ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Economic Reforms:A Decadal Stocktaking

A recent conference held in Australia to mark 10 years of India's economic reforms saw papers presented on various topics, covering the gamut of trade, investment and economic growth. The meet also helped to highlight the important work being done on the Indian economy in Australia and other neighbouring countries.

The Australia South Asia Research Centre (ASARC) held a two-day international conference to mark 10 years of economic reforms in India, on November 19-20, 2001. Twelve papers were presented at the conference, which also witnessed two special events. First, on November 19, the Narayanan Lecture of the Australian National University (named after president K R Narayanan) was delivered by C Rangarajan, governor of Andhra Pradesh. Second, on November 20, a videoconferencing session was held with Jeffrey Sachs of Harvard University.

Two papers were presented in the first session of the conference. Warwick Mckibbin and Kanhaiya Singh presented their paper on ‘Issues in the Choice of a Monetary Regime for India’. It considered the problem of designing monetary policy in an economy undergoing structural reforms. The paper adds to the important policy debate on this issue and models the impact of alternative monetary policy regimes on factors such as inflation, output, and exchange and interest rates. Three alternative targeting regimes are considered – monetary targeting, nominal income targeting and rigid inflation targeting. Of the three, monetary targeting performs the worst. Rigid inflation targeting performs better – particularly if demand shocks are more important than supply shocks. With supply shocks, rigid inflation targeting is likely to perform worse than inflation targeting around a band. Nominal income targeting performs reasonably well.

The second paper, titled ‘On the Endogeneity of the Money Multiplier in India’, was by Raghbendra Jha and Deb Prasad Rath. Citing a break in the statistical association between the broader money aggregates and reserve money in the post-reforms period of the 1990s vis-a-vis the 1980s, this paper argues that an endogenous money multiplier framework is best suited for analysing the money supply process in India, and questions the simplifying assumptions tending to justify stability and predictability of the money multiplier especially in the context of a deregulated financial system with market-determined interest rates. An empirical analysis conducted using monthly data for the period April 1980 to March 2000 establishes this and traces the source of the endogeneity of these multipliers to a range of macroeconomic variables.

In the second session, two papers were presented. Prema Chandra Athukorala and Kunal Sen, in their paper ‘Liberalisation and Business Investment in India’, develop a model of business investment in developing countries and illustrate it through an application to India. Their model is derived from the standard theory of business investment, with appropriate adoption to reflect structural features specific to developing countries. The estimation results suggest that the level of the capital stock, rental cost of capital, the level of domestic economic activity and public investment are significant determinants of business investment in India. Their paper purports to explain the behaviour of business investment in India following the structural adjustment reforms begun in 1991.

Ramkishen Rajan and Rahul Sen presented their paper, ‘A Decade of Economic Liberalisation in India: Impact on Trade and Investment’. This paper concentrates on the impact of India’s economic reforms in the 1990s on its external sector, i e, international trade and investment. The paper briefly documents the extent to which India has become integrated with the global trading system, by examining the growth in the country’s international trade (exports and imports) over time. It goes on to analyse shifts in India’s export patterns over the past two decades and compares it with that of east Asia, which has long been characterised as having followed a ‘flying geese pattern’ (FGP) of production and trade. Data limitations invariably limit the focus of the empirical analysis to merchandise trade but some attention is also paid to the buoyant services sector, particularly information technology. This sector is seen as a means of ‘leapfrogging’ the stages of trade and development that is characteristic of the FGP pattern.

The third session saw three papers being presented. Kanhaiya Singh and K Kalirajan, in their paper ‘A Decade of Economic Reforms in India – The Mining Sector’ explore the regulatory and incentive-related changes brought about in India’s mining sector through economic reforms. They conclude that in view of the growing needs and security of the supply of minerals, India has to enhance its resource base considerably through various options, including intensive exploration drive, improving recovery and production from the existing resource base, and ensuring supplies through imports. India also needs to enhance its export potential of a number of minerals and metals in which it has sufficiently large reserves. The current thrust of deregulation is driven primarily by the view that most of the future exploration will have to be done in increasingly difficult terrain and greater depths with more sophisticated technology. For this, increased domestic and foreign private sector participation will be needed. Except for coal, the mineral sector is sufficiently liberalised to attract capital and technology from abroad. However, without opening up the coal sector for large-scale operations, liberalisation of the mineral sector will remain incomplete and full benefits will not be harnessed.

