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Targeting Debt and Deficits in India: A Structural Macroeconometric Approach

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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

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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. 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 / Editura Economica, vol. 0(3(624), A), pages 139-160, Autumn.
    3. 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.
    4. Skrobotov, Anton, 2015. "Likelihood Ratio Test for Change in Persistence," Published Papers skr001, Russian Presidential Academy of National Economy and Public Administration.

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    More about this item

    Keywords

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