Export of Services: Indian Experience in Perspective

NIPFP Working Paper 102
[PDF]

Barry Eichengreen and Poonam Gupta
March 2012

Abstract

We survey India’s experience with exporting services. We show that its experience is unique in that modern tradable services are a significantly larger share of GDP than in other countries at comparable levels of economic development. This has not always been the case, however: India’s out-performance is limited to recent years. Policy initiatives, from trade reform to liberalization of domestic industrial and service sectors, were important for jump-starting the process. Regression analysis of a cross section of countries points to the importance of a range of additional factors: overall economic development, communications infrastructure, access to foreign technology, and spillovers between the merchandise and service exports. Importantly, however, these factors, jointly or individually, do not eliminate Indian exceptionalism. Not only is India a significant outlier but it becomes more so as the period proceeds.

Political Determinants of the Allocation of Public Expenditures: A Study of the Indian States

NIPFP Working Paper 101
[PDF]

Bharatee Bhusana Dash and Angara V. Raja
March 2012

Abstract

This study examines whether the allocation of public expenditures of the Indian states are significantly influenced by government specific political characteristics. Three types of government specific characteristics are considered: forms of governments, ideology of the government, and the electoral cycle. A number of hypotheses are designed to link these characteristics with expenditure allocation. The hypotheses are tested using a panel dataset of 14 Indian states spread over 27 fiscal years, from 1980-81 to 2006-07. The overall findings of the study suggest that the relationship between expenditure allocation and political determinants across the Indian states validate the proposed hypotheses even after controlling for the traditional and other unobservable determinants. These findings are robust to various forms of sensitivity analyses.

Health Care Financing Reforms in India

NIPFP Working Paper 100
[PDF]

M. Govinda Rao and Mita Choudhury
March 2012

The Second Fundamental Theorem of Positive Economics

NIPFP Working Paper 98
[PDF]

Anjan Mukherji
March 2012

Abstract

Welfare Economics is fortunate that there are two Fundamental Theorems of Welfare Economics. Positive Economics on the other hand is seemingly endowed with none. One of the fundamental results of Positive Economics is that a competitive equilibrium exists under fairly general conditions; this then may be called the First Fundamental Theorem of Positive Economics (FFTPE). The existing results on uniqueness and stability of competitive equilibrium are far too restrictive to be up for consideration as a Fundamental Theorem. It is to re-examine this question that we revisit the question of stability of competitive equilibrium. It is shown that if, for all distributions of the aggregate endowment, the matrix sum of the Jacobian of the excess demand function plus its transpose, evaluated at the equilibrium, have maximal rank then equilibria will be locally asymptotically stable. When this condition is not met, it is shown how redistributing resources will always make a competitive equilibrium price configuration stable and this need not involve redistributing endowments so that trades do not exist at equilibrium. This last result is quite general and the only requirement is that the rank condition referred to earlier hold at zero trade competitive equilibria and consequently may qualify to be called the Second Fundamental Theorem of Positive Economics (SFTPE).

Oil Price Shock, Pass-through Policy and its Impact on India

NIPFP Working Paper 99
[PDF]


N R Bhanumurthy, Surajit Das and Sukanya Bose
March 2012

Abstract

This paper analyses the impact of transmission of international oil prices and domestic oil price pass-through policy on major macroeconomic variables in India with the help of a macroeconomic policy simulation model. Three major channels of transmission viz. import channel, price channel and fiscal channel are explored with the help of a comparative static macroeconomic general equilibrium framework. The policy option of deregulation of domestic oil prices in the scenario of occurrence of a one-time shock in international oil prices as well as no oil price shock situation analysed through its impact on growth, inflation, fiscal balances and external balances during the 12th Plan period of 2012-13 to 2016-17. The simulation results indicate that the deregulation policy as such would have adverse impact on the growth as well as on the inflation. But if this policy is complemented with the policy of switching of subsidy bill to capital expenditure might result in positive growth effects only in the medium term. Given, the current pass-through policy, one-time oil shock has more intense adverse impact on growth and inflation in the year of shock while it mitigates slowly over time. The model shows that with the oil shock and with current partial pass-through regime, a 10% rise in oil prices result in a 0.6 per cent fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 per cent. Overall, the paper argues that the pass-through has differential impact on growth and inflation over the 12th Plan period. Hence, the policy of oil price deregulation must be carefully weighed and prioritized.

Monetary and Fiscal Policy in the Presence of Informal Labour Markets

NIPFP Working Paper 97
[PDF]

Nicoletta Batini, Paul Levine, Emanuela Lotti and Bo Yang
November 2011

Abstract

How does informality in emerging economies affect the conduct of monetary and fiscal policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit constraints in financing investment and is less visible in terms of observed output. We compare outcomes under welfare-optimal monetary policy, discretion and welfare-optimized interest-rate Taylor rules alongside a balanced-budget fiscal regime. We compare the model, first with no frictions in these two markets, then with frictions in only the formal labour market and finally with frictions on both credit markets and the formal labour market. Our main conclusions are first, labour and financial market frictions, the latter assumed to be stronger in the informal sector, cause the time-inconsistency problem to worsen. The importance of commitment therefore increases in economies characterized by a large informal sector with the features we have highlighted. Simple implementable optimized rules that respond only to observed aggregate inflation and formal-sector output can be significantly worse in welfare terms than their optimal counterpart, but are still far better than discretion. Simple rules that respond, if possible, to the risk premium in the formal sector result in a significant welfare improvement.

Monetary and Fiscal Policy in a DSGE Model of India

NIPFP Working Paper 96
[PDF]

Paul Levine and Joseph Pearlman
November 2011

Abstract

We develop a optimal rules-based interpretation of the ‘three pillars macroeconomic policy framework’: a combination of a freely floating exchange rate, an explicit target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies. The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions. It is calibrated using India and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules. A comparison with a fixed exchange rate regime is made. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy. These policy prescriptions contrast with the monetary-fiscal policy stance of the Indian authorities.