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Proceedings of 3rd IIFT Conference on
Empirical Issues in International
Trade and Finance
January 10th – 11th, 2013
Held at Science City, Kolkata
Editors
Triptendu Prakash Ghosh
Bibek Roy Chaudhuri
Indian Institute of Foreign Trade
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Contents Preface ................................................................................................................................................... 3
Section A: Trade and Development ...................................................................................................... 9
Section B: Application of Gravity Model ............................................................................................ 47
Section C: Theoretical Issues in Trade and Finance .......................................................................... 50
Section D: Firm Level Analysis of Trade ............................................................................................ 55
Section E: Performance of Banks and Global Financial Crisis ........................................................... 83
Section F: India’s Trade Performance ................................................................................................. 89
Section G: Foreign Investment ........................................................................................................... 93
Section H: Stock Market Returns in the International Context ........................................................ 95
Section I: Comparative Analysis between India and China ............................................................... 99
Section J: Trade Policy....................................................................................................................... 105
Section K: Impact of Microfinance on the Poor ............................................................................... 107
Section L: Testing Trade Theories .................................................................................................... 120
Section M: International Spillovers of Volatility, Vulnerability & FDI ........................................... 130
Section N: Foreign Direct Investment .............................................................................................. 139
Section O: Shorter Abstracts ............................................................................................................ 147
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Preface
There has been a recent spurt on papers related to international trade and finance. The
renewed interest of researchers in this field is a direct consequence of the rapid process of
globalization of the world. While Globalization has increased the ease with which goods
money and people can travel across borders, it has also increased the complications of
such transactions as they have to account for inter country differences. The objective of
this conference is to bring scholars working in this field together so that they can
exchange notes and be fully aware of each other’s work.
We had received a large number of submissions for the conference. Out of them only 63
could be accommodated. Papers will be presented in five parallel sessions each of two
hours duration. Four papers will be presented in each session. A discussant has been
assigned to each paper. It is thus expected that the presenter will have about 20 minutes
to present the paper. The observations of the discussant and other participants will have
to be accommodated in 10 minutes. We sincerely hope that the authors and their
discussants will keep up the discussion even after the presentation formalities are over
and during the tea and lunch breaks.
In organizing this proceedings there are several options open to us. For instance the
papers could have been arranged thematically or sequentially according to their
presentation time. At the end none of these could be followed. This is mainly because we
have not received extended abstract for all the papers and publishing extended abstracts
along with shorter abstracts did not make much of a sense. We have lumped shorter
abstracts together at the end of the proceedings. The main part of the proceedings thus
consists of extended abstract. For the sake of completeness the reference list of original
papers have been appended to these extended abstract. Participants interested in the title
of the particular paper not only get a clear view of the content of the paper through the
extended abstract they will also be able to look at the related literature in the subject.
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One of the main problems of such a large conference is that there are always last minute
changes in the programme. We have thus refrained from printing the programme along
with the proceedings. The programme schedule will be provided separately. The papers
reported here may not exactly match the papers actually presented as there might be last
minute drop outs. For a similar reasons the list of authors, chair persons and discussants
may not match with the ex post circumstances. However, we are confident that the
proceedings provide a clear, if not exact, representation of the papers to be presented in
the conference.
Triptendu Prakash Ghosh and
Bibek Roy Chaudhuri
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List of Track Chairs
• Abhijit Das, Indian Institute of Foreign Trade, New Delhi
• Abhiroop Sarkar, Indian Statistical Institute, Kolkata.
• Ajitava Roy Chowdhury, Jadavpur University, Kolkata
• Alok Ray, Indian Institute of Management, Calcutta
• Amita Shah, Gujarat Institute of Development Research
• Amitava Bose, Indian Institute of Management, Calcutta
• Anup Kumar Sinha, Indian Institute of Management, Calcutta
• Arpita Dhar, Jadavpur University, Kolkata
• C. Veeramani, Indira Gandhi Institute of Development Research, Mumbai
• Julien Chaisse, (Chinese University of Hong Kong)
• Jyotsna Jalan, Centre for Studies in Social Sciences, Kolkata
• Lucian CERNAT, Chief Economist, DG Trade, European Commission
• Manas Ranjan Gupta, Indian Statistical Institute, Kolkata
• Rajat Acharyya, Jadavpur University, Kolkata
• Rakesh Mohan Joshi, Indian Institute of Foreign Trade, New Delhi
• Ravi Shanker, Indian Institute of Foreign Trade, New Delhi
• Sahid Ahmed, Jamia Millia Institute
• Saikat Sinha Roy, Jadavpur University, Kolkata
• Sarmila Banerjee, University of Calcutta, Kolkata
• Saumen Sikdar, Indian Institute of Management, Calcutta
• Suchat Katina, Mekong Institute, Thailand
• Sunitha Raju, Indian Institute of Foreign Trade, New Delhi
• Sushil Khanna, Indian Institute of Management, Calcutta
• Vijaya Katti, Indian Institute of Foreign Trade, New Delhi
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List of Discussants
• Ambar Nath Ghosh, Jadavpur University, Kolkata
• Amit Kundu, Jadavpur University, Kolkata
• Ananda Pal, MBM, University of Calcutta
• Anil Kanungo, Indian Institute of Foreign Trade, New Delhi
• Anindita Sen, Burdwan University
• Anita Gupta Chattopadhyay, Muralidhar College for Girls, Kolkata
• Annesa Bandopadhyay, St. Xavier’s College, Kolkata
• Archana Srivastava, IIT Kanpur
• Arijita Dutta, University of Calcutta
• Arjun Kumar Singh, ICSSR&JNU
• Avijit Mondal, Moulana Azad College, Kolkata
• Bibek Ray Chaudhuri, Indian Institute of Foreign Trade, Kolkata
• Bidisha Chakraborty, Jadavpur University, Kolkata
• Bipradas Rit, Jogesh Chandra Chaudhuri College, Kolkata
• Byasdeb Dasgupta, Kalyani University
• Christopher Balding, HSBC Business School, Peking.
• Debashis Chakraborty, Indian Institute of Foreign Trade, New Delhi
• Diganta Mukherjee, ISI, Kolkata
• Gagari Chakraborty, Presidency University
• Jayanta Kumar Seal, Indian Institute of Foreign Trade, Kolkata
• Jayasri Acharyya, Lady Brabourne College, Kolkata
• Jaydeep Mukherjee, Indian Institute of Foreign Trade, New Delhi
• Joyjit Dhar, Hooghly Mohsin College, Kolkata
• Kausik Gupta, Rabindra Bharati University, Kolkata
• Kausik Lahiri, Surendranath College, Kolkata
• Kumarjit Mandal, University of Calcutta.
• Malabika Roy, Jadavpur University, Kolkata
• Michael Telda, IFPRI
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• Mousumi Datta, Presidency University, Kolkata
• Nilanjan Sen, St. Xavier’s College, Kolkata
• P. K. Das, Indian Institute of Foreign Trade, Kolkata
• Partha Paul, Indian Institute of Management, Calcutta
• Partha Pratim Ghosh, St. Xavier’s College, Kolkata
• Polami Lahiri, Institute of Development Studies, Kolkata
• Pradyut Kumar Pyne, Indian Institute of Foreign Trade, Kolkata
• Pralok Gupta, Indian Institute of Foreign Trade, New Delhi
• Pranab Das, Centre for Studies in Social Sciences, Kolkata
• Priyanka Chakraborty, Indian Institute of Foreign Trade, Kolkata.
• Rabindranath Mukhopadhyaya, University of Calcutta
• Rahul Sen, AUT, Newzeland
• Ranjan Nag, St. Xavier’s College, Kolkata
• Riddhi Chatterjee, Seth Anandaram Jaipuria College, Kolkata
• Rilina Basu (Banerjee), St. Xavier’s College, Kolkata
• Saibal Kar, Centre for Studies in Social Science
• Samarjit Das, Indian Statistical Instutute, Kolkata
• Samrat Roy, St. Xavier’s College, Kolkata
• Sandeep Kaur, Punjab University
• Sanmitra Ghosh, Jadavpur University, Kolkata
• Sayantanbandhu Majumder, University of Calcutta, Kolkata
• Senjuti Jha, Institute of Development Studies, Kolkata
• Shirshendu Mukherjee, St. Paul’s Cathedral Mission College, Kolkata
• Subhanil Chowdhury, Institute of Development Studies, Kolkata
• Subhasree Bhattacharya, Dept. of Business Management, University of Calcutta
• Subrata Majumder, St. Xavier’s College, Kolkata
• Sudeshna Chattopadhyay, Bidhannagar College, Kolkata
• Sukanta Bhattacharyya, University of Calcutta.
• Suparna Basu, Ashutosh College, Kolkata
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• Susmita Chatterjee, Globsyn Business School, Kolkata.
• Swapnendu Bannerjee, Jadavpur University, Kolkata
• Swati Ghosh, Rabindra Bharati University, Kolkata
• T P Ghosh, Indian Institute of Foreign Trade, Kolkata
• Tanmoyee Bannerjee, Jadavpur University, Kolkata
• Usri Sengupta, Jadavpur University, Kolkata
• Vivekananda Mukherjee, Jadavpur University, Kolkata
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Section A: Trade and Development
Globalization, Inequality and Corruption
Harald Badinger* and Elisabeth Nindl@
Vienna University of Economics and Business, Department of Economics,
Althanstrasse 39-45, A-1090, Vienna, Austria * E-mail: [email protected] @ E-mail: [email protected]
Both the determinants of corruption (rent-seeking behavior) and its welfare
consequences have been subject to extensive theoretical and empirical research (e.g.,
Krueger, 1974; Murphy et al., 1993; Mauro, 1995; Bliss and Di Tella, 1997; Das and
DiRienzo, 2009; Bhattacharyya and Hodler, 2010), leading to a large body of literature on
the nexus between globalization, institutional quality, and corruption. It is widely agreed
that natural resource rents increase corruption, whereas ‘detection technologies’ (high
level of economic development, good institutions, competitive elections, political rights
and press freedom, education) decrease corruption.
Previous studies concentrated on the role of globalization as a determinant of
institutional quality and corruption. Ades and Di Tella (1999) emphasize the pro-
competitive effect of trade and find that imports and proximity to world’s major exporters
significantly reduce corruption, whereas fuel and mineral exports increase corruption.
Emerson (2006) shows that corruption significantly decreases the number of firms and
thus competition within a country. Corruption can be interpreted as a more general
indicator of institutional quality, reflecting a country’s underlying legal, economic,
cultural and political institutions (Svensson, 2005).
The analysis of the determinants of corruption is thus closely related to the literature on
democracy and institutional quality. This nexus allows us to apply the theoretical
argument by Acemoglu and Robinson (2005) relating institutional quality, globalization
and income inequality. They show that emergence and survival of democracy depend on
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the distribution of income (factor prices). In a Heckscher-Ohlin framework with labor
abundant developing countries as a representative case, opening up to trade leads to an
increase in the wage-rental ratio. This reduces the income gap between factors and
thereby the risk of political conflict, since voters of lower income groups have less
demand for highly redistributive policies, making democracy less threatening to upper
income groups and the elite. A similar argument applies to financial openness, which
increases the elasticity of capital supply, leading to an inflow of capital. If the developing
country is land abundant, trade increases the income of land owners (typically a small
elite), inequality increases and democracy becomes less likely. Altogether, the effect of
globalization on democracy (and corruption) remains an empirical question.
López-Córdova and Meissner (2008), analyzing the determinants of democracy, provide
support for the close relation between international trade, natural resources and
institutional outcomes based on a sample spanning from 1870-1919, 1917-1939 and 1960-
2000. Using the same data set, empirical evidence on the positive effect of financial
integration on democracy is given by Eichengreen and Leblang (2008). However, none of
these studies have considered trade and financial openness simultaneously or explicitly
taken into account the role of inequality as a transmission channel. Against this
background, this paper makes following contributions: First, we use an encompassing
model that relates corruption to globalization in terms of both trade and financial
openness, paying particular attention to the potential endogeneity of our globalization
measures. Second, we explicitly consider the role of inequality as a determinant of
corruption and its interplay with globalization, allowing us to provide some evidence on
the transmission channels through which globalization affects corruption. Third, we use a
panel of 102 countries over the period 1995-2005, allowing us to increase the number of
observations, exploit time-variation in the data, and to control for region-specific effects.
In line with recent studies we find that a higher level of development, more education
and political rights, and a lack of natural resource rents reduce corruption. Globalization
(trade and financial openness) appears to play an important role in diminishing
corruption, particularly in developing countries. Accounting for the effect of inequality,
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which itself increases corruption, the effect of globalization is halved, which provides
empirical support for the theoretical argument by Acemoglu and Robinson (2005) that
globalization affects democracy (and thereby, institutional quality and corruption)
through its negative effect on inequality.
Keywords: Globalization, inequality, corruption
JEL Codes: F1, F3, F4, O1
References
Ades, A. and Di Tella, R. (1999). ‘Rents, competition and corruption’, The American Economic Review 89(4),
982–993.
Aizenman, J. and Noy, I. (2009), ‘Endogenous financial and trade openness’, Review of Development
Economics, 13(2), 175–189.
Badinger, H. (2009), ‘Globalization, the output-inflation tradeoff and inflation’, European Economic Review
53, 888–907.
Baier, S. L. and Bergstrand, J. H. (2007). ‘Do free trade agreements actually increase members’ international
trade?’, Journal of International Economics, 71(1), 72–95.
Barbieri, K. and Keshk, O. (2012). ‘Correlates of war project trade data set codebook, version 3.0’,
http://correlatesofwar.org.
Bhattacharyya, S. and Hodler, R. (2010). ‘Natural resources, democracy and corruption’, European Economic
Review, (54), 608–621.
Bliss, C. and Di Tella, R. (1997). ‘Does competition kill corruption’, The Journal of Political Economy, 105(5),
1001–1023.
Das, J. and DiRienzo, C. (2009). ‘The nonlinear impact of globalization on corruption’, The International
Journal of Business and Finance Research, 3(2): 33–46.
Eichengreen, B. and Leblang, D. (2008). ‘Democracy and globalization’, Economics & Politics, 20(3): 289–
334.
Emerson, P. M. (2006). ‘Corruption, competition and democracy’, Journal of Development Economics, 81:
193–212.
Frankel, J. A. and Romer, D. (1999). ‘Does trade cause growth?’, The American Economic Review, 89(3): 379–
399.
Goldberg, P. K. and Pavcnik, N. (2007). ‘Distributional effects of globalization in developing countries’,
NBER Working Paper Series, (12885).
Guerin, S. S. (2006). ‘The role of geography in financial and economic integration: a comparative analysis of
foreign direct investment, trade and portfolio investment flows’, World Economy, 29(2), 189–209.
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64(3): 291–303.
Lalountas, D. A., Manolas, G. A. and Vavouras, I. C. (2011). ‘Corruption, globalization and development:
How are these three phenomena related?’, Journal of Policy Modeling, 33, 636–648.
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Lane, P. R. and Milesi-Ferretti, G. M. (2007). ‘The external wealth of nations mark ii: Revised and extended
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economic growth’, IMF Working Paper, 99/85.
Levchenko, A. A. (2011). ‘International trade and institutional change’, NBER Working Paper Series, (17675).
López-Córdova, J. E. and Meissner, C. M. (2008). ‘The impact of international trade on democracy: A long-
run perspective’, World Politics, 60(4), 539–575.
Mauro, P. (1995). ‘Corruption and growth’, The Quarterly Journal of Economics, 110(3), 681–712.
Murphy, K. M., Shleifer, A. and Vishny, R. W. (1993). ‘Why is rent-seeking so costly to growth?’, The
American Economic Review, 83(2), 409–414.
Norris, P. (2009). Democracy time series data set release 3.0, Technical report, John F. Kennedy School of
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Solt, F. (2012). ‘Standardizing the world income inequality database’. Social Science Quarterly, forthcoming.
Stock, J. H. and Yogo, M. (2005). Testing for weak instruments in linear IV regressions, in D. W. K. Andrews
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Svensson, J. (2005). ‘Eight questions about corruption’, Journal of Economic Perspectives, 19(3), 19.42.
13
Foreign Direct Investment, Exports and Economic Activity of India:
A Long term Empirical Analysis
Dr. R. Jayaraj* and Dr. Hiranmoy Roy@
Dept. of Economics and International Business, College of Management and Economics,
University of Petroleum & Energy Studies * E-mail: @ Email:
Over the past few decades, the emerging market countries especially India have become
the most favoured destinations for FDI and investor confidence in these countries has
soared and exports have grown much faster than GDP. India’s economic reforms of 1991
had generated strong attention in foreign investors and made India as one of the favourite
destinations for world FDI flows. In different studies, several factors appear to have
contributed to growth phenomenon including FDI. However, as of yet there have not
been many attempt to investigate the long run impact of FDI, real export on real
economic activity (real GDP) for India.
This paper aims to analyse long run relationship among FDI, exports and economic
activity in India. And this empirical study has applied VAR technique to examine the long
run effect of FDI inflow and real exports on real economic activity (Real GDP), the impact
of real GDP growth as the common factor that drives growth on other variables such as
exports and FDI and to assess the effect of foreign direct investment (FDI) in a host
country’s export performance (UNCTAD, 2002), since exports have been for a long time
viewed as FDI promotes exports of host countries by augmenting domestic capital for
exports, transfer of technology, higher productivity and new products for exports and
facilitating access to new and large foreign markets (Chakraborty and Basu, 1997). It is
proved widely that exports has positive impact on real GDP but not FDI. Conversely,
cheaper price of exported goods due to the low input cost and large number of consumers
in domestic market attract foreign investors in these countries. This study was done using
annual data for 40 observations from 1970 to 2009. Several econometric tools are used in
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this study such as Unit Root tests, Lag length criteria, Co-integration tests, Granger
Causality and VAR (Vector Auto-regression).
The findings of the study reveal that there is a long-run relationship among GDP, exports
and FDI. But as per the results of VAR model, FDI did not have a significant impact on
GDP of India but, interestingly exports had a positive significant influence on GDP. It is
found that the GDP positively influenced by its own activity and exports. This study
suggests the policy makers to adopt stable and sensible measures to encourage inward
FDI especially in retail because it may have negative impact also. Labour reform
measures, improving infrastructure, non-discriminatory regulatory environment and
incentive based policies that are suggested to attract FDI. Consequently, these policies
and strategies that will lead to have better infrastructure, human resources, good
governance, business environment and overall economic growth.
Keywords: FDI, GDP, Exports, Cointegration, VAR, India
JEL Classification Code: F10, F14, F21, F43
References
Balasubramanyam, V.N., M. Salisu, and D. Sapsford. (1996). ‘FDI and Growth in EP and IS countries’, The
Economic Journal, 106, 92-105.
Blalock, Garrick, and Paul J. Gertler. (2008), ‘Welfare Gains from Foreign Direct Investment through
Technology Transfer to Local Supplier’, Journal of International Economics, 74(2): 402–421.
Blomström, M., and A. Kokko (1998). ‘Multinational Corporations and Spillovers’, Journal of Economic
Surveys, 12: 247-277.
Borenstein, Eduardo, J. D. Gregorio, and J. W. Lee (1998). ‘How does Foreign Direct Investment Affect
Economic growth?’, Journal of International Economics, 45, 115-135.
Charles A. and Y. C. Wong, (2002), ‘Trends in Global and Regional FDI Flows’, (Manuscript, International
Monetary Fund) and IMF Website (wwww.imf.org).
Choe, J. I. (2003). ‘Do Foreign Direct Investment and Gross Domestic Investment Promote Economic
Growth?’, Review of Development Economics, 7(1): 44 – 57.
De Mello (1999). ‘Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data’,
Oxford Economic Papers, 51, 133-51.
Department of Industrial Policy & Promotion ministry of Commerce and Industry, Government of India,
2006
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Frimpong, J. M., Oteng-Abayie, E. F. (2006). ‘Bivariate Causality Analysis between FDI Inflows and
Economic Growth in Ghana’, Proceedings, 3rd African Finance Journal Conference, ‘Research in
Development Finance for Africa’, 12th – 13th July, 2006, Ghana.
Girma and Wakelin (2001). ‘Regional Underdevelopment: Is FDI the Solution? A Semi-parametric analysis’,
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Görg, Holger & Greenaway, David (2003). ‘Much Ado About Nothing? Do Domestic Firms Really Benefit
from Foreign Direct Investment?’, IZA Discussion Papers 944, Institute for the Study of Labor (IZA).
Hsiao, F. S. T. and Hsiao, M. C. W. (2006). ‘FDI, export and GDP in East and Southeast Asia: Panel data
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Javorcik, Beata S. & Saggi, Kamal & Spatareanu, Mariana, (2004). ‘Does it matter where you come from?
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Larimo J. and Tahir R. (2004). ‘Understanding of the location strategies of the European firms in Asian
countries’, Journal of American Academy of Business, Cambridge 5:1-2, 102-109.
Liu, X. and C. Wang (2002). ‘Does foreign direct investment facilitate technological progress?’ Evidence
from Chinese industries’, Research Policy, 32,945-953
Ozturk, I. (2007). ‘Foreign Direct Investment – Growht Nexus: A Review of The Recent Literature’,
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Mastering a Two-edged Sword: Lessons from the Practice and
WTO Litigation on Safeguards
Julien Chaissea, Debashis Chakrabortyb, and Animesh Kumarc
a Chinese University of Hong Kong b Indian Institute of Foreign Trade
c
The objective of the WTO agreement is to promote international trade among member
countries in a mutually beneficial manner. However, the agreement also allows members
to restrict import under certain special circumstances, e.g., in case of a sudden surge in
imports, adoption of unfair trade practices by a trading partner etc. In that context, trade
remedial measures such as Anti-Dumping Agreement (ADA), Agreement on Subsidies
and Countervailing Measures (ASCM) and the Agreement on Safeguards (ASG) play
extremely crucial roles in ensuring free and fair trade. These provisions may be politically
necessary in order to undertake liberalisation in the first place but can also lead to
protectionist policies. This two-edged sword constantly runs the risk of being abused, as
producers seek excessive relief by taking recourse to such measures. While misuse of ADA
or ASCM has often received the focus of the scholars, ASG is a relatively less researched
area. Over the period, application of safeguard (SG) measures has evolved as a vital
component of the trading policy space of WTO members, especially the developing
countries. It is observed that during March 1995- April 2012, 234 instances of safeguard
initiations have been reported, while 118 final measures were imposed over this period.
