Macroeconomic Policy Simulations for the 14th Finance Commission
Publication dateDec, 2014
DetailsReport submitted to the 14th Finance Commission of India.
AuthorsN R Bhanumurthy, Sukanya Bose, Parma Devi Adhikari, and Abhishek Kumar
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 for the 14th Finance Commission period. The various scenarios include (a) shock due to 7th Pay Commission award, (b) targeting deficit and debt (c) targeting higher growth and (d) the external shocks. 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, by increasing higher government capital expenditure and reducing the government transfers could result in higher growth with a manageable fiscal deficit of 6 per cent that also brings down the government liability to its present level of 65 per cent.