services produced domestically within a nation in a single year. GDP measures the economic activity from the perspective of the total income generated by different entities within an economy as well as by measuring the total expenditures of those entities. (Argenti, 2002115) In fact, GDP sets up a fundamental macroeconomic equation, where the sum of income generated from domestic sources equals the sum of expenditures generated by the same domestic sources such that
GDP C I (X - M) G (Argenti, 2002115)
Where, C represents consumer goods, I represents investment goods, (X-M) represents exports less imports or net exports, and G represents government spending. GDP has many economic and business related implications. For instance, if GDP decreases two quarters of a year in a row, the economy is in recession. (Argenti, 2002116) GDP is classified into two types nominal GDP and real GDP. The former represents the GDP in current dollars while the latter refers to GDP in chained dollars that is adjusted for inflation and deflation this eliminating the effect of price increases or decreases form one period to the next. (Frumkin, 2000149) With respect to GDP, both India and Brazil have been in the top half of developing countries. However, while Indias GDP and growth of GDPcapita ranks have been constantly high, usually at the second place behind China, Brazil growth GDPcapita has been erratic over the past decade, even reaching negative values for the years 2002 and 2003. This is indeed a source of concern for this nation. (Jain, 200659)
Gross National Product (GNP)
GNP refers to the market value of all the goods and services purchased by households, by government, and by foreigner, in the current year. With a few exceptions, anything not purchased in the current year is not counted. GNP is an influential indicator. It is widely used to measure economic success its rate of growth is announced monthly and features prominently in news broadcasts and economic analysis. GNP is said to be the best starting point to measure economic performance, even if various subtractions have to be made from it. This is because GNP is a measure of income which is an importance component of any performance measure. However, several economists consider GNP, not GNP, to be more closely aligned with other economic indicators such as industrial production, employment, productivity, and investment in structures and equipment. In fact post 1991 GNPs popularity as a benchmark for all economic activity has been steadily taken over by GDP. However, GNP is preferable for analyzing the resources and disposition of income, because receipts from the payments to the remaining countries of the world, which are not part of GDP may be a relevant total. (Stilwell, Argyrous, 2003210 Tainer, 200638)
National Income
As production of goods and services is difficult to measure directly, an accounting system was devised National Income and Product Accounts (NIPA). This accounting systems measures GDP by goods and services purchased (the product side) or by income earned from the factors of production (the income side). National income may be complied as the sum of incomes received by factors of production, or the sum of spending from income, or the some of value added in each stage of production. Each approach uses data from different sources, but ideally each should arrive at the same total. Defining national income is easy, but compiling consistent, timely, and accurate national accounts is difficult and costly. (World Bank, 2003180 Tainer, 200623)
Gini Coefficient of Income inequality
In general, the Gini coefficient is a measure the index of dissimilarity between any two activities measured on a common base. A value of 0 means perfectly equal, while a value of 1 means perfectly unequal. In case of income, the Gini coefficient represents a measure of Human Rights Index, showing the state of income distribution in a country. The larger the Gini coefficient, the greater is the income inequality the smaller the Gini coefficient, the lower the income inequality. Although the degree in inequality in the income distribution can be known from the Gini coefficient, it can easily be misinterpreted, which is its limitation. (Arnold, 2008608) Both India and Brazil suffer from income disparities between different categories of population. However, the situation is better in India, whose Gini coefficient is 0.37 as compared to Brazil, whose Gini coefficient is 0.57. In fact statistics prove that 10 of the the population of Brazil control almost 48 of the wealth. (World Bank, 2010)
Education and Literacy
The more the number of literate men and women, the higher is the level of economic development in a country. The literacy rate refers to the percentage of a countrys population aged 15 and above who can read and write. In addition to this, some other relevant statistics are new enrolment rates in primary education literacy rate of those between 15 and 24 years primary school publicteacher ratio and gross enrolment ratio. The primary school pupilteacher ratio is found out by dividing the number of pupils who have been enrolled in primary schools of a country by the total number teachers working in a primary school regardless of their assignments. The gross enrolment ratio is defined as the total enrolment of students in a grade or level of education, regardless of age. It is expressed as a percentage of the corresponding eligible age group population in a given school year. (International Labour Office, 2003741 Capehart, 2007502)
EnergyPower Consumption
The very definition of prosperity is directly tied to energy use through commoditization. There is a direct relationship between per capital energy consumption and the measure known as Physical Quality of life Index, PQLI. This PQLI combines three measures that are often used as a way of quantifying the level of well being in a country infant mortality rate, life expectancy, and literacy. The electrical power consumption refers to the per capita electricity consumption. (Capehart, 2007501)
Poverty
The percentage of population existing below a designated poverty line is one of the most used indicators of overall economic development. Poverty standards are generally called absolute measures and are based on the assumption that there is some objective minimum level of either income of consumption such that if economic resources are less than this minimum standard, individuals and families do not have adequate resources to satisfy their basic need. The poverty line is the minimum subsistence level of consumption. This poverty line or the basic subsistence level is based on a food basket of 2500 calories for a working adult and excludes healthcare and educational expenses. An additional term is chronic poor who are the individual staying poor throughout the year i.e. who do not benefit from economic growth. (Ross, Harmsen, 200164)
Key indicators of development
Inflation Inflation is a major economic problem and can be defined as an increase in the general price level. However, inflation does not refer to the increases in prices of individual goods. Inflation can only be said to exist if the average level of all prices rises. That is to say inflation is a condition in which the economy experiences a continuous increase in the average price level of all goods and services. A one-time price increase does not constitute inflation. The primary statistic used to describe price changes, especially in United States, is the Consumer Price Index, CPI. CPI is a measure of the average changes in prices paid by consumers for a fixed market basket of goods and services. Another commonly used index is the Producer Price Index, PPI, which is the cost of raw materials required by companies to produce goods involves around 3400 commodities (Frumkin, 200048) Despite having better economic policies, Indias inflation rate continues to rise especially in the last 5 years, as compared to Brazil. The inflation rate in Brazil has continued to decline post 2003. (UNCTAD, 2010)
Fiscal Performance Fiscal deficit or surplus are calculated as the difference between total expenditure and the sum of revenue and capital receipts excluding borrowing. . The revenue includes grants, while the expenditure includes lending minus repayments. A deficit is an indication of how far is the government loving beyond its means and a large value also indicates large borrowing. A large fiscal deficit may also lead to pressures due to inflation. The Brazilian external financial need feel below the critical ratio i.e. 100 only post 2004, which helped the country rise up in terms of investor interest. The public debt of Brazil however is on a rise, though Indias public debt remains roughly the same, leading the analysts to conclude that Indian financial system is much more robust and better managed than that of Brazil. (UNCTAD, 2010)
Total Population This statistic counts all the people residing in a country. The statistic does not make any distinction between citizens and non-citizens and also does not bother about the legality of residency in a country. However, refuges who are not permanently settled in the place where they seek asylum are not considered to be the population of the host country, rather they are counted as the population of the country of origin. Population growth rate is generally calculated on an average annual rate which is the exponential rate of change of population for a year. (World Bank, 2006299) Indias population is the 2nd largest in the world as compared to 5th largest population of Brazil that is one-sixth that of India. The growth rate of Indian population has been brought down to a less rate, though it is still high. Yet economists consider that by 2050 Indian population is expected to stabilized, as opposed to Brazil, which still has one of the highest population growth rates. (CIA 2010)
Debt indicators Public debt is the total domestic and external holdings as percentage of GDP. External debt is the total private and public holdings as percentage of GDP. This statistic is useful since it relates the debt to resource base. Using these indicators, investors perform the debt sustainability analysis for the countries they are interested in investing. The concentration however is usually on external debt because of the importance of the transfer problem. The creation of debt is a natural consequence of economic activity. Debt sustainability refers to the possibility that a country can meet its debt obligation without unrealistically large corrections in income or expenditure and without hampering the economic growth of the country. Debt sustainability means that the overall debt burden on a country is consistent with the countrys overall capability to make payments. Also the payments on the debt structure have to be consistent with the countrys capacity to access market financing. (United Nations, 2008181)
Health status indicators Monitoring these indicators reflects one of the key indicators of progress of a country. The most important of these indicators is the infant mortality rate. Some other important statistics are under-five mortality rate, maternal mortality rate, life expectancy at birth, and the percentage of births attended by skilled personnel. Life expectancy refers to the number of years a newborn infant would be expected to live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life. (International Labour Office, 2003740) Healthcare both in terms of quality as well as expenditure is better in Brazil as compared to India, which has one of the poorest healthcare systems in the world. Indian situation is worsened in terms of the high infant mortality and higher prevalence of malnutrition among children below 5 years. Further, health reform is an issue, which despite the best efforts of the government continues to stagnate. (World Bank, 2010) The living conditions can also be gleaned from the infant mortality rate, which in case of India is more than twice of that of Brazil. This is also true for the population growth rate of India as compared to Brazil. The life expectancy at birth is also higher in Brazil (71.99 years) as compared to India (66.09 years). (OECD, 2000170)
EQUITY INVESTMENT COMPARISON PARAMETERS
Development finances of a country are mostly due to private financial flows. These can be divided into two broad categories equity flows and debt flows. The former comprises of the Foreign Direct Investment (FDI) and portfolio equity while the latter refers to the finances raised through bond issuance, bank lending and supplier credits. FDI inflows correspond to Direct Investment, which comprises of the capital provided (either directly or through related enterprises) by a foreign direct investor. Portfolio equity inflows are very similar to FDI inflows, only the relationships between exchange rates regime, capital controls, and portfolio equity are more complicated. This is surprising because portfolio equity is usually though to behave similarly to short-term debt. Countries with floating exchange rates and surrender requirements on export proceeds tend to have higher shares of portfolio equity. (Edwards, 200735)
Comparison with index benchmark
When investing in stock markets, it is natural to periodically assess the performance o such investments over time. The appropriate method for assessing the performance may vary with the investors objective. Most evaluations of investment performance involve some type of benchmark for comparison purposes. International investing can be assessed with different benchmarks. The performance may be compared to a U.S. index or a world index. The latter allows the evaluator to compare the performance of the foreign investment to an aggregate measure of all possible foreign stock investments. The country index benchmarks can also be compared. However, while cross-comparison of indexes, the market affects must be isolated from the currency exchange effects. (Madura, 1996143)