While the number is lesser vis-a-vis the comparable AD and SCM cases, it is often argued
that SG actions can also be considerably trade distorting if applied in an unjustifiable
manner. While the literature on the ASG is quite rich, the analysis on the related
disputes, especially in terms of misuse of the ASG provisions is a relatively less researched
area. This paper intends to explore which of the existing ASG provisions are vulnerable to
potential misuse. The present study contributes to the literature by analyzing the SG-
related complaints lodged at the WTO dispute settlement body over the years. Since the
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beginning of 2012, more than 20 measures have been notified to the WTO demonstrating
the acuity of the problem. The paper notes that the problems associated with the SG
mechanism may lead to a new wave of protectionism in coming days demonstrating how
much it is difficult to control the use of a two-edged sword such as SG. The current
analysis identifies the areas for further reform in the ASG in light of the results noted
from the analysis of the SG-disputes. It concludes that the international trade law needs
to strike a careful balance and define conditions for taking recourse to SG measures in
sufficiently precise terms.
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LEE Y.-S., Destabilization of the Discipline on Safeguards? Inherent Problems with the Continuing
Application of Article XIX after the Settlement of the Agreement on Safeguards, JWT 2001(6), 1235.
Lissel, Elenor (2011). ‘Regional Safeguard Measures: An Incentive to sign Regional Trade Agreements
without taking into consideration the special needs for Developing Countries’, dissertation entitled
‘Developing countries and emergency safeguard measures in world trade law’, Lund University.
Lodha, Ritu (2005). ‘US Steel Safeguard Dispute: Forged Protection brought to Light’, CUTS Trade Law Brief
No. 3, Jaipur.
Palmeter D., Safeguard, Anti-dumping, and Countervailing Duty Disputes in the Transatlantic Partnership:
How to Control ‘Contingency Protection’ More Effectively, in: PETERSMANN E.-U. / POLLACK M.A.
(eds.), Transatlantic Economic Disputes: The EU, the US, and the WTO, 2003, 141.
Raychaudhuri, Tilottama (2010). ‘The Unforeseen Developments Clause in Safeguards under the WTO:
Confusions in Compliance’, Estey Centre Journal of International Law and Trade Policy, 11(1): 302-
320.
Read, R. (2005). ‘The Political Economy of Trade Protection: The Determinants and Welfare Impact of the
2002 US Emergency Steel Safeguard Measures’, Lancaster University Management School Working
Paper No. 13, Lancaster.
Wolfe, Robert (2009). ‘The special safeguard fiasco in the WTO: The perils of inadequate analysis and
negotiation’, Grouped’EconomieMondiale Working Paper, Paris.
World Trade Organisation (2011). ‘Report (2011) of the Committee on Safeguards to the Council for Trade in
Goods’, Document No.G/L/972.
World Trade Organisation (2012). ‘Minutes of the Regular Meeting held on 27 April 2012’, Committee on
Safeguards, Document No. G/SG/M/41.
19
India’s Healthcare Sector under GATS: Inquiry into Backward and
Forward Linkages
Kaushik Lahiri* and Sarmila Banerjee@
* Surendra Nath College, Kolkata
E-mail: [email protected] @ University of Calcutta
There is no denying of the fact that healthcare sector of India has evolved over the years
and has attained new heights under the influence of globalization and GATS (General
Agreement on Trade in Services). With the opening up of service sector trade under the
purview of GATS subsequent to the WTO, India has extended trade to the health services
sector to find an advantageous position in terms of global connectivity with comparative
advantage in areas of IT-enabled services as well as health related services. With the
advancement in science and technology, revolutionary inroad of information and
communication technology based services, availability of skilled technicians and medical
and paramedical workforce along with enhanced support services through telemedicine
and mobile health services has elevated the Indian healthcare system to global standards.
The demand side witnessed growth with the rise of aware and relatively affluent class
resulting in a change in composition of demand for healthcare services which is expected
to have impact on the organization of the sector from provider’s perspective. The focus is
on the changing profile of the healthcare industry in India with the GATS negotiation
bringing into further changes in the composition of both supply and demand pattern by
allowing different forms of trade which are directly and indirectly linked with health
services.
Coupled with technological advances and global connectivity, domestic policies seem to
encourage increased private sector participation in this sector. India witnessed the
growth of large corporate healthcare and allied service providers in the recent past. Thus,
both backward and forward linkages of Health and medical services have undergone
significant change. While the forward linkage is expected to create more demand for
20
better healthcare services in the domestic market from the affording class and induce
growth of the health insurance sector, the backward linkage effects would create
possibilities of growth in clinical trials, pharmaceutical industry, telemedicine, tele-
radiology and other health related outsourcing services.
While the health sector in India was being primarily developed for the deserving
population as a source of merit good, the recent gain in efficiency in this sector has come
mostly through the channels of market mode meant for the affording population.
Progress towards more technology oriented public services would create internal drain of
resources, both financial and intellectual, within the sector, with possibility of leakage
from deserving to the affording population and changes in organizational set up of
providers’ profile. Moreover, with expansion of the healthcare market it is also leading
towards gradual conversion of a merit good [defined out of equity consideration] into a
market good [defined out of efficiency consideration] which calls for a more
comprehensive regulatory vigilance.
Since health care differs from other commodities in aspects of saving life and boosting
quality of life, it is a complex system that also involves information asymmetries that
generally affects the consumers (patients). Under this situation, influx of technology has
also created more opportunities for unethical practices resulted in creation of induced
demand in the healthcare market. Unreasonable use of equipments, use or introduction
of new medical technologies without assessment of their safety and efficacy are in wide
practice as found in literature and reports. In general, the large volume of out-of-pocket
expenses incurred by the patient parties in the private care market has increased the
opportunity of the providers (agents) to extort profit by recommending services beyond
the optimum level. Hence need for greater vigilance on the part of the regulator has
become the call of the day.
Key words: GATS, WTO, Input-Output Models, Health – General, Analysis of Healthcare
Markets
JEL Classification Code: F13, C67, I10, I11
21
References
Aron, R. (2009). ‘Globalized Healthcare: Driven by Technology’, Vol. 2, No. 1, Fall / Winter 2009, John
Hopkins / Carey Business School, available at
www.carey.jhu.edu/one/2009/fall/globalized-health-care-driven-by-technology accessed on
03.08.2012
Banerjee S. & Nag N. (1998). ‘India’s Health Sector: Regional Disparities in Provisioning, Utilization and
Achievement, in Regional Dimensions of the Indian Economy’, edited by Chatterjee, B and Sur, H,
Allied Publishers, India (1998).
Chanda R. (2010). ‘Constraints to Foreign Direct Investment in Indian Hospitals’, Journal of International
Commerce, Economics and Policy, 1 (2010), 121- 143, World Scientific Publishing Company
Chenery, B. and Watanabe, T. (1958). ‘International Comparisons of the Structure of Production’,
Econometrica, 26(4), 487-521
Deloitte (2009). ‘Survey of Health Care Consumers: Key Findings, Strategic Implications’, Deloitte Center for
Health Solutions, available at
http://www.deloitte.com/dtt/cda/doc/content/us_chs_2009SurveyHealthConsumers_March2009.p
df , accessed on 12.01.2012
Dholakia R H, Agarwalla A, Bazaz A B & Agarwal P (2009). ‘Trends in Technical Progress in India – An
Analysis of Input-Output Tables from 1968 to 2003’, W.P. No. 2009-11-02, Indian Institute of
Management, Ahmedabad, India available at
http://iimahd.iimahd.ernet.in/assets/snippets/workingpaperpdf/2009-11-02Dholakia.pdf accessed
on 02.07.2012
Gautam V ( 2008). ‘Healthcare Tourism – Opportunities for India’, Export-Import Bank of India, Quest
Publications, Mumbai, India
High Level Expert Group Report on Universal Health Coverage for India (2011), submitted to the Planning
Commission of India available at
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IBEF, Healthcare, various years, available at www.ibef.org accessed on 30.01.2012
IBEF Healthcare, 2009, available at
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IPS (2006), International Passenger Survey 2003, Final Report, Incredible India, Ministry of Tourism,
Government of India
ISRO (Indian Space Research Organisation), Telemedicine: Healing Touch through Space – Enabling
Speciality Healthcare to the Rural and Remote Population of India, available at
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http://www.isro.org/scripts/telemedicine.aspx accessed on 26.04.2012 KFF (2007), How changes in medical technology affect health care cost, The Henry J. Kaiser Family
Foundation, available at
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of Economics, 1(1)
Lahiri, K. (2012b). ‘Globalization and Trade in Services: The Changing Profile of India’s Healthcare Sector,
accepted for presentation in the Third National Seminar on Annual Survey of Industries, CSO,
Government of India
22
Mathur, A. (2004). ‘Design of Healthcare Trade: Role of Information Technology’, Economics and Political
Weekly, 39(20), 2036-2047
Mudur G (2004), ‘Inadequate regulations undermine India’s healthcare’, BMJ, January 17, 2004, 328
(7432):124 available at
www.ncbi.nlm.nih.gov/pmc/articles/PMC314535/ Ministry of Health and Family Welfare, GOI (2011), Annual Report to the People on Health, December 2011,
New Delhi
PWC ( Pricewaterhouse Coopers) (2007). ‘Healthcare in India: Emerging Market Report, available at http://www.pwc.com/en_GX/gx/healthcare/pdf/emergingmarket- report-hc-in-india.pdf accessed on 14.12.2012
Smith, R. D. (2004). ‘Foreign Direct Investment and Trade in Health Services: Review of Literature’, Social Science & Medicine, 59 (2004) 2313–2323, Elsevier, available at www.elsevier.com/locate/socscimed
Turner, L. (2007). ‘First World Health Care at Third World Prices: Globalization, Bioethics and Medical Tourism’, Bioethics, 2, 303-325, London School of Economics and Political Science, England
Smith R D, Chanda R, Tancharoensathien V (2009), ‘Trade in Health-related Services’, Lancet, 373( 9663),
593 – 601, 14 Feb, 2009, www.lancet.com WHO (2010a), Global Status Report on Noncommunicable Diseases, ISBN 978 92 4 068645 8 (PDF), Italy,
available at http://www.who.int/nmh/publications/ncd_report_full_en.pdf accessed on 12.11.2011
WHO (2010b), World Health Statistics 2010, available at
http://www.who.int/whosis/whostat/EN_WHS10_Full.pdf, accessed on 10.01.2012 Yip W and Mahal A (2008). ‘The HealthCare Systems of China And India: Performance and Future
Challenges’, HEALTH AFFAIRS, 27, Number, July/August 2008.
23
Doha Sectoral Negotiations: A Study on Healthcare Sector in India
Rajat Verma1, Murali Kallummal2, and Poornima Varma3
1 Guest Lecturer, Gargi College, University of Delhi 2 Associate Professor
Centre for WTO Studies Indian Institute of Foreign Trade, New delhi
3 Assistant professor Department of Policy Studies TERI University, New delhi
During the fourth ministerial meeting of WTO, which has launched in Qatar, Doha in
2001, the members agreed to initiate negotiations on all non-agricultural products.
Sectorla initiatives for elimination or harmonization of tariffs, on products of export
interest to developing countries, constituted one of the major components of these Non-
Agricultural Market Access (NAMA) negotiations. Out of various sectors, healthcare
sector assumes a special significance for India. Therefore, the present study attempts to
analyse the need for negotiations (if any) for India in the sector of healthcare products.
The analysis has been carried out by comparing India’s competitiveness with the other
major players in this sector. They are the US, Singapore, Switzerland and the Separate
Customs Territory of Taiwan, Penghu, Kinmen and Matsu, which have proposed 25
product categories (i.e. 25 products in the HS 4-digit nomenclature) in this sector for free
trade. Therefore, these countries are called as ‘the proponents’ of this sector. The present
study has made use of the calculations of growth rates and Revealed Comparative
Advantage (RCA) to analyse the trade potential for India. Both compound and annual
rate of growths show that India ranks second when compared to the proponents with an
average annual rate of growth of around 20%.
The RCA values have been computed both at aggregated level (comparing average RCA
across countries) and disaggregated level (comparing total number of products whose
RCA>1 across countries). Further to remove the extremities caused by average RCA (as
average are affected by extremes), we calculated median values of RCA >1 for USA, India
and Switzerland. Average RCA showed a declining trend for India and a value close to 1
24
hence implying that India is not very competitive in the proposed healthcare products.
On the contrary, disaggregated analysis of RCA showed a much clearer picture. Here, the
declining trend from 2005-2008 was not monotonic as seen before. Also, the median
values of RCA>1 showed that India gives tough competition to other proponents. This is
because its median value (of 6.657) was largest, for the year 2008, when compared with
the US and Switzerland. Thus showing that the degree of competitiveness for the product
having RCA>1, is highest when compared to the proponents, even though the number of
products for which India enjoys comparative advantage is less.
Thus the analysis based on RCA and the comparison of Indian scenario with respect to
the proponents in this sector revealed that India has comparative advantage and the
potential to emerge as one of the key players in this sector. However, this opportunity has
to be reaped judiciously by the Indian policy makers through an enhanced participation
in the sectoral negotiations. The possibilities to enhance the potential of some sectors -
such as organic chemicals, vehicles used in providing medical care and pharmaceutical
products such as antibiotics and other medicines – needs to be further explored as these
are the sectors that showed highest amounts of RCA in the analysis. Finally, there is a
need for looking into the trade implications of ‘remanufactured goods’, as they fall in the
ambit of the proposed products.
References
ASSOCHAM (2009). Financial Health of Indian Healthcare Industry, ASSOCHAM.
Banerjee, Ronojoy. (2011). ‘US, EU want WTO tariffs for remanufactured goods’, Financial Express. Viewed on 12th September, 2012 at http://financialexpress.com/news/us-eu-want-wto-tariffs-for-remanufactured-goods/732218/0
Batra, Amita and Khan, Zeba. (2005). ‘Revealed Comparative Advantage: An Analysis for India and China’, ICRIER, New Delhi.
Centre for WTO Studies (CWS) (2009). ‘Frequently Asked Questions: Non Agricultural Access’, CWS, New Delhi.
Chanda, R. and A. Mukherjee. (2008). ‘India-EU Relations in Health Services: Issue and Concerns in an India-EU Trade and Investment Agreement’, ICRIER, New Delhi.
Knowledge@Wharton (2012). Comparison Vs Cost: Improving the Prognosis for India’s Healthcare Sector’, Viewed on 9th
October 2010.
25
Hilary, J. (2005). The Doha Deindustrialisation Agenda: Non-Agricultural Market Access Negotiations at the WTO, War on Want, London.
IBEF (2010). Cost Comparison of Medical Services Procedure Cost (US$), Viewed on 14th June 2010,
http://www.ibef.org/artdispview.aspx?in=29&art_id=25821&cat_id=119&page=1 ICTSD (2010). WTO Industrial Goods Talks Inch Forward on NTBs, Viewed on 12th September 2012 at
http://ictsd.org/i/news/bridgesweekly/81253/ India Law Offices n.d., Indian Healthcare Sector, Viewed on 9th
June 2010, at http://www.indialawoffices.com
Lee, Christine. (2007). Medical Tourism, an innovative opportunity for entrepreneurs, Journal of Asia Entrepreneurship and Sustainability.
Mikik, M. & Gilbert, J. (2007). Trade statistic in policymaking, United Nations publication, Thailand. Prasad, C. B., Venkata Krishna n.d., Medical Tourism Industry – Advantage India, Conference on Global
Competition & Competitiveness of Indian Corporate. Pietrasik, T. (2009). Lessons from a frugal innovator, Economic Times. Price Waterhouse Coopers (PWC) (2007). Healthcare in India: Emerging Market Report 2007, PWC Sharma, D. n. d., Just a dose of Healthcare Statistics, Viewed on 9th
June 2010, at http://www.expresshealthcaremgmt.com/20040715/analysis01.shtml
Tharu, R. (2010). Union Budget 2010-11: Impact on Healthcare, Viewed on 10th June 2010, at http://www.medindia.net/news/indiaspecial/Union-Budget-201011-Impact-on-Health-Care-65647-1.htm
Unnikrishnan, C. H. (2010). Healthcare sector upset over neglect in Budget, Viewed on 10th June 2010, at http://www.livemint.com/2010/02/28212247/Healthcare-sector-upset-over-n.html
Utkulu, Utku and Seyme, Dilek (2004). ‘Revealed Comparative Advantage and Competitiveness: Evidence for Turkey vis-à-vis the EU/15, Viewed on 21st December 2010, at http://www.etsg.org/ETSG2004/Papers/Seymen.pdf
WTO (2008). Fourth Revision of Draft Modalities For Non-Agricultural Market Access, TN/MA/W/103/Rev.3
WTO n.d., Doha Development Agenda, Viewed on 10th March, 2010, http://www.wto.org/english/tratop_e/dda_e/dda_e.htm
26
Emigration Policies in India: Implications for Migration to the EU
Pralok Gupta
Assistant Professor Centre for WTO Studies,
Indian Institute of Foreign Trade, New Delhi E-mail: [email protected]
Emigration from India has expanded over the years not only in terms of number of people
emigrated but also the ways people have adopted to emigrate to overseas countries,
including irregular migration. The Indian emigrants (other than the white collar
workers) are fairly vulnerable to exploitation as they are generally ignorant of relevant
laws and procedures followed in India as well as in overseas countries. The high cost of
emigration as well as the policy of localization by the host countries further reduces the
emigrational benefits to such workers. Therefore, emigration policies of Indian
Government become very important not only in deciding the quantum of emigrants but
also the destination countries for such emigration.
As far as emigration destinations for Indians are concerned, the European Union (EU) is
increasingly becoming popular for many of the Indian emigrants in recent times. The UK
is the leading country inviting the largest number of Indian emigrants following by Italy,
Sweden, Germany, Denmark and Netherlands. However, many of the other EU countries
have invited only a small number of Indian emigrants even in recent times. An analysis of
immigrants by their occupation categories reveals that majority of these emigrants are
either skilled workers, seasonal workers or are involved in other remunerative activities.
Whereas for UK, immigration was mostly in highly skilled workers category and other
remunerated activities in 2009, for Italy, apart from other remunerated activities,
‘seasonal workers’ category is also important. ‘Researchers’ is not a very important
category for any of the EU countries.
The observed trend also suggests that the attraction of the EU as emigration destination
for Indians is both for skilled professions or white collar jobs and low skilled/unskilled
27
jobs. However, the inbound policies and programs in the EU countries are designed
mostly to attract skilled professionals from India. Low skilled workers emigrating from
India to the EU seem to be a neglected lot as far as policy orientations in these countries
are concerned.
In this context, the emigration policies and resultant focus of the Indian government
becomes very important to facilitate emigration from India to the EU. However, over the
years, most of the emigration policies in India had focused on migration to the Gulf
countries. The EU countries have not become a focus area for emigration policies so far in
spite of a growing trend of Indians migrating to the EU countries. This policy negligence
has resulted into two outcomes. First, it has reduced the size of the pie that could have
migrated to the EU countries in search of better job opportunities. Second, in the absence
of information and policy guidelines, Indians in the EU countries, especially low skilled
workers, have become more vulnerable to exploitation. A welcome step is that bilateral
social security agreements are being negotiated and signed by the Indian Government
with various EU countries to protect the interest of expatriate workers and the companies
on a reciprocal basis. However, these agreements are more helpful for skilled workers as
their recruitment and employment is properly documented whereas the low skilled
workers still remain vulnerable for exploitation. Therefore, it becomes important that the
Government of India makes EU specific policies as it had made in the case of Gulf
countries and the policies should also take into consideration the welfare and integration
of low skilled workers in these countries.
Key words: Emigration Policies, European Union (EU), White collar workers, Low skilled
workers
JEL Classification Code: F22, F66
References
Davis, K. (1951). ‘Population of India and Pakistan’, Princeton University Press, Princeton, New Jersey’
28
Desai, R. (1963). ‘Indian Immigrants in Britain’, Oxford University Press, London’
Dutta-Sachdeva, Sujata and B. Baruah (2001). ‘Westward Ho: Passport to a Better Life’, The Sunday Times of
India, January 14
Eurostat database http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Jain, P. C. (1982). ‘Indians Abroad: A Current Population Estimate’, Economic and Political Weekly, Feb. 20:
299-304
Madhvan, M. C. (1985). ‘Indian Emigrants: Numbers, Characteristics, and Economic Impact’, Population and
Development Review, 11(3), September, 457-481
Ministry of Overseas Indian Affairs website http://moia.gov.in/, last accessed on November 18, 2011 Ministry of Statistics and Programme Implementation website
http://mospi.nic.in/Mospi_New/site/inner.aspx?status=3&menu_id=54, last accessed on November 18, 2011 Premi, M. K. and Mathur, M. D. (1995). ‘Emigration Dynamics: The Indian Context’, International
Migration. 33(1): 627-663 Sasikumar, S K and Husain, Z. (2008). ‘Managing International Labour Migration from India: Policies and
Perspectives’, ILO Asia-Pacific Working Paper Series, New Delhi Subramanian, R. (2001). ‘Relocation Blues’, The Sunday Times of India, January 14
29
Trade Constraints to the Exports of Marine Products in Tamil
Nadu-India
A.Venkateswaran
Assistant Professor Department of Commerce
Noorul Islam College of Arts & Science (Affiliated to Manonmaniam Sundaranar University)
Kumaracoil, Thuckalay, Kanyakumari - District Tamilnadu, India - 629 180.
Email: [email protected]
International trade has become far more significant in the world economy, and over the
past two decades world trade has grown faster than world output growth. However, over
the 1990s, the value of world trade has fluctuated substantially. The economic
environment for trade, specifically fish trade is changing in a remarkable way due to
changes in domestic policies as well as international trade arrangements. The marine
fishery sector has been playing an important role in international trade. Liberalization of
fish trade in the world has undergone remarkable change since the launching of World
Trade Organization in 1995. Seafood is high on the global trade agenda and has become
particularly relevant in the light of the entry of fisheries into the WTO process. There is a
steady growth and heavy demand for marine products all over the world. The problem of
the efficient international trade policies were undoubtedly never posed with as much
acuity for the developing countries, more particularly in India, than in the new context
generated by the phenomenon of globalization. The outcome of the multilateral trade
negotiations in the Doha Round and WTO regulations has large implications on
International Fish Trade. The marine fishing sector in India has seen major changes
during the last decade and these changes have an impact on the people working in
various sub sectors. Marine fisheries contribute significantly to the Indian economy by
way of foreign exchange earnings and employment generation to a large section of the
population in the coastal areas of the country. There are 0.99 million active fishermen
employed directly and 0.61 million employed indirectly with the marine fisheries sector.
