NIPFP Working Papers

Modeling India’s External Sector: Review and Some Empirics

2014-05-13T03:17:00.000-07:00

NIPFP Working Paper 138
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N. R. Bhanumurthy, Sukanya Bose and Swayamsiddha Panda
May 2014

Abstract

In the aftermath of global food & fuel price spikes and the recent global financial crisis, understanding of external sector behaviour has become crucial. More specifically, the transmission mechanism of external sector shocks to domestic macroeconomic variables is essential for undertaking relevant policies to mitigate adverse impact of such shocks. Here an attempt has been made to review the theoretical and empirical issues relating to India’s external sector behaviour and present a suitable analytical framework for macro modeling.

Dependence of States on Central Transfers: State-wise Analysis

2014-05-13T03:16:00.000-07:00

NIPFP Working Paper 137
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C. Bhujanga Rao and D. K. Srivastava
May 2014

Abstract

This paper examines the dependence of states on central fiscal transfers. The pattern of dependence of states on central transfers is studied with respect to five groups of states, namely, high, middle and low income general category states and two groups of special category states categorized into high and low income states. We make a distinction between transfers that are in the form of an entitlement like states’ share in central taxes or statutory grants vis-a-vis transfers that are discretionary and depend on centre’s decisions. In terms of groups of states, the extent of dependence is relatively quite high for the special category states and the low income states. The extent of dependence was lowest during the period covered under the Tenth Finance Commission period. It has since increased, for all states considered together, by about 3.5 percentage points, from 37.4 percent to 40.9 percent of states’ revenue receipts. This increase comes both from entitlement transfers and discretionary transfers to the extent of 2.1 and 1.3 percentage points, respectively.

Exploring policy options to include petroleum, natural gas and electricity under the Goods and Services Tax regime in India

2014-05-13T03:15:00.000-07:00

NIPFP Working Paper 136
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Sacchidananda Mukherjee and R. Kavita Rao
May 2014

Abstract

The study analyses the impact of keeping crude petroleum, natural gas, motor spirit (gasoline/ petrol), high speed diesel (diesel), aviation turbine fuel (ATF) and electricity out of the Value Added Tax (VAT) scheme. Specifically, the study finds that keeping these items out of the input tax credit mechanism (either partially or fully) would result in cascading. Through an input-output framework, this study proposes some alternatives to the proposed design of GST and assesses the implications for cascading and prices. It captures the degree of cascading across 48 sectors under different scenarios and explores alternative policy options to phase out under-recoveries of oil market companies on account of sales of diesel and petrol under the administered pricing mechanism.

Room at the Top: An Overview of Fiscal Space, Fiscal Policy and Inclusive Growth in Developing Asia

2014-04-24T22:25:00.002-07:00

NIPFP Working Paper 135
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Rathin Roy
April 2014

Developmental Disability Index for Hill States in India

2014-04-24T22:24:00.002-07:00

NIPFP Working Paper 134
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Rita Pandey and Purnamita Dasgupta
April 2014

Action Plan on Base Erosion and Profit Shifting an Indian Perspective

2014-03-19T00:02:00.002-07:00

NIPFP Working Paper 133
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R. Kavita Rao and D. P. Sengupta
March 2014

Abstract

The discussion in this paper highlights some evidence to support the notion that there is base erosion in India. On the specific action points listed in the OECD's Action Plan, a perspective from India’s stand point has been presented along with a brief discussion on the steps needed to prepare for complying with likely proposed measures.

Direct and Indirect use of Fossil Fuels in Farming: Cost of Fuel-price Rise for Indian Agriculture

2014-02-25T01:06:00.000-08:00

NIPFP Working Paper 132
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Mukesh Anand
February 2014

Abstract

A hornet’s nest could be an apt simile for fossil fuel prices in India. Over years a policy maze has evolved around it, with sharply diverging influence on disparate constituencies.1 We estimate the increase in total cost of farming as a multiple of direct input costs of fossil fuels in farming. Over the period between 1990-1 and 2010-1, direct use of fossil fuels on farms has risen and there is also increasing indirect use of fossil fuels for non-energy purposes. Consequently, for Indian agriculture both energy intensity and fossil fuel intensity are rising. But, these are declining for the aggregate Indian economy. Thus, revision of fossil fuel prices has acquired greater significance for Indian agriculture than for the remainder of the economy. We validate these findings by utilising an input-output table for the Indian economy to assess the impact of fossil fuel price increase. We assess that fossil fuels sector has strong forward linkages and increase in its price has a steep inflationary impact. Using a three-sector I-O model for Indian economy, we estimate that a 10 per cent increase in fossil fuel price could cause, mutatis mutandis, the wholesale price index (WPI) to rise about 4.3 percentage points with 0.7 percentage points being contributed by the farm sector alone.

