India’s Contemporary Macroeconomic Themes: Looking Beyond 2020 (India Studies in Business and Economics)

This book extensively examines various contemporary macroeconomic themes of India, namely growth and macro policies, tax reforms, government finances and intergovernmental fiscal transfers, banking and monetary policy, and environment and social sector policies. It has three to six chapters devoted to each of these broad themes, with the contributors being eminent economists from the region. The book serves as an excellent reference for students in economics, finance, and management, and a valuable tool for professionals such as policymakers and investment analysts and other stakeholders in the areas of global economics and finance, in general, and India in particular. Excerpt from the Foreword: " This book examines various contemporary macroeconomic themes of India: growth and macro policies, fiscal reforms, government finances and intergovernmental fiscal transfers, banking and monetary policy, and environmental and social sector policies. Forty-four eminent economists who have had the privilege of working with and learning from Dr. C. Rangarajan have contributed 25 chapters. I am sure that this book will serve as an excellent reference for professionals such as policymakers and financial analysts, students, and other stakeholders interested in the field of economics and finance. " - Dr. Manmohan Singh , Former Prime Minister of India and eminent economist Foreword Celebrating 90 Years of a Visionary Economist, Dr. C. Rangarajan Speech of Dr. Manmohan Singh, Former Prime Minister at the Conference of Madras School of Economics to Honor Dr. Rangarajan on his 90th Birth Anniversary on 21–22 April, 2023 Contents Editors and Contributors 1 Introducing the Volume on India’s Contemporary Macroeocnomic Themes-Looking Beyond 2020 1.1 Introduction 1.2 Overviews of Themes and Chapters Part I Growth and Macro Policies 2 The Indian Economy in the Post-pandemic World: Opportunities and Challenges 2.1 Introduction 2.2 Pre-pandemic Economic Conditions 2.2.1 Aggregate Macro Conditions 2.2.2 Agriculture, Informal Sector and MSMEs 2.2.3 Formal Sector 2.3 Post-pandemic Economic Conditions 2.3.1 Impact of Covid-19 Pandemic 2.3.2 Aggregate Macroeconomic Conditions 2.3.3 Formal Sector Conditions 2.4 Opportunities and Challenges Going Forward 2.4.1 Short and Medium Term Challenges 2.4.2 Engines of Growth 2.5 State Finances 2.6 Freebies 2.6.1 Structural Transformation 2.6.2 Climate Change References 3 India’s Economy in the Twenty-First Century: Role of State-Differentiated Demographic Dividend 3.1 Introduction 3.2 Size of the Indian Economy in the Twenty-First Century: Review of Recent Studies 3.3 India’s US$26 Trillion Economy by 2047–48: Assumptions and Findings (EY Study) 3.4 Interdependence of Saving, Investment, and the Demographic Dividend 3.5 State-Differentiated Demographic Dividend 3.6 Messages for Policy Formulation 3.7 Conclusions Appendix References 4 Post-covid Fiscal Recovery in India: Uncertainty, Growth, and Fiscal Prudence 4.1 Introduction 4.2 Growth Outlook: Various Estimates 4.2.1 Post Covid Global Growth Recovery: A Comparative Picture 4.2.2 Why Growing at More Than 6% is Critical? 4.3 Fiscal Imbalance 4.3.1 The General Government Debt 4.4 Fiscal Stance for Higher Capital Expenditure 4.5 Framework of Fiscal Responsibility 4.6 Conclusions References Part II State Finances and Intergovernmental Fiscal Transfers 5 The Relationship Between Government Revenue, Government Expenditure and Economic Growth in India: An Empirical Investigation at the Sub-national Level 5.1 Introduction 5.2 Literature Review 5.2.1 Nexus Between Government Revenue and Government Expenditure 5.2.2 Relationship Between Government Revenue and Economic Growth 5.2.3 Association Between Government Expenditure and Economic Growth 5.2.4 Factors Driving Public Expenditure 5.3 Stylised Facts 5.4 Data and Methodology 5.4.1 Data 5.4.2 Methodology 5.5 Empirical Estimation and Results 5.6 Concluding Observations Statistical Annex References 6 Revenue Implications of GST on Indian State Finances 6.1 Introduction 6.2 State of the Economy 6.3 Fiscal Health of Indian States 6.4 Revenue Performance of GST 6.5 Revenue Implications of GST on Indian State Finances 6.5.1 Comparison of Revenue Under Protection with State GST 6.5.2 Analysis State Tax Revenue: Pre- Versus Post-GST 6.5.3 Fiscal Health of States: Pre- Versus Post-GST 6.6 Summary and Conclusions Appendix References 7 Equalization Transfers Policy Based on Expenditure Needs and Own