30
In addition, it plays a major role in ensuring the food security of the nation through the
supply of cheap and affordable fish protein to a large majority of the population. The
fisheries sector plays an important role in Indian economy and its contribution to the
GDP is about one percent. The Indian fisheries sector has been witnessing a steady
growth since the First Five Year Plan. Indian marine fish production increased from 0.53
million tonnes in 1950-1951 to a maximum of 3.3 million tonnes in 2010-2011. Marine fish
production has shown a steady increase in TamilNadu from 1.23 lakh tones in 1960-1961 to
5.09 lakh tones in 2010-2011. Export earnings from marine sector have increased from
Rs.3.92 crores in 1961-1962 to Rs.12, 901.47 crores in 2010-2011 with 11.8 percent growth
during 2009-2010. Keeping in view the above point’s present study is a modest attempt to
analyze the trade constraints to the exports of marine products in the selected state of
Tamil Nadu, India. The present study is mainly empirical in nature based on the primary
and secondary data. The field survey was carried out from April 2009 to March 2010 for
the collection of primary data. Primary data were collected from 250 exporters by
administering them an interview schedule. This study has been undertaken in Tuticorin
sub regional office and Chennai regional office with 86 exporters and 164 exporters
respectively. The secondary data relating to the export of Indian marine products were
obtained for 40 years from 1970-1971 to 2009-2010. This has been analyzed by adopting
statistical tools, the ANOVA test, Multiple Regression Analysis, Factor Analysis, Growth
Rate Analysis, Co-efficient of Variation and Garret’s Ranking Technique. On the basis of
the findings of the survey, it is observed that the policy constraints often take the form of
Non-Tariff Measures (NTM). Fisheries subsidies greatly impact the sustainability of
fishery resources. India has taken a position that arbitrary as well as restrictive Sanitary
and Phyto-Sanitary (SPS) measures and HACCP standards continue to represent major
constraints to international trade of marine products. Indian fisheries cannot escape from
the stark reality of stiff competition emerging in the global scenario.
Key Words: Globalization, Anti dumping, Barriers, Duty Entitlement Pass Book, Policy,
Technical Barrier to Trade (TBT), World Trade Organization (WTO). Trade Constraints,
Growth.
31
References
Amutha D. (1998). ‘Socio Economic Conditions of Fishermen in Tuticorin’. Department of Economics,
St.Mary’s College, Tuticorin, p.12.
Nanjappa, A. (2005). The 4th Inception workshop for the Project strategies and preparedness for trade and
globalization in India with special reference to assessment of export capabilities of small fishermen
was held at Chennai on 6th October, 2005.
Ayyappan S. DDG (Fisheries, CAR) (2009). ‘An overview of Indian fisheries sector in the perspective of the
Eleventh Five Year Plan’, Proceedings of the National Conference of State Fisheries Ministers
Bhubaneswar. p 25.
Chari, (2006). ‘The development of marine products and export potential of Tamil Nadu’, PhD Thesis,
Madras University, Chennai, p 47.
Devadasan, (2003). ‘Value Added fish and fisheries products’, Project Report, Marine Fisheries College,
Calcutta, pp 82-83.
Elias, S. (2005). The 4th Inception workshop for the Project strategies and preparedness for trade and
globalization in India with special reference to assessment of export capabilities of small fishermen
was held at Chennai on 6th October, 2005.
Gnanadoss, (2007). ‘The operatives’ training and development of marine fisheries in Tamil Nadu’, Project Report, Madras Christian College, Chennai, p 24.
Karna V. K. (2011), Deputy Director of the Indian Institute of Packaging http://www.thehindubusinessline.com/2011/01/22/stories/2011012251152100.htm Kurian, (2010). ‘Problems of the fishing industry in Tamil Nadu’, Project Report, Centre for Development
Studies, Thruvanathapuram, 2010 pp 55 and 71. Kuruvila T. (2009). ‘Strategies and Preparedness for Trade and Globalisation in India’, The United Nations
Conference on Trade and Development (UNCTAD)-Government of India- DFID, Project. Mukherjee, (2004). ‘Perspective of fisheries and manpower development in India’, Dissertation, Agriculture
University, Bangalore, p 54 and 61. Murugan, (2000). ‘Status of Education, Employment and Health in Coastal Area of Thiruvananthapuram
Corporation’, Programme for Community Organization, Thiruvananthapuram, p.39. Nikita G., et al, (2007). ‘An analysis of the Exports of finfish from India - Technical Session 1X: Exports,
Trade and Globalization’, Fisheries and Aquaculture: Strategic Outlook for Asia, Book of Abstracts, 8th Asian Fisheries Forum, pp.231.
Praduman Kumar and Anil Kumar (2003). ‘The Food Safety Measures: Implications for Fisheries Sector in India’, Conference Proceedings, CMFRI, Calcutta, 2003, pp 33 and 36.
Ramachandra Bhatta, (2003). ’Impact of Globalization on the Marine Exports of India’, Dissertation, Fisheries College Mangalore, p 23.
Ramachandra B. (2005). UNCTAD DFID project on Strategy and Preparedness for Trade and Globalization in India (project) a Sector inception Workshop in the fisheries sector was organized in Goa.
Sathiadhas, R. (1996). ‘Production and Marketing of Marine Fisheries in India’, Central Marine Fishereies Research Institute, pp. 162 and 168.
Shyam Sallm and Ojha (2004). ‘Commodity diversification and geographic concentration of Indian seafood exports’, Project, Fisheries College, Mangalore, pp 47 and 48.
Srinath,(2003). ‘An Appraisal of the exploited Marine Fishery Resources of India’, Status of Exploited Marine Fishery Resources of India, Central Marine Fisheries Research Institute, Kochi, pp.1.
Statistical Hand Book, 2011, Animal Husbandry, Fisheries and Forest, Department of Economics and Statistics, Government of Tamil Nadu, pp 62-63. http://www.tnstat.gov.in/publications.html
Venkatesan V. (2009). ‘Strategies and Preparedness for Trade and Globalisation in India’, The United Nations Conference on Trade and Development –UNCTAD, (Project) Government of India- DFID.
32
International Trade and Income in India: An Examination of
Cointegration and Causality Behaviour
Amarjit Singh Sethi* and Jyoti Anand@
*Professor, @Research Fellow, Guru Nanak Dev University, Amritsar-143 005 E-mail: [email protected]
Revival of the complex problems of rapid economic growth in export-oriented economies
of East Asia has induced a renewed interest in empirical research on the export-led growth
hypothesis. There is an exigent need to examine whether India is one of those countries
which have undergone export-led growth or not. Consequently, an attempt was made in
the present paper to examine prevalence of long-run equilibrium and causal linkage
between aggregated GDP and trade variables (i.e., aggregated exports plus imports) in
India. The study would expectedly assist in providing an answer as to whether integration
of the Indian economy with the world economy (by way of opening up since 1991) has
been in the right direction or not.
The study was based on regular time-series information on 10 components of Aggregated
GDP, 32 components of Aggregated Exports and 28 components of Aggregated Imports,
compiled for 38 years’ period (1971-2008) from various official sources. Through splicing,
data on the study variables were obtained at 1999-2000 constant prices. Stationarity
properties of the variables were examined through Augmented Dickey-Fuller (1979), and
Phillips-Perron (1988) unit root tests. VAR-based cointegration methodology (due to
Johansen, 1988; and Johansen and Juselius, 1990) was employed to identify long-run
equilibrium relationship among the I(1) variables. And, causality behavior among GDP
and trade-related variables was examined through Granger’s approach as applied to VAR
in first differences.
As per the main findings, the first-differenced series (on log scale) in respect of certain
major components (such as IND, SRV, and AGG in case of GDP; PRM, MGE, PTR, and
AGE in case of exports; and BLK, NBL, and AGI in case of imports) could attain
stationarity and were, therefore, I(1). As per the subsequent analysis, the time-series on
33
these components of exports and imports, individually, did not bear any cointegration.
Nevertheless, different components of GDP (like LGDP & LIND, and LIND & LSRV) did
exhibit cointegration. Thus, production and productivity in, say, industrial sector needs
be increased which, in a self-propelling manner, would expectedly raise production/
productivity in the other sector(s) of the economy. At the aggregated level, we again were
unable to detect the presence of cointegration, thereby implying that in the Indian
context, long-run equilibrium relationship did not exist between GDP, exports and
imports.
As per the subsequent analysis, rate of growth in India’s GDP has strongly Granger caused
jointly the rates of growth in exports and imports. Similarly, the rate of growth in exports
has strongly Granger caused jointly the rates of growth in GDP and imports, thus pointing
towards bi-directional causality between rates of growth in GDP and exports. The
findings thus tend to validate both export-led growth and growth-led exports hypotheses.
Further, imports were also seen to have Granger caused both exports and GDP, but only
moderately. Thus, on the whole, Granger’s causality analysis has provided fairly strong
evidence in favour of growth-led openness, but weak evidence in favour of openness-led
growth hypothesis.
The findings are fairly consistent with the fundamental development policy changes in
1980s and the subsequent export-promotions and incentive policies that India has been
pursuing. It appears that export promotion policies of the last two decades have paid off.
And, since imports have Granger caused both exports and GDP (though mildly); therefore
the imports of capital goods could meet India’s requirements for her economic growth by
way of providing technology for export-oriented industries, thereby expanding volume of
exports. Thus, as a policy implication from the study, we need to switch over from
protectionist to free-trade policy regime with an increased degree of openness so as to
experience economic growth at a faster pace.
34
Keywords: International Trade, Growth-led Openness, Export-led Growth
Hypothesis, Unit Root, Stationarity, Vector Autoregression, Cointegration, Granger’s
and Instantaneous Causality
JEL Classification Code: F14, F43, C22, C32, P24
References
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Bento, J. P. (2011). ‘Energy Savings via Foreign Direct Investment? – Empirical Evidence from Portugal’, Maastricht School of Management, Working Paper No. 24.
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Cuadros, A., V. Orts and M. Alguacil (2004). ‘Openness and Growth: Re-examining Foreign Direct Investment, Trade and Output Linkages in Latin America’, The Journal of Development Studies, 40 (4): 167-92.
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Engle, R.F. and C.W.J. Granger (1987). ‘Co-integration and Error Correction: Representation, Estimation, and Testing’, Econometrica, 55 (2): 251-76.
35
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36
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37
Migration, Trade & Development in South Asia: A Panel Data
Analysis
Sandeep Kaur Bhatia
Assistant Professor Central University of Punjab
Punjab, India E-mail: [email protected]
Migration has an important role for development as both are interlinked to each other
through remittances. Remittances are becoming the important source of development
particularly for developing economies. These remittances are also playing their major role
in reducing poverty, achieving stable financial system etc. Keeping in view of the
importance of remittances in developing world, this paper has studied the impact of
remittances on GDP, poverty reduction, investment, and openness of South Asian
countries (Bangladesh, India, Pakistan and Sri Lanka) through panel data model over the
period 1981-2010. It is clear that these countries are amongst top 10 countries and their
share in GDP is highest amongst other developing regions. The impact of remittances on
economic development of South Asian Countries is negative but statistically significant.
The impact of remittances on economic development has observed in indirect manner i.e.
on domestic investment and on human development. Its coefficient is positive and
significant suggesting important contribution of this variable towards economic
development as well as important channel of remittances. Therefore, the study suggested
that favourable investment climate through appropriate infrastructure should be
developed. The impact of remittances on poverty level depicts that the coefficient of
remittances as a percent of GDP is negative and significant presenting the contradictory
results of other studies. Remittances are not contributing to reduction in poverty level in
these counties. Even openness index is having positive and significant indicating trade
liberalization is not contributing towards reduction in poverty level. Though remittances
are considered as a tool of poverty reduction but the slow trickle down effects in these
countries may be the one of the reason of this negative relation. When inclusive growth is
38
spread out in these countries, it may be an important tool for poverty reduction as well as
the development of these countries. Migration should be encouraged from developing to
developed countries which will lead to the better development of the developing
economies like South Asian economies.
References
Adams, R and J. Page (2005). ‘Do International Migration and Remittances Reduce Poverty in Developing Countries?’, World Development, Vol. 33 (10): 1645-69.
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Evidence from Bangladesh, India and Sri Lanka.’ Discussion Paper 10.27, The University of Western Austrailia.
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39
Nexus between Economic Growth & Services Export in the Indian
Context
Mousumi Bhattacharya* and Sharad Nath Bhattacharya@
Army Institute of Management, Judges Court Road,
Alipore, Kolkata, India * Email: [email protected]
@ Email: [email protected]
The services sector covers a wide range of activities ranging from the most complicated
and sophisticated information technology services to the simple and easy services
provided by the unorganized sector like carpenter and barber. The services export
comprises of commercial services categorized under travel, transportation, insurance,
miscellaneous services, and government services, not included elsewhere (GNIE). Along
with the services-dominated growth, India is gradually moving towards services led
export growth phenomenon. In this paper an attempt is made to e
xamine the possible co-integration and direction of causality, if any between services
export (travel, transportation, insurance, G.n.i.e and miscellaneous) and economic
growth in a VAR framework for the period 1996-97:Q1 –2009-10:Q2. Gross Domestic
product is taken as a proxy for economic growth. Quarter wise data of GDP and services
export like travel (TRAVEL), transportation (TRANS), insurance (INS), government
services, not included elsewhere (GNIE) and miscellaneous (MISC) is collected from
various publications of the Reserve Bank of India (RBI). After checking the stationarity of
the variables, co-integration test and Granger causality test is conducted in multivariate
VAR framework at VECM form. The stationarity test reveals that all the variables are I(1).
The cointegration test reveals that there is a long-run relationship among the variables
considered for the study. The results of the Granger causality test reveal that bidirectional
causality is observed between travel services export and economic growth in both short
and long run. Unidirectional causality is observed from transport services export, GNIE
and miscellaneous services export to economic growth in both short and long run.
40
Moreover unidirectional causality is observed from transport services export, GNIE and
miscellaneous services export to travel services export in both short and long run. Only
short run unidirectional causality is observed from insurance services export to GNIE and
from GNIE to miscellaneous services export. The results reveal that most of the services’
sub-sectors export like travel, transport, GNIE and miscellaneous causes economic
growth. It is also observed that economic growth causes travel services export. Impulse
response analysis is done at the first difference of the variables. The results of the impulse
response functions are consistent with the t-statistics for differences of the variables in
estimated co-efficients. The service sector being the major FDI attracting sector is an
uncharted sea with plenty of opportunities and new challenges. This sector is a net
foreign exchange earner with the exports of some services growing geometrically. IT- ITeS
sector is the major driving force behind the growth of the services sector and thus
contributing substantially to increase in GDP, employment and exports. The challenge
lies in making inroad into globally traded services in still niche areas for India, such as
financial services, health care, education, accountancy and other business services where
India has a large domestic market and has also shown recent signs of making a dent in
the international market, but only a small part of the full potential has been tapped.
Keywords: Services export, GDP, Impulse response Analysis
JEL Classification Code: O1, F14, F19
References
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41
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42
Traditional & Emerging Services Exports: A Panel Analysis
Deeparghya Mukherjee
Doctoral Candidate Economics and Social Sciences
Indian Institute of Management, Bangalore E-mail:
International Trade in Services has grown in importance over the last few decades. The
share of services in global output, trade, and investment flows has grown steadily in the
wake of an increasingly liberalised world order. Technological breakthroughs mainly in
the IT and IT-enabled services (IT-eS) sector have made it possible to fragment
production processes, thus enabling increased tradability of services. The world has
thereby seen phenomenal increases in growth rates of non-traditional or modern
services2 such as finance, Information and Communications Technology (ICT) and Other
Business Services (OBS). This paper is an exploratory study in identifying the
macroeconomic factors that have driven the growth of different traditional and non-
traditional services exports across a panel of developed and emerging economies that
comprise of around 60% of world services exports consistently over the sample period
1991-2009. The primary data sources for the study are UNCTAD and the World Bank
databank. The categories of services exports studied are: (1) Travel, (2) Transportation, (3)
Computer and Information, (4) Finance and (5) Other Business Services. Through the
analysis of data and the estimation results, the paper infers in favour of differences in
factors that affect traditional services exports, i.e., Travel and Transportation vis-à-vis the
non-traditional (modern) services export categories, i.e., Finance, ICT and OBS.
Additionally, differences in growth trends of OECD and Non-OECD countries in the
sample are examined. While the growth rate of merchandise exports is the primary driver
of traditional services exports growth, modern services are driven mostly by factors
related to IT infrastructure and economic wellbeing. IT services exports growth in
particular is found to be insulated from fluctuations in merchandise exports growth and
GDP growth. This is not true for the other categories of services exports. The real effective
43
exchange rate affects the traditional services exports but has no significant impact on the
trends of modern services. The trends of IT services exports vary significantly across
OECD and Non-OECD countries for the sample period. The 2009 financial crisis is the
only major economic event that has adversely affected the growth trends of all the
categories of services exports. Greater volatility in services exports trends for the Non-
OECD countries in the sample, especially in response to economic crises, along with
faster recovery for non-traditional services exports in the case of Non-OECD countries is
noteworthy.
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47
Section B: Application of Gravity Model
A Gravity Model Analysis of Actual and Potential Export Services of
USA with its Asian Partners
Sandeep Kaur Bhatia
Assistant Professor, Centre for South and Central Asian Studies,
Central University of Punjab, Bathinda 151001, India.
E-mail: [email protected]
International trade in services has been increasing rapidly. It has now accounted for
twenty per cent of globe trade despite the increasing importance of services trade in
global economy; there has been limited research on service trade which uses
determinants driving such trade. Despite the increasing importance of services trade in
global economy, there has been limited research on service trade which uses
determinants driving such trade. As USA is amongst the topper economies in service
trade and Asian economies are growing in service trade. Therefore the present study
analyses the determinants of USA’s services export potential with its Asian partners
(Japan, China, India, Singapore, South Korea and Hong Kong) for the period 2000-2008
during panel data methodology by taking into account geographic, economic and other
features. The approach is based on gravity model, widely used to analyze trade in good s
and has more recently been applied to service sector. Being a nature of study is of panel
data i.e. for 9 years (2000-2008) and six cross sections, the study used panel data
methodology. The results shows that with increase of GDP of USA and also of its Asian
partners, export in services of USA to these economies will increase .one country will
trade more with another if it is close from its alternative trading partners as Asian
countries and USA will be closer in income level, the trade will also be increased in
between them. The importing country’s corruption increases, the exporter increases the
services. This may be due to easy trading of services. For India and Japan ,USA had
export potential with these nations where for China and Singapore USA has exceeded its
48
export potential with these nations.USA had convergence in exports with three Asian
countries (Hong Kong, India and Korea) and divergence with three Asian countries
(Japan, China and Singapore). There is a large scope for export expansion for Hong Kong,
India and Korea. As these economies especially India is one of the growing economies, if
USA’s export of services increase, its growth would be stable.
Key Words: Services, International Trade, Gravity Models
JEL Classification Code: F13, F15, F17, L80
References
Anderson, J. and E. V. Wincoop (2003). ‘Gravity with Gravitas: A Solution to the Border Puzzle’, American
Economic Review, 93(1), 170-192.
Arnold, J., B. S. Javorcik and A. Mattoo (2006). ‘The Productivity Effects of Services Liberalization: Evidence
from the Czech Republic’ World Bank Working Paper
Baltagi, B.H. (1995). Econometric Analysis of Panel Data, Chichester, Wiley, England.
Batra, Amita (2004). ‘India’s Global Trade Potential: The Gravity Model Approach?’ ICRIER Working Paper,
No. 151, Indian Council for Research as International–Economic Relations
Brandicourt, V., Schwellnus, C., and Wörz, J. (2008). ‘Austria’s Potential for Trade in Services’ FIW Research
Report No 002, June 2008.
Christie, E (2002). ‘Potential Trade in South East Europ e: A Gravity Model Approach’, Working Paper,The
Vienna Institute For International Economic Studies –WIIW
Di Mauro (2000). ‘The Impact of Economic Integration on FDI and Exports: A Gravity Approach’, CEPS
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66 (1), pp. 25-31
Field, A., Sosa, L., and Wu, X., (2006). ‘Impacts of Endogenous Bribes on Foreign Direct Investment’,
Manuscript, Department of Economics, University of North Carolina, Chapel Hill.
Francois, J., B. Hoekman and J. Woerz (2007). ‘Does Gravity Apply to Intangibles? Measuring Barriers to
Trade in Services’, Paper presented at the CEPII-OECD Workshop Recent Developments in
International Trade in Services, Paris, November.
Grünfeld, L. A and Moxnes,A(2003). ‘The Intangible Globalization: Explaining the Patterns of International
Trade in Services’, Norwegian Institute of International Affairs, No. 657.
Gujrati, D.N. (2003). Basic Econometrics, McGraw Hill, Higher Education, New York.
Jakab, Z.M., M.A. Kovacas and K.A. Oszlay (2001). ‘How Far has Trade Integration Advanced? An Analysis of
Actual and Potential Trade of Three Central and Eastern European Countries’, Journal of
Comparative Economics, 29, 276-292.
Kimura, F and Lee, H. H, (2004). ‘The Gravity Equation in International Trade in Services’, paper presented
at European Trade Study Group Conference, University of Nottingham
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The APEC Case’, Monash Econometrics and Business Statistics Working Paper: 1/97.
Verbeek, M. (2004), A Guide to Modern Econometrics, second edition, Chichester, Wiley.
49
Zhang J. and G. Kristensen (1995). ‘A Gravity Model with Variable Coefficients: The EEC Trade with Third
Countries’, Geographical Analysis, 27, 307-20.
50
Section C: Theoretical Issues in Trade and Finance
Multi-market Collusion with Territorial Allocation
Aditya Bhattacharjea* and Uday Bhanu Sinha@
Delhi School of Economics * E-mail: [email protected] @ E-mail: [email protected]
Since the 1990s, there has been a dramatic increase in the prosecution of cartels by
American and European antitrust/competition agencies. Many of these cartels have
involved firms from more than one country, and many of these have been charged with
dividing up international markets on the basis of territorial allocation. Typically, firms
have reciprocally agreed to stay out of each other’s home markets as well as other markets
traditionally served by their rivals, respecting each other’s ‘spheres of influence’. The first
such major cartel case involved two European chemical giants, Britain’s Imperial
Chemical Industries (ICI) and Belgium’s Solvay. They had maintained a long-standing
agreement after the Second World War, whereby Solvay was to sell soda ash almost
exclusively in continental Europe, and ICI in the British Commonwealth and the rest of
Asia, Africa and South America. In 1994, the European Commission fined 42 cement
producers for (among other infringements) agreeing not to enter each other’s home
markets. Similarly, in the choline chloride (vitamin B4) cartel, three manufacturers in
North America reached an agreement with their three European rivals to withdraw from
each other’s home markets, and to share the Latin American and Asian markets. A recent
study of 81 international cartels detected by European and American competition
agencies between 1980 and 2007 found that eighty per cent of them allocated territories
or specific customers to their members
Against this backdrop of actual observations, we provide a theory of cartel based on
territorial allocation. We consider a standard super game model of collusion between
price-setting oligopolists located in different markets separated by trade costs. The firms
51
produce homogenous goods at constant marginal costs and try to sustain collusion based
on territorial allocation of markets using grim trigger strategy. We first prove that
assuming one firm in each market a decrease in trade costs may promote collusion, a
result that we call the trade cost paradox. Under grim trigger strategies the collusion is
sustained for all discount factors above a critical level. The reason for the trade cost
paradox stems from the fact that a decrease in trade cost does not make any difference on
the collusive path of the game; however, it reduces the payoffs of the firms on
punishment path leading to lowering of the critical discount factor.
