This study attempts to construct a consistent macroeconomic framework for
India to review the macro-fiscal linkages over the 14th Finance Commission period,
2015–2019. A macroeconomic policy simulation model comprising of real, external,
monetary, fiscal and macroeconomic block is built for the purpose. The estimated
model is used for policy simulations to address three scenarios: (a) shock due to
7th Pay Commission award, (b) targeting deficit and debt and (c) targeting higher
growth. The results suggest that while Pay Commission award would result in slightly
higher growth compared to the base case, this also results in higher inflation, fiscalrevenue
deficits, current account deficit as well as higher government liability. Further
simulation results suggest that expenditure switching policy, which is the core of
expansionary fiscal consolidation mechanism, of increasing higher government capital
expenditure and reducing the government transfers could result in higher growth with
a manageable fiscal deficit of 5.3% that also brings down the government (centre plus
states) liability to around 60% by 2019–2020.

• Targeting Debt and Deficits in India: A Structural Macroeconometric Approach