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

carry forward the analysis of policy issues (simulations) initiated by the Second Phase
model builders.
(d)
Fourth Phase: Models Prepared in the Nineties and Later
A few popular models in this category include Anjaneyulu (1993), Bhattacharya and Guha
(1992), Bhattacharya, Barman and Nag (1994), Chakrabarty and Joshi (1994), Rangarajan
and Mohanty (1997), Klein and Palanivel (1999), and Bhattacharya and Kar (2007). They all
address issues relevant to new policy regime (after reform) and carry out many “what if”
policy scenario simulations. Obviously, these models are larger in size, highly disaggregated
and considering inter-links and trade-offs between sectors.
Since many of the modelling exercises in India have been the result of efforts of
individual researchers, none of them were maintained and serviced on a sustained basis for
policy analysis and forecasting. Therefore, attempts have been made to build and maintain
comprehensive models incorporating complexities by reputed institutions on an ongoing
basis and are regularly used for forecasting. They have a number of advantages over the
one-time models as they regularly add new information by the way of data, policy changes
and developments in theory and estimation techniques. An effort in this direction was
initiated jointly by the Institute of Economic Growth (IEG) and Delhi School of Economics
(DSE) in the early 1990s. At present the NCAER model, the IEG model and the DSE model
are present.
A large number of models covering the period at least until the eighties were
based on estimates where proper testing of unit roots and stationarity of series was not
undertaken. Even now, very few structural models have been specified and estimated
using co-integration and error correction mechanisms if the relevant series are
considered difference-stationary. Similarly, a comprehensive analysis of the structural
breaks and the impact of economic reforms has also not been an integral part of most of
the Indian macro models. Some of the data constraints, however, are now less restrictive
with many important macro time series stretching over 55 years. Most models that
incorporated policy analysis also became methodologically dated because of inadequate
specifications of the impact of expectations regarding policy changes on parameter
values.
New attempts at modeling the Indian economy should ensure that stationarity of
variables is properly tested. If these are non-stationary then model specifications should
recognize cointegration among variables and use error-correction models for forecasting
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