The second paper in this session was by Edgar Wilson. The paper provides a critique of the reliance of the extant literature on market integration in Indian agriculture, in particular the practice of using pairwise price relationships using correlation and co-integration techniques. It is shown by a simple example using Indian wholesale wheat prices that analyses that ignore the effects of simultaneity are flawed and any conclusions about market integration based on this methodology will be invalid. A conceptual framework is developed, which formally models market price interdependencies in a simultaneous system of temporal price equations. Johansen’s maximum likelihood procedure is used to estimate the minimum amount of information needed to identify the market system. This procedure derives significant long-run cross-price, own-price, non-price and short run equilibrating price elasticity measures, which are used to indicate the degree of market integration. Evidence is provided on market integration for Indian wheat, jowar, paddy, groundnut, rapeseed and mustard seed. Comparisons are made before and after agricultural marketing liberalisation

In their paper ‘Growth in India’s State Economies Before and With Reforms: Shares and Determinants’, Shashanka Bhide and Ric Shand trace the performance of 14 major states (Karnataka, Maharashtra, Tamil Nadu, Gujarat, West Bengal, Andhra Pradesh, Kerala, Madhya Pradesh, Haryana, Rajasthan, Orissa, Punjab, Uttar Pradesh and Bihar) during 1993-99. First, the ordering suggests some important geographical differentiations. The four high-performing states are maritime states and the three with the most potential to be high-performing (West Bengal, Andhra Pradesh and Kerala) are also maritime states. Only one coastal state, Orissa, is excluded from this pattern. By contrast, states in the low-performing group, together with other low performers, are all in the northern hinterland. A central message is given by the strong positive association between gross state domestic product growth rates and investment levels in the reform period of the 1990s in the government and private sectors. This holds for public and private sectors, and for the latter, for domestic and foreign direct investment with few state exceptions. It also held for total investment most recently, with few state exceptions. A second message is the importance of adequate economic and social infrastructure. This was manifest most strongly at the low end of the gross state domestic product (GSDP) growth rates. States that rated low on these indexes were low-growth states. This is consistent with investment flows.

On November 19, Rangarajan delivered the Narayanan oration. The lecture was preceded by the Indian high commissioner in Australia reading out a message from the president to mark the 2001 lecture. The title of Rangarajan’s lecture was ‘Monetary Policy in a Developing Country – The Case of India’. Rangarajan dwelt upon the challenges of monetary policy design in the Indian context. His talk covered a wide canvas and included the goals of monetary policy, the problem of targets and instruments and the issue of central bank independence. He also provided a penetrating view of the development of the monetary policy challenge in India and discussed, in historical continuity, the policies of the RBI during his tenure as governor. Rangarajan’s lecture was well attended and well appreciated by academics as well as members of the diplomatic corps.

On November 20, there was a videoconferencing session with Jeffrey Sachs of Harvard University. Sachs delivered a paper titled ‘Understanding Regional Economic Growth in India’. This paper was co-authored with Nirupam Bajpai and Ananthi Ramiah. The authors explore the impact of a number of key variables on the pattern of regional growth in India. The main finding of this study is that urbanisation in 1980 explains a significant portion of the pattern of regional economic growth in India. Also coastal regions, particularly in the south and west, have clocked a better economic performance than inland regions. Further, the forces of convergence, absolute and conditional, are very weak. We should probably expect that India’s growth will continue to be urban-led, favouring those states where urbanisation is already high – perhaps due to coastal access or to the relatively high productivity of agriculture. There is little to ensure that growth will equalise across regions. Still, the assessment is not pessimistic for several reasons. First, there is much more growth potential in India than has been achieved to date. Second, many coastal cities have not begun to attract foreign direct investment for export-led growth. However, delays in infrastructural reforms retard economic growth. The monopoly of the central government in infrastructure activities does not help either. Just as in China, a careful balance will have to be struck between two kinds of investments in the rural hinterland (for example, in Uttar Pradesh and Bihar): physical infrastructure in roads, rail, airports and telecoms to bring these regions closer to the international markets, and investments in human capital, mainly education and health, to raise the productivity of the rural population.

