INDIAN ECONOMY REPORT ASSIGNMENT

Comparative Analysis of Indian and Spanish Fiscal Policy

By: Group 1 (Section F)

To: Prof. Kartik Yadav

Name PGPID
Esha Pareek PGP40305
Himanshu Chawla PGP40307
Avinash Sharma PGP40301
Vanshika Gupta PGP40341
Khushi Jain PGP40314
Vibhuti Roach PGP40343
Introduction​
Early in the 1990s, India and Spain faced major financial difficulties that affected the course of their
future economies. India's balance of payments problem in 1991 led to major liberalization changes meant
to reduce trade restrictions and boost foreign economic investment. From a pre-reform average of 3.5% to
nearly 8% in the mid-2000s, this shift produced a notable rise in GDP growth. There were constant fiscal
shortfalls linked to this development plan. India's budget deficit peaked at 9.2% in FY2021, later dropping
to an estimated 4.4% by FY2026. At 5.87% of GDP in 2023, India's budget deficit remains among the
highest in recent years. Early in the 1990s, Spain was under extreme financial strain, with a 7.4% GDP
deficit in 1993 caused by a European recession. Spain adopted severe fiscal retrenchment measures to
meet the Maastricht requirements. From 2024, its deficit is expected to stay below the EU's 3% of GDP
limit. Spain maintained strict budget control even during COVID-19 in 2020. As a result, even though
both countries faced financial crises in the 1990s, Spain’s EU-aligned consolidation strategy has led to
better fiscal stability. In contrast, India’s growth-driven approach continues to cause structural fiscal
imbalances, despite higher GDP growth.

Fiscal Policy and Debt Management

Tax-GDP Ratio and Revenue Mobilisation (Refer: Graph 1 & 2): In Spain, the tax-to-GDP ratio
exceeds 37%, aided by progressive tax reforms, a strong VAT system, and a wide direct tax base. After
joining the EU, Spain gained access to mechanisms of fiscal discipline and compliance, thus
strengthening its revenue collection system.
In India, although GST was implemented in 2017, tax mobilization remains difficult due to frequent rate
structure changes, inefficiency in tax administration, and tax evasion. The tax-to-GDP ratio is 18.5% in
FY2024, significantly lower than Spain. Additionally, India relies heavily on indirect taxes, which are
regressive, whereas Spain maintains a better balance with direct taxation.
Expenditure Efficiency (Refer: Graph 3): While Spain gained fiscal discipline to increase the efficiency
of public spending, India has been beset with issues when it comes to the effective distribution of public
expenditure. Under the umbrella of market liberalization, macroeconomic reform, and integration within
the European framework, Spain consolidated fiscal targets from the 1990s onward, registering a
government surplus above 1% of GDP by 2005. This was interrupted by the financial crisis of 2008,
leading to austerity measures. In 2019, 42% of GDP was allocated to public expenditure in Spain, mainly
for social welfare, pensions, and public investments. It remained at around 25% of GDP since the 1990s
due to the liberalization of India. Given these opportunities for improving spending efficiency in Spain
versus India’s need for fiscal management and structural reforms, better outcomes in public investment
and welfare appear unlikely without improvements in the management of public expenditure in India’s
case.
Public Debt and Deficits (Refer: Graph 4 & 5): Fiscal consolidation measures have been stronger in the
case of Spain than in India because Spain has been subjected to EU-induced fiscal niceties and the
rigorous imposition of the 2012 Budgetary Stability Act. By 2024, Spain will accumulate a public debt of
107% of GDP, considerably higher than India's 81%. Contrarily, while the deficit in Spain has fallen to
3% of GDP, that of India stands higher at 5.1%.
On the other hand, India tends to keep a slightly lower debt burden in spite of an inferior enforcement
mechanism of fiscal rules. The most conspicuous difference between the two is Spain's structured fiscal
management, whereas in India, an excessive degree of borrowing and subsidy-led spending prevails.
Long Term Bond Rates (Refer: Graph 6 & 7): The stability of the Eurozone and the support of the ECB
benefit Spain, which keeps its 10-year bond yield at 2.97% in 2025, while for India, the bond yield
remains high at 6.63% due to inflation and fiscal risks. The Eurozone integration and specifically the
2012 ESM of Spain ensure lower borrowing costs and confidence among investors. In India, the Inflation
Targeting Framework (since 2016) has contributed to stabilizing inflation; however, the lingering risk of
fiscal deficits and inflationary pressures keeps bond yields at elevated levels. While Spain's fiscal
discipline assures lower yields, India must address macroeconomic imbalances for yields to fall and
investor confidence to strengthen.

