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Options and strategies for fiscal consolidation in India

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  • Tapsoba, Sampawende J.-A.

Abstract

This paper uses a multi-region dynamic stochastic general equilibrium (DSGE) model to study options and strategies for fiscal consolidation in India. The challenge for India is how to put public finances on a more sustainable footing while preserving the potential for high growth and attenuating the adverse consequences on the needy. We analyze the macroeconomic implications of three fiscal consolidation scenarios. A “benchmark” case based on authorities' intentions that reduces government consumption, general transfers, and strengthens consumption tax collection; a “growth-friendly” that reallocates the savings to more public investment; and a “social-friendly” scenario that equally reallocates the savings between more public investment and more transfers to households excluded from the financial system. The simulations indicate that fiscal consolidation yields considerable long-term benefits and also entails output costs in the near term. Growth outcomes are better under the growth-friendly and social-friendly scenarios. These consolidation scenarios alone are not enough to maximize net gains for India. Other factors, such as the pace of consolidation, the combination with structural reforms and external economic conditions, play a critical role in the success of fiscal consolidation.

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  • Tapsoba, Sampawende J.-A., 2014. "Options and strategies for fiscal consolidation in India," Economic Modelling, Elsevier, vol. 43(C), pages 225-237.
    • Handle: RePEc:eee:ecmode:v:43:y:2014:i:c:p:225-237
    DOI: 10.1016/j.econmod.2014.08.012
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    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. Nandi, Aurodeep, 2019. "Fiscal deficit targeting alongside flexible inflation targeting: India’s fiscal policy transmission," Journal of Asian Economics, Elsevier, vol. 63(C), pages 1-18.
    4. 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.
    5. Rahul Anand & Mr. Volodymyr Tulin & Naresh Kumar, 2014. "India: Defining and Explaining Inclusive Growth and Poverty Reduction," IMF Working Papers 2014/063, International Monetary Fund.
    6. Zhang, Yunhan & Liu, Zhixin & Jin, Hao, 2025. "The domestic and spillover effects of fiscal consolidation: The role of fiscal instruments, exchange rate regimes, and capital controls," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    7. Muneesh Kapur & Rakesh Mohan, 2014. "India’s Recent Macroeconomic Performance: An Assessment and Way Forward," IMF Working Papers 2014/068, International Monetary Fund.

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