Margin: The Journal of Applied Economic Research recent issues

The Causal Relationships in Mean and Variance between Stock Returns and Foreign Institutional Investment in India

Inoue, T. — Mon, 16 Nov 2009 07:34:54 PST

This paper examines the causalities in mean and variance between stock returns and foreign institutional investment (FII) in India. The analysis in this paper applies the cross-correlation function approach from Cheung and Ng (1996), and uses daily data from January 1999 to March 2008 divided into two periods before and after May 2003. Empirical results showed that there are uni-directional causalities in mean and variance from stock returns to FII flows irrelevant of the sample periods, while the reverse causalities in mean and variance are only found in the period beginning with 2003. These results point to FII flows having exerted an impact on the movement of Indian stock prices during the more recent period.

Asymmetry in Information and Varying Rates of Interest: A Study of the Informal Credit Market in West Bengal

Bhattacharjee, M., Rajeev, M., Vani, B.P. — Mon, 16 Nov 2009 07:34:54 PST

This paper examines the nature and extent of household indebtedness in West Bengal, focusing on households’ access to credit and factors influencing interest rate determination in informal credit markets. As far as accessibility is concerned, it finds that the urban poor face greater problems than their rural counterparts in accessing formal and informal sources of credit. Using an ordered logit model it shows how information and monitoring opportunities play a critical role in arriving at a rate of interest for the lender.

Trends and Patterns of Foreign Direct Investments in Asia: A Comparative Perspective

Athukorala, P.-c. — Mon, 16 Nov 2009 07:34:54 PST

This paper examines foreign direct investment (FDI) in developing Asia over the past three decades with emphasis on two key issues: the implications of the ongoing process of international production fragmentation and the alleged ‘crowding out’ effect of China’s rise as a major host to FDI on the other countries in the region. The evidence suggests that assembly processes within vertically integrated global industries (in particular, electrical goods and electronics) has gained prominence over the past two decades as the major area of attraction for foreign investors in the region. Contrary to the popular crowding out fear, China’s rise as a major assembly centre within global production networks seems to have added further dynamism to region-wide multinational enterprise (MNE) operations in the regions. A key policy inference from our analysis is that, in designing policies of outward-oriented development, investment and trade policies must be considered together as co-determinants of the location of production and patterns of trade.

Fertiliser Use, Nutrient Imbalances and Subsidies: Trends and Implications

Chand, R., Pandey, L.M. — Mon, 16 Nov 2009 07:34:54 PST

Fertiliser use in India has seen higher growth rates than any other major agricultural input in the last four decades. There has recently been a serious slowdown in the growth of fertiliser use, primarily caused by supply-side constraints. The composition of fertiliser use has also resulted in serious imbalances in the use of major plant nutrients, which could cumulatively have a detrimental effect on soil health and crop productivity. The main cause of the imbalance is found in the price distortions resulting from the structure of fertiliser subsidies. The trend in the prices of agricultural products offers scope for reducing and rationalising fertiliser subsidies to boost fertiliser production and reduce nutritional imbalances.

Do Macroeconomic Indicators Explain India's Sovereign Ratings? An Empirical Analysis

Samantaraya, A., Verrier, J. — Tue, 08 Sep 2009 08:31:56 PDT

Sovereign rating—an assessment of the relative likelihood of a country defaulting on its financial obligations—is important not only because better ratings facilitate external borrowing at favourable rates of interest, but also for the impetus it gives to the development of domestic financial markets in an emerging economy. Assessing the role of various macroeconomic factors influencing India's sovereign rating, our preliminary analysis indicated that while upgrading India's sovereign rating since 2003–04 both Standard and Poor's and Moody's apparently taken, high GDP growth, rising foreign reserves, declining fiscal deficit and rising exports into account, but the economic rational for downgrading the rating between 1998 and 2002 is not very convincing. The econometric analysis, using an ordered probit model, did not find strong statistical support for several relevant macroeconomic indicators in the determination of India's sovereign ratings. Could a major part of the explanation have come from some other sources, such as qualitative social and political considerations? India's relatively low sovereign ratings compared to its peers raises questions about rating agencies appropriately accounting for India's excellent economic performance in recent years; its formidable record of serving all external liabilities on time; and factors related to political stability and the social fabric of unity amidst diversity. Had these factors been taken into account appropriately, perhaps India's rating would have been better reflective of reality.

