A Macro-Fiscal Modeling Framework for Forecasting and Policy ...

increasing primary revenue expenditure. States also increase primary revenue
expenditure. CFDO grows at 8 percent from 2010-11. CPRE increases by 0.05
percentage points from 2011-12.
26. In Scenario 2, linked to the introduction of GST and consolidation of fiscal policy,
the centre‟s finances improve considerably compared to the base scenario. There
is a progressive but calibrated reduction in the budgeted fiscal deficit to GDP
ratio, which falls to a level of just above 4 percent by 2014-15. The revenue
deficit to GDP ratio also falls but remains just above 2 percent. The states are
able to achieve a fiscal deficit to GDP ratio below 3 percent in the aggregate as
per the FRBMA benchmark. They have a considerable revenue account position
which creates space to step up capital expenditure. On the consolidated account
of the central and state governments, a surplus on the revenue account is
achieved by 2014-15 and the consolidated fiscal deficit relative to GDP falls to
below 7 percent. There are corresponding reductions in the outstanding debt-
GDP ratios.
27. This study does not advocate a sudden withdrawal of the fiscal stimulus. The
withdrawal should be spread over at least three to four years and the rate of
reduction should be evenly spread over these years. The introduction of GST
would provide the appropriate fiscal space for resuming fiscal consolidation in a
period of four to five years accompanied by an increase in the overall growth
rate.
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