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Targeting Debt and Deficits in India: A Structural Macroeconometric Approach

Author

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  • Bhanumurthy, N.R.

    () (National Institute of Public Finance and Policy)

  • Bose, Sukanya

    () (National Institute of Public Finance and Policy)

  • Adhikari, Parma Devi

    (National institute of Public Finance and Policy)

Abstract

This study attempts to construct a consistent macroeconomic framework for India to review the macro-fiscal linkages over the 14th Finance Commission period of 2015-19. The existing NIPFP model has been reworked to add a full-fledged real sector block comprising of agriculture, industry, services and infrastructure, with the overall economy comprising of real sector block, external block, monetary block, fiscal block and macroeconomic block. The estimated model was used for policy simulations that are relevant for the 14th Finance Commission. The various scenarios include (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 per cent that also brings down the government (centre plus states) liability to around 60 per cent by 2019-20.

Suggested Citation

  • Bhanumurthy, N.R. & Bose, Sukanya & Adhikari, Parma Devi, 2015. "Targeting Debt and Deficits in India: A Structural Macroeconometric Approach," Working Papers 15/148, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:15/148
    Note: Working Paper 148, 2015
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    References listed on IDEAS

    as
    1. 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.
    2. Krishnamurty, K. & Pandit, V., 1997. "Exchange rate, tariff and trade flows: Alternative policy scenarios for India," Journal of Asian Economics, Elsevier, vol. 8(3), pages 425-454.
    3. V N Pandit & Harish Mani & G Balachandran, 2011. "Public Investment in Agricultural and GDP Growth: Another Look at the Inter Sectoral Linkages and Policy Implications," Working Papers id:4385, eSocialSciences.
    4. Kevin S. Nell, 2013. "An alternative explanation of India's growth transition: a demand-side hypothesis," Cambridge Journal of Economics, Oxford University Press, vol. 37(1), pages 113-141.
    5. 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.
    6. K.N.Murty & A. Soumya, 2006. "Macroeconomic effects of public investment in infrastructure in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2006-003, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Petia Topalova & Dan Nyberg, 2010. "What Level of Public Debt Could India Target?," IMF Working Papers 10/7, International Monetary Fund.
    8. Bhanumurthy, N. R. & Das, Surajit & Bose, Sukanya, 2012. "Oil Price Shock, Pass-through Policy and its Impact on India," Working Papers 12/99, National Institute of Public Finance and Policy.
    9. Bhanumurthy, N.R. & Bose, Sukanya & Panda, Swayamsiddha, 2014. "Modeling India's External Sector: Review and Some Empirics," Working Papers 14/138, National Institute of Public Finance and Policy.
    10. N.R. Bhanumurthy & Sukanya Bose & Swayamsiddha Panda, 2014. "Modelling India’s External Sector: Review and Some Empirics," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 8(4), pages 457-493, November.
    11. 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.
    12. Bernheim, B Douglas, 1989. "A Neoclassical Perspective on Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 55-72, Spring.
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    Cited by:

    1. 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.
    2. Ajay Chhibber & Akshata Kalloor, 2017. "Reviving Private Investment in India: Determinants and Policy Levers," Working Papers 2017-5, The George Washington University, Institute for International Economic Policy.

    More about this item

    Keywords

    Fiscal consolidation ; Government debt ; Fiscal deficit ; Macroeconometric modeling ; India;

    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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