We also prove a new paradox with interesting policy implications. We show that the
scope for collusion is enhanced by an increase in number of firms under some parameter
configurations (the competition paradox). The reason for such a situation is that presence
of more than one firm in each country although lead to sharing of collusive profits in the
home market but it changes the outcome along the punishment path as well due to
Bertrand competition there. As a result, on the balance from one firm in each country
symmetric or asymmetric increase in the number of firms might lead to a decrease in the
critical discount factor leading to extra scope for collusion with more firms. Several of our
results conform to the real-world cartel cases, but have not figured in the existing
theoretical literature so far.
The common element of these two paradoxes is that pro-competitive changes in the
economic environment might actually promote collusion. This runs counter to the
conventional wisdom in economic thinking. We also revisit some standard policies in the
light of our findings. While the first paradox shows that trade liberalization is not
necessarily a substitute for antitrust/competition policy, the competition paradox has
some more subtle and unsettling implications for standard antitrust practices. In
particular, we show that the wrong industries may be investigated for cartelization, and
that potentially harmless or even beneficial mergers may be disallowed.
52
References
Abreu, D. (1986). ‘Extremal Equilibria of Oligopolistic Supergames’, Journal of Economic Theory, 39: 191-225.
Akinbosoye, O., E.W. Bond and C. Syropoulos (2012). ‘On the Stability of Multimarket Collusion in Price-
setting Supergames’, International Journal of Industrial Organization, 30: 253-264.
Bernheim, D. and M. Whinston (1990). ‘Multimarket Contact and Collusive Behavior’, Rand Journal of
Economics, 21(1): 1-26.
Bolotova, Y.V. (2009). ‘Cartel Overcharges: An Empirical Analysis’, Journal of Economic Behavior and
Organization, 70: 321–341.
Bond, E.W. and C. Syropoulos (2008). ‘Trade Costs and Multimarket Collusion’, RAND Journal of
Economics, 39(4): 1080-1104.
Bond, E.W. and C. Syropoulos (2012). ‘Economic Integration and the Sustainability of Mutimarket
Collusion’, Economics Letters, 117: 42-44.
Choi, J.P. and H. Gerlach (2012). ‘International Antitrust Enforcement and Multimarket Contact’,
International Economic Review, 53(2): 635-657.
Colombo, L. and P. Labrecciosa (2007). ‘Sustaining Collusion under Economic Integration’, Review of
International Economics, 15(5): 905–915.
Connor, J.M. (2007), ‘Global Price Fixing’, Berlin and Heidelberg: Springer-Verlag.
Davidson (1984). ‘Cartel Stability and Tariff Policy’, Journal of International Economics, 17: 219-37.
Davies, S., M. Olczak and H. Coles (2011). ‘Tacit Collusion, Firm Asymmetries and Numbers: Evidence from
EC merger cases’, International Journal of Industrial Organization. 29: 221-31.
De, O. (2011). ‘The Internal Structures and Organisation of EC Prosecuted Cartels and the Impact on their
Performance’, PhD dissertation, University of East Anglia
Gross, J. and W.L. Holahan (2003). ‘Credible Collusion in Spatially Separated Markets’, International
Economic Review, 44(1): 299-311.
Harrington, J.E. (2006). ‘How Do Cartels Operate?’, Foundations and Trends in Microeconomics, 2(1): 1–105.
Levenstein, M. and V.Y. Suslow (2011). ‘Breaking Up is Hard to Do: Determinants of Cartel Duration’,
Journal of Law and Economics, 54(2): 455-492
Lommerud, K.E. and L. Sørgard (2001). ‘Trade Liberalization and Cartel Stability’, Review of International
Economics, 9(2): 343-55.
Markusen, J.R. and A.J Venables (1988). ‘Trade Policy with Increasing Returns and Imperfect Competition:
Contradictory Results from Competing Assumptions’, Journal of International Economics, 24(3-4):
299-316.
Miklos-Thal, J. (2011). ‘Optimal Collusion under Cost Asymmetry’, Economic Theory, 46: 99-125.
Notz, William (1920). ‘International Private Agreements in the Form of Cartels, Syndicates, and other
Combinations’, Journal of Political Economy, 28(8): 658-679.
Pinto, B. (1986). ‘Repeated Games and the ‘Reciprocal Dumping’ Model of Trade’, Journal of International
Economics, 20: 357-66.
Rotemberg, J.J. and G. Saloner (1989). ‘Tariffs vs Quotas with Implicit Collusion’, Canadian Journal of
Economics, 22(2): 237-44.
Scherer, F.M. (1994). ‘Competition Policies for an Integrated World Economy’, Washington, D.C.: Brookings
Institution.
Schröder, Philipp J. H. (2007). ‘Cartel Stability and Economic Integration’, Review of International
Economics, 15(2), 313–320.
Suslow, V.Y. (2005). ‘Cartel Contract Duration: Empirical Evidence from Inter-war International Cartels’,
Industrial and Corporate Change, 14: 705-44.
53
Macro Economic Adjustments under a Crisis Situation
Susmita Chatterjee* and Debabrata Datta@
* Globsyn Business School, Kolkata E-mail:
@ Institute of Management and Technology, Gaziabad E-mail:
The paper looks first in a static framework the working of an open economy under a
situation of price flexibility. This extends the Mundell - Fleming model and shows the
effect of exchange rate movement in a richer perspective. Instead of considering a two
variable macroeconomic system like Mundell - Fleming model, the paper considers two
five variables models, one with fixed exchange rate and another with flexible exchange
rate. The model with fixed exchange rate but with endogenous money supply opens up
the possibility of considering exchange rate as a policy parameter in a comparative static
analysis. On the other hand, the other model that considers endogenous exchange rate
but exogenous money supply is used to show the effect of monetary policy. In both these
models, the paper introduces the role of depreciation of domestic currency in increasing
cost of production by increase in the cost of imported inputs. The model shows that
consideration of this element can explain the emergence of economic crisis in a country,
dependent on critical imported input and also suffering from current account deficit.
The paper also introduces a simple dynamic framework to highlight the saddle point
stability of the macroeconomic system. This model considers two scenarios – one with
fixed price but variable output and the other with fixed output but with variable price.
The saddle point stability opens up possibility of crisis, when exchange rate is the jump
variable and output or price is the sluggish variable.
The paper also looks at a few stylized facts about the East Asian economic crisis in order
to show the applicability of the model in the real economies. The lessons learnt from the
experiences of East Asian countries shows that if the outstanding external loan of an
economy and the current account deficit as a percentage of GDP is large, the chance of
54
economic crisis is extremely high. The paper shows that current state of Indian economy
is exhibiting some characteristics that resemble the features of a crisis – prone economy.
India’s current account deficit is quite high and as a result amount of external debt is
rising. In these circumstances, the policy makers should introduce some drastic measures
with all earnestness to set right the situation.
Key Words: Economic crisis, devaluation, external debt, macroeconomic dynamics.
JEL Classification Code: F41, E32
References:
Jose Brandao de Brito (1999). ‘The Anatomy of the East Asian Crisis : An Alternative Model of Currency
Crisis’, Birmingham : Univ., Dept. of Economics, Discussion paper,99,16
Barbone, Luca, and Francisco Rivera-Batiz (1987). ‘Foreign Capital and the Contractionary Impact of
Currency Devaluation, with an Application to Jamaica’, Journal of Development Economics, 26(1), 1-
15
Dornbusch, Rudiger (1987). ‘Collapsing Exchange Rate Regimes’, Journal of. Development Economics, 27, 71-
83
Mariassunta Giannetti (2004). ‘Old and Modern Currency Crises: Short-Term Liabilities, Speculative
Attacks and Business Cycles’, Econometric Society 2004 North American Summer Meetings 133,
Econometric Society.
Mihir Rakshit(2002). ‘The East Asian Currency Crisis’, Oxford University Press, 2002
Krugman, P., Taylor, L.(1978). ‘Contractionary effects of devaluation’, Journal of International Economics, 8,
445–456.
Krugman, P. (1979). ‘A model of balance of payments crises’, Journal of Money, Credit, and Banking 11: 311-325
Krugman, P. (1996). ‘Are currency crises self-fulfilling?’, NBER Macroeconomics.
Krugman, P. (1996). ‘Will Asia bounce back?’ (speech for Credit Suisse First Boston, Hong Kong, March
1998)
Krugman, P. (1998). ‘What happened to Asia?’, (http://web.mit.edu)
Obstfeld, M. (1994). ’The logic of currency crises’, Cahiers Economiques et Monetaires 43:189-213
Stiglitz (2002). ‘Globalization and its discontents’, W.W Norton.
Turnovosky(2000). ‘Rational Expectations and Saddle Point Behaviour’, MIT Press.
Yung Chul Park & Jong Whalee (2001). ‘Recovery and Sustainability in East Asia’ (NBER)
55
Section D: Firm Level Analysis of Trade
FDI in Retail Sector, Environment, and Fair Trade Practices:
Looking for Evidence
Amita Shah
Gujarat Institute of Development Research
The issue of foreign direct investment (FDI) in retail food and agri-products in India has
seen one of the most intense debates pertaining to economic policies in the recent past
[Singh, 2010; Ghosh, 2012a; Mathew, et.al, 2008; Mukherjee, et.al; 2011; Reardon, T. and
Minten, B. 2010]. Strangely much of the debate preceding the adoption of the bill by the
two houses in the parliament in December, 2012 was marked by a series of presumptions
as well as apprehensions, rather than concrete evidence, from the supporters and
opponents of the proposed bill. For the time being the political debate seems to have
settled on the floor of the parliament. However, the academic debate may not be seen as
convincingly resolved, mainly for the want of empirical evidence on a range of issues viz;
efficiency (prices included), inclusion of the small/poor/scattered producers in the global
value chain, and the likely displacement of a large number of self-employed workers
engaged in petty production and trade. Environmental and health implications are yet
another important set of issues that, till now, have received rather limited attention in the
recent debate, not to talk about putting together empirical evidence thereof [Shah, 2011;
Ghosh, 2012b; Timmer, 2003].
Whereas the proponents of the large players in the food retail sector plead the case
mainly on the ground of fresh flux of the much needed foreign direct investment (FDI) in
the hitherto underinvested sector, those opposing the move plead that entry of the FDI
may neither reduce prices nor, create enough jobs to take care of the displaced workforce
[Singh, 2011]. Similarly, it may be noted that even if the FDI in a vital sector such as this
may create the much acclaimed `win-win` situation for producers, distributors, and
consumers of farm products, the issue of increased use of natural resources-land and
56
water-required for increasing the production of certain types of food-products and
commodities, remains to be adequately investigated. Also the questions as to `what type
of food will be produced additionally, and for which class of consumers’ is often missing
from the policy contemporary discourse in the country. These questions need careful
probing, especially at the time when natural resources are getting scarcer and the
challenges of food security is increasingly getting complex in the wake of climatic
variability, demographic dynamics, and uncertainties in the global food markets.
It is imperative to recognise that the competitive pressure works in a situation where
markets are functional and efficient; but when it comes to natural resources where
markets by and large tend to fail, the logic of market efficiency may also start weakening.
Also it is worth asking as to what is there in this improved market efficiency for those
having very limited purchasing power and almost non-existing safety net against
staggering food inflation? Of late the discourse on food security has come up with a
severe critique on `excessive emphasis` on growing cereal and pulses, rather than milk,
meat, fruits-vegetables and fish [Dorin, 1999]. To an extent this may be a valid criticism in
so far as production of these other, and perhaps, richer sources of nutrients is far below
the actual as well as potential demand of the India’s middle and higher income
consumers with ever growing life style related aspirations at the time when the bottom
30-40 per cent of the population is still underfed in terms of the basic food products. It
may be noted that the new set of food items need a far more favorable agronomic and
natural resource endowment as compared to cultivation of (coarse) cereals and pulses.
This scenario thus, poses a major challenge for striking a fine balance between in
production of the essentials as well as the desirables to attain fair degree of food and
nutrition security for all without compromising resource use sustainability in the medium
and long run.
Arguably, opening of the retail sector in food and agri-products may reduce the pressure
on the scarce land and water resources by way of imports from other countries. But this
may take away a potential policy option for the domestic producers to mix and match
57
resource intensive and subsistence agriculture that may help putting the domestic
agriculture sector on a long term growth path which is economically viable and
environmentally sustainable. It may be noted that attaining a balance (if not setting an
unconditional priority to meet the needs of the poor) requires a fine tuning of the policies
and closer monitoring of the outcomes, within a domestic sphere. In absence of this, any
promise of regulating and/or restricting the foreign investors, especially multi-brand
giant corporations appear to be fairly farfetched, especially given the lumpiness of their
investment
Recognising the trade-offs in terms of what to produce, how to produce and for whom to
produce is essential because these trade-offs tend to become sharper when natural
resources-land and water-are already scarce and likely to get scarcer in the next 20-30
years. It therefore imperative to keep engaging in the academic debate on the issues such
as: a) identification of the likely trade-offs; b) fine tuning of the domestic policies to
create right kind of signals (and regulations) for the foreign investors, and c) creation of
policy spaces for safeguarding the interests of the poor producers and traders, health of
the consumers, and also sustainability of natural environment.
It is likely that some of the fair trade initiatives may open up new avenues for promoting
equity, food security & safety, and environmental sustainability [Nelson and Smith, 2011].
Intuitively, these do not seem to be a good substitute for creating a right kind of domestic
policy framework in place. Given this backdrop, this paper aims at a) collating the
evidence on environmental and health impact of some of the new sets of food and
related products such as milk, horticulture, floriculture and processed food in India and
Asia; and b) examine experience of some of the fair-trade initiatives in food and
agriculture sector in the country. It is however, argued that such initiatives, though steps
in the right direction, need to get properly integrated into the larger policy framework in
the domestic sphere, lest these initiatives may remain as islands in the midst of non-
sustainable farm production and inequitable (and perhaps not so healthy) consumption
patterns within the country. It is further argued that if creating agri-infrastructure is so
58
vital for the poor producers and consumers of food products in the country, the state
must accord due priority to these investment; the large private sector players, including
multinationals, may at best supplement the new investment to be made by the state.
After all, the state owes directly accountable to the poor and the hungry who have been
waiting for long in the sidelines of the growing prosperity within the country.
References
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Ghosh, J. (2012a). ‘Play of Interest’ Frontline, Vol. 29, Issue 11. January 02–15. Ghosh, J. (2012b). ‘Fast Food World’, Frontline, Vol. 29, Issue 21. October 20 – Novovember 02. Methew, J, N Sundarajan, M Gupta and S. Sahu (2008), ‘Impact of Organised Retailing on the
Unorganised Sector’, ICRIER, Working Paper No. 222, New Delhi. Mukherjee A. et. al, (2011). ‘Impact of the Retail FDI Policy on Indian Consumers and the Way
Forward’ ICRIER Policy Series No. 5. Nelson V. and Smith S., (2011). ‘Fair trade Cotton: Assessing Impact in Mali, Senegal, Cameroon
and India’, Synthesis Report, Natural Resources Institute, (NRI) University of Greenwich (UoG) and Institute of Development Studies, (IDS), University of Sussex.
Reardon T, and Minten B, (2011). ‘Surprised by Supermarkets: Diffusion of Modern Food Retail in India’, Journal of Agribusiness in Developing and Emerging Economies, Vol. 1, ISS: 2, pp. 134-161.
Shah, A. (2011). ‘Retail Chains for Agro/Food Products: Inclusive or Elusive?’ Economic and Political Weekly, 46 (33), pp. 25-28.
Singh, S. (2010). ‘Implications of FDI in Food Super Markets’, Economic and Political Weekly, 45 (34), pp. 17-20.
Singh, S. (2011). ‘Controlling Food Inflation: Do Super Markets Have a Role?’, Economic and Political Weekly, Vol. 46 (18), pp. 19-22.
Timmer C.P., (2003). ‘Food Policy in the Era of Supermarkets: What’s Different?’, Journal of Agricultural and Development Economics, 1 (2), pp. 50-67, FAO, Rome
59
Effect of Foreign Ownership on Firm-Level Export Behaviour in the
Indian Machinery Industry
Pradeep Kumar Keshari
Head, Regional Training Centre, IDBI Bank Ltd., Videocon Tower, Jhandewalan,
New Delhi-110055 E-mail:
This paper aims at studying the effect of foreign ownership on export behaviour by
comparing the export behaviour of foreign controlled firms (a firm with at least 26
percent of equity holding by the foreign promoters) and domestic firms (other than
foreign controlled firms) in Indian machinery industry. It defines the export behaviour of
a firm involving two simultaneous activities, the export propensity or decision to export
(or not) as well as export intensity or the decision on the portion of output to be
exported.
The recent literature on effect of foreign ownership on the export behaviour revealed the
following: i) there exist a large number of studies comparing export intensity of foreign
and domestic firms but few studies on the effect of foreign ownership on decision to
export and still fewer on combining both aspects of export behaviour; ii) there exist some
important differences between the determinants of export propensity and export
intensity, theoretically as well as empirically; iii) as the firm-level export behaviour is
determined by a number of firm and industry specific factors including foreign
ownership, the additional factors are required to be controlled in a multiple regression
framework so as to isolate the effect of foreign ownership per se; iv) Indian studies
provide mixed evidence on comparative export behaviour (mostly measured by export
intensity) of foreign and domestic firms but the studies pertaining to other developing
countries mostly report higher export intensity as well as export propensity of foreign
firms; v) the recent Indian studies have mostly used Tobit model to study the
determinants of firm-level export intensity.
60
To conduct empirical analysis, we employ an unbalanced sample of pooled data on a
cross- section of 177 firms for 7 year’s period covering 2000/01 to 2006/07. Most of the
data for the study are sourced from the CMIE’s PROWESS - an electronic database on
financial and other parameters prepared from the annual reports of about 10000 Indian
companies. The paper estimates an appropriate sample selection multiple regression
model of export behaviour involving both the decisions in a single framework with the
help of a pooled data set for the seven years period between 2000/01 to 2006/07.
The estimation results reveals that the foreign controlled firms have greater likelihood of
exporting, even after controlling for a large number of additional factors influencing
export behaviour. Among the exporting firms of the industry, however, the export
intensity of foreign controlled firms is not found greater in comparison to those of the
domestic firms. There exist barriers to entry into export market mainly in form of sunk
and transaction costs inhibiting firms to export. To overcome these barriers, the Indian
firms based in the machinery industry can thus take advantage of FDI constituting a
package of tangible (financial capital) and intangible resources (viz. internal and external
networks and contacts, corporate image, technology, managerial, marketing and
organizational expertise).
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Industry in India’, Oxford Development Studies, 37(2): 145-69
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61
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62
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63
Integration of IT Services in the Economy –An Analysis of Selected
Countries and India
Deeparghya Mukherjee
Indian Institute of Management Bangalore
Email: [email protected]
Global information technology (IT) spending has seen phenomenal increases over the last
decade and a half and is scheduled to be of the order of $3.6 trillion in 2012(Gartner).
Amidst claims of increased productivity through greater IT integration in production
processes, India has been adopting policies to facilitate the growth of the IT industry.
Setting up of software technology parks (STPs), the IT Act of 2000 and tax holidays for IT
export incomes are some of the fiscal measures that have been taken to grow the IT sector
in India. As recognised in the literature, exports act as drivers of economic growth and
also help to increase domestic productivity through linkage effects and productivity
spillovers to other sectors of the economy. India’s policies to facilitate growth of the IT
sector are thus expected to not only increase exports but also increase overall domestic
productivity through greater IT integration with the rest of the economy. This paper
investigates the forward and backward linkages of the Indian IT services sector, IT
intensity (proportion of total value added in the economy that is attributable to IT as
intermediate inputs) and IT export intensity (proportion of IT services output exported)
from 1993-94 till 2006-07 using the Leontief input-output model. The primary sources of
data are the Organisation for Economic Cooperation and Development (OECD)
Structural Analysis (STAN) database and the input-output transaction tables published by
the Central Statistical Organisation (CSO), India. The Indian experience is compared with
that of other developed and developing economies which have a significant IT services
sector like the USA, UK, Germany, Japan, China and Brazil. Results suggest a higher
export orientation of the Indian IT industry and lower IT usage in domestic production
compared to other countries. Although backward linkages of the Indian IT sector are
64
almost similar to both developed and developing countries, forward linkages have been
low. IT intensity for India is the lowest amongst the countries considered in the study
proving the scope for greater IT integration to reap productivity benefits for the country.
Cross country regression analyses are attempted to identify causal agents of (1) IT export
intensity and (2) IT intensity. We identify low labour costs, low taxes, the size of the non-
IT services sector and a colonial past as important factors driving high IT export intensity.
IT infrastructure, technical readiness, higher education, regulatory policy and national
income emerge as important factors in increasing IT intensity in an economy. For the
manufacturing sector alone, export orientation increases IT usage in the production
process.
Key Words: Information Technology (IT) services integration, Backward and Forward
Linkages, Input-Output Model, IT export intensity, cross country regression.
References
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65
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66
Trade Effect on Employment Elasticity in Indian Manufacturing
Industries: An Aggregate and Disaggregate Level Analysis over the
Time Period 1988 to 2007
Simontini Das1, Ajitava Raychaudhuri2, and Saikat Sinha Roy3
1 Assistant Professor, Department of Economics, Rabindra Bharati University, Kolkata.
Email: [email protected] 2 Professor,
Department of Economics, Jadavpur University, Kolkata.
Email: [email protected] 3 Associate Professor,
Department of Economics, Jadavpur University, Kolkata.
