Options and strategies for fiscal consolidation in India

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...

Full description

Saved in:
Bibliographic Details
Published in:Economic modelling 2014-12, Vol.43, p.225-237
Main Author: Tapsoba, Sampawende J.-A.
Format: Article
Language:English
Subjects:
Benchmarking
Consumption
Consumption taxes
Cost benefit analysis
Democratic consolidation
DSGE models
Economic conditions
Economic theory
Fiscal consolidation
Fiscal policy
Growth models
India
Macroeconomics
Open economy macroeconomics
Public finance
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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. •This paper provides the first application of a multi-region DSGE to India.•A gradual strategy produces better outcome than a frontloaded or a deferred option.•Structural reforms and external environment help the task of fiscal consolidation.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2014.08.012