All the minute details of economic factors are the reason behind the fiscal crisis. Even a large economy can face a huge downfall. Brazil being the seventh largest economy in the world also had to face a deteriorating GDP. The solution for this crisis can never be bound by a small or medium term arrangements as it would take long term policies to overcome this phase. The Brazilian economy had fallen into a deep crunch due to the political vulnerabilities like corruption, wrong policies and breaking up of a conglomerate. The business sectors were also not any more alluring to investors except, the long term investors but, they were also very small in number.
What reasons led to the crisis?
- Corrupt Government: The President Dilma Rousseff confronted the charges of altering the fiscal and presenting an inflated record of the country. The blame and then the resign of the President were expected to be good omens for the country’s economy. China was the foreign trade partner of Brazil, was also facing financial issues and was waiting for a settlement. The budget deficit was in its two-decade low with most negligible national FICO assessment (credit rating) which led the country towards recession.
- Wrong choice of policies: In the second term of President Rousseff, she increased the tax rates, reduced the social benefits like the unemployment compensation so that she could enhance the government revenues and to channelize that into the economy. This brought a negative impact and lead to lower demand within the population, low private consumption, low buying behavior (less disposable income), less speculation (or less Investment activities) and less stream of cash flow into the economy.
- Increase in the financial deficit: There was a huge increase in the financial deficit of Brazil. This proved that the deficit was three decades high in end 2014.
- Breaking up of the biggest Conglomerate: The reasons behind the collapse of the biggest conglomerate of oil organizations of the country ‘Petrobras’ was the involvement of lawmakers, ruling position holding politician and big corporate leaders in ‘Petrobras defilement’. It involved the business and political elites in the trick. The working of the organization was very upsetting.
- Distress within the ruling party: The Vice-President Michael Temer boycotted the President and her approaches towards the policies. He also claimed to not support any of the party members in the next election.
- Downturn of the industrial averages: The industry average of Brazil was decreased by 26.5 % during the President’s term.
- Reduction in Foreign Investment: Reduction in the domestic venture or the foreign investments which reduced the foreign currency flow and devaluated the home currency.
- Fall in economic expectations: Goldman Sachs had said that Brazil had become a, by and large a big despair.
- Worst phase of the business cycle: Brazil’s economy was into a stagflation (high inflation, high unemployment rate, low economic growth, and low government expenditure) period of the business cycle and is still continuing.
Lessons learnt from the Brazilian Crisis
The RBI Governor, Raghu Ram Rajan investigated the circumstance more accurately and acted on the same. He said, to make the best choice we have to make the things right. We shouldn’t lessen the financing costs and duty charges just to get the monetary development to its sought point. Taking the cues from the crisis, the RBI Governor initiated the following:
- No reduction in Government income
The government shouldn’t lessen loan cost charged to consumers, which will lead to floating extra money in the economy, artificially.
- Improved credit rating
The extending more of liquidity to retail consumer is not the method for practical development as it decreases the national FICO scores (credit worthiness).
- No shortcut to be followed
A nation shouldn’t attempt to develop too quickly by utilizing all the transient means, Brazil is currently confronting the deteriorating evaluations and the obligation that loaded private client who is attempting to pay.
- Already in recovery phase
India just took over this when it was confronting high expansion and high shortfalls in the economy with lower development in 2013-14.
- Channelise funds into development directions
India will utilize money related strategies as well as the transient government motivators to fuel the fleeting financial development.