Economics for India

Economic Opportnuties and Fertility Behavior

paragwaknis — Fri, 27 Apr 2012 19:07:05 +0000

While Indian policy makers attack the population growth problem using variety of incentives, it looks like the economic incentive trumps all others. In a recently published paper in the Quarterly Journal of Economics, Robert Jensen finds that increased awareness of prospects of gainful employment made the women facing them to be less likely to marry and have kids than those who were not aware of such opportunities. Those married were also more likely to limit the number of kids in order to pursue a steady career.

The increased economic opportunities increased the opportunity cost of getting married and having kids leading to a substitution away from them. A good example of rational behavior from rural India. You can find the paper here.

Reference:

Robert Jensen, Do Labor Market Opportunities Affect Young Women’s Work and Family Decisions? Experimental Evidence from India The Quarterly Journal of Economics (2012) 127(2): 753-792

Some thoughts on Macroeconomics Curriculum in India

paragwaknis — Tue, 10 Apr 2012 14:25:48 +0000

My article in a recent issue of Economic and Political Weekly on Macroeconomics curriculum in India and the US.

Inflation Targeting and RBI’s Monetary Policy

paragwaknis — Wed, 14 Mar 2012 19:05:56 +0000

A link to recent musings on my other blog.

The Economist’s take on RBI

paragwaknis — Fri, 24 Feb 2012 03:18:20 +0000

The Economist has a good review of RBI’s achievements and failures over time. The policy environment that the central bank of India faces is quiet different than the ones in developed countries face and the article does a good job of appreciating the constraints these differences impose on the effective functioning of a central bank. This is notwithstanding the fact that the current crisis brings the traditional mandate of central banks like the Fed into question.

PS: Don’t forget to read the comments. They are quite entertaining!

Gender of Politicians and its effect on educational outcomes.

paragwaknis — Wed, 15 Feb 2012 18:38:46 +0000

A recent paper in the American Economic Journal: Applied Economics carries an article by Irma Clots-Figueras that claims that the gender of politicians has influence on educational attainment in a district where these politicians are elected. More specifically in urban areas, the probability of completing primary education increases if the elected candidate is a female.

Abstract This paper shows that the gender of politicians affects the educational levels of individuals who grow up in the districts where these politicians are elected. A unique dataset collected on politicians in India is matched with individual data by cohort and district of residence. The political data allow the identification of close elections between women and men, which yield quasi-experimental election outcomes used to estimate the causal effect of the gender of politicians. Increasing female political representation increases the probability that an individual will attain primary education in urban areas, but not in rural areas, and not in the sample as a whole. (JEL D72, I20, J16, 015, 017)

Econmic Liberalization and its effect on Economic Growth

paragwaknis — Tue, 31 Jan 2012 16:33:57 +0000

A quite exhaustive survey of the extensive research on the economic liberalization policies and its effect on economic growth and poverty in India appeared in JEL’s December 2011 issue. Written by Ashok Kotwal, Bharat Ramaswami and Wilima Wadhwa, it is a definite read for anyone interested in current state of the Indian economy.

Weather shocks and Indian GDP

paragwaknis — Sat, 28 Jan 2012 02:25:07 +0000

Everyone knows that the amount of rainfall the Indian economy receives every year is an important determinant of livelihood of lot of people. I was looking for some measure of importance of rainfall shocks and interestingly, I came across these couple of graphs in Cowen and Tababrrok’s Modern Principles: Macro-a text I use for my principles classes.

Not surprisingly, the agricultural output co-varies quite closely with rainfall as you can see in Panel A. But if you see Panel B, after 1995 the covariance with overall GDP shows reduction. This simply reflects the fact that the Indian economy seems to have diversified after the economic reforms of 1991.Important questions arise out of these pictures: Post liberalization, agriculture output continues to be at mercy of nature’s vagaries. This sector still employs significant proportion of working population (58%) compared to the non-agricultural sector(42%). If the overall GDP shows less sensitivity to rainfall shocks after 1995, then a relatively smaller section of working population seems to be insured from these shocks. This inequality in terms of insuring against real shocks and its implications for effective policy design are definitely worth exploring.

Hindu Rate of Growth or Nehruvian Rate of Growth?

paragwaknis — Thu, 22 Dec 2011 19:40:35 +0000

The decades before 1980-2000, when the growth rate of the Indian economy hovered around 3%, it was termed to be growing at the Hindu rate of growth. Now that the growth rate is around 6%, what do we call it? Well, technically it is still the Hindu rate of growth as the dominant population of India has not changed during this time! The more important question however is, how come the same people are growing twice the rate now than earlier?

