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Government Expenditure in India: Composition and Multipliers

  • Ashima Goyal
  • Bhavyaa Sharma
Original Article
  • 32 Downloads

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.

Keywords

Fiscal multiplier SVAR Revenue expenditure Capital expenditure Fiscal–Monetary coordination Supply shocks 

JEL classification code:

C32 E31 E62 E63 H50 

Notes

Acknowledgements

An earlier version of the paper was presented at an IIM-Bangalore 2015 workshop. Valuable comments from Sanjeev Gupta, R.K. Pattanaik, Charan Singh and Parthasarathi Shome as well as from anonymous referees of this journal are gratefully acknowledged. We thank Reshma Aguiar for help with the word processing.

Supplementary material

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Copyright information

© The Indian Econometric Society 2018

Authors and Affiliations

  1. 1.Indira Gandhi Institute of Development ResearchMumbaiIndia
  2. 2.NIPFPNew DelhiIndia

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