The Size of Fiscal Multipliers in India: A State Level Analysis Using Panel Vector Autoregression Model

Abstract

This study attempts to measure the fiscal multipliers in India using the state-level panel dataset of 17 non-special category states for the period 2001–2002 to 2013–2014. The study employs the panel vector autoregression (PVAR) approach with a generalized method of moments (GMM) framework and plots the generalized impulse response function to explore shocks and responses of endogenous variables. The article finds that the effects of fiscal variables on income in longer horizon are greater than the immediate impact. Both in the short run and long run, the multiplier effect of capital outlay on income is greater than the multiplier effect of revenue expenditure. The operation of reverse multiplier due to increase in tax is found to be lower than the favourable multiplier effect of expenditure. It provides a rationale for taxation wherein the government should resort to taxation with an objective to spend it on productive investment and thereby raise the economic activity.

Does the Effectiveness of Budget Deficit Vary between Welfare and Non-Welfare Countries?

“…A number of studies have also come up with similar findings [14]. Contrarily, another group of studies argues that budget deficit encourages macroeconomic components that curb the economic downturn through its multiplier effects [15]. Ahuja and Pandit [16] similarly state that the budget deficit boosts the demand side of the economy by increasing capital formation, employment, and wage levels, which stimulate the macroeconomic environment.…”