Email: [email protected]
India’s merchandise exports witnessed quantum growth during post reforms
accompanied by wide ranging changes in commodity composition towards more value-
added manufactured exports. Such high growth in merchandise exports and changing
commodity composition are likely to have immense implications for labour market
outcomes. This paper investigates into the impact of international trade on aggregate
employment and employment elasticity in aggregate as well as disaggregated
manufacturing in India. In specific, the paper estimates the impact of manufactured
exports on demand for both production and non-production workers and employment
elasticity in aggregate as well as disaggregates manufacturing in India during post
reforms. Econometric estimation is carried out for a panel data set comprising of
disaggregated manufacturing industries for the period 1988 to 2007 using dynamic panel
data estimation methods. Fifteen manufacturing industries are selected for estimation
purpose. These industries are classified into two groups; export-oriented industries and
import-competing industries. All the export-oriented industries are labour intensive and
most of the import-competing industries, except wood, cork, straw and plaiting materials
industry, are capital-intensive. The empirical analyses show a significant positive impact
of exports on aggregate employment for production as well as for non-production
workers. The export elasticity is found to be higher for non-production workers than
67
production workers. Thus export increases employment opportunity more for non-
production workers than production workers in Indian manufacturing industries.
Aggregate level analyses also show that export trade increases employment elasticity for
both types of workers. However, this increase in employment elasticity cannot be
explained in terms of growth of export-oriented industries. The growth of employment
elasticity in some import-competing industries (iron and steel industry and chemical
industry) may cause an increase in employment elasticity at aggregate level. The results
vary significantly across industries. Disaggregate level analyses show that positive impact
of export trade on employment elasticity of production workers is observed in most
industries (ten out of fifteen industries). In case of non-production workers, this impact is
positive in fewer industries (six out of fifteen industries). The growth of real wage and
labour market flexibility help to explain the variations in the disaggregated results. It is
observed that employment elasticity for production workers increases in those industries,
where the growth rate of real wage declines or labour market is relatively flexible due to
high growth of contract labour. These two causes individually or jointly increase the
employment elasticity for production workers across the industries. Labour market for
non-production workers is less flexible due to absence of contractualisation. This may
cause the negative impacts of trade on employment elasticity for non-production workers
over a large range of industries.
Keywords: International Trade, Employment, Employment Elasticity, Dynamic Panel
Data Analysis
JEL Classification Code: F16, F14, J23, J21, C23
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68
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70
FDI, Firm Heterogeneity and Exports: an examination of evidence
in India
Maitri Ghosh* and Saikat Sinha Roy@
* Assistant Professor, Bethune College, Kolkata. India.
E-mail: [email protected] @ Associate Professor,
Department of Economics, Jadavpur University, Kolkata, India.
E-mail: [email protected]
In an emerging market economy, exports assume the centre-stage of economic activity.
Foreign Direct Investment (FDI) is a major instrument that provides impetus in
accelerating export performance in such an economy. This is particularly true for India as
FDI brings in a bundle of intangible assets such as new technology and know-how, skill,
wider and more efficient marketing and distribution networks, better managerial
capabilities etc., which are relatively scarce in these economies but are key to better
export performance. FDI is also beneficial for the host country since it can result in
positive externalities or spillovers through various channels of transmission.
Multinational Enterprises (MNEs) form the major channel through which FDI flows into
emerging market economies. MNEs access foreign markets with much more ease than
their domestic counterparts in the host country and often use the host country as export
platform. MNEs, given their scale of operations and a wide array of intangible assets, are
productive and have the capability to overcome the huge sunk costs while entering export
markets. These specific advantages give the foreign firms an edge in the export market
than the domestic firms. Further, host country domestic firms can learn from the export
activities of foreign subsidiaries and affiliates through information externalities,
demonstration and competition channels thereby resulting in export spillovers.
The paper analyses the effect of foreign direct investment on firm-level export
performance across manufacturing sectors in India. FDI inflow in India during post
71
reforms is expected to improve export competitiveness. Such improvements are found to
vary across sectors with varying levels of FDI and hence MNE participation across sectors.
Further, the evidence of inter-firm variations in export performance across sectors is
indicative of the existence of factors specific to firms. In determination of export
performance a firm specific model has been set up for econometric estimation. In the
model, firm heterogeneity is measured in terms of productivity. Panel data estimation
results show that ownership along with import of technology (embodied and
disembodied), in-house R&D, import of raw materials, and expenditure on marketing,
advertising and distribution are the major determining factors of firm-level exports. Firm-
level productivity and credit availability also play significant role in certain sectors. As
FDI brings with it a huge base of tangible and intangible assets, there is also evidence of
positive externalities or spillovers through various channels of transmission. The results
also show presence of export spillovers from foreign to domestic firms in some
manufacturing sectors.
Key words: Export competitiveness, FDI, Multinational Enterprises, Export spillovers,
Panel data estimation
JEL Classification Code: F16, F23, L25, C23
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75
Modus Operandi of Indian Manufacturing Firms: Domestic versus
International
Bikash Ranjan Mishra
Lecturer P. G. Department of Economics, School of Social Sciences
Ravenshaw University, Cuttack- 753003, Odisha, India Email: [email protected]
and Senior Research Scholar,
Department of Humanities and Social Sciences (Economics) Indian Institute of Technology Kanpur, Uttar Pradesh, India
Email: [email protected]
Indian economy over the years has attained a high benchmark to sustain her business and
competition with other nations. The credits should go to the policy makers during the
early 1990s that had adopted a series of liberal policy and undertook major economic
reforms, by reducing government restrictions on foreign trade and investment. The
publicly owned industries are privatized and many profit earning sectors have now been
opened to private and foreign interests. Significant and far-reaching changes have been
made in industrial and trade policy. Import liberalization has been a principal component
of the economic reforms undertaken. Tariff rates have been brought down considerably
and quantitative restrictions on imports of manufactured products have been by and
large removed. In the post liberalization era, India has not only opened up its doors to
foreign investors but also made the investment procedures easier for them by
implementing the following measures: (a) Foreign exchange controls have been eased on
the account of trade. (b) Companies can raise funds from overseas securities markets and
now have considerable freedom to invest abroad for expanding global operations. (c)
Foreign investors can remit earnings from Indian operations. (d) Foreign trade is largely
free from regulations, and tariff levels have come down sharply in the last couple of years.
(e) While most Foreign Investments in India (up to 51 %) are allowed in most industries,
foreign equity up to 100 % is encouraged in export-oriented units, depending on the merit
76
of the proposal. In certain specified industries reserved for the small scale sector, foreign
equity up to 24% is being permitted now.
As the series of theoretical and empirical literature suggests, firm heterogeneity is a
deciding factor of the above-mentioned mode of market service. Besides it, other
significant firm-specific features like age of the firm, its assets size, and volume of sales,
market concentration, R&D intensity, advertisement intensity and its technological
intensity are also examined to explore the decision of a firm with respect to foreign
market service. This paper starts with the explanation of preferable mode of market
operation. In the theoretical set-up, the paper starts with the work of Melitz (2003) which
gives a solid baseline framework and justification for the choice of exports and domestic
sales as the preferable mode of market service. Adding FDI as an alternative mode,
Helpman-Melitz-Yeaple (2004) explained that FDI is the best mode of foreign market
operation. The firms which lie in the top ladder of productivity prefer to open its affiliates
abroad and produce in foreign location. Those firms which are in the next range of
productivity, obviously less in comparison to the FDI ladder, prefer to choose export as
the mode of foreign market operation. Contrarily, the firms which are in the least cadre of
productivity, they do not have any option left rather to restrict its operation to the
domestic territory only, serving the localities.
The sole objective of the paper is to undertake an investigation on the decision of Indian
firms and of its determinants with respect to the mode of service or operation. That
means, why an Indian firm chooses between the following question, i.e., whether to
expand its operation to the foreign market or restrict it to the domestic territory. The firm
heterogeneity is a deciding factor amongst the alternative mode of market service.
Besides it, other significant firm-specific characteristics of Indian firms like age of the
firm, its assets size, and volume of sales, market concentration, R&D intensity,
advertisement intensity and its technological intensity are also examined to explore the
decision of a firm with respect to foreign market service. Additionally, keeping in view the
firm-specificity and empirical evidences of new-new trade theories, this paper seeks to
77
justify that FDI is the most preferable mode of foreign market service for a firm, vis-à-vis
export.
Key words: FDI, HMY, MNL method, Levinsohn-Petrin approach
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78
China’s Telecommunications Service Sector and its Implications for
World Economy
Anil Kumar Kanungo
Indian Institute of Foreign Trade, New Delhi
E-mail: [email protected], [email protected]
China’s telecommunications service sector is uniquely positioned today because of two
important reasons. First, it is the fastest growing in the world, and second it is one of the
most restricted sectors. Once joined the WTO, opening up the sector to external
competition becomes mandatory, however China has largely remained impervious to
such demand and exclusive non-discriminatory policies of WTO. During the negotiations
and even after, liberalization of this sector remained a critical issue due to growth
potential and consideration of China’s one of ‘key national industries’.
This paper analyzes why after a decade China’s telecom service sector is not fully open.
What prompted Government to allow foreign direct investment (FDI) to come in a
phased and geographically restricted manner. What kind of regulations Government has
put in place to protect the interests of the foreign investors. How the market penetration
of telecom service providers has taken shape. How this sector performed during the
global financial crisis and what role FDI played in the sector.
The findings suggest that it is handiwork of the Chinese Government to retain the sector
as restricted. It allowed limited FDI to come and geographically available to consumers to
gauze the initial impact, and keep it an extremely urbanized affair. Ideological reasons
also played a role in restricting FDI in telecom services and allowed the sector to move
quite cautiously. On the whole State control of communications network and allowing or
disallowing of FDI has long been viewed as one of the important aspects of security and
sovereignty. The price competitiveness and discomfort to the consumers have been
79
ignored in the best interests of national sovereignty and security. The sector never
received the ‘State Patronage’ as was extended to the manufacturing sector.
The paper analyzes the major hindrance for the foreign investor was the issue of
transparency in the regulatory system. China’s regulatory framework for
telecommunications is relatively opaque and difficult to understand.
All these developments, the Study concludes, considerably indicate the influence of the
Chinese Government in handling the entire telecommunications service sector to a great
extent and it is her own wish that kept the sector so restricted even now.
Today, high barriers to foreign entrants in the telecommunications service sector, have
indicated that many potential entrants and even the WTO would concede that China
have marginally kept to the agreed schedule for phasing out WTO commitments in the
telecommunications sector. If China’s current approach to telecommunications
regulation proves not only impervious to reform but also legal under WTO rules, WTO
Members will have all the more reason to ensure that these circumstances do not arise
again.
Key words: telecommunications sector, WTO, FDI, sovereignty and security, regulatory
independence
JEL Classification Codes: F13, F14, F15
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landscape and future prospects.’ Information Technology for Development, 12(1): 7-24.
Xiangshuo Yin (2009). Personal Interview, School of Economics, Fudan University, Shanghai, China 9 April,
2009
Yong, Wang (2009). Personal Interview, Centre for International Political Economy, Peking University,
Beijing, China 13 April, 2009
Yu, Liu (2005). ‘China Gets Connected’, Beijing Review, 48(3): 30-34.
Zhang, Ming (2009). Personal Interview, International Finance Division, Institute of World Economics and
Politics, Chinese Academy of Social Science, Beijing 13 April 2009
Zhu Andong (2009). Personal Interview, Centre for Political Economy, Tsinghua University, Beijing, 14 April
2009.
83
Section E: Performance of Banks and Global Financial
Crisis
Estimation of Value at Risk (VaR) In the Context of Global
Financial Crisis of 2007 -08: Application on Selected Sectors in
India
Basabi Bhattacharya* and Piyali Dutta Chowdhury@
* Professor, Financial Economics, Department of Economics, Jadavpur Univer sity, Kolkata; and
Regional Director, Professional Risk Managers’ International Association, Kolkata Chapter,
Email: [email protected] @ Assistant Professor,
Institute of Business Management & Research, Kolkata; and Ph.D Scholar,
Department of Economics, Jadavpur University, Kolkata
Email: [email protected]
The Global Financial Crisis of 2007-08 is often considered to be the worst financial crisis
since the Great Depression of the 1930s. The turbulence generated by global financial
crisis had a profound and significant effect on country’s stock market. This has greatly
challenged risk management models and practices and has generated concerns among
the risk professionals and researchers regarding the effectiveness of alternative risk
assessment methodologies. This reflects importance of the choice of appropriate of risk
assessment models and their timely and precise implementation on the part of
institutions, corporate entities and individual investors as well. Managing financial risks
therefore surfaces as an emergent issue for research and investigation.
This study undertakes empirical estimation of Value–at-Risk (VaR), the widely used risk
assessment methodology, for assessing market risk in the Indian context. Three key
elements of VaR are specified level of loss, a fixed time period and a confidence level. The
single number, VaR, indicates the maximum loss that may be incurred for a given
portfolio for a specified time horizon and a confidence level. The general techniques
84
commonly used to estimate VaR are Parametric method (Delta Normal method) and Non
Parametric method (Historical Simulation method and Monte Carlo simulation method).
While there are several researches both on the methodological improvement on the
method and on the empirical validation of the methods especially in the global context as
well as in the Indian context, there appears a lacuna in the literature in estimating VaR
addressing the recent major global financial crisis period. This paper intends to fill this
lacuna through VaR estimation as well as comparison of methodological efficiency of VaR
models in the context of recent global financial crisis period with reference to the major
sectors in the Indian Stock Market.
The crucial period undertaken in this study refers to the period 2005-2011. Quandt
Andrews Structural Break test has been carried out on the data set to identify the
unknown Breakpoints i.e. crisis period. VaR has been estimated by using the three
methods viz. Delta Normal method, Historical Simulation method and Monte Carlo
Simulation method for the crisis period .The result based three methods are then
compared and analyzed.
In this paper we have considered sectoral diversification by considering the different
sectors which are dominant in the Indian stock market. The portfolio is diversified as it
has representation of different sectors covering Health, Energy, Banking, Realty, IT etc.
on which most of the trades are conducted. The hypothetical portfolio also ensures
further diversification since the different sectors have less correlation among their
returns. The chosen dataset has been empirically tested through application of alternative
methodologies of VaR on this hypothetical portfolio as well as on the individual sectors
for the crisis period only.
The study reflects the way in which the dominant sectors in the market responded to the
crisis phase and how they have worked upon the hypothetical portfolio. The overall risk
characters of the selected sectors are revealed through their behavior during the turmoil
period. . Among the selected sectors, VaRs of the Realty sector, Banking Sector and IT
sector have the values much higher than the other sectors. It is also unveiled from this
85
study that, among all the methodologies of VaR, Monte Carlo Simulation method
yields the best possible results in all the key elements of VaR analysis.
Key Words: Financial crisis, Indian Stock market, VaR
JEL Classification code: G01, G11, G32, C22, C41.
References
Allen, M. (1994). ‘Building a Role Model’, Risk, 7, 73 -80
Bao. Y, Lee T. and Saltoglu B. (2004). ‘Evaluating Predictive Performance of Value -at-Risk Models in
Emerging Markets : A Realty Check’, Journal of Forecasting, 25(2), 101-128.
Beder, T. (1995). ‘VaR: Seductive but Dangerous’, Financial Analysts Journal, 51, 12 -24.
Bhattacharya, B and Dutta, D. (2004). ‘Managing Market Risk in the India Context - An assessment of
Alternative VaR methods’ Working Paper Series, Department of Economics; Jadavpur University,
Kolkata, India.
Bhattacharya, B and Dutta, D. (2004). ‘Value at Risk: A study on Indian Financial Market’, National
Conference on Finance and Economics, ICFAI Business School, Bangalore, India.
Billio, Monica, and L.Pelizzon. (2000). ‘Value -at-Risk: A Multivariate Switching Regime Approach’, Journal
of Empirical Finance, 7, 531–554.
Crnkovic, C. and Drachman, J. (1997). ‘Quality Control in VaR: Understanding and Applying Value -at-
Risk’, Risk Publications, ISBN 189933226X.
Dempster, M. A. H. (editor), (2002). ‘Risk Management: Value at Risk and Beyond’, Cambridge University
Press, ISBN 0521781809.
Dowd, K. (2005a). ‘Measuring Market Risk’, John Wiley & Sons Ltd,
Hendricks, D. (1996). ‘Evaluation of Value -at-Risk Models Using Historical Data’, Economic Policy review,
Federal Bank of New York, April 39 -69.
Jamshidian F. and Y. Zhu (1997). ‘Scenario Simulation Model for Risk management’ Capital Market
Strategies, 12, 26-30.
Jorion, P. (2000). ‘Value at Risk: The New Benchmark for Controlling Market Risk’, McGraw -Hill, New York.
Lopez, J. A. (1999). ‘Methods for evaluating value -at-risk estimates’, Economic Review, Federal Reserve Bank
of San Francisco, 3-17.
Nath, Golaka, Reddy, Y. V. (2003). ‘Value at Risk: Issues and Implementation in Forex Market in India’,
November, pages 26.
Samanta, G. P. and Golaka C. Nath (2003), ‘Selecting Value -at-Risk Models for Government of India Fixed
Income Securities’, International Conference on Business & Finance, December 15 -16, 2003 at the
ICFAI, University, Hyderabad, India, Co-Sponsored by the Philadelphia University, USA.
Sarma, M., S. Thomas and A. Shah (2000). ‘Performance Evaluation of Alternative VaR Models’, mimeo,
Indira Gandhi Institute of Development Research.
Schinassi, G. (1999). ‘Systemic Aspects o f Recent Turbulence in Mature Markets’, Finance and Development,
March, 30-33, IMF, Washington
Varma, J.R. (1999). ‘Value at risk models in Indian Stock market’, Indian Institute of Management, 1999.
Working paper no- 99-07-05, Indian Institute of Management.
86
Institutional Economics: An Approach to Analyze the Conduct of
Foreign Banks in India
K. V. Bhanu Murthy* and Ashis Taru Deb
Department of Commerce Delhi School of Economics
Delhi University
*E-mail: [email protected]
This paper invokes institutional economics as an approach to understand and analyze the
conduct and role of foreign banks in relations to other segments of banking industry and
the regulator in India. It provided a new definition of Institutional Economics as a study
of long term behaviour arising in the pursuance of self interest. Various dimensions of
conduct of foreign banks in colonial period were analysed to understand their behaviour
in a long-term context. They produced information asymmetry in the market for exports
at the cost of domestic exporters. They did not provide a level playing field for Indian
commercial houses vis-à-vis foreign commercial houses engaging in international trade.
They reaped fullest advantage from a situation of laissez faire and conducted their
operations with zero transparency. They produced adverse impact on the development of
indigenous banking skills necessary for development of banking market in the country.
The paper uses data contained in ‘Statistical Tables for Banks’ and ‘Trend and Progress of
Banking in India’ for the period from 1992 to 2011. It develops seven testable hypotheses
and uses simple table and panel regressions to test them. The results show that they have
become institutions unto themselves. They do not promote basic banking; they operate
on the basis of financial exclusion and carry out a heavy dose of off-balance activities, in
comparison to other banking segments. It was observed that foreign banks engaged in
variants of carry forward trade, which went against objectives of the monetary policy.
While there are occasions when they have helped the government in mobilization of
resources, it is pointed out that they are fair-weather friends at best and a potential
source of instability at worst. Foreign banks tend to cut down upon staff and hence have a
87
very low branch network. To compensate they substitute branches with ATMs. The
foreign banks show long-term conduct in terms of following a highly risky, and profit
oriented banking. They indulge in financial exclusion. They have an urban bias. Most of
all they are contributing to the digital divide.
It was evident that the characteristics of conduct of foreign banks came to stay over the
decades, while policies towards them underwent sea changes. Although foreign banks
faced an unfavorable policy scenario, during the period from independence to
globalization, in the subsequent phase, elements of these characteristics of behaviour
continue to manifest themselves, while the form might have changed. This is strongly
indicative of the evolution of foreign banks as an institution.
It is pointed out that foreign banks enjoy more freedom in their operations in India than
in many other developing countries. India has been granting branch licenses more
liberally than is required by the commitments made in the WTO. RBI has not invoked
the 15% ceiling limit on licensing. Instead, RBI has not denied license to any foreign bank,
even though the actual share of foreign bank in total assets of the banking system has
been far above the limit. It would be extremely difficult to justify the notion that the
current regulatory regime is unduly restrictive and not conducive to the operation of
foreign banks in India.
It appears that paper has produced enough evidence to suggest that development of
foreign banks in India have contributed to conflicts in institutions at all the three levels:
firstly between foreign banks and their domestic counterparts; secondly between foreign
banks and domestic policy framework and finally between WTO and domestic policy
framework.
Key words: Foreign banks, regulation, institution
JEL Classification Code: G21, G28, K00, L51, Z13.
88
References
Bain, A.D. (1994). ‘The Economics of Financial System’, Blackwell, Oxford UK, Cambridge, USA.
Bhatt V. V. (1991). ‘On Improving Effectiveness and Efficiency of Financial System in India’, Economic and
Political Weekly, October 12, page 2367 -2372.
Bhanu Murthy, K. V. and Ashis Taru Deb (2009). ‘Sub Prime Crisis in US: Emergence, impact and lessons’,
SSRN Working Paper No http://ssrn.com/abstract=1303417
Business Line (2008) RBI likely to clamp down on arbitrage trade by foreign banks , April 22, page 6.
Business Standard, Stanchart in big rural push, 19th April, 2008.
C. Ménard and M. M. Shirley (eds.), (2005). ‘Handbook of New Institutional Economics’, Springer, Printed in
the Netherlands, pp. 1-18.
Charvaka (1993). ‘Foreign Banks in India: The Drain’, Economic and Political Weekly, January 30, pp 155-57.
Deb, Ashis Taru and Bhanu Murthy, K. V. and (2011). ‘Corporate Governance in Foreign Banks in India’ in
Corporate Governance in Banks, edited by Mridula Sahay, S. Sreenivasa Murthy and R.K. Mishra,
Macmillan Publishers India Ltd, Macmillan Advanced Research Series, New Delhi.
Economic Times, Fair-weather friends: Foreign banks seek to exit PD business, 13th April, 2005, page 1.
Economic Times, Foreign Competition in Banking, Economic Times, 10 April, 2002, page 7.
Economic Times, Differentiated bank proposal, an encouraging measure, May 2, 2007.
Frances, Jane (2004). ‘Institutions, Firms and Economic Growth’. New Zealand Treasury, Working Paper,
Wellington.
Gongopadhaya, S. and Singh, G. (2000). ‘Avoiding Bank Run in Transition Economies: The Role of Risk
Neutral Capital’, Journal of Banking and Finance, 24 (4), pp.625-642.
Hindustan Times Business, Father of India’s EMI culture says Goodbye, December 20, 2008.
IMF (2003). ‘World economic outlook: Growth and institutions’, Washington DC, Working Paper,
International Monetary Fund. http://www.imf.org/external/pubs/ft/weo/2003/01/
Joseph, M. and Nitsure, R. R (2002) WTO and Indian Banking Sector: The Road Ahead, Economic and
Political Weekly, 37(24), 2315-2322.