Revenue Capacity of Indian State Governments 7.1 Introduction 7.2 Literature Review 7.3 Empirical Model, Data, and Estimation 7.4 Empirical Results 7.4.1 Estimation Results of State Governments’ Revenue Expenditures 7.4.2 Estimation Results of State Governments’ Own Revenues 7.4.3 State-Wise Efficiency Scores 7.4.4 Determining Fiscal Equalization Transfers 7.5 Summary and Policy Conclusion References Part III Fiscal Reforms 8 Goods and Services Tax in India: A Stocktaking 8.1 Introduction 8.2 Salient Features of Indian GST 8.3 Impact of GST on Minimizing Distortions and Revenue Productivity 8.4 Multiplicity of Rates: Complications, Distortions, and Inverted Duty Structure 8.5 The Reform Issues and Strategy for Implementation 8.6 In Conclusion References 9 Recent Reforms in India’s Corporate Income Tax Regime: Rationale, Impacts, and Improvements 9.1 Introduction 9.2 Literature Review 9.3 Tax Rate Evolution in India: Stylized Facts and Analysis of Effective Tax Rates 9.3.1 Basic Tax Rates 9.3.2 Minimum Alternate Tax 9.3.3 Effective Corporate Tax Rates 9.4 Recent Optional Lower Tax Rate Regime 9.5 User Cost of Capital Method and Analysis 9.5.1 Methodology 9.5.2 Industry-Level User Costs of Capital for Basic Tax Rates 9.5.3 Impact of Optional Tax Rates 9.5.4 Loss-Making Companies 9.6 Conclusions, Caveats, and Policy Recommendations 9.7 Annexure 1 9.8 Annexure 2 References 10 The Anatomy of Public Debt Reductions: Case of India References 11 Measuring Tax Impact on Corporate Dividend Behavior in India 11.1 Introduction 11.1.1 Recent Developments Pertaining to the Dividend Taxation 11.2 Literature 11.2.1 The Lintner Study 11.2.2 Studies Testing Tax Impact on Dividend Behavior 11.2.3 Other Recent Studies 11.3 The Model and the Methodology 11.3.1 Inter-Temporal Adjustment 11.3.2 Interpretation of the Model in the Indian Context 11.3.3 Influence of Other Factors 11.4 Empirical Analysis 11.4.1 Regression Analysis (Cobb-Douglas Assumptions) 11.4.2 Regression Analysis (CES Assumptions) 11.5 Summary References Part IV Banking and Monetary Policy 12 Non-performing Assets of Indian Banking: An Evolutionary Journey 12.1 Introduction 12.2 Broad Trends of NPAs of Indian Banks 12.2.1 Some Definitional Issues 12.2.2 The Timeline and Identification of Twists and Turns 12.3 Phase I (1996–2008): Falling NPAs 12.4 Phase II (2008–09 Through 2017–18): Rising NPAs 12.4.1 Broad Trends 12.4.2 Regulatory Forbearance 12.4.3 Bad Fundamentals and Steep Fall of Commodity Prices 12.4.4 Corporate Sector Debt Problems 12.4.5 Corporate Governance and Corruption Related Issues 12.4.6 To Sum Up ... 12.5 Improvements in NPAs Since 2018 12.6 Concluding Observations and the Way Ahead References 13 Conduct of Monetary Policy in India: The Journey so Far and Contemporary Challenges 13.1 Introduction 13.2 Evolution of Thinking on the Role of Monetary Policy 13.2.1 Theoretical Foundation: Quantity Theory of Money 13.2.2 Keynesian Revolution and Role of Monetary Policy 13.2.3 Monetarist View 13.2.4 AD-AS Model 13.3 Conduct of Monetary Policy in India: The Evolving Process 13.3.1 Credit Planning and Social Control of Banking Business 13.3.2 Monetary Targeting Framework 13.3.3 Multiple Indicators Approach 13.3.4 Inflation Targeting 13.4 Contemporary Issues and Challenges 13.4.1 Conflict in Objectives 13.4.2 Monetary Policy Response to Negative Supply Shocks 13.4.3 External Sector Dominance on the RBI’s Monetary Policy 13.4.4 Monetary Policy Without Money 13.5 Concluding Remarks References 14 Macroeconomics of Digitalization—Evolving Issues and Perspectives 14.1 Introduction 14.2 Measurement of Digitalization: 14.3 Digitalization and Economic Growth 14.3.1 Supply Channel: Productivity Enhancements 14.3.2 Demand Channel—Boost in Consumption 14.4 Digitalization and Inflation 14.5 Digitalization and Financial Markets 14.6 Digitalization and Cash Adoption 14.7 Issues in Digitalization 14.7.1 Cyber Security, Data Protection, and Privacy 14.7.2 Socio-economic Challenges—Digital and Financial Exclusion 14.7.3 Labor Market Implications of Digitalization 14.8 Conclusion References 15 Does Financial Frictions Matter for Monetary Policy Transmission in India? 