Fiscal Policy Report

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This increase in the job creation, wages and overall consumption expenditure gave rise to the Consumption Boom in Brazil, during which the real and lending interest rates also kept falling. This gave growth to consumer credit and an eventual rise in the debt-to-income ratio. The value of this ratio, which stood at 18% at the end of the year 2005, had jumped to 46% at the end of the year 2014.

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Figure 4 – Real and Lending Interest Rates

Courtesy: TheGlobalEconomy.com

This happened due to the contradictory economic policies that were put into effect by the Brazilian government post 2010. The conditions that were necessary to keep up the growth of the first decade for Brazil required it to maintain the growth in the real disposable income and the consumer credit. As one can observe from the Figure 4, the interest rates were hiked by the Brazilian government in 2011, to put control on the growing debt-to-income ratio. In addition, the number of job creating measures kept by the government too had come down.

The end of the consumption boom came with increase in the default rate, decelerated private consumption growth and an overall slowdown of the Brazilian economy. While the central bank did understand the on-going slowdown, it was only after 2012 did they pushed the rates lower. While it did affect the economy by raising the private consumption growth in 2013, the growth was nowhere near the rate of growth that was achieved in the period 2004-2010. Thus, even though there was increase in the consumption expenditure by the Brazilian government, their contradictory monetary policies kept them at the bay of development post 2010.

Indian economy on the other hand has been dealing with serious demand and supply constraints in the past few years. The aggregate demand has suffered a decline due to fall in the rate of consumption and domestic investment. It is due to this reason; the Indian fiscal policy has been accommodating the higher rates of consumption expenditure. As a matter of fact, the rate of final consumption expenditure as a percentage of GDP has risen to 72.1% in 2014-15 from 68.8% in 2011-12.

One of the effects it has had on the Indian economy is the increase in the average propensity to consume. This trend can be noticed in the figure 5, where we can observe the Gross Domestic Saving as a percentage of the national GDP going down post 2008 financial crisis. The savings in the public sector almost went down to nil in 2009, but went up robustly in 2010. Other than this, the Household and the Private sector savings have been going down, giving a good indication of rise in the consumption.[pic 5]

Figure 5 – Gross Domestic Saving (Per Cent of GDP)

Courtesy: CSO, India

However, as discussed above the major reason for this has been the public expenditure itself, rather than progress in Capital Formation. As given below in the figure 6, the Gross Fixed Capital Formation has seen fall in the recent years, especially the public sector. Even in the more recent times, that is 2014 and post NDA era, the problems that the government is facing regarding passing different bills such as Land Acquisition Bill has been acting as the bottleneck for the capital formation. It is thus on the Consumption expenditure, that the government has been banking on for stimulating the aggregate demand.

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Figure 6 – Gross Fixed Capital Formation (Per Cent of GDP)

Courtesy: CSO, India

- Public Debt & Interest Payments

INTEREST PAYMENTS

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Figure 7 – Public Debt as percentage of Revenue Receipt (as % of Revenue Receipt)

Courtesy: CSO, India

Public debt is an important factor of the economy. Interest rate on the debt is the price of the debt that is incurred on its amount. India’s public debt has made significant contributions for the better of the Indian economy. In an indirect fashion, i.e. through inducing investments, this debt has increased the growth of the nation’s output. This has had significant effect on the GDP of India.

If we look at the trend of the Public Debt as a percentage of Revenue Receipt in the Figure 7, we can notice that the public debt had reached its peak in 2003-04. As a matter of fact, in 2003-04, the total public debt was 81.4% of the GDP. This was the phase in which India government had also been hiking its consumption expenditure and India saw an increase in the gross fixed capital formation in the upcoming years. Investment rate in the year 2004-05 had shown considerable increase, from 26.87% to 32.82% (Source: Computed from the data available in Indian Public Finance Statistics, 2011-12 and Economic Survey 2011-12). However, the decrease in the public debt post 2007-08 can be observed in the figure 7 and figure 9 (especially in 2010-11) has not affected the interest payment much, [pic 8]

Figure 8 – Interest Payments (in ₹ Crore)

which has been increasing consistently post 2008-09. At the same time it may be mentioned that the data regarding debt consists of external as well as domestic liabilities. The domestic liabilities or the internal debt here

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Figure 9 – Interest Payments (as % of Total Revenue Receipt)

Courtesy: CSO, India

consists of the market loans, treasury bills and other bonds and securities. The external debt, on the other hand consists of the commercial borrowings, expert, multilateral and bilateral credits and other such borrowings. The trend of these debts for India is shown in figure 10. We can observe that the overall ‘Outstanding’ external debt of India has been on an increase, except in 2010-11. This pattern is also supported by the figure 7 and figure 9, which show that the overall debt as a percentage of the Total Revenue Receipts also spiked down in that year. If we dig deeper, in 2010, India saw a 10.26% growth in its economy against 8.48% in 2009-10. The agriculture sector showed an excellent growth of 7% against 1% that was in 2009, and services sector grew at the rate of 9.3%.

The reason for the growth might be evident from figure 4 where we can notice that the Real and

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