An autonomous research institute under the Ministry of Finance

 

Working papers

Dynamics of the Economics of Special Interest Politics

  • Aug, 2017
  • Authors Ganesh Manjhi and Meeta Keswani Mehra
  • Details NIPFP Working Paper No. 206
  • Abstract
     
    This paper offers the solution of the dynamics of the differential games, where there are four players, namely – two political parties (politicians), voters and a special interest group. The basic results are similar as Lambertini (2001, 2014). We find that, open-loop equilibrium collapsed as closed-loop equilibrium. Therefore, the open-loop equilibrium is a sub-game perfect. Further, the private optimum is always higher than the social optimum in terms of the provision of the expenditure on public good. That is, if both the parties have access to public expenditure for the provision of the expenditure on public good they have the tendency to overspend and can incur higher deficits. Consequently, voters vote retrospectively to the party which overspend and results in higher fiscal deficits. Similarly, larger private optimal regulatory benefit helps the political parties to receive higher financial contribution. Overall, the fiscal deficit in excess of certain level of threshold, can create higher cost to the voters and hence the economy as the future tax and this is more so in the presence of special interest group.
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Bolder Disinvestment or Better Performance Contracts? Which Way Forward for India’s State-Owned Enterprises

  • Aug, 2017
  • Authors Ajay Chhibber and Swati Gupta
  • Details NIPFP Working Paper No. 205
  • Abstract

    This paper analyses the performance of India’s Public Sector Undertakings (PSUs) using measures of labour and overall efficiency and productivity indicators as opposed to financial returns. Using methods that correct for selection bias, the results show that performance contracts do not improve firm efficiency but disinvestment has a very strong positive effect on firm efficiency. Disinvestment improves labour productivity and efficiency, which is not surprising, but it also improves overall efficiency. India should pursue much bolder privatization even of PSUs which claim to be making operational profits – such as Air India, because privatization improves overall firm efficiency and unlocks capital for use elsewhere, especially in public infrastructure, and reduces the possibility of political interference in their functioning in future.

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Public Procurement in India: Assessment of Institutional Mechanism, Challenges, and Reforms

  • Jul, 2017
  • Authors Bhabesh Hazarika and Pratap Ranjan Jena
  • Details NIPFP Working Paper No. 204
  • Abstract

    The present study assesses the public procurement system and recent reform initiatives in India and outlines the need for changes in the institutional frameworks. There are several issues in the public procurement activities in India, which stem from fragmented procedures and rules, lack of transparency, widespread irregularities, and unavailability of sufficient procurement professionals. The recent initiatives to establish a consistent and transparent public procurement system have not yielded the desired results. The emergence of the practice of e-procurement as a vital tool in integrating the public service delivery and good governance, however, shows some forward movement towards a transparent, accountable, and competitive procurement regime. Although General Financial Rules (GFRs) and other procurement manuals are exhaustive in nature, these need to be backed by legislative power.

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Social Security Agreements in practice: Evidence from India's SSA with countries in Europe

  • Jul, 2017
  • Authors Atul Kumar Tiwari, Dhananjay Ghei, Prerna Goel
  • Details NIPFP Working Paper No. 203
  • Abstract
    India has signed 18 Social Security Agreements from 2009 till 2016. Social Security Agreements (SSAs) are bilateral treaties, which allow export of social security benefits, totalisation of insurance periods, and prevent dual contribution of social security in the country of origin and destination for inter-corporate transfers. Thus, the SSAs help in protecting the interest of workers, and in increasing circular migration of highly skilled labour.
     
    Since SSAs are of recent origin in the context of India, a systematic study on Indian SSAs has not yet been undertaken. A key policy question in this context is promotion of circular migration of highly skilled labour willing to migrate to other countries.  In this paper, we summarise the existing framework of SSAs in India, understand the demographics of people utilising SSAs (using a novel dataset) and discuss some areas of concern. The key policy issues in this field pertain to detachment benefits, totalization procedure and  ensuring greater coverage under these agreements.
     
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Examining the Eco-Macroeconomic Performance Index of India: A Data Envelopment Analysis Approach

  • Jul, 2017
  • Authors Ranjan K. Mohanty and Biresh K. Sahoo
  • Details NIPFP Working Paper No. 202
  • Abstract

    The prime objective of the paper is to construct a robust macroeconomic performance (MEP) index of India using Data Envelopment Analysis (DEA) approach. Six major macro indicators, namely, economic growth, employment rate, terms of trade, inflation rate, fiscal deficit, and pollution are used to computeMEP and Eco-MEP index of the Indian economy from 1980-81 to 2015-16. Overall, both the MEP and Eco-MEP index scores have quite similar best performing years, worst performing years, and have also captured the major events that adversely affected the economy during the last 35 years. This shows that the trend in overall performance of Indian economy was better in the 1980s and the 1990s but has deteriorated after the 2000s. The ARDL Bounds Testing approaches to cointegration methods are used to test the robustness/utility of these indices. The estimated results find that MEP and Eco-MEP have a positive impact on private investment, negative effect on current account deficit (CAD), and positive impact on foreign investment inflows (FIIs) and foreign direct investment (FDI). Hence, the suggested composite MEP index is stable, robust and truly captures the economic performance of India.

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Resource Requirements for Right to Education: Normative and the Real

  • Jul, 2017
  • Authors Sukanya Bose, Priyanta Ghosh and Arvind Sardana
  • Details NIPFP Working Paper No. 201
  • Abstract
    The paper examines the issue of resource adequacy for Right to Education (RTE) by estimating the resource requirement for universalization of elementary education across twelve Indian States. Using RTE norms as the base, a framework for estimating school and system level resource requirements is laid down. Apart from the official norms, framing of the normative must necessarily take into account the present structure of schools including the pattern of enrolment in government schools vis-à-vis private schools, existing infrastructure in these schools, school size etc. Database of school-level information has been used for the purpose. Actual budgetary expenditure presents the distance from the normative.
     