Two papers were presented in the next regular session of the conference. In his paper ‘Are the Poor More Vulnerable to Income Shocks: An Analysis of Consumption in Rural India’ Pushkar Maitra developed a theoretical model of insurance against shocks by the poor in India. He estimates the effects of income changes on consumption after controlling for aggregate shocks. The results show that the poor are unable to insure themselves fully against shocks. Further, consumption tracks income more closely for rural households compared with richer households.

The next paper, titled ‘Income Generation Programme and Empowerment of Women – A Case Study in India’, was by Parikshit Basu and Saswati Basu. It analyses whether implementation of economic development programmes automatically improves the level of empowerment of women. The authors consider a socio-economic case study based on the interview of some 70 women beneficiaries of the economic development programme from a non-governmental organisation (NGO) and a governmental organisation (GO) in the district of South 24 Parganas in West Bengal. These women are micro-entrepreneurs and self-employed for over three years. The economic development programme of the NGO and the GO in the case study area provided credit for the women to run their businesses. The authors found that income generation activities of the NGO increase economic empowerment and overall empowerment of women more than government organisations. Thus NGOs’ development programmes have contributed more than the GOs’ programmes to improve the economic and social status of women beneficiaries. The NGOs’ emphasis on participation, partnership and member accountability make them more effective in empowering women.

The final session of the conference had three papers. Bhagwan Dahiya and Desh Gupta in their paper ‘Foreign Investment and Issues of Corporate Governance in India’, review the role of corporate governance in improving foreign investment flows into India. They trace changes in the regulatory structure as a result of reforms and evaluate the implications for corporate governance. They also evaluate India’s performance in this regard against the high-growth east and south-east Asian countries and conclude that regulatory factors have kept India a marginal player in global FDI. They suggest policy changes and argue that there are inherent possibilities of India improving its FDI performance through improved corporate governance.

The next paper, titled ‘The Impact of a Decade of India’s Trade Reforms’, was by Kaliappa Kalirajan. He argues that, for almost half a century, India maintained a restrictive trade regimes. It imposed a system of high tariffs and stiff non-tariff barriers such as licensing and quotas, which virtually closed the economy from the international trade arena. India began implementing economic reforms in the 1991, and has made drastic changes in trade policy to reorient itself to integrate with the global economy. While reviewing trade policy measures, an important empirical question that is investigated in this paper is: How open has India’s trade been after a decade of economic reforms? The paper presents an analysis of this issue at the aggregate as well as the sectoral levels.

The last paper of the conference was by Milind Sathye, called ‘Efficiency of Banks in a Developing Economy: The Case of India’. This paper measured the productive efficiency of Indian banks using data envelopment analysis for 1997-98. Two models have been constructed to show how efficiency scores vary with changes in inputs and outputs. The efficiency scores, for three groups of banks – publicly owned, privately owned and foreign owned – are measured. The efficiency of domestically owned private sector commercial banks as a group is, paradoxically, lower than that of public sector banks and foreign banks in India. The study recommends that the existing policy of reducing non-performing assets and rationalisation of staff and branches should be continued to obtain efficiency gains and make Indian banks internationally competitive, which is a declared objective of the government.

The conference was characterised by a high quality of discussion and served to highlight the important work that is being done on the Indian economy in Australia and neighbouring countries and the role of ASARC in promoting such research. All papers from the conference, including the Narayanan Lecture and the paper by Jeffrey Sachs, are available on ASARC’s Web site http://economics.anu.edu.au/asarc/Default.htm.

 

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