Economists have deemed India as a net importer and Brazil as a net exporter. Indias Forex reserves are much higher than Brazil, though the amount of FDI that India attracts is nearly half that of Brazil. The external debt of each country is similar and the value fluctuated between years 2007 and 2009. Both the countries managed to reduce their negative current account balances from the year 2008. While Brazil managed to bring the value down by 60, India managed to bring the value down by more than 70. (CIA, 2010)
Comparison of Profitability
Comparison of profitability across countries is notoriously difficult. Different countries have different accounting standards and therefore a direct comparison of profitability figures, even when it comes to comparing apparently the same measure e.g. return on assets, always carriers some danger. Industry-wise cross-country comparison of profitability gives better understanding of the business environment existing in the country. A comparison between Return on Equity i.e. net Profit after tax over Capital, between different countries gives an assessment of the profitability of domestic firms (Clarke, 200731) The analysis Indian and Brazilian stock performance shows Indian firms to be more profitable than Brazilian forms. The latest analysis performed by MSCI Barra showed that the returns provided by Indian firms were 113.58 in the fiscal year 2009-2010 as compared to Brazilian firm returns of 103 percent (Economic Times, 2010)
Country Risk Analysis
Country risk refers both to the possibility of default on foreign loans and to unanticipated restrictions of cash flows to the parent country. The country risk assessment is critical for commercial banks to safeguard their international loans against country risk. Country risk is nothing more than an assessment of economic opportunity against political odds. This, country risks assessment requires that the investment analysts analyze political and economic indicators. While political factors reflect a countrys willingness to pay its debt, economic indicators measure the countrys ability to pay its debt. This means that any rating system for the countrys risk must combine both economic and political risks. The term country risk is refined as the possibility that the borrowers in a country will not honour their past obligations. Country risk may be assessed by various debt rations, the general creditworthiness of a country, and sovereign-government bond ratings. (Kim, 2006309)
It is generally expected that developing countries, facing a scarcity of capital, will acquire external dent to supplement domestic saving. The Debt burdens vary from one developing country to another. For some countries, external debt and debt-service payments are insignificant both in absolute amounts and in relation to gross national product (GNP) or exports of goods and services. In these countries, therefore, the burden of external debt does not cause hardship in the economy. For other countries, the debt burden is so large that it hampers growth-oriented policies. Developing countries that fall between these two categories are not seriously burdened by their external debt, but remain vulnerable. A heavy debt burden compromises the economic growth of a country. The is especially true for very poor countries, and emerging economies are generally seen to have higher debt sustainability because of their access to capital markets. (Kim, 2006310)
In India a state with a debt-service ratio exceeding 20 percent is classified as having debt stress, triggering the central governments close monitoring of additional borrowing. In Brazil, such an agreement of debt-restructuring was established recently between federal government at the states, establishing a comprehensive list of fiscal targets. Whole India has a higher debt to GDP ratio that Brazil, its external debt as a share of export is much lower. (Thomas, 200621-22)
Taxation Aspect
One of the most important factors that persuade a foreign investor to run the risk of investing capital in a particular country is the potential for profits in that country. As taxation involves a considerable cut in income or profit, it is in fact counted as an impediment to foreign investment. Taxation may operate in two ways. In the first place, it may be an impediment to foreign investment, though it is a normal business risk, secondly, it can be used as an effective incentive by taking certain measures. In this respect, taxation is the sole element of the investment climate which directly affects a basic economic factor, namely the investments rate of return. (Sheikh, 200372)
Taxation may operate as an impediment to foreign investment in either the two ways. In the first place, a foreign investor may be subject to international double taxation. On the other hand, he may be discriminated against or excessively taxed. International double taxation arises where various sovereign states exercise their sovereign power to subject the same person to taxes of a substantially similar character on the same subject. This usually happens when a person is subject to taxation both in the host and his home country. It may also arise when the tax system of each country adopts different criteria such as nationality, residence, domicile or the place where the property is situation, whereby a foreign investor finds himself subject to more than one tax system at the same time. This results from the absence of any customary international law limitation on the tax jurisdiction of s state. (Sheikh, 200373) Taxation also adversely affects foreign investment here there is discrimination against, aliens, excessive taxation and the imperfect functioning of the capital-importing countrys tax system. To attract foreign investment, discrimination and excessive taxation should be avoided. They cannot be challenged as unlawful in international law, except in so far as they become virtually confiscatory in character. (Sheikh, 200374) Brazil has an extremely complex taxation structure with many types of taxes, which makes it hard for the companies to comply to with the regulations. The tax levied on investment i.e. the STT also varies a lot sometimes changing multiple times in a year, due to the economic volatility and frequent government intervention. In contrast, Indian tax laws, especially those related to investment are defined extremely clearly and are expected to stay stable long-term, enabling interested parties to plan for a long-term stay in the market. The Indian financial laws are also deemed to be at par and based on international standards, which makes it easier for investors to enter the domestic market with ease. (Fan, Reis, Jarvis, 2008 76, 108)
Country Credit Rating
Credit rating usually refers to a symbol with a specific reference attached as an indicator representing the current opinion on the relative capability of an individual, a corporation, or a country to service its debt obligation in a timely fashion. Credit ratings are usually expressed with alphabetical or alphanumeric symbols. They are simple and easily understood which enables the investor to differentiate between debt instruments on the basis of their underlying credit quality. The main focus lies in communicating to the investors, the relative ranking of the default loss probability for a loan given to an entity, in comparison with other similar entities. In case of the entity being a country, the credit rating becomes sovereign rating. In some context, it is also known as country risk though both terms are different from each other. The feasibility study should identify the country risk, appraise of the risk and discuss how a project intends to avoid such risks. Sovereign risk differs from country risk in that it refers to the risk of a loan to a sovereign nation by a lender located in another country. This has application in project finance where the sovereign nation is one of the investors or joint ventures in the project a loan to the project is in part, at least, a loan to the nation. Financial advisers or lenders to a project can help sponsors to appraise and consider this risk. (Nevitt, Fabpozzi, 200022) These ratings are meant to capture the likelihood of default i.e. the debt is not repaid according to original terms. The credit rating system and criteria may be different for various evaluated object and purpose. The rating is intended as a grade and an analysis of the credit risk associated, but is neither a general-purpose evaluation of the issuer, nor an overall assessment of the credit risk likely to be involved in all the debts contracted by such an entity. Credit rating is merely based on the relative capability and willingness of the borrower to service debt obligations, both principal and interest, in accordance with the terms of the contract. It primarily aims at furnishing guidance to investorscreditors in determining credit risk associated with a credit obligation. The credit rating however, does not provide any sort of recommendation to buy, hold or sell a debt instrument, since it does not take into consideration, factors such as market prices, personal risk preferences and other considerations which may influence an investment decision. Ratings cover many different aspects prediction horizon, prediction method, object of rating, risk type, local and foreign currencies, and national ordering. The ratings can be stand-alone ratings or support ratings. Although the exact rating definitions differ from one agency to another, credit rating levels are considered in industry practice as more or less comparable. (Montford, Mulder, 200033)
Following the Asian financial crisis, the important of the strength of financial infrastructure has gained even more important in assigning credit ratings. These ratings represent a countrys relative credit risk and serve as an important guideline for foreign investments and financial decisions. There is a strong relationship between a sovereigns debt and its credit rating, which is well documented. When a countrys rating decreases, this is often also the case for the ratings of the countrys banks and companies. Moreover, sovereign credit ratings seem to have a correlation with national stock returns and firm securities. (van Gestel, Baesens, 2009141) Brazil was upgraded to an investment grade credit rating of BB in 2008 by Standards Poor, while India received an investment grade rating for the first time in the year 2009 by Standards Poor, with a rating of BBB-A-3. The local Indian currency too received similar rating in the year 2007. (Damodaran, 2009169)
Currency Risk
Currency risk arises from potential movements in the value of foreign currencies. This includes currency-specific volatility, correlations across currencies, and devaluation risk. Currency risk is measured in the form of positions per currency. Currency risk arises in the following environments
In a pure currency float, the external value of a currency is free to move, to depreciate or appreciate, as pushed by market forces. An exchange is the dollareuro exchange rate.
In a fixed currency system, a currencys external value is fixed (or pegged) to another currency. An example is the Hong Kong dollar, which is fixed against the U.S. dollar. This does not mean there is no risk, however, due to possible readjustments in the parity value, called devaluations or revaluations.
In a change in currency regime, a currency that was previously fixed becomes flexible or vice versa. For instance, the Argentinean Peso was fixed against the dollar until 2001, and floated thereafter. Changes in regime can also lower currency risk, as in the recent case of the Euro.
Currency risk is related to other related financial risks in particular, interest rate risk. Often, interest rates are raised are raised in an effort to stem the depreciation of a currency. This raise in interest rates usually leads to a positive correlation between the currency and the bond market. Currency risk is hedged through contracts that protect the home currency value of transactions denominated in a foreign currency, removing exposure the exchange rate fluctuations. The currency risk is transferred to another party who wants to take an exposure in opposite direction. The currency risk is perceived lower in fixed-currency regimes than floating regimes, but even in such cases devaluations or revaluations that change in the parity value of the currencies and changes from fixed to floating regimes represent currency risk. (Jorion, 2007270) Studies have found that currency appreciation in the Brazilian real has a statistically significant positive effect on Brazilian equity prices, while it has no statistically significant affect for Indian Rupee. In 2008, Moodys analysis report gave a rating of Ba1 for both local and foreign currency rating, while Indias rating for local and foreign currency was Baa3 and Baa2 respectively. This shows that the bonds issued by the Indian government are more at risk than the Brazilian government bonds. (Damodaran, 2009159)
INVESTMENT CLIMATE THAT ATTRACTS INVESTMENT
While creating an investment climate will attract investment depends on some explicitly economic factors, the investment climate actually refers to the quality of the ultimate non-tradable that makes a location competitive the shape of its social order. The economic factors include the following
Macroeconomic stability Macroeconomic stability remains crucial because the relative prices relevant for each investment must remain stable and predictable.