    The results indicate that even with minimal norms, there is a vast amount of underspending per student  by governments. Except in the case of Tamil Nadu, the required expenditure per student is short of the normative requirement. In States like Bihar, Jharkhand, Orissa and Madhya Pradesh, not only is the requirement many times the present levels of expenditure, the burden of additional requirement falls disproportionately on these poorer States. The present set of policy interventions and inter-governmental resource sharing arrangements fail to adequately address the specific resource needs of these States for fulfilling the basic entitlement.
     

     

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Estimating Public Spending on Health by Levels of Care for National Health Accounts: An Illustration of Use of Data on Withdrawals by Drawing and Disbursing Officers in India

  • Jul, 2017
  • Authors Mita Choudhury and Jay Dev Dubey
  • Details NIPFP Working Paper No. 199
  • Abstract
    This paper illustrates the use of information on withdrawals by Drawing and Disbursing Of-ficers (DDOs) for improving estimates of public spending for National Health Accounts (NHAs) in India. Using information from two selected States (Karnataka and Rajasthan), the study highlights the advantages of combining DDO-level information with budgetary data for two purposes (i) map-ping public spending to different provider classes of the international System of Health Accounts 2011 (SHA 2011) and (ii) mapping public spending to different types of healthcare providers in In-dia. The benefits of using DDO-level information are found to be higher while mapping expenditure to healthcare providers in India than mapping to international categories of the SHA 2011. In partic-ular, while mapping public spending to different types of healthcare providers in India, the im-provement in precision of estimates brought about by DDO-level information was found to be sig-nificant in the two States. 
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Trade Misinvoicing: What can we Measure?

  • Jul, 2017
  • Authors Suranjali Tandon and R. Kavita Rao
  • Details NIPFP Working Paper No. 200
  • Abstract

    The existing studies on trade misinvoicing have focussed on the discrepancy in reported trade statistics between developing and developed countries. The estimates based on such methods rely on the assumption that developed countries report their trade statistics correctly. In this paper, we provide evidence that trade misinvoicing between developed countries is in fact large and any estimate based on such method may not provide an accurate representation of the dimensions of trade misinvoicing in the world. Further, there is need to develop a methodology by which one can attribute the misinvoicing to one or the other trade partner. To address this problem, we offer an alternative methodology. Since the exports of a country are necessarily imports of another country we use domestic factors to predict the export and import misinvoicing for a sample of large misinvoicers for the period 1990 to 2014. Such estimates allow us to establish whether the discrepancy can be attributed to the export or the import side for all countries. We find that the domestic factors better explain the export side, therefore, allowing us to estimate illicit flows through trade misinvocing using the export misinvoicing by all countries.

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Stock Market Participation in the Aftermath of an Accounting Scandal

  • Jun, 2017
  • Authors Renuka Sane
  • Details NIPFP Working Paper No. 198
  • Abstract
    In this paper, we study the impact on investor behaviour of fraud revelation. We ask if investors with direct exposure to stock market fraud (treated investors) are more likely to decrease their participation in the stock market than investors with no direct exposure to fraud (control investors)? Using daily investor account holdings data from the National Stock Depository Limited (NSDL), the largest depository in India, we find that treated investors cash out almost 10.6 percentage points of their overall portfolio relative to control investors post the crisis. The cashing out is largely restricted to the bad stock. Over the period of a month, there is no difference in the trading behaviour of the treated and control investors. These results are contrary to those found in mature economies.
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What explains Regional Imbalances in Infrastructure? Evidence from Indian States

  • Jun, 2017
  • Authors Biswajit Mohanty, N. R. Bhanumurthy and Ananya Ghosh Dastidar
  • Details NIPFP Working Paper No. 197
  • Abstract

    The literature on regional growth suggests that divergences in infrastructure is a major factor behind the wide and persistent regional growth imbalances in India. Using a state infrastructure-expenditure function, the paper examines the possible factors that determine infrastructure expenditure and its implication for regional imbalance in infrastructure creation across 14 major Indian states. We, in the present study, find that factors such as resource mobilization, per capita income, and population density may result in unequal infrastructure expenditure across states. We also find that factors such as more spending by the infrastructure-deficit states, political stability, and positive spatial dependence in infrastructure expenditure among states have a balancing effect on infrastructure creation across regions. These results suggest the need for augmenting the financial capacity of the infrastructure-deficit states and strengthening the positive spatial dependence among states through creation of interstate infrastructure networks (railways, national highways etc.) and conducive investment climate, which could boost competition among states for better infrastructure creation.

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Changing Tax Capacity and Tax Effort of Indian States in the Era of High Economic Growth, 2001-2014

  • May, 2017
  • Authors Sacchidananda Mukherjee
  • Details NIPFP Working paper No. 196
  • Abstract
    Growing demand for public expenditures, limitations in expanding fiscal space and limited scope to deviate from common harmonized tax system under the proposed Goods and Services Tax (GST) regime may induce the states to look for opportunities to expand revenue mobilization through alternative channels (e.g. non-tax revenue mobilization). An assessment of the existing tax efficiency (or tax effort) and strengthening tax administration could be one of such alternatives available for states to pursue. Tax administration is as important as tax base to augment revenues of a state. Efficiency of tax administration helps a state to achieve a stable tax regime which is conducive for introduction of tax reforms measures like GST. Buoyancy of tax revenues of a state is not only dependent on growth in tax base and structure of taxes but also on the state of tax administration. Many papers have been written to estimate tax effort of Indian states. Taking this exercise to the next level, this paper focuses on measuring tax effort and identifying factors that explain variations in the tax effort across states. In measuring tax potential, an attempt has been made to differentiate between factors that determine the tax base and factors that constrain the state from utilizing the available base. The exercise looks at comprehensive revenue collection under Value Added Tax of general category states for the period 2001-02 to 2013-14.
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Understanding Judicial Delays in Debt Tribunals

  • May, 2017
  • Authors Prasanth V. Regy and Shubho Roy
  • Details NIPFP Working Paper No. 195
  • Abstract
    We argue that the judicial statistics that are currently collected are inadequate for understanding and solving the problem of judicial delay. We propose a new approach to collecting data, which will lead to useful insights about delays. We apply this approach to a dataset, and find that about half the time taken by cases is lost to delays. Most delays are due to the petitioners asking for more time to file documents.
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Competition Issues in India's Online Economy

  • Apr, 2017
  • Authors Smriti Parsheera, Ajay Shah and Avirup Bose
  • Details NIPFP Working Paper No. 194
  • Abstract
    The world of high technology companies is seen as a dynamic area with a rapid pace of creative destruction. There is, however, a class of industries where there are strong network effects, where the market tends to collapse into a narrow set of players. After one burst of innovation where a new online business is born, there is the possibility of entrenched market power with the extraction of consumer surplus.
     
