Good piece from professors of NIPFP. Fiscal multiplier gives one an idea about how government spending/revenue impacts the final output of the economy. India’s growth has tumbled to a decade low due to a number of reasons. Faltering growth has only exacerbated government’s concern with regard to fiscal deficit. Authors in the paper present a framework for the estimation of fiscal multipliers.

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Accordingly they list down below numbers after their assessment:

Expenditure

Capital Expenditure Multiplier: 2.45

Other Revenue Expenditure Multiplier: 0.98

Income

Corporate Tax Multiplier: -1.02

Every 100rs increase in capital expenditure will boost country’s GDP by Rs.245. Similarly for every rise in Rs.100 via direct tax collection GDP falls by Rs.102.

Not listing transmission mechanism (in the paper) but one should read it.

They conclude

Despite policy targets that have sought to raise the capital expenditure by the government, allocation for capital account expenditure continues to be a residual expenditure as observed in recent budgetary exercises. The high value of the estimated capital expenditure multiplier points to a high multiplier effect of capital expenditure on output, and underscores the need to prioritize capital expenditure.

Government is widely expected trim its plan expenditure in addition to payment delays and other stuff to limit its deficit number at 4.8% of GDP. Plan expenditure has two components – Capital and Revenue expenditure. In the previous year FM saved heavily on plan expenditure (primarily on revenue expenditure). Among other ministries rural is the one which is expected to take a big hit on its budgeted amount. Last year government set aside ~763bn for Ministry of Rural Development out of which they were allowed to spend only ~550bn on the back of last minute austerity. This year budgeted amount of the ministry was set at ~801bn. Let’s see how situation pans out this time. If post monsoon harvest falls out of line then probably a double whammy for rural population.

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