Openness to trade in tradable goods and services, particularly to inputs and intermediate goods An open trade regime is essential for integration in international chains of production.
Local managerial abilities Expatriate managers are expensive, so the availability of local managerial talent that can be trained to manage a proposed investment is a key element in investment decision,
Initiative and education of the population In an international economy progressively driven by the knowledge contents of products, the possibility of training the local labour force to work in sophisticated processes is a key factor in the decision about the location of investments.
Low telecommunication costs Telecommunications costs remain high in many developing countries, largely because local monopoles are controlled by state owned companies.
Low domestic and international transaction costs Transaction costs tend to be very high in developing countries. Their magnitude was not a problem in the world of protected economies. Today, however, they impose costs on enterprises that do not represent value-added and therefore represent an obstacle to investment.
Access to social amenities and facilities for expatriate and local personnel and their families In the globalized world, people with skills useful for worldwide production are in global demand. Both to attract international companies that would import expatriates and to retain local with global skills, countries must become attractive places to live in. Managers must have access to attractive residential areas with good educational, health, and recreational facilities for their families.
(Kochendorfer-Lucius, Pleskovic, 200598)
METHODOLOGY
This chapter describes the research methodology used in this study. The chapter starts a discussion of the research philosophy and then discusses the strategy used for the research. After this the various possible approaches are discussed for the research undertaken, and the most viable one is chosen. Following this the research sampling method and size are discussed which is followed by the research ethic considerations.
RESEARCH PHILOSOPHY
Descriptive analysis refers to the procedures that describe data. Descriptive analysis is primarily used in order to present information in a convenient, usable, and understandable form. It is used to describe the characteristics of relevant groups such as a consumer group, area of market, organizations etc, in order to estimate the percentage of units in a specified population that show a particular behaviour and hence determine the characteristics of the group. Some procedures that come under descriptive analysis in order to made the data more presentable calculating frequency, presenting data in a graphical form, measuring central tendency parameters (such as mean, median, and mode), calculating dispersion of the scores (such as variations and standard deviations), and identifying outliers in the distribution of scores (Runyon Haber, 19846). The research uses descriptive analysis compare similar economic parameters in order to understand the state of economy in both countries as well as make a judgement regarding the better place of investment by international investor.
RESEARCH STRATEGY
Data Gathering
The collection, organization, and presentation of data are basic background material especially for any statistics based research. There are two sources of data primary and secondary. Primary data are the data collected specifically for the study in question and may be collected from methods such as personal investigation or mail questionnaires. In contrast secondary data were not originally collected for the specific purpose of study at hand, but rather or a different purpose (Lee et al., 1998, p.14). A sample or a census may be taken from primary or secondary data. A census contains information on all members of population whereas a sample contains observations from a subset of it (Lee et al., 1998, p.15). This research uses secondary data for analysis
Primary Data Overview
Primary data consists of original research done to answer current questions regarding a specific operation. This type of data is pertinent of an individual operation but may not be applicable to other situations. The advantages of primary data include the following
Specificity The data is tailored to one operation and can provide excellent information for decision-making process
Practicality Primary data can provide solid real-life information and a practical foundation to be used in the decision-making process.
The disadvantages of using primary data include the following
Cost For an individual gathering primary data can prove to be extremely expensive. To gather primary data even from a city of 100,000 people is a monumental task for an operator and may cost too much time and money.
Time lag Marketing decisions often must be made quickly, yet it requires a good deal of time to conduct a thorough information gathering study. While a person is collecting the data, the data already collected may be irrevocably changed.
Duplication Although primary data are geared towards a specific operation, other sources of existing data may closely duplicate the information collected and would therefore be appropriate for decision-making purpose. The duplication of effort is very expensive, and primary data collection should therefore be undertaken only after all secondary data sources have been exhausted.
Secondary Data types
Survey-Based Secondary Data Survey data is the published or at least accessible results of survey in the form of quantitative, mainly questionnaire-based study done by other researchers. A national census is a good example of such a research. There are multiple sources of such type of data such as academic archives, government agencies, public opinion research centres, and any other organization that stores such type of data. The best pat of such a data is that the sample in this case is fairly large and in many cases it has been carefully selected to represent the population. (Quinton, Smallbone, 2006, p 68-69)
Documentary Secondary Data There is a great deal of information already published, which can be used without the researchers needing to collect data themselves. This is called documentary evidence. This type of data has been usually collected for a purpose other than evaluation of a particular project. Such material may not have been previously accessed for research purposes, and was not created specifically for such purpose. Hence, in such cases it is necessary to identify any biases or other factors that might limit the utility of some secondary sources (Sim, Wright, 2000, p. 60). Various forms of documentary data can be used for exploratory studies. This may be collected from a number of sources, and can be classified in terms of whether they were collected for formal or informal purposes, and whether they were intended for public or private consumption. Although documentary sources are usually textual, the term is also sometimes applied to oral narratives and certain non-textual objects, such as works of art. In case of exiting studies or datasets, a re-analysis is carried out often after they have been synthesized or aggregated. Documentary data is often historical i.e. they were created before the time at which the research is taking place (Sim, Wright, 2000, p. 61). The present study uses documentary secondary data for the purpose of analysis. The data has been gathered by various governmental, intra-governmental, cross-country, and non-governmental agencies for generating statistics. The original purpose of data gathering varies depending on the agencies. For instance, the World Bank and IMF data was gathered from a financial standpoint, while the statistics in CIA World Fact book has a knowledge perspective.
Using Secondary Data
This research uses secondary data to make a competitive analysis of the Indian and Brazilian economy with the intent to find out the better country for equity investment. This data being inexpensive to obtain and easier to find, and hence was used as the sole source of information to assist in the decision making of the present research. The first step followed while search for the data was to ascertain if and where was the data available. The research done at the time of literature review helped to gather such resources, since a complete detailed study regarding brand ad brand extension was done. This included coming across the works, theories and studies done by previous researchers and their corresponding evaluations regarding various issues in brand research. The initial search for secondary data was the local University library where books, journals and periodicals were sought. The study was enhanced by the use of the University Library web archives, which proved invaluable for providing an abundance of academic articles and journals.
Advantages and Disadvantages of Secondary Data
The major advantages of secondary data are savings in time and savings in money. In addition to this, some of the available data is only in the form of secondary data. Also secondary data provides flexibility and great variety. Finally the amount of data available by secondary analysis is immense, which provides an opportunity for a greater depth of research by the analyst, which primary data cannot provide (Wren, Stevens, Loudon, 2002, p 65). A major disadvantage of secondary data is that the data may not be as recent as desired. In addition, since the data is meant for some other purpose, the relevance may also be less than ideal for the questions proposed by the current research. The accuracy of the data is also not known since it is not directly collected by the researcher hence authenticity of the data is always in question. The quality of data is similarly a moot point and the researcher must be extremely careful about the reputation and capability of the collecting agency, or at least the credentials of the past researcher (Wren, Stevens, Loudon, 2002, p 66).
Data Quality Issues
Data quality is particularly important when there is reliance on secondary data, especially when there are issues concerning data meeting acceptable standards. Data quality, in fact is always a concern with secondary data, even when the data are collected by an official government agency. The government actions may be influenced by political actions. Even inter-country organizations may succumb to international pressures, which might affect the quality of data. In addition, secondary data may not always give detailed information required that would enable a researcher to assess their quality or relevance. Some other quality issues affecting secondary data are completeness, accuracy, and lineage. (Schutt, 2006423) To eliminate quality issues relating to secondary data, the resources were gathered for several reputable resources like CIA World fact Book, World Bank, IMF and the online database maintained by the governments of Brazil and India. Each datum gathered for analysis was cross checked against different sources to see whether the validity as well as the trends matched. In addition, the past works of researchers on similar or related studies were also used to see whether the data gathered and conclusions gathered matched.
RESEARCH APPROACH
Positive Approach The approach is also known as objective approach to a research, and is considered to be a scientific approach to performing research. The base of the research is empirical analysis. The researchers following this approach start by stating one or more research questions outlining the objectives of the research. Following the research question, hypotheses are generated, as all possible solutions to the research questions. The research design is then performed to collect data, analyse and interpret it and then accept or reject a hypothesis based on the analysis carried out. This exercise gives a precise answer to the research question. As is clear from the explanation the approach taken during the research is quantitative in nature, while the reflections following the research would be qualitative in nature (Babbie, 200759).
Interpretative Approach Unlike positivist approach, interpretative approach does not predefine variables, dependent or independent. The phenomenon under study is explained by understanding the subjects of the study and their viewpoints. Needless to say, this requires that there is good understating between participants and the researcher. The focus of an interpretative research is on standards, norms, rules, and values of the people who are a part of the research. Hence, interpretative research does not merely state facts or solutions as per statistics, as the positivist research does it tries to go beyond the explanation part by including the viewpoints of the people involved in the study and tries to enhance their understanding of the meanings of the situation. (Schutt, 2008)
Descriptive approach Descriptive approach intends to describe and explain what is, rather than what should be. This theory is also known as positive theory, and seeks to explain why specific things occur, leaving individual theorists to make inferences about how things should be done (Babbie, 200769)
Normative or Prescriptive Approach Prescriptive approach can be viewed as the engineering side of pure theory. It deals with problems such as eliciting values and beliefs about uncertainties, confronting incoherencies, and deciding how to put it together to guide action (Babbie, 200769)
The present research uses positive approach for the research.