    Many firms, global and Indian, have resorted to the strategy of making large losses by subsidising users, as a way to obtain those network effects. This has created a new class of concerns about predatory pricing, with unprecedented negative profit margins on a sustained basis, being supported by equity capital infusions. In the short run, discounts are popular, but recoupment is inevitable and market power will adversely affect consumers in the future. 
     
    We argue that the existing competition law regime in India needs to be fine tuned, for technology-enabled markets with significant network effects, to address the possibility of new kinds of abusive conduct. We offer a series of tangible proposals through which the Competition Commission of India can better handle these emerging situations. We also look into the role and responsibilities of the investors who back these online businesses and the impact of their conduct on competition in the underlying markets.
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An Automatic Leading Indicator Based Growth Forecast For 2016-17 and The Outlook Beyond

  • Mar, 2017
  • Authors Parma Chakravartti and Sudipto Mundle
  • Details NIPFP Working Paper No. 193
  • Abstract
    Building on the early work of Mitchell and Burns (1938,1946), the automatic leading indicator (ALI) approach has been developed over the last few decades by Geweke (1977), sargent and Sims (1977), Stock and Watson (1988), Camba-Mendez et al. (1999) , Mongardini and Sedik (2003), Duo-Qin et al. (2006), Grenouilleau (2006) and others. It has come to be widely accepted as one of the most effective methods for macroeconomic forecasting. This paper uses the ALI approach to forecast aggregate and sectoral GDP growth for 2016-17. The approach uses a dynamic factor model (DFM) in the form of state space representation to extract factors from a pool of variables and then the factors are incorporated into a VAR model to generate the forecast series. Three alternate models have been tried: demand side, supply side and combined model. The model with the lowest RMSE is selected for the forecast. Real GDP growth is forecast at 6.7% for 2016-17 without factoring in the impact of demonetisation. Incorporating that impact reduces the forecast to 6.1%.
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Judicial Review and Money Bills

  • Mar, 2017
  • Authors Pratik Datta, Shefali Malhotra and Shivangi Tyagi
  • Details NIPFP Working Paper No. 192
  • Abstract

    Under the Constitution of India, for a bill to be enacted into a law, it has to be approved by both Houses of the Parliament - the Lower House (Lok Sabha) and the Upper House (Rajya Sabha). There is one exception to this general rule. A bill certi fied as a 'money bill' by the speaker of the Lower House can be enacted into a law by the Lower House alone, without any approval from the Upper House.

     

    The scope of what could constitute a 'money bill' is de fined in the Constitution of India. Yet, it is possible that a bill which does not fall within the scope of this defi nition could be incorrectly certifi ed as a 'money bill' by the speaker and enacted into a law without the approval of the Upper House. The Constitution of India categorically states that 'if any question arises whether a Bill is a Money Bill or not, the decision of the Speaker of the House of the People thereon shall be fi nal'. Does this provision imply that the Indian Supreme Court cannot review whether the speaker's certi fication of a bill as a 'money bill' is correct or not? And if it is actually incorrect, can the Supreme Court not strike down such a law for being unconstitutional? These questions are of immense contemporary relevance in India and form the central research theme of this article.
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Budget 2017-18: Business as Usual

  • Mar, 2017
  • Authors M. Govinda Rao
  • Details NIPFP Working Paper No. 191
  • Abstract

    Budget 2017-18 was presented at the time when the global situation is inhospitable, marked with protectionism and domestic environment is constrained by the twin balance sheet crisis. The investment climate is further jeopardised by the note ban.  There was a great deal of expectations on the budget this year to create a policy environment to kick-start the virtuous investment cycle in the economy.  However, this budget has turned out to be a mere ‘business as usual’ budget.  While it does well to be prudent in containing the deficits, it fails to address the critical issue of accelerating investment and employment.  The capital expenditure as a ratio of GDP is static and the clean-up of tax preferences, as promised, to reduce the corporate tax rates is yet to be initiated.   The Finance Minister has lost the opportunity to prune the exemption list and align the excise duty rates in preparation to the GST implementation.  Finally, the measures to reduce cash donations and the introduction of bonds to political parties is cosmetic and is not likely to have any impact on cleaning up political funding as long as anonymity of donors is assured.

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Envisioning Tax Policy for Accelerated Development in India

  • Mar, 2017
  • Authors M. Govinda Rao and Sudhanshu Kumar
  • Details NIPFP Working Paper No. 190
  • Abstract
    The objective of the paper is to highlight the reforms needed in the tax system to improve the revenue productivity of the tax system to conform to the vision of accelerating economic growth and development in India. Based on the cross-country analysis of tax-GDP ratios in 98 countries, the paper estimates the extent of under-taxation in India. Assuming 8 per cent growth in GDP, the paper estimates the increase in tax–GDP ratios needed to be raised and this additional e ort would provide  scal space for much needed investments in physical infrastructure and human development.  e paper goes on to identify the reforms needed to raise the revenue productivity of the tax system keeping in view the best practice approach to tax reform in India.
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An Exchange Market Pressure Measure for Cross-Country Analysis

  • Feb, 2017
  • Authors Ila Patnaik, Joshua Felman and Ajay Shah
  • Details NIPFP Working Paper No. 189
  • Abstract
    EMP measures in the existing literature are oriented towards applications in crisis dating and prediction. We propose a modified EMP measure where cross-country comparisons are possible. This is the sum of the observed change in the exchange rate with an estimated counterfactual of the magni- tude of the change in the exchange rate associated with the observed currency intervention. We construct a multi-country dataset for EMP in each month. This opens up many new research possibilities.
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Employment, Education and the State

