Targeting Debt and Deficits in India: A Structural Macroeconometric Approach

N R Bhanumurthy, Sukanya Bose () and Parma Chakravartti ()
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Parma Chakravartti: National Institute of Public Finance and Policy

Journal of Quantitative Economics, 2018, vol. 16, issue 1, No 4, 87-119

Abstract: Abstract This study attempts to construct a consistent macroeconomic framework for India to review the macro-fiscal linkages over the 14th Finance Commission period, 2015–2019. A macroeconomic policy simulation model comprising of real, external, monetary, fiscal and macroeconomic block is built for the purpose. The estimated model is used for policy simulations to address three scenarios: (a) shock due to 7th Pay Commission award, (b) targeting deficit and debt and (c) targeting higher growth. The results suggest that while Pay Commission award would result in slightly higher growth compared to the base case, this also results in higher inflation, fiscal-revenue deficits, current account deficit as well as higher government liability. Further simulation results suggest that expenditure switching policy, which is the core of expansionary fiscal consolidation mechanism, of increasing higher government capital expenditure and reducing the government transfers could result in higher growth with a manageable fiscal deficit of 5.3% that also brings down the government (centre plus states) liability to around 60% by 2019–2020.

Keywords: Fiscal consolidation; Government debt; Fiscal deficit; Macroeconometric modeling; India (search for similar items in EconPapers)
JEL-codes: C32 E10 E17 E60 H60 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Targeting Debt and Deficits in India: A Structural Macroeconometric Approach (2015)
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DOI: 10.1007/s40953-017-0115-2

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