DATA ANALYSIS METHODS
Data Reporting
After gathering the data used for analysis, the researchers organize it in an understandable format and then analyze it using the theories developed at the time of literature review. The data has been collected in accordance with the principles discussed in the Literature Review in the previous chapter. All the factors that affect the economy of a country have been grouped in a separate section, while all the factors that affect the equity investment decision for an international investor are grouped in a different section.
Qualitative analysis
A unique aspect of qualitative research is that the analysis actually begins before data collection ends. That is to say, in qualitative research a project may be modified as it progresses. Qualitative data at the start appears unordered and phenomenological. Hence, a thorough analysis is needed to make sense of the disparate information. Otherwise subtle biases and selective attention may cloud the conclusions. Since, qualitative approach is highly individualistic and idiosyncratic there is no single way to perform the analysis. Some researchers use the data very meticulously and in fact come up with a semi-mathematical model out from the data they have collected, other researchers are more improvisational and use the data merely as a resource (Mariampolski, 2001, p. 255).
Quantitative Analysis
Quantitative techniques attempt to eliminate the subjectiveness of the qualitative methods. Quantitative analysis allow for statistical analysis that can help verify or provide confidences in the data. They include methods such as market tests, trend analysis and exponential smoothing. The first step in the quantitative analysis process is to count and rank the responses on the basis of frequencies. The second step is to calculate percentages. The processes and concepts include raw data, frequency, measures of central tendency, normal distribution, asymmetric distribution, spread of distribution, variances, the standard deviation, inferential statistics, bivariate statistics, testing techniques, regression analysis, multivariate analysis, multiple regression, factor analysis, cluster analysis, and discriminant analysis (Nykie, 2007102).
The analysis performed in the present research report is basic quantitative, where simple comparisons of number and trends are done. In addition, some part of the analysis is also qualitative in nature, for instance the nature of tax exemption rule in both the countries Brazil and India. However, the aim in both the types of analysis is merely to find which is the better among both the countries.
INVESTING IN BRAZIL AN ANALYSIS OF VARIOUS ISSUES
Brazil is the largest economy in South America. The country is increasingly becoming a force in the world markets, thanks to rising exports and progressive trade and fiscal policies. The main parts of the economy are agriculture, mining and manufacturing. Brazils young and growing population and large consumer markets have attracted significant inflows of foreign investment in recent years. Brazils prospects as potentially a major foreign investment are analyzed in the following subsections
Demographics Neutral
Brazil has the fifth largest population in the world and is also one of the fastest growing. The composition of its populace gives this factor a neutral ranking. The youth population is 25 of the total population which is fair but well below the proportion of youth in India. In addition, the percentage population above 60 years is also higher than that of India, which leads to conclude that the Brazils population is relatively aging in comparison to that of India. Further, its population rise is also expected to continue till 2050, by which time the population in countries like China and India are expected to stabilize. Brazils businesses are set to expand along with an accelerated growth in personal savings, leading to a stronger economy. However, the population of Brazil is something of a double sword. That is, the improvements that the country expects to gain can offset the stress placed on the economy due to an increase in its population. (Tiku, 200841-44 United Nations, 2010)
Economic performance Neutral
Brazil has a large working population, but it is primarily employed in low-wage, labour-intensive jobs such as agriculture, retail sales and construction brazils per-capital GDP has grown about 1.5 percent per year in absolute terms, however, during the past several decades it has declined relative to other emerging economies such as Korea, India, and Russia, whose GDP gains are between 6 and 9 percent every year. In comparison, Brazils economy registers as anaemic, with real growth rates often falling below 3 percent. Indias per capita GDP is expected to surpass Brazil, although a decade ago Brazils was nearly twice that of Indias. Most experts point to the poor productivity as the main culprit behind Brazils slow GDP growth. About 20 percent of the population is employed in low-wage agricultural jobs, an industry that represents just 8 percent of the economy. Brazil also has an enormous informal economy comprised of workers who do not hold regular jobs with benefits. Many individuals and companies operate in this gray economy to avoid taxes. According to McKinsey, this segment accounts for 55 percent of the total employment, and more than 80 percent of new job growth. According to World Bank, this segment of the labour force represent 40 percent of the Brazils GDP, compared with about 10 percent for the United Staes and less than 15 percent for China. These factors are also responsible for Brazils standing as having one of the worlds least equitable income distributions. (Tiku, 200844 McKinsey, 2010 World Bank, 2010)
Open trade Favourable
Brazils open trade is considered favourable for economic development. Its trade policies are liberal as compared with some of its neighbouring countries. Such open policies are attractive for investors interested in investing in developed countries, whose main source of frustration is the openness to foreign trade. According to IMF, Brazils average export tariffs were only slightly more than China. While both imports and exports are rising, export growth is outpacing imports, resulting in major trade surpluses. The countrys main exports include metals used in airplanes and other transport applications, such as aluminium, titanium, and magnesium alloys, metals, oils and fuels, soybeans, and grains. Growing demand for basic materials in other fast-growing emerging countries is a positive sign for Brazil. Its exports of heavy manufacturing inputs such as iron ore could grow rapidly for years to come. Agricultural exports are also significant parts of the countrys exports and are central to the Brazilian economy, which is responsible for 20 percent of Brazils labour force. in recent years, prices have risen for corn and sugarcane commodities as they are increasingly being used as biofuels and feedstock in foreign markets, consequently driving higher export revenues. In other respects, Brazil is less open than its neighbours. For instance, several agencies like World Bank rate Brazil as one of the most difficult countries in the world in which to start a business. The investment in the country is definitely impeded by such obstacles, though the country is more open to foreign trade than most BRIC nations. Thus, its foreign trade appears to be a profitable investment opportunity. (Tiku, 200844 IMF, 2010 World Bank, 2010)
Infrastructure Development Neutral
Infrastructure in Brazil is uneven and merits a neutral ranking. Brazil claims one of the worlds largest aerospace companies and admirable cell phone internet penetration rates, yet its interior regions are virtually trackless. In the year 2006, WEF ranked Brazil as 8th out of 12 Latin American countries in terms of infrastructure quality. A major hurdle is the dismal quality of the countrys roadways and ports, which ranked 12th i.e. the last place and 10th i.e. near to the last place, respectively on the WEF scale. Offsetting these factors, however, are the adequate supplies of electricity, high-quality air transportation, and the underdeveloped miles of navigable river that could help speed transportation of fresh agricultural products from interior regions to urban international markets. Roughly 56 percent of Brazilians enjoy advanced telecommunication systems by four large mobile operators. (Tiku, 200848 WEF, 2010 CIA, 2010)
Transparency and Rule of Law Unfavourable
While Brazils financial and economic prospects have gradually improved in recent years, its scores in the area of openness and rule of law have declined and are considered unfavourable. Transparency International is an independent organization that surveys business executives worldwide about their perceptions on the level of transparency in legal and business transactions and the enforceability of laws and contracts. In its 2009 Corruption Perceptions Index, Brazil ranked 75th among all the countries with a score of 3.7, representing a cumulative drop of ranking of 42nd over the last seven years, and has consistently been ranked below its last years ranks for the past 5 years. In addition, the WEF assessments show an inefficient legal system as a major factor that could contribute to poor rule of law scores and in turn low levels of capital investment in Brazil. The allegations of corrupt political practices in the highest levels of countrys administration have become routine, and many Brazilians view bribery as a normal course of business, thus leading to this unfavourable ranking. if business contracts cannot be enforced cost-effectively, people would be less willing to invest in ventures that could put their intellectual property and other types of assets at risk. (Tiku, 200848 WEF, 2010 Transparency International, 2010)
Education and Training Unfavourable
Education and training in Brazil have done little to contribute to the nations recent economic growth, and, as such, it has been given an unfavourable ranking. Though Brazil has a high level of literacy, with 88 of the population able to read and write, formal education at the primary and secondary levels is failing to produce students capable of competing in math and science with students from other regions of the world. Moreover, low levels of public funding for college-level programs makes it more difficult for poor students to attend institutions of higher education. United Nations data ranks Brazil at 75th out of 125 countries based on the number of students enrolled in post-high school-level programs. Continued efforts may help slow the widening gap between Brazilian students and those in countries that have historically made more investments in education, including India and Korea. Stronger economic growth would mean higher tax revenue for Brazils government and more money to spend on education. This likelihood of increased tax returns should please investors, many of who remain apprehensive about the nations poorly funded education infrastructure. (Tiku, 200851 United Nations, 2010)
Financial systems and Policies Favourable
Brazil has made enormous strides in improving its financial position in the past decade, and has received a favourable ranking for the same. The countrys reserves have more than doubled since 2000, providing the government with a cushion to help absorb changes in the global economy. In fact, Brazil is one of the very few nations that have had a positive impact post the economic crisis of 2008-2009. The floating exchange rate, lower inflation rates, and tight fiscal policy are yielding good results for the company with budget surpluses exceeding 4.5 percent of GDP. On the negative side, Brazil has very high levels of public debt, close to 72 percent of the GDP. A large chunk of public spending is allocated to particular projects or categories that limit the governments ability to spend on investment that could help spur faster economic growth. Interest rates are also quite high, ranging in the 17 to 19 percent range during much of the past decade, with occasional spikes above 20 percent. These rates have helped keep the inflation low, but also made it costly for companies to borrow to fund business start-ups or expansion. This in turn limits that economys growth, as small and mid-sized business typically create most the new jobs in an economy. Further, Brazils financial services sector is considered underdeveloped by international standards. Equity markets account for only about 60 percent of the GDP, a low level suggesting that many more firms could potentially access equity markets as a source of capital. Bank deposits are also low relative to GDP, at 32 percent compared with 66 percent in India. This, banks and investment firms can play a bigger role in helping the countrys domestic business tap into much-needed financing. (Tiku, 200851, 54)