Monetary policy analysis in an inflation targeting framework in emerging economies: The case of India

2014-02-10T22:04:00.000-08:00

NIPFP Working Paper 131
[Link]

Rudrani Bhattacharya and Ila Patnaik
February 2014

Abstract

Monetary policy in India has moved towards an increasingly flexible exchange rate regime without any explicit framework for an alternative nominal anchor. The failure of monetary policy to anchor inflationary expectations of agents, coupled with negative supply shocks has kept inflation above the acceptable range of 5-5.5% for last five years in India. In this paper we present a model for policy analysis for India that provides insights in the setting of an inflation targeting framework to anchor inflationary expectations. The model offers an understanding of the extent to which various shocks, including the post-global crisis fiscal stimulus, accommodative monetary policy and ensuing decline in global demand, explain growth and inflation in India.

Exchange Rate Regimes and Inflation: Evidence from India

2014-02-10T22:02:00.000-08:00

NIPFP Working Paper 130
[PDF]

Biswajit Mohanty and N R Bhanumurthy
February 2014

Abstract

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’- restricting money supply growth, and a ‘credibility effect’- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.

Revival of Mining Sector in India: Analysing Legislations and Royalty Regime

2014-01-30T20:32:00.002-08:00

NIPFP Working Paper 129
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Lekha Chakraborty
January 2014

Abstract

Impact of fiscal policy at the firm level is a rare field of research. A major lacuna to date is the paucity of studies on the impact of public policy –especially fiscal policy –on the mining firms and their competitiveness. This paper on the mining sector is an attempt to analyse the sector, in particular, at its competitiveness. Against the backdrop of the Planning Commission’s High-level Committee Report on National Mineral Policy 2006, and the subsequent Mines and Minerals (Development and Regulation) Bill, 2011, this paper attempts at the legal and fiscal policy transition in the mining sector of India. The results challenge the popular view that the competitiveness of the mining industry is largely determined by the quality of mine endowments, geological characteristics and production cycle, and highlighted that fiscal policy regime – taxation and royalty regime – that affects the productivity of the mining firms more than the mine-specific factors. Recently, though the legal framework of the mining sector has incorporated the environmental and human developmental aspects in its policy, the fiscal regime related to mining is in a state of flux. Particularly, the current methodology of royalty estimation on an ad valorem basis on the ore, linking to London Metal Exchange (LME) reference Prices, in the non-ferrous non-atomic non-fuel mining sector requires a relook. From the public policy perspective, the royalty estimation should incorporate the mineral value chain and estimate royalty on the basis of concentrate, and in plausible cases, the metal at the end of the mine value chain, after the process of beneficiation and smelting process.

Gender Responsive Budgeting, as Fiscal Innovation: Evidence from India on “Processes”

2014-01-30T20:30:00.001-08:00

NIPFP Working Paper 128
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Lekha Chakraborty
January 2014

Abstract

Gender responsive budgeting (GRB) is a fiscal innovation. Innovation is defined as a way of transforming a new concept into tangible processes, resources and institutional mechanisms in which a benefit meets identified problems. GRB is a fiscal innovation in that it translates the gender commitments into fiscal commitments through applying a ‘gender lens’ to the identified processes, resources and institutional mechanisms; and arrives at a desirable benefit incidence. Theoretical treatment of gender budgeting as fiscal innovation is not incorporated, as the scope of this paper is broadly on the processes. GRB as an innovation has four specific components: knowledge processes and networking; institutional mechanisms; learning processes and building capacities; and public accountability and benefit incidence. This paper analyses these four components of GRB in the context of India. National Institute of Public Finance and Policy (NIPFP) has been the pioneer on gender budgeting in India, and also played a significant role in institutionalizing gender budgeting within Ministry of Finance, Government of India in 2005. The Expert Committee Group on ‘Classification of Budgetary Transactions” recommendations on gender budgeting (Ashok Lahiri Committee recommendations) led to the institutionalization process, integrating the analytical matrices of fiscal data through a gender lens and also the institutional innovations for GRB. Revisiting to the 2004 Lahiri recommendations and revamping the process of GRB in India is inevitable, at ex-ante and ex-post levels.