Structural Reforms & Economic Competitiveness

Spain has pursued labor flexibility post-2012 labor reform, which relaxed rules on hiring and firing and
facilitated wage flexibility and lowered the cost of dismissal. These changes have facilitated employment
stability and reduced the volatility in unemployment. On the other hand, former labor law rigidity in India
and the great extent of the informal sector deter formal sector job creation despite recent efforts towards
labor code simplification by the government itself. Spain has managed to significantly improve its
business environment by removing bureaucracy. It drew €34bn FDI in 2023. However, though India has
seen improvement in Ease of Doing Business rankings, the remaining regulatory uncertainty and policy
unpredictability are the main deterrents to immediate investor action and restrict FDI to sectors only with
clear frameworks. Meanwhile, a high reliance on IT continues in the Indian economy, with limited growth
on account of Make in India, especially with regard to electronics and automobiles. The Indian industrial
scenario slows down due to execution delays, land acquisition hurdles, and red-tapism. Spain has been on
track with keeping its economy steadily growing through implemented structural reforms.

Financial stability
Banking sector health: Spain's banking sector confronted major challenges subsequent to the 2008
financial crisis, largely as result of collapse of the real estate bubble. The Spanish government in 2009
established the FROB i.e. Fund for Orderly Bank Restructuring to regulate bank restructuring and
recapitalization. In addition, the Sociedad de Gestión de Activos procedentes de la Reestructuración
Bancaria (Sareb) was set up in 2012 in order to handle toxic real estate assets. These steps taken,
combined with stringent stress tests and consolidation efforts, had resulted in a reduction in the number of
banks from 55 to 10, thus improving the sector's robustness and bringing down the NPA ratio from a peak
of 13.6% to 3.3% in 2024. Conversely, India confronted a chronic Non-Performing Assets (NPA) crisis,
with the aggregate NPA ratios hitting a high of 11.5% in 2017. In the effort to improve the procedures
related to debt resolution , the Indian government had implemented the IBC i.e. Insolvency and
Bankruptcy Code (IBC) in 2016. Furthermore, in 2021, the National Asset Reconstruction Company
Limited (NARCL) was established to remove problematic loans from the banks' balance sheets. Due to
these efforts of the government, by September 2024, the aggregate NPA ratios had come down to a
13-year low of 2.6% as an outcome of these initiatives.
Exchange Rate & External Debt: When Spain had adopted Euro, the step ensured exchange rate
stability to protect itself from currency fluctuations which enabled predictable foreign financing costs.
This stability as a result bolstered investor confidence which aided international trade. ​On the other hand,
the Indian Rupee (INR) has been subject to volatility in relation to major currencies of the world, due to
changing global economic conditions and trade imbalances. It has resulted in fluctuating foreign financing
costs, thus impacting the cost of imports and overall economic stability. Spain’s external debt ratio at
164% reflects a huge international market borrowing due to high debt of private sector. Fiscal
consolidation as well as utilization of recovery funds of the EU have been used to stabilize this. India’s
lower external debt to GDP ratio as compared to Spain reflects its cautious approach and high foreign
exchange reserves.

