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Brazil is in deep economic crisis. China is slowing down. Russia has been battered by the collapse in global oil prices. South Africa is a mess. It is no wonder that there are now calls for India to ease itself out of the BRICS family. For example, banker Uday Kotak said in a recent interview that there is no advantage today in being clubbed with these countries.

It is important to recognize that the Indian policy establishment did well to learn the hard lessons from the rupee crisis in the middle of 2013. The current account was brought under control. The process to reduce the fiscal deficit began. Interest rates were increased. There is no doubt that the sudden collapse in global oil prices helped improve economic stability, but it is also true that these gains were not frittered away. P. Chidambaram, Arun Jaitley and Raghuram Rajan deserve wider credit for this.

A closer look at Brazil is worthwhile because it gives us a sense of what might have been if India had not begun its course correction in late 2013. Its economy is shrinking, inflation is in the double digits, the trade gap is dangerously high and its debt has junk rating. India has steered clear of these dangers, yet there are broader lessons from the Brazilian crisis.

In a prescient column written in May 2011, economist Abhijit Banerjee had noted how political leaders in Brazil had responded to growing inequality and corruption in the 1970s by unleashing entitlement programmes to buy public support. He wrote this at a time when the United Progressive Alliance was trying a similar strategy. Banerjee had said that rising spending in the years before the global economy tanked in 1979 had pushed Brazil into an economic crisis. The implicit warning was that India was flirting with the same risks.

In an article on whether Brazil is headed for another lost decade, The Economist points out that “some 90% of the federal budget is ring fenced either by the constitution or legislation". What this means is that no government can tweak spending depending on economic circumstances. A surfeit of entitlements guaranteed by law may seem attractive till you start thinking about the consequences over the long term. Taxes cannot be increased either because of a weak economy as well as the fact that they have anyway gone up sharply as a percentage of gross domestic product since 1991. There is almost no space for fiscal policy to be used to stabilize the Brazilian economy.

Brazil has also tended to run a pro-cyclical fiscal policy. It means that the fiscal deficit expands in good years while it has to be cut during downturns, exactly the opposite of what the doctor ordered. Various economists have commented on how fiscal policy in Brazil has a tendency towards pro-cyclicality.

As economist Mauricio Oreng concluded in a 2012 paper: “The pro-cyclical bias precludes fiscal policy from smoothing out economic cycles and, in practice, produces less efficient fiscal spending, as investment is always the adjusting variable." It is not hard to see the parallels with India.

All this matters at a time when one of the foremost experts on financial crises has sent out a clear warning that there could be trouble ahead.

“As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. We can already see the first white-capped waves... From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it," economist Carmen Reinhart wrote in a recent column.

Some of the countries she specifically mentions are Ukraine, Greece and Puerto Rico, but she more generally raises the red flag about emerging market countries that could get hurt as the US increases interest rates, global capital flows weaken, China slows down and commodity prices remain low.

It is now widely accepted that India is in a good position compared to most of its peers in the emerging markets. Yet, this is no time to let the guard down. The coming year promises to be a rocky one. And it is against this backdrop that the finance ministry has indicated that it will push back its fiscal consolidation plans for a second year while there is strong pressure on the Reserve Bank of India to slash interest rates. Loose fiscal and monetary policies at a time of global economic instability could prove to be a risky bet.

And back to Brazil. India has avoided its current fate thanks to sensible economic management plus the fall in global oil prices. But there are two lessons that are relevant over the long term. The danger of getting locked into large entitlement spending commitments despite a weak tax base. And designing macro policies that accentuate economic cycles rather than lean against the wind.

Niranjan Rajadhyaksha is executive editor of Mint.

Comments are welcome at To read Niranjan Rajadhyaksha’s previous columns, go to

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