Investment environment in India vs. Brazil

I recently wrote an article comparing the investment environment in India and Brazil from the point of view of an investor from a developed country. I analyzed the countries on the various parameters like Macroeconomic Environment, Political Environment, Equity Market and Risk Assessment etc.

The major findings are as follows:
India’s GDP growth has outgrown Brazil’s GDP growth (both in real and PPP terms) during the last 15 years. However, Brazil’s annual income and annual gross disposable income as a percentage of GDP is higher then India. Both the countries have depreciated their currency during the last 10 years which resulted in export competitiveness. However the trade balance has deteriorated during this period. Moreover, the liquidity ratio of Brazil (current account balance as % of GDP) is better than India has improved its capability to serve the external debt (solvency ratio).

India’s political environment is fairly stable and all the government after economic liberalization of 1991 have further liberalized the economy. India has maintained a GDP CAGR in excess of 6% during 1991-2006. Brazil benefited from the economic reforms of the government of Mr. Cardoso (1995-2002) during which hyperinflation ended and reforms were introduced to liberalize the economy, but public-debt indicators deteriorated amid low economic growth. At present, Brazilian government seems unlikely to advance any ambitious reforms as political maneuvering starts ahead of mid-term elections in late-2008. Political motives may stall the reforms in near future.

Equity markets of both the countries have witnessed large offerings and market capitalization has also increased many folds. Average 3-year and 5-year ROCE and ROE of equity markets of both the countries is not much different; however P/E ratio of Brazil is much higher. The credit/deposit ratio of banks of both the countries is low implying that commercial borrowing is costly.

The major risks associated with Brazil are sagging consumption and investment besides high debt ratio; however the strength is abundant natural resources and ethanol. The major risks associated with India are poor infrastructure, reducing growth in agriculture sector and supply side constraints. India has a large educated working class population and a large consumer base which should help India sustain its growth.

A short term investor can be indifferent between the two economies however a long term investor may prefer India over Brazil.