  • Feb, 2017
  • Authors Sudipto Mundle
  • Details NIPFP Working Paper No. 188
  • Abstract

    The 2016 India Employment Report demolishes the myths of both ‘demographic dividend’ and ‘jobless growth’ in the India growth story. But it recognises that the growth of decent, productive employment is too slow even to absorb the annual increment of new workers in the workforce, let alone eliminate the huge backlog of open unemployment and low productivity underemployment. This paper argues that this challenge is a man-made problem, the consequence of a range of dysfunctional policies that have a strong anti-employment bias. Moreover, a long standing elitist bias in education policy has pre-empted the provision of quality basic education without which the bulk of the workforce cannot be suitably skilled for decent, productive employment. The paper suggests that these dysfunctional policies are attributable to a fractionalized polity and India’s soft state, which stands in sharp contrast to the hard states seen in the dramatically successful East Asian model of guided capitalism.

     

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Beyond Catch Up Some Speculations About the Next Twenty Five

  • Jan, 2017
  • Authors Sudipto Mundle
  • Details NIPFP Working Paper No. 187
  • Abstract
    In his book Catch Up, Deepak Nayyar has identified a total of twenty five developing countries (excluding Taiwan) as having the most potential for catching up with the developed countries. This paper speculates about the likely status of these countries, Nayyar’s ‘Next Twenty Five’, around the middle of the 21st century. Drawing on his own earlier work on the subject as well as the recent contributions of Acemoglu and Robinson, among others, the author first presents the elements of a theory of economic history as the dynamics of interactions between resource endowments, technology and institutions, mediated by the cumulative impact of incremental change as well as transformative shocks at criticaljunctures. The prospects of the ‘Next Twenty Five’ are then assessed through the lens of this theoretical framework, recognising that outcomes are probabilistic in a Bayesian sense and not deterministic. Size matters because very large and very small countries have their own specific dynamic. Hence, two very large countries, China and India, and two very small countries, Tunisia and Honduras, are separately analysed. In assessing the prospects of the other twenty one countries in the group, the paper addresses the question of why there is a distinct geographic pattern of the catch up process working more powerfully in Asia as compared to Latin America or Africa.
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Public Sector Undertakings - Bharat's Other Ratnas

  • Jan, 2017
  • Authors Ajay Chhibber and Swati Gupta
  • Details NIPFP Working paper No. 186
  • Abstract
    This paper analyzes the performance of India’s 235 public sector undertakings (PSUs) – India’s socialistic legacy from the Nehru-Gandhi days. Of these 7 largest PSUs are called Maha Ratnas, 17 are called Nav Ratnas and some 73 are given the title of Mini Ratnas. The economic reforms of 1991 dismantled the “license-raj” but left the PSUs intact. Attempts were made to improve their performance through performance contracts called Memorandum of Understandings (MoUs) with some success but with still a large number of loss makers. A brief attempt was made under the NDA-1 government from 1999-2004 to begin dismantling this legacy with strategic disinvestment (privatization) but met with considerable opposition from vested interests and labour unions. Subsequent UPA governments tried to further improve the performance of these companies through better performance contracts and bringing more PSUs into the Ratna classification. Under UPA-2 more aggressive disinvestment (partial privatization) was also pursued to raise more revenue and hopefully improve firm performance.
     
    Using firm-level data over the period 1990-2015 from the Public Enterprise Survey now collated in the Capitaline Data Base, this paper looks into factors that explain the performance of these PSUs. The results show that MoUs have had a positive impact on PSU performance by increasing their return on capital (ROC) by almost 8-9 percentage points. This result holds mainly for the non-service sector (manufacturing, mining) but less so for service sector firms. In the case of service sector firms, partial privatization (share sales) has a significant impact on performance, making them ideal candidates for more aggressive disinvestment. The results also show that larger PSU–Maharatnas appear to perform better than smaller PSUs and even better than private firms of similar size. But smaller PSU– Navratnas and MiniRatnas perform worse than private companies and should be good candidates for strategic disinvestment (privatization). PSUs that do not have Ratna status, and are loss makers should be disposed of for their real estate and scrap value. We conclude that India should raise capital through strategic disinvestment (privatization), disinvestment and liquidation of up to $250 billion which can be re-invested in public infrastructure through the National Infrastructure Investment Fund and not into the budget as a revenue raising measure.

     

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Indian Variant of MTEF: The Scope and Opportunities to Develop an Effective Budget Planning Process

  • Jan, 2017
  • Authors Pratap Ranjan Jena
  • Details NIPFP Working paper No. 185
  • Abstract

    The paper examines the medium-term fiscal policy (MTFP) and a more conventional medium-term expenditure framework (MTEF) adopted in India under the provisions of the fiscal rules. The MTFP and the MTEF, professed to improve fiscal discipline in the context of fiscal rules, did not promote a multi-year budget planning process. The abolition of the five-year development planning process and the subsequent decision to remove plan and non-plan distinction from budget classification created a void with regard to the budget planning. This has necessitated developing a revamped fiscal architecture in the form of a medium-term framework to widen the short horizon of the annual budgeting exercise. The paper makes a case for developing structured medium-term budgeting framework (MTBF) building on the existing institutional framework both at the Central and at the subnational level and subsequently incorporating performance indicators in sector strategies. 

