External Shocks and the Indian Economy: Analyzing through a Small, Structural Quarterly Macroeconometric Model

Though a large number of structural macroeconometric models have been estimated for India, the fact that all these are based on annual data limit their usefulness for short-term policy analysis, particularly in volatile periods of the type seen during last few quarters. Therefore the present paper builds up a short-term macroeconometric model for India using quarterly data. The model has reasonably good in-sample performance. One important feature of the model is use of quadratic relation between government expenditure and credit to private sector, which shows presence of both crowding in and crowding out effects, the latter dominating the former when expenditure is high enough. Some simulations are also carried out to analyse the impact of recent external shocks such as rise in global food and fuel prices and the global financial meltdown, on the Indian economy. The results show that the current slowdown in India’s growth predates the global price shock and the global financial crisis, and is more of a regular cyclical downturn. The global developments only further deepen the slowdown and prolong the recovery.