Keizer, Piet (2008). ‘The Concept of Institution: Context and Meaning’, Working Papers 08-22, Utrecht
School of Economics. North, Douglass C (1991). ‘Institutions’, Journal of Economic Perspectives 5(1): 97-112.
Ram Mohan, T. T. (2004). ‘RBI Guidelines on Foreign Ownership in banks: Don’t shoot the Regulator’.
Economic and Political Weekly, 39(46 and 47), 4964-496.
Reserve Bank of India, Statistical Tables relating to banks, various issues, Bombay.
Reserve Bank of India, Report and Trends of Banking in India, various issues, Bombay.
Rodrik, Dani (2003). ‘Growth strategies’, National Bureau of Economic Research, Working Paper No 10050.
Cambridge MA.
Verma, Sunny (2011). RBI terns on off -balance sheet exposures of foreign banks, Economic Times,
September 1, page 2.
Vishwanathan, Aparna. (1993). ‘Foreign Banks: Need for Control’, Economic and Political Weekly, March 22-
27, pp 503-04. http://www.blonnet.com/2003/02/10/stories/2003021002070100.htm
Williamson, Oliver (2000). ‘The new institutional economics: Taking stock, looking ahead’, Journal of
Economic Literature, 38(3): 595-613.
89
Section F: India’s Trade Performance
Import Liberalization and Persistent Negative Trade Balances in India: Impact on Domestic Income and Employment
Tushar Das
Sadananda Mission High School, Howrah, India E-mail: [email protected]
Economic liberalization in India in 1991 had its major component reflected in the
liberalized import policies of government of India. The obvious objective was to promote
freer trade by allowing the substitution of imported inputs for domestic ones when it is
needed for achieving more competitive exports via more efficient production and thereby
gaining greater share of Indian export products in the world market. However, we notice
stimulating debates in the empirical literature questioning the possibility of success of the
above in the Indian context. Nambiar and others (1994,1999) have tried to establish the
view that instead of promoting income and employment through accelerated export
growth via more efficient production through eased used of imported inputs, trade has
shrunk income and employment growth. This paper using slightly improved
methodological framework and data base (substituting domestic input-output matrix for
total matrix (domestic + import) matrix) for projection of income and employment, we
arrive at the conclusion that liberalized trade has promoted income and employment
rather than squeezed it. Again, in no way persistent adverse trade balance can be
considered an essential byproduct of liberalization. If import relaxation and export
promotion can go together through an integrated policy package in the liberalized
scenario, it may be possible to overcome persistence of sizable negative balance of trade.
So, we have made an attempt to visualize a ‘zero trade balance’ scenario to separate out
the impact of negative trade balance on income and employment in the liberalized trade
situation in India.
90
We consider ( )MEFfQ d −+=
where Q = Production of goods, dF= Domestic final
demand, E = Exports and M = Imports. It follows from the equation that any change in
production can be decomposed into i) a change due to domestic use and ii) a change due
to foreign trade. To estimate the impact of a change in domestic demand, exports or
imports or trade on production, the induced effect of that change must be taken into
account also. We first obtain the sector wise labour coefficients (the labour requirement
per rupee worth of output). Then the direct and indirect labour requirements for
domestic final demand, exports, imports and for trade are separately derived in the
following way:
( ) dL
d FAdILF1−
−= : Total Labour requirement due to final domestic demand (Direct
plus Induced)
( ) EAdILE L 1−−= : Total Labour requirement due to export (Direct plus Induced)
( ) MAdILM L 1−−= : Total Labour requirement for import replacement (Direct plus
Induced)
Where L is a row vector of labour coefficients, ( ) 1−− AdI is the Leontief inverse of the
domestic input matrix, E is the column vector of exports, M is the column vector of
imports, Fd is the column vector of domestic final demand. LdF is the direct and indirect
labour requirement for domestic use. EL is the direct and indirect employment associated
with exports. ML is the direct and indirect employment displaced by the competitive
imports. In a similar way, value added requirements are calculated for domestic final
demand, exports, imports and trade.
Though liberalized trade has contributed to loss of employment and value added over the
period 1993-94-1998-99 but it has contributed to growth in net employment and income
in the later phase of import liberalization ie, 1998-99 -2006-07. As far as the relative
contribution of domestic use and trade to the net change in employment and value added
91
over the period 1993-94 – 2006-07 is concerned, the result of our decomposition exercise
shows that the induced effect of domestic use and trade are contributing to positive
employment growth of the economy but in case of value added, while domestic demand
contributes to positive income growth, trade stimulates negative net income growth of
the economy during the period just mentioned.
Like pre reform periods, Indian economy under liberalisation is also characterized by
persistent and sizable negative trade balances. In this paper, our attempt to study the
impact of negative trade balances on domestic income and employment visualizing a
‘zero trade balance’ scenario (Imports scaled down to the size of exports and exports
scaled up to the size of imports) suggests that persistence of adverse negative trade
balance itself is, to a large extent, responsible for the employment and value added loss
especially in the era of import liberalisation. It is to be remembered that import
liberalization and huge trade deficit should not go simultaneously and large negative
trade balance need not be considered as an essential by product of economic
liberalization. So, it seems essential that import relaxation and export promotion should
go together through an integrated policy package in the liberalized scenario to overcome
persistence of sizable negative balance of trade and the resultant loss of employment and
income.
Key Words: Economic Liberalisation, Domestic Input-Output Matrices, Value added
JEL Classification Code: F14
References
Basu, K. (1993). ‘Structural Reforms in India, 1991-93: Experience and Agenda’, Economic and Political
Weekly, November, 2
Bharadwaj , R (1962). ‘Structural Basis of India’s Foreign Trade’, (University of Bombay).
Das, T. (2010). ‘Generation of Employment and Income in Non Manufacturing Sector Stimulated by Trade
in Manufacturing Sector in India Under Liberalisation’, Arthabeekhsan, 19(3), 30-39.
Das, Tushar, A.K Sengupta (2011). ‘Import Liberalisation in India: It’s Impact on Domestic Income and
Employment’, The Indian Journal of Labour Economics, 54(2), 239-250
Economic Survey - 2002-03, 2006-07 Govt. of India.
Ghosh, A. (1960). Experiments with Input-Output Models, (Cambridge University Press).
92
Input-Output Tables - 1993-94,1998-99 , 2003-04 and 2006-07, Central Statistical Organization, Govt. of
India.
Nambiar, R.G and G Tadas (1994). ‘Is Trade De industrializing India?’ Economic and Political Weekly, Oct-
15, 2741-46
Nambiar R G, B L Mungekar and G A Tadas(1999). ‘Is import Liberalisation Hurting Domestic Industry and
Employment’, Economic and Political Weekly, Feb-13, 417-24
93
Section G: Foreign Investment
An Empirical Analysis of Trade Liberalization –
Compensation for Expropriation of Foreign Investments: Hull formula Revisited
Rajesh Babu
Associate Professor, Public Policy and Management Group,
Indian Institute of Management, Kolkata E-mail:
The standard of compensation for expropriation of alien property has remained till date
one of the most disputed issues in international law. It has been decades since the United
States Secretary of State Cordell Hull articulated the famous Hull Formula as standard of
compensation as Mexico’s nationalization of American petroleum companies in 1936.
Mexico had invoked the ‘Calvo clause’ in the investment contract, where it was agreed
that whenever there is any dispute relating to investment, the investor will treat
themselves in all respects as a citizen of the host government. Since then the debate has
centered on the application of host country’s standard (laws) or international law
standard for determining compensation for expropriation alien property. The debate also
became one of the most contentious issues in the developed-developing country’s
relationship. Despite persistent objection from the developing countries, the standard set
by the Hull formula has survived to continue to dictate terms of compensation for
expropriation of foreign investment.
Today, the Hull formula and its variants is an integral part of international investment
law. Indeed, the United Nations resolutions in the 1970s and official position espoused by
the developing countries have prevented the Hull formula from establishing itself as the
universal standard of compensation for expropriation in international law. In reality,
however, the 2800 odd bilateral investment treaties (BITs) and interpretations developed
by the international arbitration institutions have helped the Hull formal attain permanent
status, albeit indirect, in international law. In addition, the Hull standard has outgrown to
94
include not just outright or direct expropriation of foreign property, as has been
traditionally understood, but also circumstances where certain acts of States can be
construed as meeting the conditions of expropriation, i.e., practices often known as
creeping or indirect expropriation and circumstance tantamount to expropriation. This
paper attempts to briefly analyze the continuing relevance and resurgence of Hull
formula as the international standard for compensation for expropriation.
95
Section H: Stock Market Returns in the International
Context
The Relationship between Dividend Payout Policy and Foreign
Institutional Investment in India
Poulomi Lahiri
Doctoral-Fellow Institute of Development Studies Kolkata (IDSK)
E-mail id: [email protected]
This paper tries to explore the link between dividend payout policy and foreign
institutional investment. After financial liberalization, it is evident that the share of
foreign institutional investment has increased in developed as well as in developing
countries like India. Dividend payments follow more or a less stable path for most of the
Indian companies during the reform period.
This potential linkage between dividend payout policy and foreign institutional
investment can be explained by several theoretical explanations. Among those theories,
agency theory suggests that being large shareholders and also governed by strong legal
laws of domestic countries along with practising effective and enhanced monitoring
facilities, foreign institutional investors may prevent managers of the domestic firms to
reduce the over-investment or bad investment problems by forcing the domestic firm’s
managers to formulate effective dividend payout policy.
Signalling theory suggests that under asymmetric informational situation firms will pay
dividends in order to attract foreign institutional investors. Hence, a positive association
between dividend payout policy and foreign institutional investors is expected.
Asymmetric informational theory assumes that the agency or the signalling theory arises
out of the conflict between managers (controllers) and shareholders (outside). But, in
India, this agency cost problem takes place between large controlling owners and
96
minority shareholders. In India, foreign institutional investors provide investment to
Indian firms as well as possess equity holding in those respective firms. So, they have
direct access to all the activities of those firms. Thus, dividend signalling theory has no
significance at all.
Dividend clientele theory suggests that having better legal laws, institutional charters and
prudent man rules and restrictions of domestic countries with tax advantage or enjoying
tax exempted status foreign institutional investment and dividend payment may maintain
a positive association with each other.
Over time two new theories have been emerged, these are the maturity theory and the
pecking order theory which could explain the effect of foreign institutional investments
on dividend payout policy. The pecking order theory suggests that highly leveraged firms
will be in favor of paying lower dividends. Maturity hypothesis advocates that firms
having low growth potential (defined by having very few good investment opportunities)
may be in favor of distributing more dividends.
This paper addresses the following questions: a) Do foreign institutional investments
affect payout policy of Indian corporate firms? Under such broad objective we would first
like to investigate whether foreign institutional investments induce Indian corporate
firms to pay dividends? If foreign institutional investments induce the Indian corporate
firms to pay dividends, then by classifying foreign institutional investment into higher
foreign institutional investments (the foreign investors who own more than 5 percent
shareholding ratio) we would like to see whether foreign institutional investments as a
whole, as opposed to higher foreign institutional investments, or both play an important
role in increasing the level of dividend payouts because in many countries foreign
investors who own more than 5% shareholding ratio are only considered as foreign
institutional investors. On the contrary, we want to see whether dividend payout policy
affects the inflow of foreign institutional investment. Using panel data of 150 listed Indian
companies for the period 2001-10, this paper has first tried to explore the impact of
foreign institutional investment on dividend payout policy and vice-versa.
97
The outcomes indicate the foreign institutional investments, as a whole, increase the
chance of paying cash-dividend, but the marginal impact is quite small in economic terms
and also FIIs increases the probability of paying more dividend payouts. Our analysis has
further shown that the foreign institutional investors are attracted towards cash-dividend
paying firms. Thus, our study does not support the agency cost problems but do support
the clientele theory. Our results further reveal that our firm-level characteristics do
support the free-cash flow theory and the pecking order theory firmly but the maturity
theory partially. However, the financial recession, which has started since 2007, has
shown its usual negative impact on the level of dividend payments.
Keywords: Foreign institutional investment, Dividend payout, Panel Probit estimation,
Panel, Tobit estimation, Linear dynamic panel estimation.
JEL Classification Code: C23, C24, G30, G35
References
Allen, F., Bernardo, A. and Welch, I. (2000). ‘A Theory of Dividends Based on Tax Clienteles’, Journal of
Finance, 55(6): 2499-2536.
Baba, N. (2009). ‘Increased Presence of Foreign Investors and Dividend Policies of Japanese Firms’, Pacific-
Basin Finance Journal, 17(2): 163-174.
Black, F. and Scholes, M. (1974). ‘The Effects of Dividend Yield and Dividend Policy on Common Stock
Prices and Returns’, Journal of Financial Economics, 1(1): 1-22.
Chai, D.H. (2010). ‘Foreign Corporate Ownership and Dividends,’ Centre for Business Research, Working
Paper, University of Cambridge.
Easterbrook, F.H. (1984). ‘Two Agency-cost Explanations of Dividends’, American Economic Review, 74(4):
650-659.
Ecbo, B.E. and Verma, S. (1994). ‘Managerial Share Ownership, Voting Power, and Cash Dividend Policy’,
Journal of Corporate Finance, 1(1): 33-62.
Fama, E. and French, K. (2002). ‘Testing the Trade-off and Pecking Order Predictions about Dividends and
Debt’, Review of Financial Studies, 15(1): 1-33.
Gopalan, R., Nanda, V. and Seru, A. (2005). ‘Do Business Groups Use Dividends to Fund Investments?’, Olin
School of Business, Working Paper, Washington University.
Grullon, G. and Michaely, R. (2005). ‘Institutional Holdings and Payout Policy’, Journal of Finance, 60(3):
1389-1426.
Hotchkiss, E.S. and Lawrence, S. (2007). ‘Empirical Evidence on the Existence of Dividend Clienteles’,
Department of Finance, Working Paper, Boston College.
Jensen, M. (1986). ‘Agency Costs of Free Cash-flow, Corporate Finance and Market for Takeovers’, American
Economic Review, 76(2): 323-329.
98
Jeon, J., Lee, C. and Moffett, C.M. (2011). ‘Effects of Foreign Ownership on PayoutPolicy: Evidence from the
Korean Market’, Journal of Financial Markets, 14(2): 344-375.
Khanna, T. and Palepu, K. (2000). ‘Is Group Affiliation Profitable in Emerging Markets? An Analysis of
Diversified Indian Business Groups’, Journal of Finance, 55(2): 867-891. Kim, S., Sul, W. and Kang, A.S. (2010). ‘Impact of Foreign Institutional Investors on Dividend Payout Policy
in Korea: A Stock Market Perspective’, Journal of Financial Management and Analysis, 23(1): 10-26.
Kumar, J. (2004). ‘Does Ownership Structure Influence Firm Value? Evidence from India’, Journal of
Entrepreneurial Finance and Business Ventures, 9(2): 61-93.
La Porta, R., Lopez-de Silanes, F., Shelifer, A. and Vishny, R. (2000). Agency Problems and Dividend Policies
around the World, Journal of Finance, 55(1): 1-33.
Lin, C.H. and Shiu, C.Y. (2003). ‘Foreign Ownership in the Taiwan Stock Market- An Empirical Analysis’,
Journal of Multinational Financial Management, 13(1): 19-41.
Myres, S.C. and Majluf, N.S. (1984). ‘Corporate Financing and Investment Decisions When Firms Have
Information that Investors Do Not Have’, Journal of Financial Economics, 13(2): 187-221.
Short, H., Zhang, H. and Keasey, K. (2002). ‘The Link between Dividend Policy and Institutional
Ownership’, Journal of Corporate Finance, 8(2): 105-122.
Strickland, D. (1996). ‘Determinants of Institutional Ownership: Implications for Dividend Clienteles’,
Finance Department, Working Paper, Ohio State University.
99
Section I: Comparative Analysis between India and
China
An Empirical Analysis of Trade Liberalization between India &
China
Rahul Arora* and Sarbjit Singh@
* Senior Research Fellow (SRF-UGC) in Economics, Indian Institute of Technology Kanpur, Kanpur. India
Email: [email protected] @ Senior Research Fellow (SRF-UGC) in Economics,
Indian Institute of Technology Kanpur, Kanpur. India. Email: [email protected]
The motivation behind the present study is the ongoing talks in between India and China
for further trade liberalization and concerns about the future trade and investment
policies of both the countries. Recently, on August, 2012, both countries have decided to
set up a Joint Working Group (JWG) to address the trade and investment related issues.
Among the various policy issues, trade liberalization has been an important part of
foreign policy agenda for both the countries and the main stumbling block on the way of
trade liberalization is the restriction on imports. These restrictions can be in the form of
tariff or non-tariff barriers. The present study considered only the tariff barriers on goods
traded and attempted to estimate the potential benefit/losses if these barriers would be
completely eliminated in between India and China. The paper employs the WITS-SMART
simulation model (Under the SMART tool in WITS) to analyze the effect of tariff
reductions on revenue and welfare of both the countries. In the preliminary analysis,
different trade indicators have been calculated to assess the trade pattern of both the
countries. For simulations under the assumption of zero tariffs on imports from partner
country, only those products are considered in which other country has comparative
advantage. The results on different variables such as trade creation, trade diversion,
welfare effect, consumer surplus and change in tariff revenue have been estimated and
presented for both the countries. The results depict that the liberalization effort from the
100
Indian side create more trade than the liberation effort from the other side. Particularly,
Indian imports from China have been increased more than the increase in imports of
China due to their own liberalization efforts. Further, the figures on trade diversion effect
shows that Indian trade has been diverted more towards China as compared to the
diversion of Chinese trade towards India because of their own policy efforts. Moreover,
the loss in tariff revenue is again greater in case of India due to the effort of trade
liberalization with China. The loss in tariff revenue is supported by the positive
relationship between the imports of a country and loss in tariff revenue under the policy
of zero tariffs.
Keywords: India-China Trade, Trade Liberalization, SMART Analysis.
JEL Classifications Code: F13, F14, F47.
References
Amjadi A., Schuler, P., Kuwahara, H. and Quadros, S. (2011). User Manual, World Integrated Trade
Solutions (WITS), World Bank, Washington, DC.
Mathur, S.K. (2012). ‘Trade in Climate Smart Goods and other Specialized Products of Ecuador’, Ventus
Publishing ApS.
Mikik, M. and Gilbert, J. (2009). ‘Trade Statistics in Policy Making: A Handbook of Commonly Used Trade
Indices and Indicators’, ESCAP, UN.
Othieno, L. and Shynyekwa, I. (2011). ‘Trade, Revenue and Welfare Effects of the East African Community
Custom Union Principle of Assymtry on Uganda: An Application of WITS-SMART Simulation
Model’, Research Series no. 79, Economic Policy Research Centre, Uganda.
World Trade Report (2011). ‘The WTO and Preferential Trade Agreements: From Co-Existence to Coherence’,
World Trade Organization (WTO).
101
Structural Changes in Commodity Composition of India’s Trade
with China Since 1991
Dr. Rajiv Kumar Bhatt* and Rajni Kant Ojha@
* Associate Professor, Department of Economics, Banaras Hindu University, India
E-mail: [email protected] @ Research Scholar,
Department of Economics, Banaras Hindu University, India E-mail: [email protected]
In recent years, bilateral trade and investment between India and China are growing fast,
indicating the existence of a vast potential for economic cooperation. The
complementarities exist between India and China, particularly in imports from China in
electrical and electronics goods, chemicals and silk products. There are limited
complementarities of Indian exports to China. Both countries are developing closer
economic relations with each other and with the rest of the Asian countries through
bilateral and regional agreements.
India and China are the economic powers of the Asian region. For sustainable
development of the world and Asian economies, China and India should be integrated
with the Asian economy and simultaneously with the rest of the world. Open regionalism
and trade cooperation between the world’s two largest developing economies can foster
outward-oriented development and intraregional trade based on comparative advantage
and complementarities. The bilateral trade between India and China is increasing at rapid
growth rate and Indo-china two-way trade has crossed $ 59465.20 million in 2010-11.
India’s export to China $ 19247.20 million and import from China reached to $ 40128.0
million. Both the countries are considering the conclusion of bilateral trade agreement to
enhance trade. So, we can say that there is a huge growth in the volume of India’s trade
with China since 1991. In the year 1991, the Indian Government adopted the policy of
globalization and economic liberalization which as a result of it, India’s exports to China
has increased significantly after 1991.
102
We have compared the exports of top fifteen commodities in the years of 1991-92, 2000-01
and 2010-11 to examine the structural change in the commodity composition of India’s
export to China. This shows that iron-ores, slag and ash remain the major components of
Indian exports to China. Cotton and residuals, wastes of food industries, animal fodder,
Iron and steel, plastics and articles, organic chemicals have emerged as major products in
Indian exports to China. Organic chemicals though remain a major product of export to
China but its export growth rate is less than the overall growth rate of Indian exports to
China. Both iron and steel and plastics and articles have increasing share in Indian
exports to China. Share of plastics and articles in 2010-11 is 8 per cent. The Iron and Steel
sector emerged as the major product group in export to China. These compositional
changes in Indian export basket to China clearly indicate a shift from primary and natural
resource based manufacturing products to low and medium technology manufacturing
products.
We have also compared the imports of top fifteen commodities in the years of 1991-92,
2000-01 and 2010-11 to examine the structural change in the commodity composition of
India’s import from China. Salt, sulphur, earths and stone with 21.29 per cent was in the
top position in 1991-92 followed by mineral fuels & mineral oils and silk but in 2010-11,
electrical machinery, & equipment occupied the first position with 27.27 per cent, nuclear
reactors boilers machinery, organic chemicals, project goods etc. are other major items of
India’s imports. From the analysis, it is clear that during the period of 1991-91, 2000-01
and 2010-11, there is significant change in commodity composition of India’s trade with
China.
Study shows that the structure of commodity composition of India’s export to China and
import from China through Spearman Rank Correlation (SRC) coefficient did not
undergo change between 1995-96 and 2001-02 where SRC was 0.68 and 0.66. But there is
a significant change in commodity composition of India’s trade with China during 1995-
96 to 2010-11 where SRC is 0.08 for India’s export to China and 0.01 for India’s import from
China.
103
In this paper an attempt is made to analyze the trends and patterns of India’s trade with
China since 1991.The paper has covered following aspects of India-China trade – first,
trends of India’s trade with China since 1991, second, Commodity composition of India’s
trade with China since 1991, third, Structural Change in commodity composition of India’s
trade with China through SRC and fourth is Conclusion & suggestions.
Key Words: India, China, trend, commodity composition, trade, SRC.