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Demonetization, the Cash Shortage and the Black Money

  • Dec, 2016
  • Authors Ashok K. Lahiri
  • Details NIPFP Working paper No. 184
  • Abstract

    Demonetisation of INR 500 and INR 1,000 notes in India on November 8, 2016 is different from many other countries’ scrapping of high value notes in two respects – the withdrawal of their legal tender status and continuation with INR 1,000 and INR 2,000 notes. It has resulted in a cash shortage. Non-cash medium of payments may be encouraged by this shortage, but, with supplies only from the domestic currency presses, the shortage is unlikely to disappear by the end of 2016. Import of currency printed abroad may provide a solution for ending it sooner. The impact of the shortage, if it continues, will be fully felt in the last quarter of 2016-17. Its growth impact in 2016-17 is 0.7-1.3 per cent depending on how much shortage continues and for how long. The big painful jolt of demonetisation creates the right psychological milieu for the war against black money to start. Only Time will tell whether steps such as the Income Declaration Scheme (IDS) in the Budget for 2016-17, the August 2016 amendment of the Benami Transactions (Prohibition) Act of 1988, and the Taxation Laws (Second Amendment) in November 2016, are parts of a concerted plan for tackling black money, and this time is different from 1946 and 1978. With the strides made in digitisation of tax returns and bank records together with PAN, Aadhar and KYC regulations, compared to 6 per cent in 1946 and 11 per cent in 1978, at least 15 per cent or INR 2.2 trillion of the demonetised notes not exchanged into deposits or cash will provide a preliminary positive feedback on the success of the current demonetisation.

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Impact of the Recommendations of the 14th FC: Central Transfers and Social Sector Expenditures in the 1st Year

  • Nov, 2016
  • Authors Mita Choudhury, Ranjan Kumar Mohanty and Jay Dev Dubey
  • Details NIPFP Working paper No. 183
  • Abstract

    Recent evidence on the impact of the recommendations of the Fourteenth Finance Commission (FFC) suggests that there has been an increase in Central transfers and social sector expenditures in a number of States in 2015-16, the first year of the FFC award period. We argue that the evidence on gains through Central transfers and increases in social sector expenditures is biased upwards because of two factors. First, much of the gains have been measured with respect to a low base year, and secondly, inferences have been drawn based on comparisons between Actuals and Revised Estimates or Revised Estimates and Budget Estimates. Comparing Revised Estimates for the same years for fifteen major States, we find that Central transfers and expenditures on Social Services as per cent of Gross State Domestic Product (GSDP) are likely to fall in a number of States. Besides, in most States, Social Services have received a lower priority than Economic Services in the first year of the FFC award period.

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Demonetisation: Impact on the Economy

  • Nov, 2016
  • Authors Tax research team
  • Details NIPFP Working paper No. 182
  • Abstract

    The argument posited in favour of demonetisation is that the cash that would be extinguished would be “black money” and hence, should be rightfully extinguished to set right the perverse incentive structure in the economy. While the facts are not available to anybody, it would be foolhardy to argue that this is the only possibility. Therefore, it is imperative to evaluate the short run and medium-term impacts that such a shock is expected to have on the economy. Further, the impact of such a move would vary depending on the extent to which the government decides to remonetise. This paper elucidates the impact of such a move on the availability of credit, spending, level of activity and government finances.

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Reviving Private Investment in India: Determinants and Policy Levers

  • Nov, 2016
  • Authors Ajay Chhibber, Akshata Kalloor
  • Details NIPFP Working paper No. 181
  • Abstract
    Private investment has slumped in India and its revival is vital for accelerating India’s growth rate on a sustained basis. This paper analyzes the determinants of aggregate private investment and its components corporate and non-corporate private investment for the period 1980-81 to 2013-14. This paper finds that the key determinants of private investment are the size of the public sector capital stock, the real effective exchange rate, the output gap and the availability of credit to the private sector. So, higher public investment would crowd-in more private investment. When we break it down further private corporate investment is significantly explained by the real exchange rate and the availability of credit to the private sector whereas for non-corporate investment public capital stock is the most significant variable- as it crowds in private investment. Real interest rate has no significant effects on investment.

     

    Simulations show that if India increases public investment by 5% of GDP, depreciates the real exchange rate by 10-15% and fixes the bad loan problems in the banking sector so that credit growth to the private sector is restored, India can increase its GDP growth rate by at least 2% points on a long run sustained basis and achieve 8% plus GDP growth.
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Endogenous Leadership in a Federal Transfer Game

  • Nov, 2016
  • Authors Bodhisattva Sengupta
  • Details NIPFP Working paper No. 180
  • Abstract

    Conventional wisdom suggests that, to negate fiscal externalities imposed by provinces which spend too much and raise lower local resources, central authority should always be a first mover in the transfer game. In spite of such recommendations, central governments, in almost all countries, chooses to be the second mover from time to time. We explore the conditions, other than the familiar political economy arguments, under which the central government optimally chooses to be the second mover. Moreover, ex post transfer protocols may induce provinces to generate more local resources than otherwise. The results depend crucially upon the benefit received by each level of government from the project outcomes of other tier.

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Towards a privacy framework for India in the age of the internet

  • Nov, 2016
  • Authors Vrinda Bhandari and Renuka Sane
  • Details NIPFP Working paper No. 179
  • Abstract

    Over the last decade, there have been vast improvements in surveillance technology and the availability, storage, and mining of personal information online, supported by developments in big data analytics. This has created a public policy conundrum over balancing the benefits of big data with the threat to the right to privacy. In an environment of pervasive surveillance and intrusive technology, there is a need for improved protection of privacy rights through a mixture of legislation and regulation, and building public awareness and demand for safeguards. This paper makes a case for the need for privacy from both the State and the private sector, examines the jurisprudential development of the right to privacy in India, and lays down privacy principles, that will underlie any proposed privacy law. It then evaluates the Indian IT Act, and the recently legislated Aadhaar Act, against the proposed privacy principles.

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Legislative strategy for setting up an independent debt management agency

  • Oct, 2016
  • Authors Radhika Pandey and Ila Patnaik
  • Details NIPFP Working paper No. 178
  • Abstract

    The Public Debt Management Agency (PDMA) is a body that issues public debt with the objective of keeping long term costs of government borrowing low. In India, the existing legal framework obliges the government to give the task of managing its debt to the RBI. Pursuant to its role as debt manager, RBI set up market infrastructure such as an exchange and a depository. Carve-outs were made in the regulation of securities, to allow the RBI to regulate the bond market. Over the last 20 years, the proposal to establish an independent PDMA has been repeatedly put forward. In this paper, we work out the legal strategy to set up a PDMA. We show the transition path for the roll out and for the movement of the functions, accounts, records and systems to the new agency in a phased manner.

