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Buttonwood Conference: Are India and Brazil Still Global Growth Engines?

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The Economist's Philip Coggan leads the concluding panel of the 5th Annual Buttonwood Gathering.

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MINYANVILLE ORIGINAL "Accounting for one-fifth of the world's population, just about," is how The Economist's Capital Markets Editor Philip Coggan began last night's "Growth Engines: Brazil, India, and Beyond" panel, one of the final conversations of the 5th Annual Buttonwood Gathering held in New York City's Financial District.

Coggan was joined by Shikha Sharma, the Managing Director of India's Axis Bank (NSE:AXISBANK), and Arminio Fraga, a Founding Partner of Brazil's Gávea Investments, to discuss the role of these two BRICS in the global economic engine.

Coggan was quick to point out that India's inflation rate is at about 10%, last quarter growth was at a decade low of 5.5%, the current account balance is in deficit to the extent of 4% of the GDP, and government deficit is 6% of the GDP.

"What the BRICS story is all about is looking at what the long term potential would be" Sharma responded.

She offers that, in addition to structural changes that have taken place over the past couple of years, the fiscal deficit and current account deficit in India has alway been relatively high, given the country's stage in development. While subject to the global financial crisis since 2008, these numbers have risen as India has diverted more money to the rural poor and farmers. The inflation numbers are a direct result of this support, which, according to Sharma, allows for more sustainable growth and less inequality.

"That's the advantage of a democracy," she said

[Many investors have exposure to the Indian economy through PowerShares India Portfolio ETF (NYSEARCA:PIN).]

Inflation has also been driven up by the reduction of oil subsidies, as Indian reformers have begun to push for cash transfers -- in all areas, not just oil -- over traditional subsidies.

"For India to get things truly right, we need to get a few things done," Sharma says. These include building out infrastructure, enacting some fiscal consolidation, and restructuring the subsidy system.

Vodafone (NASDAQ:VOD) was a talking point, too. The global telecommunications company has recently been at the center of legal struggles in India, where a tax has been applied retrospectively to a subsidy merger. Coggan highlighted this as a source of concern for foreign companies either considering an entrance to the Indian marketplace or planning to increase their exposure there.

Sharma defended the tax as legitimate, but emphasized that the government has listened to the negative feedback, in a clear sign that India is willing to cooperate and reform.

Moving on to Brazil, Coggan noted South America's largest economy is growing at a rate of 1.6%. Inflation is 5.3%, the current account deficit is 2.7% of the GDP, and the budget deficit is 2.5% of the GDP.

"If we're look at the BRICS as the exemplar of the countries of the future," Coggan said, "that does not sound too encouraging."

Fraga admits it's been a slow year, noting Brazil's trend rate of growth is below India's and China's. He turned to humor to illustrate the circumstances.

"I remember some years ago, hearing from a former colleague of mine at the Bank of Mexico: The good news is we're having the first normal business cycle in Mexico. The bad news is we're in a recession."

Brazil is experiencing a local recession driven by what Fraga sees as too much exuberance in the credit world in the past few years. On top of that is the "global anxiety" being driven by Europe and China.

But not all is bad in Brazil.

"Consumption has been growing at an accelerated pace....We're happy to report that the bottom half of population is actually growing at a much faster rate than the top half. So, you see development, a fantastic decline in the poverty rate, and the development of a lower middle class, which is different from a middle class in places [like the US], but it does consume."

Coggan condensed the difference between the investment opportunities in the two BRICS by explaining: "If India is the play on the emerging middle class...Brazil is seen as the play on commodities."

[Many investors have exposure to the Brazilian economy through iShares MSCI Brazil Index ETF (NYSEARCA:EWZ).]

Fraga, while not denying the role commodities like oil and iron ore play in the country's economic growth, was quick to mention there is much more diversification to the Brazilian economy.

"What we need now is to invest more," Fraga goes on to explain. "We are a low investment country, and this is the main reason why we don't grow. We have major gaps in infrastructure and education, and mobilizing capital and getting the government to be more effective in its roll."

Fraga went on to add that China has been a big consumer of commodities from Brazil, which has afforded Brazil some slack in its balance of payments.

Twitter: @brokawbrokaw
No positions in stocks mentioned.
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