Social Investments & Demographic Trends

Education & Workforce Productivity: While Spain has a well-developed education system, the country
suffers from high levels of youth unemployment and educated youth form a large segment of the
unemployed. However, in 2024, almost 70 percent of all new jobs were taken by foreign workers
(Spanish labor market policy). India has a young population, with more than 65% below 35, struggling
with the contrasting problem of an unskilled workforce. Only 46.2% are highly employable and around
78% seem to have no practical skills, underscoring urgent need for vocational training and education
relevant to industries.
Healthcare & Welfare Spending: The universal healthcare services in Spain encompass a wide
coverage, encouraging well-being and productivity; in India, a country where health expenditure is at less
than 2% of GDP- comparative low level-this underfunding poses tremendous rural health challenges to
tackle. While telemedicine-based ICUs in rural areas are some of the initiatives designed to fill this gap,
huge investments will be needed for real equity.
Demographics & Aging: With an aging workforce and ever-rising pension burden costs in Spain, the
obvious labor shortages are undertaken by Spain's emerging pro-immigration policy. Absence of adequate
job opportunities along with the mismatch of skills pose a liability for the Indian economy in spite of a
young population, necessitating targeted policies toward creating job opportunities.
Pension & Social Security Systems: The pension system in Spain is under severe pressure due to the
need to maintain and pay benefits for many pensioners, and long-term sustainability is in serious question.
Social security in India presents a fragmented picture, very limited in scope, leaving large populations
exposed to vulnerabilities.

Lessons, Challenges & Future Outlook

India can learn from Spain’s fiscal discipline, highlighted by its successful campaign to reduce its
debt-to-GDP ratio significantly post-Covid. Their VAT modernization and anti-tax evasion measures also
provide a roadmap for India to broaden its tax base and simplify its taxation policy. Thirdly, Spain’s
decentralized fiscal policy structure has enhanced governance and efficient resource allocation, a potential
option for the highly diversified Indian states’ financial and infrastructural needs. On the other hand,
Spain has to address fiscal consolidation while maintaining social spending for an aging population as
well as defence investments. With the EU’s Stability and Growth Pact reinstated, Spain faces pressure to
curb deficits while continuing to foster economic competitiveness in a tightening labour market. India
must balance fiscal expansion with debt sustainability as it races to the trillion dollar mark. It has been
gradually reducing its fiscal deficit, targeting a decline from 5.9% of GDP in FY24 to 4.5% by FY26.
This adjustment is crucial for long-term stability, given that India’s public debt-to-GDP ratio stands at
81%, higher than many emerging economies. To maintain fiscal sustainability while addressing
development needs, the government must optimize public expenditure efficiency even as its
capex-to-GDP ratio increases.. Ultimately, India’s fiscal future hinges on a delicate balance between
growth and sustainability.
 APPENDIX
Graph 1: India

Source
https://www.ey.com/en_in/insights/tax/economy-watch/sustaining-india-s-long-term-growth-role-of-gover
nment-finances

Graph 2: Spain

Source
https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-tax-revenues/revenue-statistics
-spain.pdf

Graph 3: Spain
Source: https://tradingeconomics.com/spain/government-spending-to-gdp

Graph 4: India

Source: https://tradingeconomics.com/india/government-debt-to-gdp

Graph 5: Spain

Source: https://tradingeconomics.com/spain/government-debt-to-gdp

Graph 6: India
Source: https://tradingeconomics.com/india/government-bond-yield

Graph 7: Spain

Source: https://tradingeconomics.com/spain/7-year-note-yield

Graph 8

Graph 9
Graph 10

Indicator India (2024) Spain (2024)

Gross NPA Ratio 2.6% 3.3%

Inflation Rate 5.22% 2.80%
Exchange Rate Stability High volatality Euro stability
External debt (% of GDP) 19.4% 164%

Research Links

https://www.imf.org/external/pubs/ft/pam/pam49/pam4902.htm
https://chatgpt.com/c/67d6e1b4-bf58-8001-bb2d-9fa9ffb2fe3f
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nment-finances?
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https://www.ey.com/en_in/insights/tax/economy-watch/fy-26-union-budget-diversifies-stimuli-and-rethin
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