References
Athwal, Amardeep (2008). ‘China–India Relations Contemporary dynamics’, Routledge 2 Park Square,
Milton Park, Abingdon, Oxon
Batra,Amita and Khan, Zeba (August 2005). ‘Revealed Comparative Advantage: An Analysis for India and
China’, Working Paper No. 168, Indian Council for research on International Economic
Relation(ICRIER) New Delhi.
Bhat, T.P. (2011). ‘Structural Changes in India’s Foreign Trade’, ISID, New Delhi
Bhat, T.P.; Guha, Atulan and Paul, Mahua (2006). ‘India and China in WTO-Building Complementarities
and Competitiveness in External Sector’, Report of Planning Commission, Govt. of India, ISID, New
Delhi
Bhattacharya, Biswa N. and De, Prabir (2005). ‘Promotion of Trade and Investments between China and
India: The Case of Southwest China and East and Northeast India’, CESifo Working Paper No. 1508,
Category 7: Trade Policy
Bhattacharya, Swapan K. and Bhattacharya, Biswa N. (April 2007). ‘Gains and Losses of India-China Trade
Cooperation- A Gravity Model Impact Analysis’, CESifo Working Paper No. 1970, Category 7: Trade
Policy.
Chai, Joseph C.H. & Roy, Kartik C. (2006). ‘Economic Reform in China and India: Development experience
in a Comparative Perspective’, Edward Elgar Publication, Cheltenham, UK & Northampton, USA
Christopher, J Rusko & Karthika, Sasikumar (2007). ‘India and China: From Trade to Peace?’, Asian
Perspective, 31(4), 99-123.
Gang, Zhou (2008). ‘Current China–India Relations and Economic Cooperation’, China Report, 44(1), Sage
Publication, Los Angeles/London/New Delhi/Singapore, pp 41-46.
Kalirajan, Kaliappa & Singh, Kanhaiya (2008). ‘A Comparative Analysis of China’s and India’s Recent Export
Performances’, Asian Economic Papers,
Kochak, Anjani K. (2006). ‘Development Indices: A Comparative Study of India and China’, China Report,
Vol. 42:1 (2006), Sage Publication, New Delhi/Thousand Oaks/London, pp 57-68.
Panagariya, Arvind. (2006). ‘India and China: Trade and Foreign Investment’, Columbia University, New
York.
Pillani, Rajesh K (2010). ‘Indo-China Trade: trends, Composition and Future’, Journal of Applied Economics,
V -2/ (12), 129-137.
104
Srinivasn, T.N. (2004). ‘China and India: economic performance, competition, and cooperation: An update’,
Journal of Asian Economics, 15 (2004), 613–636
Srinivasn, T.N. (2004). ‘China, India and the World economy’, Working Paper no. 286, Stanford Center for
International Development, Stanford University, Stanford, California.
Wu, Yanrui and Zhou, zhangyue (2006). ‘Changing bilateral trade between China and India’, Journal of
Asian Economics, 17, 509-518
105
Section J: Trade Policy
Counter-Cyclical Payments under Doha Negotiations: An Analysis
of USA Subsidy
Sachin Kumar Sharma
Assistant Professor/ Consultant Centre for WTO Studies,
Indian institute of foreign trade New Delhi
Email: [email protected]
Agricultural trade has always been and continues to be one of the most sensitive trade
issues in recent negotiations under Doha Round. This round mandated a development
round and recognizes the need for special and differential treatment for developing and
least developing countries (LDC). However, recent agriculture negotiations suggest that
Doha Development Round has explicit agenda for the development of rich countries at
the cost of millions of poor and resource less farmers in developing and least-developing
countries. Over the last ten years, various draft modalities on agriculture negotiations
shows that many provisions were crafted for the developed countries, so that these
countries continue to enjoy artificial comparative advantage in agricultural goods and
therefore, dilute the development agenda of Doha round. One of the most contentious
issues in agriculture negotiations is the Counter Cyclical Payment programme (CCP) of
USA. The issue of CCPs in Doha Round has emerged as USA seeks to put this trade
distorting subsidy under blue box rather than under amber box. For this purpose, USA
seeks to broaden the definition of blue box. However, this policy change will undermine
the main objective of Agreement on Agriculture (AoA) as well as of Doha Declaration
(Para 13, WT/MIN (01)/Dec/1) i.e. to establish a fair and market-oriented agricultural
trading system. With this background, the main objective of this study is to critically
examine the various aspects of CCPs in the context of USA commitment under
Agreement on Agriculture (AoA) and future obligations under recent Doha round
Negotiations.
106
Key Words: Subsidy, Blue Box, counter-cyclical payments, Doha negotiations, WTO
notifications
JEL Classification Code: F 51, Q17, Q 18
References
Anton, J., and C. Le Mouel. (2004). ‘Do Counter-cyclical Payments in the 2002 US Farm Act Create
Incentives to Produce?’, Agricultural Economics, 31. 2-3: 277-84.
Basco, C., I. Buccellato, V. Delich, and D. Tussie. (2003). ‘Implications of the Shift in United States Farm
Policy’, CEPAL Review, 81: 137-149.
Bullington Elizabeth (2005). ‘WTO Agreements Mandate That Congress Repeal the Farm Bill of 2002 and
Enact an Agriculture Law Embodying Free Market Principles’, American University International
Law Review, 20(6)
Chavas, J., and M. T. Holt. (1990). ‘Acreage Decisions under Risk: The Case of Cotton and Soybeans’,
American Journal of Agricultural Economics, 72(3): 529-538.
Daniel.a.Sumner (2006). ‘Effects of U.S. Upland Cotton Subsidies on Upland Cotton Prices and Quantities’,
Web link http://aic.ucdavis.edu/research1/Sumner_WTO_Cotton.pdf.
Das Abhijit and S.K.Sharma (2011). ‘Evolution of WTO agriculture modalities’, Occasional paper no.1, Centre
for WTO Studies Publication.
OECD Report (2010). ‘Agricultural Policies in OECD Countries 2010 at a Glance’, OECD Publication.
Oxfam briefing note (2005), ‘From Development to Naked Self-Interest: The Doha Development Round has
lost its way’, Oxfam Publication.
Oxfam Briefing Note. 2008. ‘Square Pegs in Round Holes: How the Farm Bill Squanders Chances for a Pro-
Development Trade Deal’, Oxfam publication.
Oxfam briefing paper (2009). ‘Empty promises: what happened to ‘development’ in the WTO’s Doha
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Ratna, R.S., Abhijit Das and S.K.Sharma(2011). ‘Doha Developemnt Agenda for Developed nations:
Carveouts in recent agriculture negotiations’, Discussion paper no.8, Centre for WTO Studies
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Westcott C. Paul (2005). ‘Counter-Cyclical payments Under the 2002 Farm Act: Production Effects Likely to
be Limited’, in CHOICES, published by American Agricultural Economics Association, 3rd Quarter
20(3)
Westcott, Paul C., C. Edwin Young, and J. Michael Price (2002). ‘The 2002 Farm Act: Provisions and
Implications for Commodity Markets’, Agriculture Information Bulletin No. 778, U.S. Department of
Agriculture, Economic Research Service, 2002,
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107
Section K: Impact of Microfinance on the Poor
Measuring the Impact of Microfinance on Poverty: A Cross Country
Analysis with Special Reference to India
Arindam Laha and Pravat Kumar Kuri
University of Burdwan, India
The outreach of microfinance programme is considered to be a means enhance the
economic wellbeing among the member households through poverty alleviation. It is, in
fact, a well-designed institutional innovation to ensure a substantial flow of credit to
collateral poor households, who were often been excluded by the conventional financial
institutions. Undoubtedly, the potentiality of such programmes in enlarging the
opportunity of rural poor is conditioned upon its linkages to the poverty alleviation.
However, this causality is a complex process. There might be indirect channels by which
one reinforces the other. The process of microfinance outreach enables to create an
environment to provide better access to economic opportunities. To ensure equal access,
it is necessary to strengthen human capabilities to enable the people to qualify for
productive employment. The enhancement of economic opportunities through banking
inclusion has indirect effect upon the attainment of education and health opportunities
and this, in turn, enhance the capability.
Microfinance as an institutional intervention is widespread in developing world.
According to Microfinance Summit Campaign Report, 2012, out of 3652 microfinance
institutions, 1009 are found in operation in Sub-Saharan Africa, 1746 in Asia and the
Pacific, and 647 in Latin America and the Caribbean. Among the developing world, Asia
and the Pacific predominantly occupied a large client share of 82 percent, followed by
Latin America and the Caribbean countries (6.47 percent), Sub-Saharan African countries
(5.67 percent). In fact, Asia accounted for the majority of microfinance institutions,
retained the highest number of savings and credit, and served more members than any
other continent. More interestingly, microfinance programmes in Asia and Pacific
108
countries are found to be successful in extending its services to the poorest and women
sections of the population. It is evident that Asian and Pacific region retains more than 90
percent of the share in the number of poorest clients and number of poorest women
clients in comparison to the global trend.
Among the countries of South Asia, historically, Bangladesh dominates in terms of
microfinance outreach and share of total borrowers. The share of Bangladesh in total
number of active borrowers was 73.49 per cent in 2005 and maintained its supremacy for
a quite a long time. Interestingly, over the period of only six years, India achieved a
tremendous development in expanding the outreach of micro finance institutions. The
outreach and the share of total borrowers had increased from 18.64 per cent in 2005 to
76.25 per cent in 2011. Some other countries, viz. Afghanistan, Nepal, Pakistan and Sri
Lanka maintained a more or less constant share of borrowers in South Asia. A similar
trend is also visible in case of gross loan portfolio. Among south Asian countries, India is
thus emerging in a big way defeating Bangladesh in outreaching its microfinance
programme and thereby access to micro-credit to the member households. India, being
the largest market in South Asia, still lags in outreaching microfinance services to the
poor households. Despite the significant growth of microfinance institutions and its
active borrowers the penetration of microfinance lending services to the poor households
in the country is limited to only 8 percent in 2010 vis-à-vis 33 per cent in Bangladesh and
91 per cent in Sri Lanka .
Though, in India, microfinance institutions are emerging in a big way, there are
substantial regional variations in the outreach of microfinance institutions. A composite
index has been constructed using the penetration, availability and usage indicators of
microfinance outreach to examine the interstate variations in the level of its achievement.
Subsequently, attempt has been made to analyse the role of microfinance in alleviating
poverty across the states of India. The result shows that out of 27 states and Union
Territories, only in seven states (Kerala, Andhra Pradesh, Tamil Nadu, Goa, Himachal
Pradesh, Tripura and Karnataka) outreach of microfinance programme has made a
109
significant impact on the reduction of poverty. Interestingly, the southern region is
observed to be leading in the outreach of microfinance programme, followed by central,
northern, north-eastern and eastern regions.
Keywords: Microfinance, Poverty, Index of Microfinance Outreach among the Poor
Households
JEL Classification Code: G21, I32, O53, Z13.
References
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110
MFIs and poverty alleviation in India: Quo vadis?
Anand Saxena* and Ashis Taru Deb@
* Associate Professor Deen Dayal Upadhyaya College
University of Delhi E-mail: [email protected]
@ Associate Professor College of Vocational Studies
University of Delhi E-mail: [email protected]
Born out of the poor’s desperation in Bangladesh in 1970s, microfinance was a noble-prize
winning novel financial innovation, that is, Grameen Bank. By 2010, however, the industry
was facing its worst ever crisis, due largely to the developments in Andhra Pradesh where,
pushed by the pressure from the MFIs, over 200 borrowers committed suicide.
Commentators lamented the mission drift and hence the question quo vadis. Andrew
Hilton (2011), director of Centre for Studies in Financial Innovation, USA wrote:
A lot of people—well-meaning, thoughtful people who are in the microfinance industry
are now worried that microfinance has taken a wrong turn, that it has drifted away from
its original mission, that is had been co-opted (or even corrupted) by the pursuit of size
and profitability.... This is new and...it leaves microfinance and individual MFIs at a
‘tipping point.’ Will the industry continue to evolve—to grow, to offer new products, to
move up market—until it is essentially indistinguishable from conventional financial
institutions (banks, consumer finance companies, etc.)? Or will it rediscover its roots as a
more modest source of small-scale credit to a relatively limited market amongst lower-
income groups in generally poor countries?
The predicament of the MFIs comes alive dramatically in case of SKS Finance. The frantic
drive to scale up the operations around the time of its initial public offer (IPO) points to
the pitfalls of market based solutions to the problem of poverty. Overselling of debt,
practice of usury, arm twisting of the borrowers and the resultant suicides have given rise
111
to serious doubts about the efficacy of the MFIs in meeting the challenge of poverty in
India. Whereas the government of Andhra Pradesh shut down all the profit driven MFIs
in the state once hailed as the cradle of the industry, neoliberals view this act of the state
as resulting into the worst crisis for the microfinance industry in India, and the world.
It seems that in microfinance, the word finance has been emphasised far more than the
ideas of self-help, interpersonal solidarity and social engagement in search of solutions to
the common problems of the people outside the reach of the formal institutions of the
state or the market. The success of MFIs, in view of the presenters, shall ultimately be
dependent upon their ability to move bottom up rather than top down by the motives of
the impatient private equity funds and other investors. It is not that the industry has been
oblivious of these imperatives. The presenters note that the crisis of 2010 has triggered
soul-searching and several initiatives on account of client protection, transparency on
pricing of the microfinance products, corporate governance, business ethics and social
performance management are underway.
Any crisis pushes you behind. However, if you have the courage of conviction, nobility of
purpose and clear conscience you can indeed rise like a phoenix. However, alibis won’t
and shouldn’t work. There is a need to extend research beyond positive economics and
into the realms of normative economics and commerce.
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Small Business and Non-Institutional Credit: A Study in West
Bengal
Santanu Chakraborty
Acharya Prafulla Chandra College, New Barrack Pore, Kolkata, India
E-mail: [email protected]
This is a preliminary study looking at small business and non-institutional credit in West
Bengal from a primary survey. In this paper, I want to observe the role of non-
institutional credit in the development of small businesses. Volume of small business in
West Bengal is relatively large and non-institutional credit is deeply entangled with small
business in different modes and styles of operation. I have selected two urbanized
districts Kolkata and North twenty-four Parganas, which forms the core business area in
the state and I am looking at the forms and features of non-institutional credit markets be
fitting to the characters of small businesses across two districts.
The small business in India is highly heterogeneous in terms of the size, variety of
products and services and the levels of technology employed. Small businesses have a
critical role to play in enhancing export competitiveness given their very significant share
in exports. The Economic Survey, 2011-12 has stated that small business nurtures
entrepreneurial talent besides meeting social objectives including that of providing
employment to millions of people across the country.
Non-institutional credit refers to all credit transactions that take place outside authorized
banking and credit issuing systems. Within the non-institutional credit markets, some of
that date back for centuries, rooted in customs and tradition and yet are existent today in
India. Others constantly evolve in response to changing economic and social conditions,
sometime legal while sometime operating by avoiding the legal system (chit funds).
I have selected Kolkata, because it is the most important business center of East and
North-East India. A large section of the population of Kolkata depend on the small
115
businesses like small shops, roadside hawkers, furniture making, electrical wiring, shoe
making, readymade garments and various kinds of activities such as services and order
supply. I have selected North twenty-four Parganas, due to its rapid urbanization and
closeness to Kolkata (55% of population in urban areas; Census, 2001). My Study area
comprises Burrabazar & Sealdah in Kolkata and Barasat-NewBarrackPore in North
twenty-four Parganas.
The study reveals five forms of non-institutional credit system, such as trading credit
arrangement, unregistered chit fund, traders’ association, individual moneylendig system
and hundi system, each feature of its own. Small businesses favor non-institutional credit
markets, because of certain advantages, such as low transaction cost, spontaneity and
flexibility, mutual trust, unique record keeping system and acceptance of flexible
collateral.
I used a static partial equilibrium model with high risk and low risk small wholesalers to
assess the trading credit. It shows that the demand for trading credit of the low risk small
wholesaler is greater than that of the high-risk small wholesaler at any price. Desirability
of issuing trading credit by large wholesaler have influenced by nine factors such as
mutual trust, presence of brokers, good behavior, regular and timely repayment prior to
trading credit, time of repeated cash transactions, money value of creditable commodity,
reputation in the market, presence in personal occasions and third party guarantee.
Using a logit model, it shows how these factors play a critical role in determining the
desirability of issuing trading credit.
Existence of urban non-institutional credit markets in developing countries focused by
existing literatures. Using primary data generated in West Bengal, this study has
attempted to provide a broader understanding of the workings of these markets in West
Bengal in the development of small businesses in West Bengal. The terms and conditions,
type and volume of loans significantly differ from district to district. However, small
businesses of West Bengal totally depend on the non-institutional credit markets of West
Bengal.
116
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118
Role of POSB in Delivering Rural Credit (Micro) in India
Amlan Ghosh
IBS Hyderabad
Financial inclusion of un-served people is a major issue today in India. The un-served or
the excluded are poor people mostly rural and unorganised, hence commercially
insignificant. Unless we include this unorganised sector into our developmental process
the whole development would be jeopardized. Since the opening up of the economy and
reforms in the banking sector in India, rural finance is in back foot. The focus has shifted
primarily to earn more profit than to serve the social banking need of the masses which
was the main objective behind the nationalization of banks in 1969. As a result the
numbers of bank branches in rural areas are declining and employee per branches as well.
Banks are now more focused to service the section of population that they deem
profitable, other than stipulated priority sector lending which are regulated by the RBI.
Due to the shift in the policy level from social banking to core commercial banking, there
is a wide spread believe that viable financial inclusion in the rural areas or in the
unorganized sector is better achieved through alternative channels such as micro credit
through Micro Finance Institutions (MFIs) or Non Government Organisation (NGOs) or
credit (micro) through Self Help Groups (SHGs).
But if we look at the share of these credit to total rural credit disbursed by the schedule
commercial banks (only 3.7%) we will be able to find out that there is a huge gap between
the demand and supply of rural credit (micro) in India.
Few MFIs has already rolled out their products for individual borrowers and others are in
pilot state and preparing to launch such products. But they charged exorbitant interest
rates for their products and it is found that the people fall into the debt trap and
sometimes they commit suicides too. Recently the state of Andhra Pradesh has come up
with their own laws to regulate MFIs in their state. MFIs in India can’t accept deposits
and on the other hand NBFC can’t extend loan facilities to the retail customers as MFIs
119
do. The recent report of Malegam Committee has suggested creating a new structure,
NBFC-MFIs to deliver the micro credit to the poor. This would once again lead to create
another institution in the market with new regulations.
This paper examines the problems of formal banking in providing (micro) credit to the
poor of rural areas along with the present reach of MFIs in India in the present era and
finds that the Post Office Savings Bank (POSB) of India Post can play a pivotal role in
providing micro credit to the poorest of poor by performing itself as a micro finance
institution.
This paper tried to study the emerging role of POSB in the near future as a complete
financial institution in India as the India Post has the largest postal network in the world
of which 90% are in the rural areas. It has more than double the number of branches of
all the commercial banks operating in India. None of the financial institution has such a
big network to reach to the bottom of population as the India Post has.
The study also shows that the cost of funds would be cheaper in case of POSB than the
MFIs working in India and is quite align with the recommendations of the Malegam
Committee.
We do not need to create another new institution such as NBFC-MFIs as suggested by the
Malegam Committee; instead we can use the existing infrastructure of POSB in India in
delivering credit to the poor through the formal sector. Proper management and policy is
solicited from the Department of Post to serve the credit needs of the rural poor in India
and India Post can become the ultimate touch point for the India Public.
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Section L: Testing Trade Theories
A Model of Commodity Prices after Sir Arthur Lewis Revisited
Atanu Ghoshray* and Ashira Perera@
* Department of Economics, University of Bath, UK @ School of Economics, University of Nottingham, UK
This paper builds on the work of Deaton and Laroque (2003) by formulating a nonlinear
model of commodity prices. The paper makes three distinct contributions. First, a
nonlinear model is constructed that explains long-run dynamics of commodity price
behaviour. We posit that the change in supply being responsive at a constant proportion
of the deviation of price from marginal cost is a restrictive assumption. One would expect
the supply changes to be very small when price is marginally higher than marginal cost.
However the change in supply is more responsive when price deviates to a greater extent
from marginal cost. Moreover, suppliers, especially in developing countries, do not have
precise information regarding the market. It is likely that they will base their expectations
of price in the current period on what prices were in the previous period. This leads us to
modify the supply equation proposed by Deatona and Laroque (2003) and put forward a
nonlinear supply equation. This leads to reduced form price equations that are nonlinear.
Secondly, more recent data is employed by updating the price, income and production
indices. The data set in this study updates the popular Grilli Yang Index due to Grilli and
Yang (1988) and extends the data from 1987 to 2008. Finally, advanced econometric
techniques are adopted in order to investigate whether there is empirical evidence to
support the theoretical underpinnings of the nonlinear model. Since we propose a
nonlinear model, this paper employs a test for unit roots under the null hypothesis
against the alternative hypothesis of nonlinear Exponential Smooth Transition Auto
Regressive (ESTAR) adjustment designed by Kapetanios, Shin and Snell (2003). Elliot et.
al. (1996), derive a more powerful GLS detrending/demeaned based test in the context of
linear unit root tests. In a more recent paper, Kapetanios and Shin (2008) extend the GLS
detrending/demeaned procedure to test for unit roots allowing ESTAR adjustment
121
concluding that the GLS based unit root tests are more powerful than the OLS alternative
due to Kapetanios, Shin and Snell (2003). These higher power tests broadly reverse the
empirical findings of Deaton and Laroque’s (2003) model of commodity prices, lending
support to the underlying model proposed in this paper. Tests for cointegration provide
evidence that the long-run relationship between world commodity production and world
income for key commodities such as sugar, copper, and tin may be better explained by
non-linear behaviour.
Keywords: Commodity prices; Lewis Model; Cointegration, ESTAR.
JEL Classification Codes: E3; F1; O1
References
Balagtas, J. and M. Holt., (2009). ‘The commodity terms of trade, unit roots and nonlinear alternatives: a smooth transition approach’, American Journal of Agricultural Economics, 91, 87–105.
Bond, M. (1983). ‘Agricultural Responses to Prices in Sub-Saharan African Countries. IMF Staff Papers, 30(4), 703 – 726.
Cashin, P., Cespedes, L. F., and Sahay, R., (2002). ‘Keynes, cocoa and copper: In search of commodities currencies’, IMF Working Papers, No.02/223.