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Regime Shifts in India’s Monetary Policy Response Function

  • Sep, 2016
  • Authors Lokendra Kumawat and N.R. Bhanumurthy
  • Details NIPFP Working paper No. 177
  • Abstract

    The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates.

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UIDAI’s Public Policy Innovations

  • Sep, 2016
  • Authors Ram Sewak Sharma
  • Details NIPFP Working paper No. 176
  • Abstract
     
    The Unique Identification Authority of India (UIDAI) was mandated to issue unique identification numbers to every resident of India. The Authority has largely accomplished this mandate in a short time and within budget because it took many innovative and bold decisions.
     
    The first innovative decision we consider, in this paper, is the UIDAI’s decision to add iris images to the set of biometrics collected by it. Another innovation of the UIDAI was its practice of conducting on-field trials. The last innovation we consider relates to how the UIDAI promoted competition and standardisation.
     
    The success of the UIDAI offers lessons for other government projects. Government processes need not prevent it from taking innovative decisions. High-quality procurement and project management skills can help the government outsource many functions that are currently housed within it. Testing major hypotheses through field trials before launching projects at scale can help ensure best use of public resources.
     
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Dating Business Cycles in India

  • Sep, 2016
  • Authors Radhika Pandey, Ila Patnaik and Ajay Shah
  • Details NIPFP Working paper No. 175
  • Abstract

    This paper presents a chronology of Indian business cycle in the post-reform period. The period before reforms primarily saw monsoon cycles. We find three episodes of recession in the post-reform period: 1999Q4 to 2003Q1, 2007Q2 to 2009Q3, and 2011Q2 to 2012Q4. We find that the average duration of expansion is 12 quarters and the average duration of recession is 9 quarters. The diversity in duration of expansion is seen to be 0.34 while the diversity in duration of recession is 0.31. We find that the amplitude of recession is relatively more diverse at 0.45 while the diversity in amplitude of expansion is 0.38.

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Misled and Mis-sold: Financial Misbehaviour in Retail Banks?

  • Aug, 2016
  • Authors Monika Halan and Renuka Sane
  • Details NIPFP Working paper No. 174
  • Abstract

    We use an audit methodology where auditors ask for tax-saving instruments from banks and document the disclosures made on product features at the time of sale. In private sector banks with high sales incentives, the high commission product is recommended. In public sector banks, where there are deposit mobilisation targets, fixed deposits are recommended. Banks rarely make voluntary disclosures on product features. When specifically requested, information provided is inaccurate or incomplete. Our results demonstrate the challenges of mandating disclosures when buyers have little understanding of the relevance of product characteristics, and distributors are themselves ignorant or influenced by incentives.

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How does Supply Chain Distortion affect Food Inflation in India?

  • Aug, 2016
  • Authors Rudrani Bhattacharya
  • Details NIPFP Working paper No. 173
  • Abstract

    How does supply chain distortion affect food inflation in India? During the recent episode of persistently high food inflation in India, the role of rent seeking activities of food suppliers emerged as the centre of debate in the country. The rent seeking activities of agents in both wholesale and retail marketing of food, catered by the lack of a competitive food market and required infrastructure, often causes large positive shocks to mark ups. This paper estimates the contribution of these mark-up shocks at both wholesale and retail level, in food inflation, an issue unexplored in the literature till date. The study finds moderate but significant pass through of mark-up shocks in food inflation after controlling for other factors. The duration of the transmission effect depends on the origin of the shock in wholesale market, while the effect seems to last for five months in retail food inflation. In the backdrop of advocated competitive national market for food commodities to promote greater competition and stabilise large shocks to mark ups, this paper contributes towards understanding the extent to which stabilisation of mark-up shocks can lower wholesale and retail food inflation in the country.

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Some areas of concern about Indian Manufacturing Sector GDP estimation

  • Aug, 2016
  • Authors Amey Sapre and Pramod Sinha
  • Details NIPFP Working paper No. 172
  • Abstract

    In this paper, we discuss some of the methodological issues involved in the computation of value addition in the manufacturing sector. We deal with (i) problems of blow-up of estimates (ii) choice of indicators in measuring output, and (iii) a possible misclassification of companies in the MCA21 database that can distort the GVA estimates. A sample based blow-up exercise shows that Paid-Up Capital and GVA contribution of firms have no one-to-one correspondence and the method can lead to overestimation of value addition. We construct an alternate method of blow-up by using representative industry GVA growth rates to scale up previous GVA estimates to account for data of unavailable companies. We show that a potential misclassification of companies in the MCA21 can also lead to significant distortion in GVA estimates.

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Public Expenditure, Governance and Human Development: A case of Madhya Pradesh

  • Jul, 2016
  • Authors N R Bhanumurthy, Manish Prasad and Richa Jain
  • Details NIPFP Working paper No. 171
  • Abstract

    This paper examines the link between quality of governance, public expenditure and human development outcomes in the state of Madhya Pradesh. The role of Governance is measured in dimensions: Political, Legal & Judicial, Administrative, Economic and Social. A total of 22 indicators have been used to measure the Governance Index (GI) of Madhya Pradesh at district level.  The results in this paper suggest that, at district level, development expenditure alone is not sufficient in achieving human development outcomes. However, the effectiveness of public expenditures improves with better governance indicators. In addition, GI is found to be significant and positive in improving development outcomes. Among the governance dimensions, weak administrative index appears to be the main constraint in improving the human development outcomes in less developed districts. Disaggregated analysis suggests that the districts with lower human development achievements need to prioritize only in one or two dimensions of governance, in particular administrative governance. Prioritization of various or specific dimensions of governance should help in reducing the divergences in development outcomes across the districts. The findings of this paper are very important as they suggest that public expenditure efficiency depends on the quality of governance. Hence, there is a need to equally focus, both, on improving governance as well as on increasing development expenditures.  In the context of achieving SDGs and with the lessons learnt from MDGs, the findings of the paper suggest that we should focus on policy both at the sub-national and sub-state level.

