Policy simulations with a macroeconometric model of the Indian economy

In this paper, the results of various dynamic policy simulations are analyzed within the context of a macroeconometric model of the Indian economy. The model contains 35 equations and offers a consistent framework for policy analysis. It is considerably expanded on the side of the fiscal sector and usefully incorporates the interdependence between monetary and fiscal sectors and gives due attention to supply side considerations. Magnitudes of effects of sustained policy changes are analyzed for the period 1964–1965 to 1974–1975. Impact multipliers and elasticities are also analyzed. Government expenditures variables and deficit financing are shown to have substantial impact on the system whereas changes in tax-rates, discount-rates, and liquidity ratios for commercial banks are shown to have only a marginal impact. The model is used for exploring the growth potential of the economy in a forecast period of five years under alternative assumptions regarding policy options.