Fiscal Consolidation with High Growth: A Policy Simulation Model for India

Sudipto Mundle, N R Bhanumurthy and Surajit Das

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8% or so. The strategy is to gradually bring down the revenue deficit to zero by 2014-15, while allowing a combined fiscal deficit for centre plus states of about 6% of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case.

Keywords: Macroeconomic Modelling; Policy Simulation; Fiscal Policy; India (search for similar items in EconPapers)
JEL-codes: C32 E10 E17 E60 H60 (search for similar items in EconPapers)
Date: 2010-01
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Fiscal consolidation with high growth: A policy simulation model for India (2011)
Working Paper: Fiscal Consolidation with High Growth A Policy Simulation Model for India (2010)
Working Paper: Fiscal consolidation with high growth: A policy simulation model for India (2010)
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