“Some
macroeconomic impacts of different types of public expenditure in India:
Analysis using a computable general equilibrium model”
Citation: Ganesh-Kumar, A., B. K. Ghosh, K.
Mate and P. S. Rawat. (2017). “Some macroeconomic impacts
of different types of public expenditure in India: Analysis using a computable
general equilibrium model”. Development Research Group (DRG) Study No. 43,
Department of Economic and Policy Research (DEPR), Reserve Bank of India (RBI),
Mumbai.
Executive
Summary:
In this study
we examine the impacts of various types of government expenditure on the Indian
economy. In particular we examine the impacts of a rise in (a) Government
consumption expenditure in general and the nature of the relation between
government expenditure and GDP, (b) Government expenditure in Social Sectors
and in Public Administration, (c) Government transfer payments to households,
and (d) Public investment.
Towards this
we have used a recursively dynamic computable general equilibrium (CGE) model
of the Indian economy developed by Bhakta and Ganesh-Kumar (2016), which is
built around a social accounting matrix (SAM) for the year 2011-12. The SAM and
the model distinguish 9 commodities / sectors, 9 factors of production, and 12
household types distinguished by their location and by the monthly per capita
expenditure (MPCE) percentile. The model is solved annually over the period
2011-12 to 2025-26.
As a first
step, we develop a BASE scenario that captures a “Business As Usual” trajectory
that the Indian economy is likely to take over the 10-year period 2016-17 to
2025-26 given the current structural characteristics of the economy, and the
set of policies currently prevailing. We then develop five sets of
counter-factual policy scenarios to study the economy-wide impacts of different
types of public expenditure. Each of these sets consists of two or more
simulations that are designed to address one main question and its
sub-questions, if any. The impacts in each simulation are assessed by comparing
the model outcomes in that simulation with the BASE scenario.
Our results
show that the impact of expansion in government expenditure across different
types of expenditure depends crucially on the prevailing macroeconomic
conditions, especially whether there is full employment / unemployment of
factors, and also on the complementary set of policies that are needed to generate
the resources required to finance the additional expenditure. The main messages
that emerge are as follows:
·
Fiscal expansion in boom times is actually disastrous for the economy on
all counts.
·
However, it is not a foregone conclusion that fiscal expansion during
recessionary conditions when unemployment prevails is always beneficial. It
depends crucially on the type of government expenditure undertaken and the
accompanying set of policies that determine how fiscal expansion is financed.
·
Amongst alternative types of current expenditure, clearly expansion of
government consumption scores over additional transfers to households in terms
of impact on GDP.
·
Between additional government current consumption and investment, the
choice is not straightforward.
·
Using additional taxes on households to finance expansion of public
investment does not fare well compared to government consumption.
·
Nor does shifting of government expenditure from current consumption to
investment help if the exchange rate regime is neutral.
Amongst all
the policy options considered in this study, shifting of government expenditure
from current consumption to investments accompanied by a slight depreciation of
the Rupee turns out to be the best in terms of overall impacts on the GDP and
various other macro indicators as well as household real income per capita.