15.1 Introduction 15.2 Related Literature 15.3 Analytical Framework 15.4 Data and Methodology 15.4.1 Data Description 15.4.2 Methodology 15.5 Empirical Analysis 15.5.1 Unit Root Tests & the BDS Test 15.5.2 Preliminary Analysis Using the SVAR Model 15.5.3 The MS-VAR Results 15.6 Conclusion and Policy Implications References 16 Cash and Debt Management in India 16.1 The Indian Economy in the Eighties and Early Nineties 16.2 Monetary Policy and the Monetary-Fiscal Co-ordination 16.3 Stoppage of Automatic Monetization 16.4 Transparency in the Budgetary Operations 16.5 Administered Interest Rates and the Financial Sector Reforms References Part V Environment and Social Sector Policies 17 Role of Fiscal Policy in Climate Change Mitigation in India 17.1 Introduction 17.2 Economic Modeling of Climate Change 17.3 India’s Policies Toward Mitigation of Climate Change 17.4 Issues in Framing Mitigation Policies in a Macro Framework 17.5 Concluding Remarks References 18 Ecological Fiscal Transfers and State-Level Budgetary Spending in India: Analyzing the Flypaper Effects 18.1 Introduction 18.2 Review of Literature 18.3 Interpreting Data 18.4 The Econometric Models and Results 18.4.1 Medium Dense Forest Cover Models 18.4.2 Very Dense Cover Models 18.5 Conclusion Appendix 1: Dense Cover and Tax Devolution—Outlier Elimination References 19 Measurement of Multidimensional Inequality of Opportunity in India 19.1 Introduction 19.2 Relevant Literature 19.3 Methodology 19.3.1 Econometric Specification 19.3.2 Identification 19.3.3 Estimation 19.3.4 Discussion of Identification 19.4 Data 19.5 Results 19.5.1 Presence of Heteroskedasticity 19.5.2 Estimation Results 19.5.3 Contributions of Circumstances and Efforts to Inequality in Work Wellbeing 19.6 Conclusion 19.7 Appendix 19.8 Tables 19.8.1 Estimation Results for the Wellbeing Equation of the SEM Using Klein and Vella (2010) Procedure of Identification 19.8.2 Estimation Results for an Income—Monthly Per Capita Expenditure—Equation 19.8.3 Check for Heteroskedasticity 19.8.4 Shares References 20 Youth Labor Market Challenges in India: Education, Employment, and Sustainable Development Goals 20.1 Introduction 20.2 Labor Market Scenario in India and the Youth 20.2.1 Structural Transformation and Its Reversal 20.2.2 Rising Youth Population, But Inadequate Growth of Workforce 20.2.3 Sectoral Decomposition of Youth Employment 20.2.4 Youth Work Participation: Role of Education and Training 20.2.5 Youth Active Job Seekers and Passive Unemployment 20.3 Effectiveness of the Past Skill Development and Employment Generation Measures 20.4 Policies to Achieve Sustainable Development Goals Through Creation of Jobs 20.5 Conclusion References Part VI Emerging Economic and Policy Challenges 21 Forecasting State-Level Fiscal Imbalances in India 21.1 Introduction 21.2 Review of Literature 21.3 Data Characteristics and Methodology 21.3.1 Data Characteristics and Sample Period 21.3.2 Model Specification 21.4 Results: Estimated Model 21.4.1 State-Level Real GSDP 21.4.2 State-Level Implicit Price Deflators 21.4.3 State-Level Total Expenditure 21.4.4 State-Level Effective Interest Rate 21.5 Model Validation and Sample Period Estimation 21.6 Forecasting State-Wise Fiscal Imbalances 21.7 Conclusion Appendix References 22 Machine Learning in Macroeconomics: Application to DSGE Models 22.1 Introduction 22.2 What is Machine Learning and What Are Its Main Components? 22.3 Machine Learning and Macroeconomics: A Brief Overview 22.4 Techniques of Machine Learning 22.4.1 Relevant Machine Learning Models 22.4.2 Random Forests 22.4.3 Support Vector Machine 22.4.4 Relevance of Random Forests and SVM in Economic Modeling 22.5 Evaluation of Machine Learning Techniques 22.6 DSGE Models and Machine Learning—rationale and Findings 22.6.1 How Are Machine Learning Methods Applied to DSGE Classification? 22.7 Conclusion References 23 Friends with Benefits: The Role of Internal Capital Markets During Financial Stress 23.1 Introduction 23.2 Literature Review 23.3 Data and Methodology 23.3.1 Data Description 23.3.2 Methodology 23.4 Results and Discussions 23.4.1 Results of Base Models 23.4.2 Result of Stand-Alone Versus Group Member Model 23.4.3 Result of Net Transfer Model 23.5 Conclusion Appendix References 24 Reforming the Indian Census 24.1 Introduction 24.2 Background 24.3 Census Schedules 24.4 Concluding Remarks References 25 The Performance of India’s Merchandise Exports: An Analytical Perspective 25.1 Introduction 25.2 India’s Export Performance 25.2.1 Growth and Composition of India’s Exports: A Disaggregated Sectoral View 25.2.2 India’s Exports in the Global Context 25.2.3 Direction of India’s Exports 25.2.4 Import Intensity of India’s Exports 25.3 Determinants of Exports 25.3.1 Determinants of India’s Export: Review of Recent Literature 25.3.2 Determinants of India’s Merchandise Export: An Empirical Investigation 25.4 Summary and Conclusions Annexure 1: Vector Error Correction Estimates References