FISCAL MULTIPLIERS FOR INDIA

Summary
By Kartik Maan

This paper which is made by Sukanya Bose and NR Bhanumurthy tries to present a
framework for the estimation of fiscal multipliers for the Indian economy in the
structural macroeconomic modelling tradition and based on the short-run
estimates, multipliers are obtained by giving shocks to fiscal instruments that are
expenditure and taxes. Also, the expenditure multipliers were obtained in the
presence of fiscal consolidation targets (Policies made by govt. to reduce debt
accumulation and minimize deficit).

In introduction, the origin of the concept of multiplier and how it progressed over the years
is talked upon. How the Global financial crisis of 2008 and attempt by countries to
revive economic activity through various fiscal stimulus measures have revamped
interest in this area.

Some Imp. Findings of multiplier:

• The size of spending multipliers in recessions and expansions vary substantially

due to fiscal policy being more effective in recessions than in expansions.
• A multiplier well in excess of one is possible when monetary policy is constrained
by the zero lower bound on nominal interest rate.
• The fiscal multiplier is relatively large in economies operating under predetermined
exchange rate but zero in economies operating under flexible exchange rates.
• Closed economies have a higher value of multiplier in comparison to open
economies

Out of the two approaches, instead of using SVAR model, approach of tracing the effect on
GDP of increased public investment and discretionary govt. consumer expenditure based on
structural macroeconomic model is used by building a fiscal block and integrating it w/
existing NIPFP structural macroeconomic policy simulation model.

FRAMEWORK
Three important policy levers are found to be in the hands of Indian govt. which are Capital
A/C, Revenue A/C and various tax rates. Following is a brief description on the impact of
these levers

1) Expenditure on Capital A/C:

Inc. in Capex by govt. > higher public investment > crowds in pvt. Investment >
greater exp. on demand side and adittion to capital stock on supply side
 2) Expenditure on Revenue A/C:
Includes direct spending by the government on goods, services and wage
payments, as well as t/f payments to the rest of the economy.
T/f by govt. > higher disposable income (pvt. Sector) > higher pvt. Consumption exp.

3) Tax revenue:
Main source of revenue receipts for govt.
Shock to tax rate > impact on disposable income > change in pvt. Consumption exp.

THE MODEL
The NIPFP core model has been extended to examine fiscal multipliers. It is a simultaneous
equation system model which is eclectic in nature developed for policy simulation and is
useful for policymakers to assess the likely consequences of alternative policy choices.

Previously, the model has been used to analyze macroeconomic outcomes of fiscal
consolidation paths, oil price policy shock, global oil price shock.

The model is flexible as sub- components of the model can easily be expanded if it is
required. It consists of 4 blocks; macroeconomic block, fiscal block, external block and
monetary block.

For estimating fiscal multipliers, fiscal block was separated to analyze the impact of
changes in various types of govt. expenditures and taxes.

RESULTS
The authors estimated multipliers under two scenarios: one where was no restriction on
fiscal deficit and one with a restriction on fiscal deficit (as per 13th Finance Commission)

No Restrictions:

• Estimated values of expenditure multipliers ranged b/w 2.45-0.98. It was noticed

that and increase in Capital expenditure by govt. will lead to the most impact on the
output.
Inc. in govt. exp. > public inv. > crowds-in pvt. Inv. > higher spending
Also, marginal increase in interest rates due to rise in fiscal deficit is overshadowed
by accelerator effect.

• Tax multipliers for major taxes considered are negative which implies that a positive
shock leads to decrease in the economic activity.
• The revenue expenditure multipliers work through the consumption channels, an
increase in t/f payments raises private consumption expenditure by raising the
disposable income of individuals, other revenue expenditure augments public
consumption expenditure directly.
With Fiscal Consolidation:

• Freezing of fiscal deficit to GDP ratio was done and fiscal deficit targets were
obtained from Kelkar committee.
• It was noticed that an increase in govt. capital expenditure at the cost of revenue
expenditure is anticipated to raise overall output by 1.99 times, while fulfilling the
specified fiscal deficit targets.

CONCLUSION

The authors observed that the allocation for the Capital A/C expenditure despite all the
policy targets continues to be a residual expenditure. It was also suggested by authors that
even though output can be increased through any kind of public expenditure or tax rate
cuts, it is preferred to increase Capital Expenditure.

The authors tell us about the current challenge that Indian policymakers face i.e., combining
high growth in output with fiscal discipline and concludes on the statement for using Capital
expenditure invigorating growth.