Central Fiscal Transfers and States' Own-Revenue Efforts in India: Panel Data Models

Panda, P. K. — Tue, 08 Sep 2009 08:31:56 PDT

Using the fixed and random effect panel regression models the paper tries to empirically examine the incentive effects of federal transfers on states’ own-revenue. Per capita resource transfers from the centre are found to be significant and negatively associated with states’ own-revenue, own-tax revenue and own-non-tax revenue in per capita terms, irrespective of choices of models or specification. This possibly indicates that central transfers have a dampening effect on states’ revenue efforts. Further, the incentive criterion for tax effort as used in the Finance Commission devolutions and in the Gadgil formula used by the Planning Commission is not reflected in the system, and it has failed to induce the desired, positive revenue pattern in states. The paper calls for assigning a higher weight to tax effort in the devolution formula and for more effective co-ordination among different channels in designing criteria and incentives.

Size Distribution of Metropolitan Areas: Evidence and Implications for India

Narayana, M.R. — Tue, 08 Sep 2009 08:31:56 PDT

Using the Pareto distribution, this paper estimates the size distribution of metropolitan areas in India from 1981 through 2025. Empirical results offer evidence for dispersion of metropolitan population size, notwithstanding the growing concentration of urban population in metropolitan areas as compared to non-metropolitan areas. The economic importance of metropolitan size dispersion is analysed with respect to levels of employment, consumption expenditure and poverty and for select years since 1987–88. The implications of these results are explored for national urban development policy, as they are related to the competitiveness of smaller metropolitan areas to attract national and global business and investments.

Dynamics of Agricultural Development and Rural Poverty in Indian States

Ghosh, M. — Tue, 08 Sep 2009 08:31:56 PDT

This paper examines the inclusiveness of growth in agriculture and the dynamics of change and inter-state variation in rural poverty in India between 1972–73 and 2004–05. The incidence of and regional variations in rural poverty increased significantly, immediately after economic reforms. Variations in rural poverty have been associated with variations in consumption, inequality, agricultural performance and agrarian structure. The benefits of growth in agriculture seem to have trickled down to the rural poor, but the strength of the trickle-down process and the inclusiveness of growth have been limited and are weakening with time. The regressive features of the agrarian structure and the process of marginalisation and proletarianisation of the peasantry seem to have aggravated rural poverty. The results offer important policy implications for the alleviation of rural poverty.

Foreign Firms and Inter-industry Spillovers in Indian Manufacturing: Evidence from 1989 to 2004

Iyer, G. C. — Tue, 08 Sep 2009 08:31:56 PDT

Foreign direct investment (FDI) has benefits both for the host country and the home country. Multinational corporations or foreign firms are supposed to have frontier technology, which are expected to have spillover effects on local firms when they enter a country. Most studies on Indian industry have focused on intra-industry spillovers and have found some evidence of this. The present study's focus is on inter-industry spillovers (for example, from auto-components to assemblers) on which there are few studies, as the literature unambiguously expects inter-industry spillovers to occur. This paper establishes the presence of spillover effects on domestic firms due to horizontal, backward and forward linkages with foreign firms in the Indian manufacturing industry, which affect domestic firms’ productivity. It also establishes that inter-industry spillovers are negative for some industries.

Private Household Transfers and Poverty Alleviation in Rural India: 1998-99

Lal, D., Sharma, A. — Thu, 25 Jun 2009 04:25:37 PDT

A transfer function for private household transfers in rural India is estimated from the National Council of Applied Economic Research's (NCAER's) ARIS-REDS survey for 1998–99. It is found that till a threshold, income (close to the rural poverty line) transfers are altruistically motivated. There is partial ‘crowding out’ of private transfers by public transfers of Rs 0.56 for every rupee of public transfer. About 10 per cent of rural households participate in the rural private ‘transfer economy’, with transfers going to relatively well-educated, pensionless, aged destitutes who have a number of adults to support.

A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka

Jayasooriya, S.P. — Thu, 25 Jun 2009 04:25:37 PDT

This paper explores the dynamic equilibrium between minimum wages and inflation in Sri Lanka. From a theoretical perspective, while minimum wages tend to be sluggish in the economy, changes in price levels are compulsive. This empirical investigation which includes causality, co-integration and error correction models, reveals the existence of a long-term equilibrium relationship between minimum wages and inflation, and a one-way causality between the two variables. An interruption in equilibrium leads not only to a significant adjustment process but also to structural changes in long-run equilibrium. Finally, macroeconomic stability is established through the impulse response function in a situation, where shocks are applied to both minimum wages and inflation. The study recommends policy-making entities contemplate a minimum wage adjustment process in a climate of unstable inflation.

