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Fiscal consolidation with high growth: A policy simulation model for India

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  • Mundle, Sudipto
  • Bhanumurthy, N.R.
  • Das, Surajit

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.

Suggested Citation

  • Mundle, Sudipto & Bhanumurthy, N.R. & Das, Surajit, 2011. "Fiscal consolidation with high growth: A policy simulation model for India," Economic Modelling, Elsevier, vol. 28(6), pages 2657-2668.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2657-2668
    DOI: 10.1016/j.econmod.2011.08.001
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    Cited by:

    1. Bhanumurthy, N.R. & Sharma, Chandan, 2013. "Does Weak Rupee Matter for India's Manufacturing Exports?," Working Papers 13/115, National Institute of Public Finance and Policy.
    2. Hüseyin ŞEN & Ayşe KAYA, 2017. "Mali Konsolidasyon Büyüme ve İstihdam için Bir Çıpa mı, Mali Tuzak mı? Teorik ve Ampirik Literatür Temelli Bir Analiz," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    3. N. R. Bhanumurthy & Sukanya Bose & Parma Chakravartti, 2018. "Targeting Debt and Deficits in India: A Structural Macroeconometric Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 87-119, December.
    4. Tapsoba, Sampawende J.-A., 2014. "Options and strategies for fiscal consolidation in India," Economic Modelling, Elsevier, vol. 43(C), pages 225-237.
    5. Surajit Das & Sukanya Bose & N. R. Bhanumurthy, 2014. "Oil Price Shock, Pass-Through Policy and its Impact on India," India Studies in Business and Economics, in: Ratan Khasnabis & Indrani Chakraborty (ed.), Market, Regulations and Finance, edition 127, chapter 13, pages 231-253, Springer.
    6. Mr. Chadi Abdallah & Mr. David Coady & Mr. Sanjeev Gupta & Emine Hanedar, 2015. "The Quest for the Holy Grail: Efficient and Equitable Fiscal Consolidation in India," IMF Working Papers 2015/152, International Monetary Fund.
    7. Sukanya Bose & N.R. Bhanumurthy, 2015. "Fiscal Multipliers for India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 9(4), pages 379-401, November.
    8. Chhibber, Ajay & Kalloor, Akshata, 2016. "Reviving Private Investment in India: Determinants and Policy Levers," Working Papers 16/181, National Institute of Public Finance and Policy.
    9. Rajbhushan J NAYAK & Vishwanath PANDIT & Gopakumar K. U, 2020. "Structural modeling of fiscal structure for policy analysis: A case study of India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(624), A), pages 139-160, Autumn.
    10. Mr. Sampawende J Tapsoba, 2013. "Options and Strategies for Fiscal Consolidation in India," IMF Working Papers 2013/127, International Monetary Fund.
    11. Bhanumurthy, N.R. & Bose, Sukanya & Satija, Sakshi, 2019. "Fiscal Policy, Devolution and Indian Economy," Working Papers 19/287, National Institute of Public Finance and Policy.
    12. Kelkar, Vijay & Shah, Ajay, 2011. "Indian social democracy: The resource perspective," Working Papers 11/82, National Institute of Public Finance and Policy.
    13. Mundle, Sudipto & M.Govinda Rao & Bhanumurthy, N.R., 2011. "Stimulus, Recovery and Exit Policy G20 Experience and Indian Strategy," Working Papers 11/85, National Institute of Public Finance and Policy.

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    More about this item

    Keywords

    Macroeconomic modelling; Policy simulation; Fiscal policy; India;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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