Fiscal Consolidation and Macroeconomic Variables in India: A Cointegration Analysis
VISION Journal of Indian Taxation
Fiscal consolidation is in the forefront of policy discussion in India since 1990s. But the debate on fiscal consolidation and its real effects has been unable to attain any culmination so far on analytical as well as empirical grounds. The present paper tries to examine the impact of fiscal consolidation on growth, inflation, private investment, and exchange rate in India by analysing a time series data for the period from 1980-81 to 2013-14. The paper observes that there exists a long run
... ists a long run relationship between GDP, fiscal consolidation, inflation and private investment. Fiscal deficit reduces GDP significantly. This finding gives empirical support to the neoclassical school of thought. However, the paper does not find any significant crowding-out evidence in India. The conclusion as such is sensitive to lag selection, and inclusion of variables. Although necessary diagnostic checking has been done, a robust analysis warrants a longer time series. The question remains inconclusive that if fiscal deficit does not cause significant crowding-out of private investment, then what are the channels of its negative influence on GDP.