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Search for Resources in a High Income State: A Study of State Finances of Sikkim

  • May, 2016
  • Authors Pratap Ranjan Jena, Kausik K. Bhadra, Satadru Sikdar
  • Details NIPFP Working paper No. 170
  • Abstract
    The paper examines the public financial management (PFM) of Sikkim focusing mainly on resources generation effort and budget management practices. We note that any deviation from the Central transfers creates fiscal stress as the State depends heavily on them to fund vast expanse of social and economic services and infrastructure. The sparse internal resources reduce flexibility to invest in the sectors where the State has inherent advantages. The search for resources to enhance development needs and create higher employment opportunities remain a major drag for the State. The paper looks at the possibilities of strengthening internal resources and improving the efficiency of public spending to ensure value for money. The fiscal stress faced by the State due to decline in Central assistance to the State plan should be considered as an opportunity to make an unbiased assessment of its fiscal capacity and development commitment.
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Revisiting the tax compliance problem using prospect theory

  • Apr, 2016
  • Authors R. Kavita Rao and Suranjali Tandon
  • Details NIPFP Working paper No. 169
  • Abstract

    The paper presents a model for tax compliance based on prospect theory wherein an individual makes the decision whether to file, and declare a certain amount of income, or to not file based on a set of policy parameters as well as his/her preferences. The paper poses the question - at what incomes would individuals choose to file a return and answers the same using a model based on prospect theory. Further, simulations are presented to illustrate the impact of changes in tax rates, penalty and audit probability on the individual’s preference to file. The results from the simulation show that for different values of policy parameters there exists crossover income at which individuals would choose to file a return. Given all else, at the exemption threshold of 0.1 million, individuals would choose to file a return at incomes greater than or equal to 0.6 million. 

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Motivations for capital controls and their effectiveness

  • Apr, 2016
  • Authors Radhika Pandey, Gurnain K. Pasricha, Ila Patnaik, Ajay Shah
  • Details NIPFP Working paper No. 168
  • Abstract

    We assess the motivations for changing capital controls and their effectiveness in India, a country where there is a comprehensive capital control system covering all cross-border transactions. We focus on foreign borrowing by firms, where systemic risk concerns could potentially play a role. A novel fine-grained data set of capital control actions is constructed. We find that capital control actions are potentially motivated by exchange rate considerations, but not by systemic risk issues. A quasi-experimental design reveals that the actions appear to have no impact either on the exchange rate or on variables connected with systemic risk.

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Foreign Currency Borrowing by Indian Firms:Towards a New Policy Framework

  • Apr, 2016
  • Authors Ila Patnaik, Ajay Shah, Nirvikar Singh
  • Details NIPFP Working paper No. 167
  • Abstract
    India has a complex multidimensional system of capital controls for foreign currency borrowing by firms. In this paper, we summarise existing regulations, review the outcomes and discuss areas of con- cern and recent policy changes. Unhedged foreign currency  exposure for firms, the complexity and uncertainty in the policy framework as it has evolved, and questions about regulation making processes are highlighted. In an emerging economy with a managed exchange rate and incomplete markets, foreign currency borrowing poses systemic risks when left unhedged by large firms that constitute a significant part of GDP. We identify policy directions to help address these concerns.
     
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Assessing and Evaluating the Addis Ababa Action Agenda(AAAA)

  • Mar, 2016
  • Authors Ajay Chhibber
  • Details NIPFP Working paper No. 166
  • Abstract

    The Sustainable Development Goals - SDGs with 17 goals and 169 targets were adopted by world leaders in September, 2015. This paper argues that if the world had problems monitoring the MDGs - with 8 goals and 21 targets, it will find it impossible to track the SDGs. It recommends focusing on 60 highest priority targets. It also highlights the synergies and trade-offs among the various goals - especially between growth, inequality and sustainability which countries and the world will have to navigate. The Addis Ababa Action Agenda (AAAA), ostensibly, the financing plan for the SDGs widens the scope of development financing to include private and domestic financing - moving from billions to trillions. But such an approach also dilutes global responsibility for development and climate financing. The paper suggests an evaluation framework for assessing the AAAA and ensuring that the synergies among the SDGs are exploited and the trade-offs confronted. The paper suggests a pathways approach with concurrent evaluation every five years to assess and adjust programmes and policies. 

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Corporate Tax: A brief assessment of some exemptions

  • Mar, 2016
  • Authors R. Kavita Rao, Suranjali Tandon and Sacchidananda Mukherjee
  • Details NIPFP Working paper No. 165
  • Abstract

    Government of India proposes to reduce the number of tax incentives built into the corporate tax regime and alongside reduce the statutory tax rate on corporate tax to 25 percent. Beneficiaries of the incentive regime tend to argue that these regimes provide tangible benefits which induce higher level of activity within the economy and hence, phasing these out can be detrimental for the Indian economy. An attempt is made in this paper to briefly assess what can be inferred from available evidence on the effectiveness of the incentive regimes. The focus is on three such schemes, incentives provided for investment in backward areas, incentives for special economic zones and incentives provided for expenditure on research and development. 

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Governance Performance of Indian States 2001-02 and 2011-12

  • Mar, 2016
  • Authors Sudipto Mundle, Samik Chowdhury, Satadru Sikdar
  • Details NIPFP Working paper No. 164
  • Abstract

    There is a core concept of good governance, the combination of authority and responsibility to pursue the common good that goes back over millennia in different geographies around the world. Based on a contemporary interpretation of this concept, the paper develops a measure of the quality of governance as service delivery. This measure is applied to rate and rank the governance performance of major states in India in 2001-02 and 2011-12. The governance measure has been derived from the three main pillars of the government, i.e., the legislature, the judiciary and, especially, the executive. These pillars are represented by five dimensions: infrastructure services; social services; fiscal performance; justice, law & order; and quality of the legislature. Performance on each dimension of governance has been measured using indicators that are based exclusively on official factual data, not perceptions or opinions drawn from unrepresentative samples. The results show considerable stability of the cluster of high performing and low performing governments at the top and the bottom of governance rankings over the period analysed, though there are also some interesting dynamics of change. The paper also presents a second set of results that correct for the strong correlation between governance quality and the level of development. When we correct for the effect of development on the quality of governance, it turns out that some of the poorer states significantly improve their rank, implying their governance performance is much better than would be expected at their level of development.