INVESTING IN INDIA AN ANALYSIS OF VARIOUS ISSUES
India suffered from misplaced priorities in its immediate post-independence period. Further, the closed economic system resulted in a stagnant economy barely averaging a 3 growth. On top of it, the Indian population more than doubled during the first 50 years of self-governance. The result of all this was entrenched poverty and neglect that persisted until recently. This all changed in the late 1980s, and the country saw an even more dramatic transformation of its economy in the 1990s. Today, India promises to have one of the fastest-growing economies in the next half century. It has achieved a good, though short history of strong growth, with emergence of world-class companies in many cutting-edge industries. Indias prospects as potentially a major foreign investment are analyzed in the following subsections
Demographics Favourable
India has the second largest population in the world with a growth rate that has been curbed but is still on the higher side. However, the population of the country, in conjunction with a large number of working-age adults makes the demographics favourable. India is known as one of the worlds youngest countries with over half its population under the age of 25, while those over the age of 65 account for less than 6 percent of the total population. Combined, these two variables portend an unstoppable forward motion in the coming decades. In terms of demographic boom, India does lag behind China currently. However, it is already experiencing declining fertility rates as its national income is increasing. Meanwhile, its working age population is expected to grow by approximately 150 million in the next decade, a number equal to the entire working population of the United States, up from 58 percent in 2000 to a peak of 64 percent in 2035. Hence, Indias growing population can be a strong positive force provided the nation succeeds in nurturing and educating its youth and achieves a broad distribution of wealth and sources. Indias enormous potential, if properly cultivated, can transform into a major surge in growth and innovation. (Tiku, 2008111-113 United Nations, 2010)
Economic performance Favourable
India ranks favourably in terms of economic performance because of its expanding middle class, robust GDP growth and greater productivity. Several estimates judge Indias middle class to be 25-30 percent of the total population. The middle class on the basis of purchasing power represents 250 to 300 million people, equal to the entire population of the United States. These consumers are moving rapidly up the consumptions scale which has led to a fast-growing consumer market that is attracting investment from multinational firms such as Wal-Mart. The middle class comprises of about 30 million households, with another 75 million households that come under the aspiring class, poised to embark on a wave of consumption. The trend of growth in consumer class has strong reasons to propel it forward. The indicators of the size of a nations middle class include per-capital income and the ratio of richest to poorest individuals, reflecting on whether the wealth is concentrated among a small subset of the population or is distributed more equitably. The growth in Indias middle class depends on the higher rates of GDP growth and engaging more of the population in productive employment. (Tiku, 2008113-114)
Open trade Favourable
Indian foreign direct investment (FDI) totals are quite low because of past restrictions. Indias largest source of FDI is the European Union (EU), but India has only 1.3 of the EUs worldwide direct investments. But the liberalization of Indias markets is paving the way for larger FDI inflows from other regions in addition to EU. The FDI confidence index had rated India as the second most popular destination in the world for FDI. Though India slipped one rank, losing out to US, in the year 2010, it is still considered to be one of best FDI destinations. Indias attractiveness factors include the upswing of sentiments by foreign companies, the establishment of fast-track approvals that reduce the need to interact with Indian bureaucracy, increases in FDI caps, and the availability of favourable financing terms. These are the signs of openness that are likely to encourage foreign forms to increase their expansion in India and profit from investment opportunities made available to them. The current policy allows FDI up to 100 percent in many sectors, including power, mass transit, airports, oil and gas exports, drugs and pharmaceuticals, mining construction, houses and infrastructure. In addition to all this, India has also embarked aggressively on a plan to privatize its large stakes in public enterprises, from steel to energy to banking. However, there are still entrenched interests resistant to changing the status quo. These range from leftist elements to labour unions that see privatization as a diminution of control and a source of lost jobs and benefits. However, governments continuing need for capital to spend on poverty-eradication projects and to develop infrastructure will likely results in the reduction of its ownership, causing higher efficiency, more open competition, and greater opportunity for increased FDI. Privatization of state-owned enterprises has been received with great enthusiasm by both domestic and foreign investors. The pace of such privatisation is likely to increase in the future, creating even more opportunities for investors. (Tiku, 2008123-124)
Infrastructure Development Unfavourable
India lags behind severely in terms of infrastructure and the investment and interests of the government to support the same. There are problems on several fronts including basic utilities, sanitation, ports, urban and freight transport, and rural roads. These drawbacks directly affect the efficiency and quality of production as well as quality of life, which in turn influence a nations economic success. Despite serious attempts to improve in this category, this continues to be a major challenge, given the massive amount of resources needed to complete the task at hand. Thus, India receives an unfavourable rating in this segment. A significant caveat on Indias growth potential is its dependence on imports of energy supplies. The lack of internal energy resources is likely to keep the growth in check, particularly if energy prices continue to rise. Energy generation and distribution, oil refining, and various infrastructure projects are priority areas for new investments. Today, India imports 70 percent of its oil and derives 30 percent from internal reserves the reverse was true in 1980. Greater energy efficiency and new investments in nuclear power are seen as possible ways to ease the energy crunch. Currently, India consumes about 1.5 barrels of oil per 1,000 increase in GDP triple that of Italy, France, and Germany and about twice the U.S. ratio. (Tiku, 2008124-126)
Transparency and Rule of Law Neutral
Indias judiciary is fiercely independent and relatively free of political oversight. It has at times raised eyebrows and ruffled feathers by handing out verdicts against the government or powerful elite. At the same time, according to some sources, bribes are not uncommon in day-today operation of the judiciary or even the general operations. Transparency International reported in 2007 that 77 percent of Indias citizens described the judicial system as corrupt, and that 36 reported paying bribes. The countrys judiciary also has an enormous back log of over 20,000,000 cases. Nevertheless India is improving its ranking in Transparency Internationals Corruption Perception Index, though it is still ranked behind Brazil at 84 with a score of 84. (Tiku, 2008126-128, Transparency International, 2010)
Education and Training Favourable
Despite Indias enormous rural population and lack of infrastructure, the country boasts a highly educated workforce that makes it a formidable presence in the world market for skilled labour. While India lags in secondary education levels on a percentage basis from its more developed peers such as China, the country on an absolute basis has among the largest number of science, technology, and engineering graduates in the world. India produces 400,000 graduate engineers, second only to Chinas 490,000. It boasts of more than 6000 PhDs a year only China and Japan produce a larger number. The graduates of Indian colleges and science and technical schools are fully fluent in English, enabling them to collaborate efficiently with U.S. corporate customers. Thanks to the minuscule telecommunication costs, this competitive workforce is able to work at a fraction of cost of similarly skilled workers in developed countries. These factors are strong enough to offset Indias still low levels of per capita income, lack of widespread technology, and low literacy level about 40 percent of Indias population cannot read or write. (Tiku, 2008128)
Financial systems and Policies Favourable
Indias financial standing has improved substantially since 2000 because of recent growth in exports and greater productivity, and due to this it has been ranked as favourable. The national governments budget deficits have declined as the GDP has increased, falling to 6 percent of GDP in 2007, compared to more than 10 percent of the GDP in 2002. The currency account deficit is being used to finance infrastructure investments that are essential. India has liberalized its rules dramatically by allowing an easier registration process for foreign financial services companies and thereby allowing foreign investors to participate in the securities market. Financial services companies in India represent enormous potential as per capital income increase. Many domestic banks and brokerage firms are small by international standards, limiting the side of deals that they can manage. Well-capitalized domestic banks, and the entry of Western Banks, are helping to fianc Indias growing business (many of which are still substantially state owned) as they expand the services offered to urban populations and expand into rural areas. (Tiku, 2008128-132)
COMPARISON OF BRAZILIAN AND INDIAN ECONOMIES
GDP Statistics Comparison
CountryItem200720082009Brazil EMBED PBrush GDP (PPP)1.924 trillion2.022 trillion2.024 trillionGDP Per capita PPP9,90010,30010,200GDP Real growth rate6.15.10.1The world ranking for GDP (PPP), GDP Per capita PPP and GDP real growth rate for the year 2009 were 10, 104, and 104 respectivelyFor the year 2009, the GDP composition by sector stood at 6.5 for agriculture, 25.8 for Industry and 67.7 for services sector.India
EMBED PBrush GDP (PPP)3.113 trillion3.344 trillion3.561 trillionGDP Per capita PPP2,8002,9003,100GDP Growth rate97.46.5The world ranking for GDP (PPP), GDP Per capita PPP and GDP real growth rate for the year 2009 were 5, 164, and 13 respectivelyFor the year 2009, the GDP composition by sector stood at 15.8 for agriculture, 25.8 for Industry and 58.4 for services sector.Table 4.1 GDP Statistics Comparison (Data Source CIA World Fact book HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html)
Looking at the data presented in the table 4.1 above, it can be seen that Indias GDP (PPP) has been consistently higher than that of Brazil. The real growth rate of the GDP has been much higher for India as compared to Brazil. The figures are extremely important since the data depicts the crucial pre- and post- recession economic conditions of the country. The year 2009 saw the real rate of Brazilian GDP to shrink to an extremely low rate of 0.1 from a fairly healthy figure of 5.1. During this period, Indias GDP too decreased, but the value stood at a respectable 6.5. The most surprising aspect of the GDP figures given is however the per capita GDP (GDP). Brazilian figures are more than 3 times that of Indian data, showing that the economic condition per person is much better for a person residing in Brazil than for a person residing in India. The per capita figures for both the country increased consistently for the last 3 years. Further, the GDP distribution across agricultural, industrial and services sector is also different for both countries. Indias GDP from agricultural sector is 2.5 times that of Brazil, because India is predominantly an agricultural country. On the other hand, the industrial sector for both countries accounts for the same percentage of GDP. The services sector has the highest proportion of GDP for both countries.