Integrating Time in Public Policy: Any Evidence from Gender Diagnosis and Budgeting

2013-11-06T23:10:00.001-08:00

NIPFP Working Paper 127
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Lekha Chakraborty
October 2013

Abstract

Incorporating time in public policy making is an elusive area of research. Despite the fact that gender budgeting is emerging as a significant socio-economic tool to analyze the fiscal policies to identify its effect on gender equity, the integration of time use statistics into this process remain partial or even nil across countries. If gender budgeting is predominantly based on the indexbased gender diagnosis, a relook into the construction of the gender (inequality) index is relevant. This is significant to avoid a partial capture of gender diagnosis in the budget policy making. The “Hard-to-Price” services are hardly analysed for public policy making. The issue is all the more revealing, as the available gender (inequality) index so far has not integrated time use statistics in its calculations. From a public finance perspective, gender budgeting process often rest on the assumption that mainstream expenditure such as public infrastructure is non rival in nature and applying gender lens to these is not feasible. This argument is refuted by the time budget statistics. The time budget data revealed that this argument is often flawed, as there is intrinsic gender dimension to the non-rival expenditure.

Fiscal Multipliers for India

2013-09-30T22:10:00.002-07:00

NIPFP Working Paper 125
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Sukanya Bose and N R Bhanumurthy
September 2013

Abstract

This paper attempts to present a framework for the estimation of fiscal multipliers for the Indian economy in the structural macroeconomic modelling tradition. Empirical estimates of short-run multipliers are obtained by giving shocks to a range of fiscal instruments - expenditures and taxes. As per our estimates, the values of capital expenditure multiplier, transfer payments multiplier and other revenue expenditure multiplier are 2.45, 0.98, and 0.99, respectively, while the tax multipliers are in the range of -1. Expenditure multipliers were also obtained in the presence of fiscal consolidation targets. These estimates again point to the strong multiplier effect of capital expenditure on output, and underscore the need to prioritize capital expenditure.

Foreign investment in the Indian Government bond market

2013-09-26T21:39:00.000-07:00

NIPFP Working Paper 126
[Link]

Ila Patnaik, Sarat Malik, Radhika Pandey and Prateek
September 2013

Abstract

A country witnesses currency exposure when locals hold a large amount of unhedged foreign currency denominated debt. However, India's capital controls continue to be guided by concerns about debt and its maturity, rather than its currency denomination. Even though the there is foreign appetite for rupee denominated debt, India has placed many restrictions on foreign investment in rupee denominated bonds. These include caps on the total as well as limits by investor class, maturity and issuer and have been implemented through a complicated mechanism for allocation and reinvestment. This paper presents the logic and rationale for why these restrictions fail to meet the objectives of economic policy today. It recommends removal of quantative restrictions on foreign holding of Indian rupee denominated debt and suggests ways to move to a more efficient framework.

The investment technology of foreign and domestic institutional investors in an emerging market

2013-06-07T00:27:00.000-07:00

NIPFP Working Paper 124
[Link]

Ila Patnaik and Ajay Shah
June 2013

Abstract

We compare the investment technology of foreign versus domestic investors with a focus on decomposing outcomes attributable to asset allocation and security selection. We document significant differences in exposure to systematic asset pricing factors between foreign and domestic investors. A quasi-experimental strategy is introduced, for comparing security selection after controlling for differences in asset allocation. Our results show that foreign investors in India fare poorly at security selection, while domestic investors fare well.

Improving Public Financial Management in India: Opportunities to Move Forward

2013-05-05T22:18:00.000-07:00

NIPFP Working Paper 123
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Pratap Ranjan Jena
April 2013

Abstract

In recent years the role of a sound PFM system to achieve the objectives of fiscal discipline, strategic planning, and improved service delivery has been getting increasing public attention in India. Since public financial management reforms undertaken intermittently over the years, have not delivered anticipated results in these areas, studies and recommendations of Government appointed committees and expert bodies have identified gaps that need attention to strengthen the PFM institutional framework and to improve the efficiency of government spending. This paper examines key PFM reform measures undertaken in India over the past few years and provides suggestions to enhance the effectiveness of these PFM systems.

Fiscal Reforms, Fiscal Rule and Development Spending: How Indian States have Performed?

2013-04-17T22:35:00.000-07:00

NIPFP Working Paper 122
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Pinaki Chakraborty and Bharatee Bhusana Dash
April 2013

Credit constraints, productivity shocks and consumption volatility in emerging economies

2013-04-17T22:33:00.003-07:00

NIPFP Working Paper 121
[Link]

Rudrani Bhattacharya and Ila Patnaik
March 2013

Abstract

How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the model's key predictions.

Emerging Economy Business Cycles: Financial Integration and Terms of Trade Shocks

2013-04-17T22:32:00.000-07:00

NIPFP Working Paper 120
[Link]

Rudrani Bhattacharya, Ila Patnaik and Madhavi Pundit
March 2013

Abstract

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affect business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.

