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Government Expenditure in India: Composition and Multipliers

Author

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Bhavyaa Sharma

    (NIPFP)

Abstract

We estimate fiscal multipliers for total, capital (capex), and revenue (revex) Indian government expenditure using a two variable Structural Vector Auto-Regression (SVAR). Our quarterly data allows us to estimate both short- and long-run multipliers. We then extend and re-estimate the model including supply shocks and the monetary policy response sequentially and together and re-estimate the multipliers. The long-run capex multiplier remains much larger than the corresponding revex multiplier in all the estimations. The short run impact multiplier is the highest for revex, but does not rise after the first quarter. The capex peak multiplier in the 2nd quarter is 1.6–1.9 times larger. The cumulative multiplier is also the highest for capex, 2.4–6.5 times the size of the revex multiplier. Capex also reduces inflation more over the long-term. Despite this, capex shows greater volatility since it is more vulnerable to discretionary cuts. Monetary accommodation of capex and revex is allowed to differ. It varies in the absence/presence of supply shocks. The combination of a direct cut in capex and monetary tightening in response to a supply shock reduces the capex multiplier. The results are consistent with an elastic long-run aggregate supply. Disaggregated evaluation of spending policy, therefore, gives useful insights.

Suggested Citation

  • Ashima Goyal & Bhavyaa Sharma, 2018. "Government Expenditure in India: Composition and Multipliers," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 47-85, December.
    • Handle: RePEc:spr:jqecon:v:16:y:2018:i:1:d:10.1007_s40953-018-0122-y
    DOI: 10.1007/s40953-018-0122-y
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    Cited by:

    1. Ashima Goyal, 2020. "Post Covid-19: recovering and sustaining India’s growth," Indian Economic Review, Springer, vol. 55(1), pages 161-181, November.
    2. Kumar, Alok, 2023. "Financial market imperfections, informality and government spending multipliers," Journal of Development Economics, Elsevier, vol. 163(C).
    3. Raut, Dirghau & Raju, Swati, 2019. "Size of Expenditure Multipliers for Indian States: Does the Level of Income and Public Debt Matter?," MPRA Paper 104947, University Library of Munich, Germany.
    4. Ashima Goyal, 2018. "The Indian fiscal-monetary framework: Dominance or coordination?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-010, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. Riddhima Sobti, 2022. "The Macroeconomic Impact of Fiscal Policy Shocks: What do the Indian Data Say?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 16(1), pages 7-27, February.

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