Geography and People
CountryItem200720082009Brazil EMBED PBrush Population190.12 million190.17 million198.73 millionPopulation growth rate111.199Brazil is the fifth most populous country in the world, and the population growth rate is 110th in the world. The male-female ratio is 0.98 (2009)The birth rate is 18.43 births1000 population infant mortality rate is 22.58 deaths1000 live births, life expectancy at birth is 71.99 yearsBrazil is the 5th largest country in the world with an area of 8,514 thousand sq. Km. 86 of the population is urban, the rate of urbanization is 1.8India
EMBED PBrush Population1,124. million1,139.9 million1,156.9 millionPopulation growth rate1.31.31.407India is the second most populous country in the world, and the population growth rate is 93rd in the world. The male-female ratio is 1.06 (2009)The birth rate is 21.72 births1000 population infant mortality rate is 50.78 deaths1000 live births, life expectancy at birth is 66.09 yearsIndia is the 7th largest country in the world with an area of 3,287 thousand sq. Km. 29 of the population is urban, the rate of urbanization is 2.4Table 4.2 Geography and People, Data Sources CIA World Fact book ( HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html), World Bank
The table 4.2 above, showed a comparison of the geography and people of the country. The population data shows clearly the per capita GDP differences. The population of India is roughly 6 times that of Brazil, while its area is about a third of that of Brazil. Further, more than 88 of Brazils population is urban as compared to 29 of Indian-urban population. The living conditions can also be gleaned from the infant mortality rate, which in case of India is more than twice of that of Brazil. This is also true for the population growth rate of India as compared to Brazil. The life expectancy at birth is also higher in Brazil (71.99 years) as compared to India (66.09 years). All these factors lead one to conclude that the living conditions in Brazil are better than that in India.
Economic Social Conditions of the People
CountryItem2009Brazil EMBED PBrush Labour Force95.21 million (World Rank 6)Labour force by occupationAgriculture 20, Industry 14, Services 66Unemployment rate7.4 in 2009 and 7.9 in 2008Population below poverty line26 in the year 2008Literacy rate88.8 (Adult literacy 15 years)Education Expenditure5.05 of GDP in the year 2005India
EMBED PBrush Labour Force467 million (World Rank 2)Labour force by occupationAgriculture 17.5, Industry 20, Services 62.6Unemployment rate10.7 in 2009 and 10.4 in 2008Population below poverty line25 in the year 2007Literacy rate61 (Adult literacy 15 years)Education Expenditure3.2 of GDP in the year 2005Table 4.3 Economic and Social conditions of People, Data Source CIA World Fact book
Table 4.3 above, describes the socio-economic conditions of the people living in Brazil and India. The labour population is more than 4 times larger in India, which comes as no surprise given its population. As a percentage of the population, about 40 of the population of India forms the labour force as compared to 48 of the population of Brazil. The literacy rate is extremely high in Brazil at 88.8, as compared to a worrying 61 in India. Indeed, literacy is one of the crippling factors affecting the economic conditions of people in India. The percentage of population below poverty line is similar, though when this figure is converted into the numbers, the Indian figure is almost 6 times that of Brazil another of the major drawbacks of the Indian economy. Indian government in the year 2005 spent approximately 3.7 of the nations GDP on education, while Brazil spent 5.05 of the GDP on education. This is problematic for India since high illiteracy is one of its major problems.
Countrys Economy
CountryItem200720082009Brazil EMBED PBrush Inflation rate3.75.94.2Imports (goodsservices)120.6 billion173.1 billion136 billionExports (goodsservices)160.6 billion197.9 billion158.9 billionMarket value publicly traded shares1,370 billion589.4 billion976 billionInvestment ( of GDP)17 in the year 2009Public Debt ( of GDP)46.8 (2009)38.8 (2008)Central bank Discount Rate8.75 (31 Dec. 2009) 20.48 (31 Dec. 2008)Stock of Money (in Billions)125 (30th Nov. 2009) 95.03 (31st Dec. 2008)Stock of Quasi Money (in Billions)645 (30th Nov. 2009) 724.5 (31st Dec. 2008)India
EMBED PBrush Inflation rate4.97.310.7Imports (goodsservices)230.5 billion322.3 billion253.9 billionExports (goodsservices)151.3 billion200.9 billion165 billionMarket value publicly traded shares1,819 billion645.5 billion1,301 billionInvestment ( of GDP)32.1 in the year 2009Public Debt ( of GDP)59.6 (2009)79.6 (2008)Central bank Discount Rate4.75 (9 Dec. 2009) 6 (31 Dec. 2008)Stock of Money (in Billions)278.8 (30th Dec. 2009) 239.9 (31st Dec. 2008)Stock of Quasi Money (in Billions)853.4 (30th Dec. 2009) 687.7 (31st Dec. 2008)
Table 4.4 Countrys Economy, Data Sources CIA World Fact book ( HYPERLINK httpswww.cia.govindex.html httpswww.cia.govindex.html), Nation Master ( HYPERLINK httpwww.nationmaster.comindex.php httpwww.nationmaster.comindex.php)
Table 4.4 gives a general picture of the economic conditions prevailing in Brazil and India. Comparing these figures, the first aspect that comes up is the inflation rate. Brazils inflation rate as remained more or less steady in the period between 2007 and 2009. The rate increased in 2008, but 2009 saw the rate coming down. Whereas in India, the inflation rate almost doubled in the year 2008, and also doubled that of Brazil, and in 2009 also the inflation further increased. The 2009 inflation rate for India is also more than double that of Brazil. The investment rates of India, as a percentage of GDP, is also double that of Brazil, showing a healthy interest of both domestic and foreign investors in the country. The stock of money available in India is more than twice that of Brazil, which reduces its risk due to public debt somewhat. The public debt increased in 2009 in Brazil, while reduced in India. However, the public debt in India is much more than that of Brazil even after a 20 reduction. India managed to keep its Central bank discount rate steady, while the Central bank interest rate in Brazil reduced by almost 4 times in the year 2009. The export figures of both countries are similar, but India imports double of what it imports and double that of Brazils exports also. The conclusion that can be drawn is that India is a net importer while Brazil is a net exporter (as its exports are higher in value than imports). A reliance on imports to fulfil its requirements is always a risk. The market value of publicly traded shares is higher in India by 50 as compared to Brazil, which is in tune with its investment percentage.
Countrys Global Links
CountryItem200720082009Brazil EMBED PBrush External Debt237.4 billion262.9 billion216.1 billionExchange Rates per USD1.85 BRL1.8644 BRL2.0322 BRLCurrent Account Balance- 11.28 billion (2009)- 28.19 billion (2008)Foreign exchange Reserve 238 billion (2009) 193.8 billion (2008)FDI Stock (Domestic) 318.5 billion (2009) 294 billion (2008)FDI Stock (Abroad) 124.3 billion (2009) 127.5 billion (2008)Export partners (2008)Largest is US (13.7), followed by Argentina (8.7), China (8.1), Netherlands (5.2) and Germany (4.4)Import partners (2008)Largest is US (14.9), followed by China (11.6), Argentina (7.9), and Germany (7)India
EMBED PBrush External Debt220.9 billion232.5 billion223.9 billionExchange Rates per USD46.78 INR43.319 INR41.487 INRCurrent Account Balance- 8.399 billion (2009)- 30.41 billion (2008)Foreign exchange Reserve 287.5 billion (2009) 354 billion (2008)FDI Stock (Domestic) 161.3 billion (2009) 123.4 billion (2008)FDI Stock (Abroad) 77.42 billion (2009) 61.77 billion (2008)Export partners (2008)Largest is UAE (12.3), followed by US (11.7), China (5.4), and Singapore (4.5)Import partners (2008)Largest is China (10.8), followed by Saudi Arabia (6.9), US (6.7), UAE (6.7), and Iran (4.2)Table 4.5 Countrys Global Links, Data Sources CIA World Fact book, Nation Master.
As seen in the earlier section, India is a net importer, while Brazil is a net exporter. The main import as well as export partner for Brazil is US, followed by Argentina and China (for both exports and imports). For India, the main export partner is UAE, while the main import partner is China. US is the second largest import as well an export partner for India. Indias Forex reserves are much higher than Brazil, though the amount of FDI that India attracts is nearly half that of Brazil. The external debt of each country is similar and the value fluctuated between years 2007 and 2009. Both the countries managed to reduce their negative current account balances from the year 2008. While Brazil managed to bring the value down by 60, India managed to bring the value down by more than 70. The figures combined with the cash and Forex reserve values show that India has more ability to accumulate capital than Brazil
Countrys Development Indicators
CountryItemYear indicated in bracketsBrazil EMBED PBrush Gini Index56.7 (2005)56.99 (2004)Starting a Business (2009)120 days (Brazil)13 days (OECD average)Malnutrition (2007)2.2 ( of children under 5)People living with HIVAIDS730,000 (2007, 16th highest in the world)Health Expenditure (2006)7.5 ( of GDP), 427 (per capital)Market Capitalization (2008)For all listed companies 36.6 of GDP ( 589 million)Telephone (Main lines 2008)41,141 million (World Rank 6)Telephone (Mobile 2008)150.641 million (World Rank 5)Internet Hosts (2009)15.929 million (World Rank 5)Internet Users (2008)64.948 million (World Rank 5)Electricity production438.8 billion kWh (2007, World Rank 11)Electricity consumption404.3 billion kWh (2007, World Rank 10)Electricity imports42.06 billion kWh (2008, Supplied by Paraguay)Electricity exports2.034 billion kWh (2009)India
EMBED PBrush Gini IndexNot available36.8 (2004)Starting a Business (2009)30 days (Brazil)13 days (OECD average)Malnutrition (2006)43.5 ( of children under 5)People living with HIVAIDS2.4 million (2007, 4th highest in the world)Health Expenditure (2006)3.6 ( of GDP), 29 (per capita)Market Capitalization (2008)For all listed companies 53 of GDP ( 645 million)Telephone (Main lines 2010)36.76 million (World Rank 7)Telephone (Mobile 2010)545 million (World Rank 2)Internet Hosts (2009)3.611 million (World Rank 22)Internet Users (2008)81 million (World Rank 4)Electricity production723.8 billion kWh (2007, World Rank 6)Electricity consumption568 billion kWh (2007, World Rank 6)Electricity imports5.27 billion kWh (2009)Electricity exports810 million kWh (2009)Table 4.6 Countrys Development Indicators, Data Sources CIA World Fact book, Nation Master, World Bank
Economy is not merely confined to the monetary aspect, it also comprises of the people living the country, their living conditions and the facilities available to them. Looking at the table above, it can be clearly seen that Brazil surpasses India in all these aspects. While, the Gini index that signifies the income distribution is better in India, which leads to better social inclusion, and also it is much faster to start a business in India, as compared to Brazil which takes more than 5 times the number of days taken in India. Further, the market capitalization of all the listed companies is more than 50 of that of the GDP in India, which is 15 higher than that of Brazil. Also, in terms of US dollars, the market capitalization in India is 50 million higher than that of Brazil. However, the situation starts to deteriorate, when health expenditures, facilities and problems are considered. The statistics are merely selective, but they give enough of an indication to show the true state of healthcare in both countries. The first issue is the health expenditure in India which is lower than that of Brazil in terms of GDP. However, as the Indian GDP is extremely higher compared to that of Brazil as is the population, the statistic by itself does not give any useful insight. But when the per capital expenditure is compared, Indias expenditure is merely 29 as compared to a whopping 427 spent by Brazil. The malnutrition prevalence shows the quality of basic living in the countries. The figures show that almost half of the children under 5 may be malnourished, as compared to 2.2 of the children under 5 in Brazil a very disturbing aspect. Further, the number of people living with HIVAIDS is also extremely high in India. In India, the number of telephone main lines is less than that of Brazil but India has the 2nd largest number of mobile phone users in the world. Also, while the number of Internet host in Brazil is much higher than that in India, the number of Internet users is higher in India. Finally, the electricity consumption and production is higher in India. Indian electricity exports are half that of Brazil, but the export values are very also low as compared to Brazil (one eighth).
