A Report on Fiscal Policy

A Report

 On

Fiscal Policy
(A comparison between India & Brazil)

Submitted in the partial fulfilment of the requirements

of the Course: Economic Environment & Policy

By (Sec B – Group 2)

Aditi Wahi                15P063

Rohan Deshpande         15P076

Gaurav Kothari         15P081

Naman Ratan                15P094

Rohit Jain                        15P103

Vikrant Wakhlu       15P117

TABLE OF CONTENTS

1. Capital Expenditure                                                                        1

1. Revenue Expenditure                                                                        3

1. Public Debt & Interest Payments                                                        6

1. Transfer Payments                                                                        9

1. Tax Revenue                                                                                12

1. Contribution of various Taxes to Revenue                                                13

1. References                                                                                14

1. CAPITAL EXPENDITURE

[pic 1]

Figure 1 – Capital Investment (Per cent of GDP)

Courtesy: TheGlobalEconomy.com

The capital expenditure done by India, as a percentage of GDP has clearly been more than what Brazil has invested in the last 15 years. However, in the past few years, Brazil has been criticised of being on a spending spree without showing any substantial progress in the growth of the country. With the preparation of the FIFA World cup and Olympic Games 2016 approaching, the country has been lavishly spending its monetary resources.

Having observed that, one also can expect Brazil to get on a more positive track, given if it opens up investment to its private sector, which would give rise to better opportunities for the citizens of the nation. However, at present Brazil’s situation has been deteriorating so much that ratings agency Standard & Poor’s last year had to downgrade the country’s credit rating from BBB to BBB-, which is the lowest grade in the investment-grade, expressing the corrosion in the government’s fiscal policies.

India, on the similar lines has seen sharp rise in the capital expenditure since the arrival of 2015. NDA government has recently been trying to get the better part of the investment cycle for Indian economy.

In the first quarter, India has seen 38% rise in the capex spending in the first quarter of 2015. Total capital spending therefore has risen to ₹31,051 crore. At the same time, RBI loosened the noose on interest rates, by cutting the repo rate by 75 basis points, giving a boost to public spending. Again, there was also seen in the fiscal deficit in the first quarter, which rose to 51.6% of the budget estimate, lower than 56.1% that was last year in the same quarter. This is expected to have a multiplier effect on the growth of the Indian economy.

To compare the capital investment in both the economies, we would need to compare the backgrounds first. Brazil has been enjoying the attention of the global sports for some time now. This has pushed its government towards spending more on developing the relevant infrastructure. However, this has come at a price. Not only has Brazil taken criticisms from the outside world, even the citizens have been vehemently opposing the spending spree of the government. In India, on the other hand, the spending has been targeted more towards development. But as one can see in the Figure 2 that shows the corruption index of India and Brazil, India has scored considerably lower.

[pic 2]

Figure 2 – Corruption Index (Lower the value, more the corruption)

Courtesy: TheGlobalEconomy.com

This shows that while the capital spending in India has been growing with the beginning of the year, there has been a lot that has been filtered out due to corruption in the echelons of the central as well as state government. An example of this can be seen in the downfall of capex in the year 2012-13, which was supposed to be due not only to the inflationary pressures, but also the regulatory issues and the corruption – related investigations that lowered the credibility and the private investment. In the case of public investments by the government, bureaucracy red-tape and delays in getting approvals with multiple agencies interfering in the central and the state level were the major causes of low effect of the public investment on the economy.

1. REVENUE EXPENDITURE

CONSUMPTION EXPENDITURE

[pic 3]

Figure 3 – Government Final Consumption Expenditure (Average, in Billions of National Currency)

Courtesy: OECD (2010), "Main Economic Indicators - complete database", Main Economic Indicators (database)

Brazil as a nation has seen an excellent growth in the first decade of 2000s. Combined external and internal economic conditions have been favourable for Brazil. Especially post 2004, Brazil saw a huge improvement in its sustained growth, which can be attributed to two factors.

First one was the increasing household consumption due to better job creation in the formal sectors which lead to increase in the household credit and growing public sector transfers to households. Second was the expansionary nature of the fiscal policy to boost the aggregate demand. More jobs and more wages led to better taxes and rising commodity prices. This led to better aimed policies and higher government consumption expenditure and even social transfers. This however, did not lead to any dissatisfactory decrease in the primary surplus. This can be clearly seen in the Figure 3, as the consistently rising curve of the final consumption expenditure of Brazil.