Options and Strategies for Fiscal Consolidation in India

IMF Working Papers, May 29, 2013

Source details

Paper uses a multi-region DSGE model to quantify macroeconomic implications of three adjustment scenarios for India: growth-friendly, social-friendly, and a benchmark case centered on bringing down unproductive spending and strengthening the consumption tax.
Simulations assess short-term output costs and long-term benefits of fiscal consolidation.
Emphasis that consolidation outcomes depend on factors beyond the package itself: pace and credibility of consolidation, concomitant structural reforms, and global economic conditions.

Growth-friendly scenario
- Deficit reduction accompanied by greater investment.
Social-friendly scenario
- Deficit reduction accompanied by greater social spending.
Benchmark case
- Centered on bringing down unproductive spending and strengthening the consumption tax.

Fiscal consolidation yields considerable long-term benefits but entails output costs in the near term.
Scenarios in which deficit reduction is accompanied by greater investment and social spending lead to better results than the benchmark case.
The consolidation package alone is not enough to maximize net gains; other factors are critical to success:
- Pace of consolidation.
- Credibility of consolidation.
- Concomitant implementation of structural reforms.
- Global economic conditions.

Favor consolidation strategies that protect or enhance productive public investment and social spending to improve outcomes relative to cutting unproductive spending alone.
Recognize trade-off between near-term output costs and long-term gains when designing consolidation paths.
Ensure credible and appropriately paced consolidation combined with structural reforms to maximize net benefits.
Consider global economic conditions when sequencing and implementing consolidation measures.

Author: Sampawende J Tapsoba
Date: May 29, 2013
Series: Working Paper No. 2013/127
Issue: 127
Volume: 2013
Pages: 26
DOI: https://doi.org/10.5089/9781484382257.001
Stock No: WPIEA2013127
ISBN: 9781484382257
ISSN: 1018-5941
Subjects: Consumption taxes, Expenditure, Fiscal consolidation, Fiscal policy, Public investment spending, Revenue administration, Taxes
Keywords: adjustment cost parameter, aggregate consumption, consumption spending, consumption tax revenue, Consumption taxes, debt ratio, distribution effect, DSGE models, fiscal consolidation, Global, government debt ratio, growth effect, India, interest rate, investment rate, open economy macroeconomics, Public investment spending, spending, spending level, steady-state GDP decomposition, unproductive spending, VAR estimate, WP

IMF Working Papers — Options and Strategies for Fiscal Consolidation in India (Sampawende J Tapsoba), Working Paper No. 2013/127, May 29, 2013.