EQUITY INVESTMENT DECISION ANALYSIS
Equity Price Indices
The figure below shows the equity price indices of both the countries for the period between January 2007 and January 2009. The period is important since it covers the economic crisis completely. It can be seen that the equity indices of both the countries started increasing post October 2007. While Brazils indices doubled, Indias indices increased by 60-70. During in the economic crisis however, the indices of both the countries fell sharply to 50, in the last quarter of 2008 the change being more severe for Brazil, considering its high-value before falling. The year 2009 saw the Brazilian index rising rapidly than the Indian indices which continued to fluctuate slightly above the plummeted value. The changes in asset equity indices are important for developing countries as it has a direct effect on their asset prices. Brazilian index is based on the Ibovespa, while Indias indices trends can be found by following either the Sensex or Nifty. Nifty is similar to Ibovespa since they the same total market cap weighted method index measurement, while the sensex uses the free-float market cap weighted method.
The analysis of the latest MSCI Barra indices showed that Indian stocks are the best performers among those of the BRIC nations. The returns given by the stocks were nearly 113.58 in the fiscal year 2009-2010. The comparative emerging market index that covers all the developing countries was 77.26 gain. In addition to this Indian stocks also outperformed similar stocks from countries like US, UK and China during this period. MSCI Barra Indices are a measure of returns from the stock markets across the world. Brazilian stocks too performed extremely well giving an extremely high return of 103 percent in the fiscal year 2009-2010. (Economic Times, 2010)
Taxation aspect
In India, capital gains on sale of equity shares are subject to various tax rates depending on whether they are short-term or long-term, listed or non-listed. Short-term listed shares are subject to 10, whilst long-term listed are exempt. Short-term unlisted shares are subject to 30 (FII), or 40 (FDI), whilst long-term unlisted shares are subject to reduced tax rates of 10 (FFF), or 20 (FDI). Despite such facilities, however, many investors use some other specific tax routes to penetrate the Indian market such as Cyprus and Mauritius. (Lessambo, 200932-33) Further, dividends are taxed at 12.5, but are not taxed as income for the recipient. In addition, transactions in securities listed on a recognized stock exchange attract taxes of between 0.017 percent and 0.25 percent. India introduced its first STT in October 2004. Finally, India has signed comprehensive double taxation avoidance deals with many countries. There are area-specific agreements too, relating to aircraft profits, and so on. The Brazilian tax framework parallels OECD tax country systems. Under the Brazilian domestic law, there is no participation exemption or relief from investment. However, dividends are exempt from IRPJ and CSL irrespective of the percentage or value of the participation, the holding period, or the type of entity distributing such dividends. (Lessambo, 200957) The Financial Operations tax (IOF) is levied on selected financial transactions, insurance contracts and securities transactions. The rates vary considerably and change frequently.
As compared to India, Brazils tax system is not very progressive. While both India and Brazil do not yet have a tax on long-term capital gains tax, there is a Securities Transactions Tax (STT) levied in both countries for portfolio investments. The rates in India fall under a pre-specified limit which is reasonable and also in tune with the taxes in most OECD countries. This is not true for Brazil, whose taxes are mostly indirect in nature. While the portfolio investment currently attracts no STT, known as IOF in Brazil, the IOF rates are entirely dependent on the governments decision on how the economy should be revamped, regardless of the interest of foreign investors. (OECD, 200980-84)
Risk due to currency movement
The figure below shows the currency movement for the five year period between 2005 and 2009 for Brazil and India, including the percentage change each year,
The figure shows that India has seen a sharper trend for change than Brazil during the period. However, the year 2009 did show an upward surge in currency exchange, but in case of Brazil, the value has been steadily decreasing post a high in the year 2006. Nevertheless, a steadier currency movement is always deemed better than a sharply fluctuating one, since the investors can have a long-term hedging strategy to counter the currency changes if they are steady. Thus, from an long-term investing stand point Brazil would be a better place, for investors since they can design long-term hedging strategies to save their investment.
Effect of Economic Crisis
The economic crisis has forced many countries to face the possibility of deleveraging. The term deleveraging means, reducing the lead of debt service to a level that can be supported by the available cash flow. This may involve writing down principal or cutting the coupon, or both. (Fledsteing, Fabozzi, 2008786). McKinsey states that it is seen historically that deleveraging for a long period of time is often a consequence of a financial crisis. Further, McKinsey also adds that the phases have been painful, usually lasting for 6-7 years, a reduction in GDP and the reduction in the debt to GDP ratio by as much as 25 percent. To analyze the possibility of deleveraging, McKinsey conducted a worldwide study of the economies that would be most vulnerable to this trend. Both Brazil and India, showed the least possibility of deleveraging showing that their economy was healthy enough to withstand the financial crisis, and would not face any major risk of governmental intervention in the near future. This bodes well for the investors who are interested in investing in these countries. Comparatively, Brazil showed a lower possibility of deleveraging as compared to India, the differentiating sector being the government. This is a bold assumption to make since the governmental inefficiency is equally prevalent in both the countries. The figure 4.3 below shows the results of the survey conducted.
Debt and deleveraging have been shown to be interlinked hence it is logical to simultaneously understand the debt position of Brazil and India. The figure 4.4 below shows the corresponding survey results. McKinsey found that the emerging markets had much lower level of debts as compared to the mature markets. In case of both Brazil and India, the prevalent debt was close to each other at about 150 of the GDP. The corresponding figure for developing countries was 300 of GDP having grown by more than 65 in a decade. The scenario for future is hence one of hope for both the countries for the investors considering to invest in the two economies. Brazil was a better choice here, since the country actually managed to reduce its debt in the period 2000-2008, which shows the commitment of the government towards economic reforms that would bring financial stability to the countrys economy.
FDI inflows assessment
A.T. Kearney regularly conducts a regular survey to determine the confidence in FDI from various investing agencies worldwide. The 2010 survey ranked India as the 3rd best country and Brazil as the 4th best country with a confidence index of 1.64 and 1.53 respectively. The top two investing destinations were China and United States with confidence indexes of 1.93 and 1.67 respectively. China maintained its rank, while both United States and Brazil moved up in their ranks. India, however, moved down from its previous world rank of 2. Investors have significantly been positive about Brazil since 2004 state that has not changed even during and post the economic crisis. The country reached the top five rankings for the first time since 2001. The previous survey in 2007 had ranked Brazil at the 6th position. (Kearney, 20103-4)
The figure below shows the historical trends of the Global FDI inflows as a percentage of the total FDI inflows throughout the world.
Looking at the figure 4.5 above, it is clear that the India has seen a steady increase in the FDI inflows in the past 3 decades. Whereas, in 1980, the FDI inflow was barely 0.1, in 2008 the figure stood at 2.4. However, as compared to China, which also started similarly in 1980, and in the year 2008 had 6.4 of the total FDI inflows, the effort seems lacking. India also fell behind Brazil consistently throughout the 3 decade period, except in 1990, when there was no FDI inflow in the country. Brazil initially had a healthy inflow of FDI but has to start again from scratch from 2000. The increase in the 8 year period has been merely 1 of the total FDI inflow, but the consistent belief in investors as demonstrated by the confidence survey shows that the country is on an upward path as far as the investor willingness is concerned.
