RBI Grade B Officers 21 Nov 2015 Paper

Directions (31–40) : Read the following passage carefully and answer the questions given below it. Certain words/phrases have been printed in bold to help you locate them while answering some of the questions.
 Brazil does not look like aneconomy on the verge of overheating.The IMF expects it to shrink by 3% this year, and 1% next (Thecountry has not suffered twostraight years of contraction since1930-31). 1.2m jobs vanished inSeptember, unemployment hasreached 7.6%, up from 4.9% a yearago. Those still in work are findingit harder to make ends meet real(i.e. adjusted for inflation) wages aredown 4.3% year-on-year. Despitethe weak economy inflation is nudgingdouble digits. The central bankrecently conceded that it will missits 4.5% inflation target next year.Markets don’t expect it to be metbefore 2019. If fast-rising prices aresimply a passing effect of the Brazilianreal (R $) recent fall, which haspushed up the cost of importedgoods, then they are not too troubling.But some economists have amore alarming explanation: thatBrazil’s budgetary woes are so extremethat they have undermined the central bank’s power to fightinflation—a phenomenon known asfiscal dominance.
 The immediate causes of Brazil’stroubles are external: the weakworld economy, and China’s falteringappetite for oil and iron ore inparticular, have enfeebled both exportsand investment. But much ofthe country’s pain is self inflicted.The president could have used thecommodity windfall from the firstterm in 2011-14 to trim the bloatedstate, which swallows 36% of GDPin taxes despite offering few decentpublic services in return. Insteadhandouts, subsidised loans andcostly tax breaks for favoured industrieswere splurged on. Thesefuelled a consumption boom, andwith it inflation, while hiding theeconomy’s underlying weaknesses:thick red tape, impenetrable taxes,an unskilled workforce and shoddyinfrastructure. The government’sprofligacy also left the public financesin tatters.
 The primary balance (before interestpayments) went from a surplusof 3.1% of GDP in 2011 to aforcast deficit of 0.9% this year. Inthe same period public debt hasswollen to 65% of GDP, an increaseof 13 percentage points. That is lowerthan in many rich countries, butBrazil pays much higher interest onits debt. It will spend 8.5% of GDPthis year servicing it, more than anyother big country. In September it lostits investment-grade credit rating.
 Stagflation of the sort Brazil isexperiencing presents central bankerswith a dilemma. Raising interestrates to quell inflation mightpush the economy deeper into recession;lowering them to fostergrowth might send inflation spirallingout of control. Between Octoberlast year and July this year, thecountry’s rate-setters seemed to prioritiseprice stability, raising thebenchmark Selic rate by three percentagepoints, to 14.25%, where itremains.
 The alluring real rates of almost5% ought to have made the BrazilianReal attractive to investors. Instead,the currency has weakenedand rising inflation despite higherinterest rates, combined with a doublingof debt-servicing costs in thepast three years has led to the diagnosisof fiscal dominance. Thecost of servicing Brazil’s debts hasbecome so high, that rates have tobe set to keep it manageable ratherthan to rein in prices. That, in turn, leads to a vicious circle of a fallingcurrency and rising inflation.There is no question, however, thatBrazilian monetory policy is at besthobbled. State-owned banks haveextended nearly half the country’scredit at low, subsidised rates thatbear little relation to the Selic—ata cost of more than 40 billion R(10 billion) a year to the taxpayer.As private banks have cut lendingin the past year, public ones havecontinued to expand their loanbooks. All this hampers monetarypolicy and If left unchecked, thisspurt of lending may itself threatenprice stability.