Fiscal Imbalances and Indebtedness Across Indian States: Recent Trends

2013-03-06T21:59:00.000-08:00

NIPFP Working Paper 119
[PDF]

Tapas K. Sen and Santosh K. Dash
February 2013

Does Political Competition Influence Human Development? Evidence from the Indian States

2013-03-06T21:58:00.000-08:00

NIPFP Working Paper 118
[PDF]

Bharatee Bhushan Dash and Sacchidananda Mukherjee
February 2013

Abstract

Recently, it has been argued that political competition may have similar effects on economic performance as market competition. This study empirically examines this proposition by linking political competition with the Human Development Index (HDI) of the Indian states. The findings suggest that politically competitive governments perform well along the HDI. A more detailed analysis also shows that the rural India benefits the most from the intense political competition as compared to urban India. We also found that if the same government rules a state for a relatively longer period, it helps the state in achieving higher HDI score. Increasing voter participation found to be positively associated with HDI score, but this finding is confined to the sample of major Indian states only. Increasing public spending on developmental activities is also found to have a positive and significant effect on HDI performance. These findings are robust to various forms of sensitivity analyses.

Negative Influence of Fiscal Subsidies on Environment: Empirical Evidence from Cross-Country Estimation

2013-01-30T01:42:00.000-08:00

NIPFP Working Paper 117
[PDF]

Sacchidananda Mukherjee and Debashis Chakraborty
January 2013

Abstract

It has been observed that a number of developed as well as developing countries provide subsidies to their resource-intensive sectors like agriculture, fisheries, manufacturing etc. However, overproduction and consequent pollution as well as overexploitation of natural resources resulting from the provision of input and output subsidies have been a serious threat to environmental sustainability. An area of concern is that subsidies with potentially harmful environmental impacts are not declining in the recent period, despite the ongoing negotiations through the WTO framework and the UN forums. The present analysis attempts to understand the role of government budgetary subsidies on the overall environmental performance through panel data model estimation for a set of seventy four countries over an eleven year period (2000-2010). The empirical findings confirm that a positive relationship between subsidies and environmental degradation exists in a cross-country framework. The analysis notes that the failure to contain provision of subsidies through timely conclusion of the Doha Round negotiations is also posing a serious threat to the global climate change related concerns.

Comovement in business cycles and trade in intermediate goods

2013-01-30T01:26:00.000-08:00

NIPFP Working Paper 116
[PDF]

Madhavi Pundit
January 2013

Abstract

Positive correlation between intermediate goods trade and business cycle comovement raises the question of causality. Existing theories propose the direction from trade to comovement, but don't explain positive correlation of trade with TFP comovement, also in the data. My model predicts both positive correlations, and explains potential causality in the reverse direction, i.e. countries might choose trade partners based on business cycle properties. There is greater benefit in trading with positively correlated sources and self-insuring through capital accumulation, when constrained by domestic technology. I provide empirical evidence of this condition by estimating the elasticity of substitution between capital and intermediates.

Does Weak Rupee Matter for India’s Manufacturing Exports?

2013-01-30T01:18:00.000-08:00

NIPFP Working Paper 115
[PDF]

N. R. Bhanumurthy and Chandan Sharma
January 2013

Abstract

The role of weak exchange rate in stimulating exports is a foregone conclusion both at the theoretical as well as in empirical literature. This is more so in many of the emerging economies that are pursuing export-led growth strategy and led to currency intervention to contain any appreciation. In this context, this paper tries to empirically re-examine this issue in India as the recent trends does not suggest such relation between exports and exchange rate. The analysis is undertaken at two levels: at macro-aggregate level by using some time series models; and at the micro-firm level from the Indian manufacturing industries. At the macro level, by using both annual and monthly data, this study finds that exchange rate does not have theoretical (positive) relationship with exports. Rather it finds a negative relationship, which is unconventional. Further, it is also found that imports and the import tariffs playing a major role in boosting exports growth in India, thus indicating ‘import-led exports growth’ mechanism. Subsequently, the paper examines the relationship between exports, imports, exchange rate and productivity using a panel of firms from the Indian manufacturing industries. Results indicate that, although imports and exports are inter-linked, import intensity, rather than exchange rate, is a major factor in boosting exports as well as productivity. Hence, this paper argues against currency intervention to maintain weak exchange rate as a policy option for export promotion. Rather, as exchange rates have differential impacts, we argue for sectoral policies, instead of exchange rate intervention, for enhancing productivity and, hence, exports in manufacturing sector.

Property Tax System in India: Problems and Prospects of Reform

2013-01-14T20:54:00.000-08:00

NIPFP Working Paper 114
[PDF]

M. Govinda Rao
January 2013