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Dynamics of Political Budget Cycle

  • Feb, 2016
  • Authors Ganesh Manjhi and Meeta Keswani Mehra
  • Details NIPFP Working No. 163
  • Abstract

    Using the method of optimal control, when an incumbent politician derives utility from voting support and dis-utility from budgetary deficit, the equilibrium time paths of both voting support and budgetary deficit are characterized in a finite time horizon under complete information. The incumbent politician may be an opportunist, in that she/ he is interested in garnering votes for herself/ himself, and manipulates budgetary deficit to achieve this, or else she/ he may be partisan, that is, characterized by heterogeneous preferences, reflecting preferences for specific economic policies. The citizen-voters vote for the opportunist as well as the partisan incumbent. However, they reject the same when there is a sufficiently strong anti-incumbency in the opportunist case. The level of voting support obtained in case of both opportunist and partisan is found to be positive and rising over time, but running the budgetary deficit will be costlier for the economy in the former case than the latter. That is, per unit votes garnered by raising the budgetary deficit as compared to the benchmark deficit are lower when the incumbent is an opportunist than when she/ he is partisan.

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Growth of Finance, Real Estate and Business Services: Explorations in an Inter-Sectoral Framework

  • Feb, 2016
  • Authors Sukanya Bose and Abhishek Kumar
  • Details NIPFP Working Paper No. 162
  • Abstract
    The Indian growth experience over the past several decades has been service led. More recently, within services, Finance, Insurance, Real Estate and Business Services (FINREBS) has been the fastest growing sector, with its share in GDP rapidly rising to around 22 percent in a relatively short time-frame. What relation does the growth of FINREBS have with the rest of the sectors of the economy?
     
    Empirical exploration using input-output tables and econometric methods shows that FINREBS ranks low in backward and forward linkages compared to most other sectors of the economy. It is difficult to imagine FINREBS as a `leading sector’ in the Hirschman sense. Rolling co-integration to study the evolution of long-term relationships shows an increasing co-movement in output of FINREBS and agriculture and allied activities. However, for most other sectors the association with FINREBS is insignificant or weak. Variance decomposition of forecast error corroborates that a large percentage of variation in the growth of FINREBS cannot be explained by other sectors of the economy, which gives FINREBS an autonomous character. The probable reasons for the ‘autonomous’ nature of growth in FINREBS are explored briefly in the paper.
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Cashing in on Mining: The Political Economy of Mining Regulations and Fiscal Policy Practices in India

  • Jan, 2016
  • Authors Lekha Chakraborty, Shatakshi Garg, Gurpreet Singh
  • Details NIPFP Working Paper No. 161
  • Abstract

    Against the backdrop of the recent Mines and Minerals Development and Regulation (MMDR) Amendment Bill 2015, this paper examines the political economy of State-business relations in mining sector, in the two newly-formed States in India, Chhattisgarh and Jharkhand. It is important to note that the two States have low income despite being resource-rich.. Analyzing the legal fiats (State Reorganisation Acts and Fiscal Responsibility Acts), it was revealed that the formation of new States has not created any distinct fiscal agency in the extractive sector. The States – both parent and the new States – have adjusted their deficits to conform to the fiscal rules (FRBM Act) stipulated by the Centre; and these States have revenue surplus – not deficits - ex-post to the enactment of fiscal rules. The new States have insignificant share of mining proceeds in their State exchequer, around 10 per cent of the revenue receipts. Though nebulous estimates from fresh mining e-auction proceeds are on board, ambiguity remains how the newly-generated fiscal space would resolve resource curse. The use of fiscal proceeds from mining is difficult to map as it is not yet earmarked for redressing socio-economic inequalities of mining districts. However, the new MMDR Bill 2015 stipulates that District Mineral Fund (DMF) would be created in mining districts to link the proceeds to human development. Despite the data paucity, based on our analysis we caution that the road map of forthcoming DMF to plough back a portion of royalty and fresh e-auction mining proceeds exclusively to the mining districts may exacerbate spatial inequalities.

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Seasonal adjustment of Indian macroeconomic time-series

  • Jan, 2016
  • Authors Rudrani Bhattacharya, Radhika Pandey, Ila Patnaik, Ajay Shah
  • Details NIPFP Working Paper No. 160
  • Abstract

    Macroeconomic analysis benefits from seasonal adjustment. Month- on-month changes of economic time series yield faster information about developments in the economy, but the values have exaggerated variance when annual seasonality is present. In this paper, we show the full process for seasonal adjustment for four important Indian time-series. We find that significant reductions of variance are obtained by using black box seasonal adjustment, at the risk of failure for some time series. Thorough knowledge about seasonal adjustment yields more reliable answers, and a roughly 15% improvement in the volatility of month-on-month changes.

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Where is India’s Growth Headed?

  • Jan, 2016
  • Authors Ila Patnaik and Madhavi Pundit
  • Details NIPFP Working Paper No. 159
  • Abstract

    Growth in India declined in the post financial crisis years both due to external and domestic factors. While the slowdown appears to be largely cyclical, it is possible that trend growth may also have been affected especially by negative shocks from the domestic policy environment. In this paper, we analyze the sources of output growth in the past three decades and discuss the outlook going forward. We make projections for the growth of factors of production and the growth of trend GDP per worker for the period 2013-2030. In general, the outlook for factors appears strong. As long as policy reforms support the broad environment for investment in infrastructure and in education and eliminate frictions in the efficient use of labor and capital, all of which can also boost productivity, it does not appear that trend growth is likely to decline in the future.

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