Global Competitiveness Ranking
Data by the World Economic Forum demonstrated that for the year 2009-2010, both Brazil and India improved their competitiveness rankings. India moved up by one rank from 50 in 2008-2009 to 49 in 2009-2010, while Brazil moved up 8 ranks from 64th in 2008-2009 to 56th in 2009-2010. Brazil, followed by India also occupied the top choices of economists across the world who considered that the economic crisis had positively affected the competitiveness of the countries. Indias financial markets are considered to be extremely sophisticated, while Brazils technological readiness was formidable. Both countries macroeconomic fundamentals were also considered to be extremely strong, which was another reason why the financial crisis did not affect the countries. (Schwab et al., 200934)
India is a country of many anomalies. The country possesses some of the best universities in the world, but technologically the country lags behind most of its counterparts. While GDP per capita is decent, and the overall GDP is the fifth highest in the world, the gap between rural India, where majority of population resides, and urban India is immense, bringing as much as 26 of the countrys immense population below the poverty line. In fact 42 of the population survives on less than 1.25 dollars a day, while one the other hand, a large number of Indian companies are global players and even leaders in their field. The business sophistication of the country is ranked 26th in the world, financial markets are ranked at 16th, banking sector at 25th and its domestic market is the 4th largest in the world. However, the other main aspects of competitiveness are severely lacking. For instance, the health and education rank at 101st, economic stability rank 96th, though it is improving, and infrastructure ranks at 76th in the world. In addition, mobile penetration rates rank at 116th, Internet penetration ranks at 104th and personal computer penetration ranks at 96th all of which are the among the lowest in the world. These factors severely cramp the competitiveness edge of the country. (Schwab et al., 200932)
The economic downturn has least affected Brazil, which is known as the Latin American giant. The countrys government has taken multiple steps since the 1990s in order to bring sustainability in the financial sector. In addition, the government also tool several initiatives to open up the economy. Both these initiatives have increased the competitiveness of the country to a major extent providing a better environment for private-sector development. Some major aspects of competitiveness in Brazil are its growing domestic market ranked 9th, its financial market ranked 51st in the world and the most developed in Latin America, a sophisticated and diversified business sector ranked 32nd and a significant potential for innovation that is ranked 43rd in the world. There are some factors that hamper the competitiveness of Brazil. The major problem is its macroeconomic stability ranked 109th, the institutional environment ranked 93rd, the efficiency of goods ranked 99th and the labour markets ranked 80th all of which are among the lowest end the world and are poorly assessed, regardless of the improvement initiatives of the government. Also, while the health and education sector is better than India, ranked at 79th and 58th for health and primary education, and higher education and training respectively, they are in need of a major overhaul. This is due to the large number of dropouts and the regional disparities in the quality of education provided, which also need to be addressed. (Schwab et al., 200934)
CONCLUSIONS
Results of comparison of Brazilian and Indian Economy
The first part of the data analysis compared the Brazilian and Indian economies. The detailed comparison consisted of a study of the GDP statistics comparison, geography and people, socio-economic conditions of people, economy of the countries, global links and the development indicators of the economy. Examining all these aspects in detail, it can be said that the Indian economy is stronger than that of Brazil and offers more scope for development. Majority of the problems are a result of high-population, rampant illiteracy and poor health conditions. These issues are mostly a result of the poor governance and corruption. The problems are not so big in Brazil, because of its proximity to US and lower population levels, but the mis-governance and corruptions is still rampant in the country.
The strength of economy is not merely the problems faced currently by the country, but how well it has faced these problems against odds. In this respect, India has been much better since it emerged from being an extremely closed economy to a fairly open one in less than 25 years and has managed to be one of the top most countries in terms of many sectoral developments. The success has been in spite of the several regional tensions prevailing in the surrounding South Asian nations that have affected the country directly. Brazil too has been growing extremely rapidly following a lull in its growth and is an economy to watch out for considering the source of large natural resources which will always be in demand. However, in this case governance is extremely important, since the national resources need to be guarded closely and managed extremely well in order to gain long-term benefits from them.
Results of comparison of Brazilian and Indian Equity Investment climate
The equity investment climate of both countries has been analyzed in the second part of the data analysis section. The factors that were analyzed were equity price indices, taxation aspects, currency movement, affect of economic crisis, FDI inflows, and global competitiveness ranking. Following the analysis, it can be concluded that both the countries India and Brazil are similar in terms of investment climate. The global competitiveness ranking demonstrates these results, which are echoed by the investor sentiments. India is consistently ranked above Brazil in all these aspects, though the differences between the ranking and the corresponding indicator values are not very large.
The present thesis too would echo a similar result as far as the investment climate is considered. The first research question, What factors effect to equity investment has been answered in detail in the data analysis and literature review sections. The second research question, What are the similarities and difference of Indian and Brazilian economy is also answered in detail in the Data Analysis section. Economists always recommend a mixed approach while investing in emerging economies. That is to say, it is recommended that investors should some amount in each country. The similarities and differences between India and Brazil can be summarized as follows. Brazil is essentially a commodity player. That is to say, the economy is affected by commodity prices and they account for forty percent of the total exports from the country. In the long-term India presents the investors with one of the largest bull markets of the 21st century. However, the country faces daunting challenges too especially related to infrastructure finance given its high debt levels and ambivalence towards foreign investment and privatization. Both India and Brazil put greater emphasis on containing inflation, though Brazils success is more marked as compared to India. India has liberalized outflows, and selectively restricted inflows, while Brazil increased outflows by expediting external debt repayments, and then liberalized some outflows. Brazil and India provide some incentives to selected sectors including through import tariff exemptions and subsidized credit. With respect to Indias fiscal policy, staff expects higher revenues to be fully spend, while Brazil is taking advantage of revenue over-performance to achieve better-than-budgeted fiscal balances. With respect to currency exchange regimes, Brazil can be said to be an independent floater, while India is a managed floater with no predetermined path. India sterilizes its foreign exchange intervention, while in Brazil the intervention is fully sterilized consistent with its inflation target. Brazil, followed by India also occupied the top choices of economists across the world who considered that the economic crisis had positively affected the competitiveness of the countries. Indias financial markets are considered to be extremely sophisticated, while Brazils technological readiness was formidable. Both countries macroeconomic fundamentals were also considered to be extremely strong, which was another reason why the financial crisis did not affect the countries.
The primary research question prompting the present research to be undertaken was Which among the two nations Brazil India, is a better choice for international equity investment The answer to this question would be India. The country has better financial infrastructure and despite the rampant corruption has a much better industry record and is at par with most of the global standards. The problems of the country are no doubt major, but are by no means insurmountable. The government too is taking a much more active role in making the socio-economic conditions better which is the root cause of the problems in the country. Further, the diplomatic ties that the country has with other countries, the regional tensions that it faces with aplomb on a daily basis, as well as the immense potential of the population of the country as demonstrated by the existence of numerous world-class institutions, gives it a definite edge over Brazil. The country still needs to battle issues such as corruption and terrorism, in addition to the socio-economic issues, before it can rise more significantly in investors esteem as a better place of investment. India has seen a steady increase in the FDI inflows in the past 3 decades. Whereas, in 1980, the FDI inflow was barely 0.1, in 2008 the figure stood at 2.4. However, as compared to China, which also started similarly in 1980, and in the year 2008 had 6.4 of the total FDI inflows, the effort seems lacking. India also fell behind Brazil consistently throughout the 3 decade period, except in 1990, when there was no FDI inflow in the country. Brazil initially had a healthy inflow of FDI but has to start again from scratch from 2000. The increase in the 8 year period has been merely 1 of the total FDI inflow, but the consistent belief in investors as demonstrated by the confidence survey shows that the country is on an upward path as far as the investor willingness is concerned.
RECCOMENDATIONS FOR FUTURE RESEARCH
The present study was based on the results of data taken from IMF and the data was analyzed using simple comparative means. This may be one of its drawbacks, since financial ratios were not used to analyze trends of individual stocks. This may not cause any difference in the conclusion arrived at, but it would definitely cross-check the data and assumptions taken by the various agencies. Further, there was no primary data used for the research. That is to say, a real interviewquestionnaire with some investment analysts would have further strengthened the conclusions of the study. Again, as the data used was secondary and from an extremely reputable source, the results and conclusions might not have varied a lot.
REFLECTIVE ANALYSIS
The present thesis was an experience that brought together several aspects of practical learning for me. Even before the research, I had been aware of several concepts of learning such as the famous David Kolbs model based on Experiential Learning Theory, Honey and Mumfords model, Anthony Gregorcs model etc. However, the theories had been abstract concepts for me. Based on the way I conducted the research, I would consider myself to be a assimilator, according to Kolbs model, at least for the present project. I had chosen reflective observation to observe the data trends from different resources, and abstract conceptualization for visualizing impact of the changing trends of various related parameters on the investment attractiveness of the country (BrazilIndia).
Country analysis reports, and facts based on them are one of the most seen reports by any average financial person in the present times. Having to actually write a report, by compiling information and analysis made me look at the theoretical concepts in more depth than what I did earlier. Hence, while the information covered in the Literature Review consists of general terminology, the number of bookspapersjournals I scoured for the information has given me a better understanding of the topic. The Methodology chapter was an eye opener, since I had to select one from several possible methods for conducting the research. In doing so, I had to extrapolate the types of errors that would be possible if I selected a particular data selection research approach. This has made me more aware of the issues that surround the statistical agencies such as the recentness of the data, the authenticity, the cross-references with other statistical agency data etc.
Performing the analysis was a good exercise in improving my practical analytic skills. While the analysis itself was uncomplicated and consisted of either observing comparative trends or merely comparing values, drawing conclusions was an interesting experience since it was dependent on multiple factors apart from merely a parameter showing a better trend for one country rather than other. The Education Literacy aspect of Brazil and India is an apt case in point. At the first glance, Brazil seems way better than India since over 88 of Brazils population is literature, as compared to 61 in India. Even considering the number of illiterate people, which depends on population, Brazil scores much better than India. However, the government of Brazil does not focus on education too much, and while many people can read and write, the level of skilled education is woefully lacking, as compared to India, where the educational institutions are at par with the best in the world.
The research project, in my view has honed my analytical abilities as well as inculcated a habit of performing extensive groundwork before approaching the actual problem, so that every aspect and requirement is clear before tackling the problem. The project could have been improved, however, by talking to analysts regarding their opinions on the research problem, which could have given the results more authenticity in addition to learning the actual standards and processes followed in the industry.
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