According to me, this doubled growth rate is a clear evidence that people in India responded to changed incentives and institutions. Clearly, the rules and regulations we see now are more successful in fostering growth than the ones that were in place prior to 1980. Before 1980, the Indian economy was still characterized by the License Raj that was the result of the socialist (Nehruvian) policies. But later, the economy was slowly liberalized and moved towards a more market based economy. Thus, calling the lower growth rate as Hindu growth rate seems to be a misnomer as the people under the both regimes are still the same. I think it is high time we change the nomenclature to “Nehruvian growth rate” or ” a Socialist growth rate”!

Food Inflation, Falling Rupee, and Retail Reforms: Figuring out the right policy mix for India

paragwaknis — Mon, 19 Dec 2011 19:57:56 +0000

The title of this piece reflects the three most important policy issues facing the government and policy makers in India. It is a well know fact by now that over the years the major contributor to the overall inflation has been food inflation (Basu 2011a). It has also been shown that much of the food inflation has been contributed by inflation in food products supplying protein (Gokurn 2010). However, much of the food price inflation is related to the way the whole system of food production, procurement and distribution takes place (Basu 2011b). So the argument that RBI should not worry about food inflation seems to be valid one. Economics theory tells us that there is not much a policy ( monetary or fiscal) can achieve in case of supply shocks. Also, given the fact that RBI also has to manage the exchange rate along with domestic inflation makes matters worse. If it does not steralise its exchange market interventions, it risks worsening the inflation caused by food inflation. So actually the fact that it cannot do much to reduce food price inflation also limits its capacity to handle fluctuations in the exchange rate. This is the primary reason why RBI has not been able to do much about the falling rupee lately. Now what is the way out of this mess?

It seems the only way out is to think hard about the real reforms that are required to reduce the severity of supply shocks and not ask the monetary policy to do all the work through its limited monetary policy tools. Food price inflation is not going to reduce unless the food grains policy is reformed and unless this happens RBI will not be able to do its job of managing money supply and its effects on inflation.The next important question is will the propose retail reforms help in any way to correct the food grain policy failures and ease food inflation?

The solution seems to be more long term than immediate. What is apparent from the above discussion is the limits on RBI’s ability to tame inflation and manage the exchange rate simultaneously. Food inflation being this limiting factor, it has become important to completely rethink the way the system of food grain policy is managed. Basu (2011b) makes a persuasive argument for one such solution. As a part of the solution, he suggests establishing a Standard Operating Procedure allowing intervention in the food market based on the current market price. As such policy is a rule based policy, it avoids the pitfalls of setting policy by discretion ( the famous rules vs. discretion debate) and hence stands strong on the grounds of economic efficiency. There are many other details of the policy which form an integral part of it, but an important point to note is that in itself poor storage facilities do not seem to be the primary reason for food price inflation. According to Basu, the reason why the FCI interventions do not seem to be effective is because they have a dampening effect on the food oftake which does not go well in case of shortage.

Given this analysis, would allowing foreign retailers with 51 % equity help reduce inflation? The requirement of back end investment in storage facilities may reduce wastage and hence have a somewhat favorable effect on the prices (at least the ones which farmers receive). How much of these efficiency gains would be passed on to the consumers will depend on the degree of competition between these retailers. So it seems the consumers as well as to some extent small farmers would stand to benefit from their entry. Also, because the government still would have the right to procure food grains, it would still be in the position to even out the market price fluctuations. What about the small traders? There would obviously be some restructuring in the retail sector. However, it is hard to imagine the small traders completely vanishing.

Many of these small traders provide short term credit to buyers. This is important when there are many who would not qualify for a standard credit card. Secondly, labor being cheaply available, these shops are in a much better position to provide incentives like home delivery to buyers. Big retailers tend to require more space and have significantly less number of branches per consumer. Whereas small traders are numerous and hence would score much higher in terms of accessibility than the retail counter parts. I am sure one could think of numerous other such reasons, but the point is that there will not be a significant effect on number of small traders after the foreign players are allowed in. If at all there seems to be a strong argument for retail reforms being complimentary to government’s efforts towards controlling food inflation. I think RBI would certainly like that!

Basu Kaushik, India’s Food Grain policy, Economic and Political Weekly, February 29 2011b.

Basu Kaushik, Understanding Inflation and Controlling it, Economic and Political Weekly, October 8, 2011a.

Gokarn Subir, Food Inflation: This Time it’s Different, Kale Memorial Lecture, Gokhale Institute of Politics and Economics, Decemebr 9, 2011

Food price inflation in India

paragwaknis — Mon, 27 Jun 2011 16:37:27 +0000

Understanding the policy implications of inflation fueled by temporary supply shocks- an interesting paper and certainly an exercise in right direction.

http://mpra.ub.uni-muenchen.de/31564/