Structural Shifts in the Current Account of India's Balance of Payments

Singh, B. — Thu, 25 Jun 2009 04:25:37 PDT

This paper explores structural shifts in the current account of India's balance of payments alongside the micro foundations from 1950 to 2008. Key structural features that emerge are the disappearance of twin deficits and the reversal of a unidirectional causality in the post-reform period from foreign savings to domestic investment. Current account deficit, although sustainable, is marked by a significant structural component after adjusting for remittances. Merchandise trade is characterised by higher quantity growth rather than price growth, a transition from low-technology to medium-technology exports, a shift in trade towards developing countries. Service exports exhibit reduced volatility and diversification from traditional to business and technology-related services. This period also witnessed a spatial shift in the sources of workers’ remittances from oil-producing to developed countries, with the overall behaviour of remittances influenced by the income effect in the host country, exchange rate movement and interest rate arbitrage.

Biofuels--Breaking the Myth of 'Indestructible Energy'?

Shunmugam, V. — Thu, 25 Jun 2009 04:25:37 PDT

With the pervasive use of oil-based energy in the global economy, even the slightest movement in the price of crude oil reverberates across all economies and businesses. This paper attempts to gauge the importance of the thrust on renewable energy against the backdrop of the perils of untamed energy (mainly fossil fuel) use. It looks at the strengths and weaknesses of various sources of renewable energy, with an emphasis on biofuels. Given their renewable nature and environmental friendliness, do biofuels have the potential to become the energy of the future or will it remain another form of energy? The paper concludes that socio-political repercussions from the widespread use of biofuels would warrant that the sector be driven by sound policy initiatives.

BOOK REVIEW

Thu, 25 Jun 2009 04:25:37 PDT

Is There a Threshold Level of Inflation for Bangladesh?

Hayat, Z. U. C., Kalirajan, K. P. — Tue, 19 May 2009 09:31:45 PDT

Given the argument that an excessively low inflation threshold in developed countries may hurt economic growth, the objective of this study is to examine whether a developing country's perspective is different. The empirical analysis is done using the annual data from Bangladesh for the period 1976 to 2005. A specific question that is addressed in this paper is what the threshold inflation rate is for Bangladesh. The findings clearly suggest that the increase in inflation from any level has negative effects on economic growth, and substantial gains can be obtained by focusing monetary policy towards maintaining price stability.

A Rolling Regression Analysis of International Transmission of Inflation in Malaysia

Ibrahim, M. H. — Tue, 19 May 2009 09:31:46 PDT

The paper assesses the transmission of foreign inflationary disturbances for Malaysia. Using quarterly data from 1971 to 2003, we form a four–variable vector error correction model (VECM) consisting of domestic prices, US prices, Ringgit exchange rate and relative interest rate. Apart from the full–sample analysis, recursive and rolling regressions are adopted to examine potential changes in inflation transmission from the US to Malaysia. As a basis for inferences, we rely on the speed of adjustments estimates as well as the sig–nificance of lagged first–differenced terms of the VECM. The results unequivocally suggest significant spillover of US inflationary disturbances to Malaysia in the short run regardless of the estimation periods. However, the speed of adjustment estimates for domestic prices tend to decline or turn insignificant when recent observations are added. Our findings demonstrate that inflation transmission across nations ought not to be cast in the light of exchange rate regimes alone. Indeed, the degree of capital mobility may have played a more dominant role.

Challenges of a Sustainable Housing Finance System in India

Mahadeva, M. — Tue, 19 May 2009 09:31:46 PDT

The Indian housing finance market (HFM) has failed to promote housing development across the country. In its desire to stabilise itself mainly in the major urban areas, the HFM has largely neglected issues of the housing sector in rural and less–developed regions. Further, the financial housing needs of a large segment of the population are not being addressed. They continue to rely on informal sources for housing finance. This paper describes and analyses the major issues confronting India's HFM. It offers policy options to make the HFM more effective in addressing the hitherto neglected segment, the rural and less–developed region.

Asymmetry in the Science and Technology Base and Its Bearing on Regional Development

Shukla, R., Satish, N.G., Rao, P. R. — Tue, 19 May 2009 09:31:46 PDT

It was envisaged in the Science Policy Resolution (SPR), which Nehru got the Parliament to approve in 1958, that the country would participate fully in the march of science. However, as we celebrate the golden jubilee of the pioneering SPR, it is discomforting to note that just as there are economic disparities, the science and technology (S&T) scenario also presents glaring regional imbalances in the country. This paper examines asymmetries in S&T development across the states in terms of category–wise spread of research institutions. The paper further studies what bearing S&T institutional disparities have, if any, on regional economic development with the help of an extensive dataset developed for the purpose. The results of the study suggest a notable correlation between S&T development and the economic and welfare status of different regions of the country.