Deaton, A. (1999). ‘Commodity Prices and Growth in Africa’, Journal of Economic Perspectives, 13(3), 23-40. Deaton, A., and Laroque, G. (2003). ‘A model of commodity prices after Sir Arthur Lewis’, Journal of
Development Economics, 71(2), 289-310. Deaton, A., and Laroque, G. (1996). ‘Competitive Storage and Commodity Price Dynamics’, Journal of
Political Economy, 104(5), 289-310. Deaton, A., and Laroque, G. (1992). ‘On the Behavior of Commodity Prices’, Review of Economic Studies,
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root’, Econometrica, 49, 1057-1072. Elliot, G. E., Rothenberg, T. J. and Stock, J. H. (1996). ‘Efficient Tests for an Autoregressive Unit Root’,
Econometrica, 64(4), 813-836. Enders, W. (2004). ‘Applied Econometric Time Series’, 2nd ed. New Jersey: John Wiley & Sons, Inc. Engle, R. F. and Granger, C. W. J. (1987). ‘Cointegration and Error Correction: Representation, Estimation
and Testing’. Econometrica, 49(2), 251-276. Ghoshray, A. (2011). ‘A Reexamination of Trends in Commodity Prices’, Journal of Development Economics.
95(2), 242 – 251. Grilli, E. R., and Yang, M. C. (1988). ‘Primary Commodity Prices, Manufactured Goods Prices, and the Terms
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Kapetanios, G., and Shin, Y. (2008). ‘GLS Detrending-based Unit Root Tests in Nonlinear STAR and SE-TAR Models’, Economics Letters, 100(3), 377–380.
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123
The Structure of factor content of India’s Trade with Sri Lanka
Chandrima Sikdar* and Debesh Chakraborty@
* Associate Professor, School of Business Management,
Narsee Monjee Institute of Management Studies, Mumbai Email: [email protected]
@ Former Professor, Department of Economics,
Jadavpur University, Kolkata, India. Email: [email protected]
Large numbers of studies in recent times have tried to test the Hecksher-Ohlin theory for
India’s foreign trade. The present study attempts a similar exercise with respect to India’s
bilateral trade with Sri Lanka. India- Sri Lanka Free Trade Agreement (ISFTA) operational
since 2000 has been a landmark in the economic as well as political ties between the two
economies. It is now twelve years since this FTA has been operational and both the
countries have fully implemented the tariff concessions committed by each of them. As a
result, the bilateral trade between these economies during this period has reached new
heights and dimensions.
With increasing integration of countries across the world there has been stupendous rise
in intermediate trade flows across boundaries and production networks in trade patterns
have assumed a pivotal role. As a result pattern of trade flows between countries have
often been found to be dictated by trade policies and pattern of technology transfer
rather than by resource endowment and factor content of trade of respective countries.
India- Sri Lanka too has been no exception to this. Such increase in intermediate trade
flows and production networks have often led to the idea that concept of comparative
advantage is possibly not relevant for trade policy anymore. Trade patterns are argued to
be no longer determined by resource endowment and factor content of trade of respective
countries.
124
In fact, as far as India- Sri Lanka are concerned, in the post FTA period, the growth in
exports from either side of these two South Asian countries was noted in products, many
of which were not major export earners for either country prior to the implementation of
the ISFTA. So these products became commercially viable only following the
implementation of the free trade agreement.
Against this backdrop, the present paper examines whether the factor intensity of this
bilateral trade has been in conformity with the pattern of comparative advantages of
India as is determined from the country’s factor endowment. The paper uses the GTAP 7
database to test the Hecksher Ohlin theory empirically for India’s bilateral trade with Sri
Lanka. For doing this, the present paper has evaluated three indexes: Leontief, Leamer
and Reimer/Trefler.
Key Words: Factor content, Leontief paradox, Leamer, Trefler, Bilateral trade, India-Sri-
Lanka
JEL Classification Codes: F1, F14
References
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Foreign Trade’, paper presented at the 17th International Input-output Conference in Sao Paulo, Brazil, July 13-17, 2009
Davis, D.R. & Weinstein, D.E.(2001). ‘Do Factor Endowments Matter for North-north Trade?’, NBER Working Paper Series, 8516, Massachusetts, Cambridge
Deardorff, A.V. (1982). ‘Testing Trade Theories and Predicting Trade Flows’, In Handbook of International Economics, Vol 1, ed. By R.W.Jones and P.B. Kenen. Amsterdam: North Holland.
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Trade Balance & Real Exchange Rate: An Empirical Analysis of
Multilateral and Bilateral Relationship.
Suranjali Tandon
Research Associate at NIPFP, Delhi and a PhD student of JNU
The central theme of the paper is to dwell on the causes and effects of changes in
exchange rate. The paper tries to empirically test whether there are changes in price
levels as a consequence of a movement in domestic nominal exchange rate; and the
repercussion of all changes in real exchange rate on exports, import and trade balance.
Firstly the movements in NEER and REER are analysed country-wise to see if domestic
prices respond instantly or over a period of time to changes in NEER. For the purpose of
estimation a set of countries selected on the basis of specific criteria (Austria, Brazil,
China, Denmark, France, Germany, Italy, Japan, Malaysia, Mexico, Norway, Netherlands,
Philippines, Singapore, Switzerland and United Kingdom) were separated as per region
and further, as per income, currency unions etc., into separate panels for the period 1980-
2010. Once the relationship between trade balance and real effective exchange rate is
estimated the paper further delves into the significance of bilateral real exchange rates in
explaining bilateral trade for the same period. Five major trading partners (China, France,
Japan, Mexico and Republic of Korea) of United States were selected to see if the
relationship holds true between bilateral rate of exchange and trade.
The regional analysis illustrates real effective exchange rate not only affects the countries
within a currency union differently, as compared to those peripheral to the union but
there is also inter country differences within the union. While explaining the relationship
for Asia the countries were grouped separately due to differences in income (as per World
Bank’s definition). Separate panels were constructed within each region to analyse the
effect of real exchange rate. There is evidence of an impact of real exchange rate on the
trade balance in Asia and Latin America; though there are country differences in high
income Asia and Latin America. Thus for all these countries relative strength of domestic
currency vis-à-vis all major currencies is a major determinant of its total external position
127
on goods. The processes of adjustment suggest value and volume changes among a set of
countries.
There are some countries where an appreciation of domestic currency leads to an erosion
of competitiveness, whether gradual or instantaneous, of exports like Japan, Brazil, France
and China. There are others where there is little evidence of such deterioration suggesting
that there are no volume adjustments.
Responses of imports are also regionally different. There is evidence for an appetite for
imports during periods of appreciation in Netherlands, Austria, Switzerland, Denmark,
Norway, Mexico, Philippines, Singapore, Malaysia and China. The results corroborate
theory and only for China are increases in imports due to an appreciation reversed in the
subsequent year.
For bilateral trade and real exchange rate, the results for all countries except Korea point
in the direction of no significant impact on the net position on trade. China’s exports to
US are sensitive to changes in real exchange rate and any appreciation leads to a
deterioration of its export competitiveness. Japan’s exports respond instantly, that is
within a year but suggest no volume adjustments. Korean exports and imports increase in
dollar value due to an appreciation of the exchange rate however, subsequently the
exports decline in response to deterioration of competitiveness i.e.an appreciation. France
and Mexico’s merchandise trade with US is not determined by movements in their real
exchange rates. The lack of response for France is due to regional integration and lack of
dependence on US for its trade and for Mexico it may be other factors such as common
borders and trade agreements.
JEL Classification Codes: F: International Economics F1: Trade F14: Empirical Studies of
Trade
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Exchange Rate Rules (New York: St. Martins, 1981). Corsetti, Giancarlo, and Gernot Minier (2006). ‘Twin Deficits: Squaring Theory, Evidence and Common
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130
Section M: International Spillovers of Volatility,
Vulnerability & FDI
Return and volatility spillover among the PIIGS Economies & India
Dilip Kumar* and S. Maheswaran@
* Research Scholar Institute for Financial Management and Research
24, Kothari Road, Nungambakkam, Chennai, India. Email: [email protected]; [email protected].
@ Professor Centre for Advanced Financial Studies
Institute for Financial Management and Research 24, Kothari Road, Nungambakkam, Chennai, India
Email: [email protected].
The PIIGS economies (Portugal, Ireland, Italy, Greece and Spain) are at the center of
study worldwide due to the current European debt crisis. The PIIGS countries have
experienced similar economic conditions and financial problems over the past several
years. The constituent countries of the PIIGS economies have common high levels of
government debt, recently low GDP, high public-spending, high unemployment, high
labor costs, financial sector problems and an inability to deal with debt. The debt
problem in the PIIGS economies and other European economies is likely to remain a
concern in the future also.
A significant portion of India's export goes to the PIIGS economies in the form of IT
services, consumer durables and pharmaceuticals. The slowdown in the PIIGS economies
has also moderated capital flow into India. The adverse impact of the debt crisis in
Europe has created an environment of uncertainty that has a bearing on the Indian
economy, too. The European debt crisis is limited in scope to not just Europe but has a
spillover effect around the globe affecting the financial health of developed and
developing economies. The inter linkages of stock markets around the globe is of great
importance to market participants. Due to globalization of financial markets around the
131
globe, the impact of market shocks originating in one economy is not limited to the local
market but may spread to other economies that have economic or trade links with the
shock originator.
The central aim of this paper is to examine the dynamic first and second moment
interactions among the stock markets from the PIIGS economies (Portugal, Ireland, Italy,
Greece and Spain) and India using the vector autoregressive multivariate exponential
GARCH (VAR(1)-MVEGARCH) model. It attempts to analyze the lead-lag relationships
among the stock markets of the PIIGS economies and India. We also examine the upside
and downside risk spillover effect from PIIGS economies to India and vice versa. The
multivariate analysis provides evidence in support of return and volatility spillover from
Greece to India. Furthermore, we apply the vector autoregressive bivariate exponential
GARCH (VAR(1)-BVEGARCH) model to examine the interrelationship between India and
the stock markets from the PIIGS economies. The bivariate analysis also provides
evidence in support of return and volatility spillover from Greece to India. Moreover, the
results provide evidence in support of return spillover from Spain and Italy to India and
vice versa and volatility spillover from Portugal to India. The significant value of the
asymmetry coefficient (δi from EGARCH model) for Portugal, Ireland, Spain and India
supports the contention that both the size and the sign of innovations are important
determinants of volatility spillover across these markets. We also find that except Italy, all
other markets from PIIGS economies are showing significant upside risk spillover to
India. In addition, Italy, Greece and Spain are showing significant downside risk spillover
to India.
Keywords: Return spillover, Volatility spillover, VAR-MVEGARCH model, PIIGS
economies
References
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Beirne, J., Caporale, G. M., Ghattas, M. S. and Spagnolo, N. (2010). 'Global and regional spillovers in
132
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Billio, M. and Pelizzon, L. (2003). 'Volatility and shocks spillover before and after EMU in European stock markets'. Journal of Multinational Financial Management, 13, 323–40.
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Fratzscher, M. (2002). 'Financial Market Integration in Europe: on the effects of EMU on Stock Markets'. International Journal of Finance and Economics, 7(3), 165-193.
Hamao, Y., Masulis, R.W., and Ng, V. (1990). 'Correlations in Price Changes and Volatility across International Stock Exchanges'. The Review of Financial Studies, 3 (2), 281-307.
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Koutmos, G. (1996). 'Modeling the dynamic interdependence of major European stock markets'. Journal of Business, Finance, and Accounting, 23, 975-988.
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Mukherjee, K. N. and Mishra, R. K. (2008). 'Stock Market Integration and Volatility Spillover: India and its Major Asian Counterparts'. Research in International Business and Finance, 24(2), 235-251.
Savva, C., Osborn, D. and Gill, L. (2009). 'Spillovers and correlations between US and major European stock markets: the role of the euro'. Applied Financial Economics, 19(19), 1595-1604.
Singh, P., Kumar, B. and Pandey, A. (2010). 'Price and volatility spillovers across North American, European and Asian stock markets'. International Review of Financial Analysis, 19(1), 55-64.
Theodossiou, P., Kahya, E., Koutmos, G. and Christofi, A. (1997). 'Volatility reversion and correlation structure of returns in major international stock markets'. The Financial Review, 32, 205–24.
133
Measuring Vulnerability to Spillovers
Purba Mukherjee
Connecticut College New London, CT- 06320
Susceptibility of countries to economic developments in other countries is an issue of
universal interest. There have been efforts to study the channels that propagate crises
contagion across countries1. In spite of this, the spread of contagion continues to have a
surprising degree of uncertainty from the point of view of which countries will get
affected.
In the face of uncertainty, the reaction of foreign investors is an important determinant of
whether a crisis from outside spreads to a given country. This reaction is based on their
perception of the fundamentals of the economy of the country as well as the links it has
with countries embroiled in the crisis. Naturally both these factors are in constant flux.
While accounting for these two factors, the aim of this paper is to formulate a basis to
quantify the likely effects on a country’s economy caused by contagion from linked
economies. It is important to clarify that the paper does not aim to predict crises
emanating out of contagion. Instead it attempts to estimate the impact on a particular
country’s economy resulting from changes taking place in related economies.
Given the difficulty in predicting the spread of crises, the approach this paper takes is to
keep an ongoing check on the fundamentals and international economic links of the
country. This approach is capable of monitoring the exposure of countries at all times.
Naturally not all exposures will lead to crises. The effect in most cases is likely to be
benign or even positive when there are good outcomes outside the country.
I use the ‘vulnerability index’ outlined in Kelejian and Mukerji (2011) which describes the
response of a given unit over time to events in ‘neighboring’ units. For our purposes, the
1 Those that have specifically attempted to identify the channels of crises propagation include, Eichengreen,
et al., 1996; Kamisky & Reinhart, 2001; Rijckeghem & Weder, 2001, 2003; Kaminsky, et al., 2001; Broner, et al., 2006; Kelejian et al., 2006; Mondria & Quintana-Domeque (2010)
134
unit is a country and the neighbors are related countries. In the current paper I
decompose the index to provide a practically convenient and succinct quantification of
both the domestic economic fundamentals and the international links of an economy. As
we will see, distinguishing between the two is useful to make the root cause of
vulnerability apparent.
The estimation starts with a model which allows for the simultaneous determination of
growth, the volatility of growth and financial development of an economy. The paper uses
a panel data version of the general spatial three stage least squares approach applied to
the three equation system as a whole (Kelejian & Prucha, 2004). The vulnerability index is
calculated for each country based on this estimation. For a given country the vulnerability
index yields the percentage change, in a variable of interest (in this paper this variable is
taken to be the volatility of growth), as a result of a uniform percentage worsening in the
fundamentals of the economies it is related to.
I present the average vulnerability indices for the decades of the 1980s, 1990s and 2000s.
Vulnerability is decomposed into its ‘international links’ and the ‘domestic economic
fundamentals’ parts. The paper uses the examples of countries involved in the ERM crisis
of 1992, the Mexican crisis of 1994, the Asian crisis of 1997-98, and the Euro debt crisis
starting 2009 to clarify the source of contagion.
Findings indicate that the vulnerability index has been consistently on the rise over the
decades driven by the rise its ‘international links’ component. This highlights the
usefulness of measuring vulnerability on an ongoing basis since the international links
and therefore countries’ exposure are likely to change over time.
Keywords: Spillovers, Vulnerability Index, Country-level Risk, Integration.
JEL Classification Code: F32, C31.
135
References
Baig, T and Goldfajn, I., (1998). ‘Financial Market Contagion in the Asian Crisis’. International Monetary Fund, Washington, D.C. Working Paper WP/98/155.
Broner, F. A., Gaston Gelos, R., and Reinhart, C. M., (2006). ‘When in Peril, Retrench: Testing the Portfolio Channel of Contagion’. Journal of International Economics, 69, 203-230.
Edison, H.J., (2002). ‘Do indicators of financial crises work? An evaluation of an early warning system’. International Journal of Finance & Economics, 8(1):11 – 53.
Eichengreen, B., Rose, A., and Wyplosz, C., (1996). ‘Contagious Currency Crises’. NBER WP No. 5681. Forbes, K., and Rigobon, R., (1999). No Contagion, Only Interdependence: Measuring Stock Market
Comovements. NBER Working Paper 7267. Hernandez, L.F. and R.O. Valdes, (2001). What drives contagion: Trade, neighborhood, or financial links?
International Review of Financial Analysis, 10(3):203-218. Kaminsky, G., Lizondo, S. and C.M. Reinhart, (1998). ‘Leading Indicators of Currency Crises’. IMF Staff
Papers, 45(1). Kaminsky, G. L., Lyons, R. K., and Schmukler, S. L., (2001). ‘Mutual Fund Investment in Emerging Markets:
An Overview’. The World Bank Economic Review, 15, 315-340. Kaminsky, G. L., and Reinhart, C. M., (2001). ‘Bank Lending and Contagion. Regional and Global Capital
Flows: Macroeconomic Causes and Consequences’. Kelejian, K and P. Mukerji, (2011). ‘Important dynamic indices in spatial models’. Papers in Regional Science,
90(4), 693-702. Kelejian, H.H. and Prucha, I., (2004). Estimation of Simultaneous Systems of Spatially Interrelated Cross
Sectional Equations. Journal of Econometrics, 118. Kelejian, H.H., G. Tavlas, and G. Hondroyiannis, (2006). ‘A Spatial Modeling Approach to Contagion
Among Emerging Economies’. Open Economies Review, 17(4-5):423-441. King, R. G. and R. Levine, (1993). ‘Finance and Growth: Schumpeter Might Be Right’. Quarterly Journal of
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Financial Studies, 5-33. Mobarak, A. M., (2005). ‘Democracy, Volatility and Economic Development’. The Review of Economics and
Statistics, 87(2). Jordi Mondria and Climent Quintana-Domeque, (2010). Financial Contagion and Attention Allocation. Mukerji, P, (2009). ‘Ready for Capital Account Convertibility?’, Journal of International Money and Finance,
28(6), 1006-1021. Sachs, J., A. Tornell and A. Velasco, (1996). ‘Financial Crises in Emerging Markets: Lessons from 1995’. NBER
Working Paper No. 5576. Stiglitz, J. E., (2002). ‘Globalization and Its Discontents’. W. W. Norton, New York. Van Rijckeghem, C., and Weder, B., (2003). ‘Spillovers through Banking Centers: A Panel Data Analysis of
Bank Flows’. Journal of International Money and Finance, 22, 483-509. Van Rijckeghem, C., and Weder, B., (2001). ‘Sources of Contagion: Is It Finance or Trade?’, Journal of
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136
Spill-over Effects of Foreign Direct Investment: An Econometric
Investigation of Indian Firms
Bikash Ranjan Mishra
Lecturer P. G. Department of Economics
School of Social Sciences Ravenshaw University Cuttack, Odisha, India
Email: [email protected] And Senior Research Scholar,
Department of Humanities and Social Sciences (Economics) Indian Institute of Technology Kanpur
Uttar Pradesh, India. Email: [email protected]
It is by now well recognized that inward foreign direct investment (FDI) can immensely
benefit the host country and it is perhaps because of this the governments of many
countries around the world formulate several strategic policies that soothe the
Multinational Corporations (MNCs) to enter into their provinces. World Bank (1993)
writes that ‘FDI brings with it considerable benefits: technology transfer, management
know-how, and export marketing access. Many developing countries will need to be more
effective in attracting FDI flows if they want to bridge the technological gap with high
income countries, upgrade managerial skills, and develop their export markets.’ These
claims have encouraged countries, irrespective of their development stage, to create
conducive environments.
The mechanism of the contribution of foreign direct investment (FDI) in economic
progress of the host economies can both be direct as well as indirect. FDI adds directly to
employment, capital, exports, and new technology in the host country (Blomström et al.,
2000). In addition, local firms may also benefit from indirect means. Such advantages or
pecuniary benefits result in improved productivity of domestic firms which cannot be
fully appropriated by foreign investors. These externalities are commonly known as spill-
overs.
137
According to the literature, FDI spill-overs can work through a number of channels. First,
domestic firms can benefit from the presence of FDI in the same industry, leading to
intra-industry or horizontal spill-overs, through labour turnover, demonstration effects
and competition effects. Second, there may be spill-overs from foreign invested firms
operating in other industries, leading to inter-industry or vertical spill-overs. This type of
spill-over effect is often attributed to buyer–supplier linkages and therefore may be from
upstream sectors (forward spill-overs) or downstream industries (backward spill-overs).
The channel through which the inflows of foreign direct investment (FDI) contribute to
economic progress of the host economy like India can both be direct as well as indirect.
Such pecuniary benefits resulting in improved productivity of local firms which cannot be
fully appropriated by foreign investors are better known in the literature as spill-over
effects. The paper is based on the following research question: what are the firm-level
direct impact and indirect effects of FDI in India? This question is analysed with reference
to a micro-level investigation which tests particularly for inter- and intra-industrial spill-
overs from FDI by applying a Panel framework with Levinsohn-Petrin approach. The
study envelops a rich firm-level dataset from 22 sectors of Indian Manufacturing
industries and over a time period from 2006 to 2010. After controlling for firm-wise and
year-wise effects, the paper finds marginal and insignificant direct impact and mixed
spill-over effects of FDI inflow on the productivity of local firms.
Key words: FDI, spill-over effects, panel data, Levinsohn-Petrin approach.
JEL Classification Code: F21, C33, F23,
References
Aitken, B. and A. Harrison. (1999). ‘Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela’. American Economic Review, 89, 605-618.
Blomström, M. and R.E. Lipsey. (1986). ‘Firm Size and Foreign Direct Investment’. NBER Working Paper 2092. Cambridge, MA: National Bureau of Economic Research.
Blomström, M., A. Kokko and M. Zejan. (2000). ‘Foreign Direct Investment. Firm and Host Country Strategies’, London: Macmillan.
Carr, David L., James R. Markusen and Keith Maskus (2001). ‘Estimating the knowledge-capital model of the multinational enterprise’, American Economic Review, 91, 693-708.
138
Caves, R.E. (1971). ‘International Corporations: the Industrial Economics of Foreign Investment’. Economica, 38, 1-27.
Cohen, W.M. and Levinthal, D.A. (1989). ‘Innovation and learning: the two faces of R&D’, Economic Journal, 99, 569–96.
Driffield, N. (2001). ‘The impact on domestic productivity of inward investment in the UK’, Manchester School, 69(1), 103–19.
Du, Luosha, Ann Harrison and Gary Jefferson. (2011). ‘Do Institutions Mater for FDI Spillovers? The Implications of China’s Special Characteristics’. Cambridge, MA: NBER Working Paper 16767.
Edfelt, Ralph B. (1975). ‘Direct Investment in a Developing Economy: Towards Evaluating the Human Resource Development Impact in Brazil’. Ph.D. dissertation, University of California, Los Angeles.
Globerman, S. (1979). Foreign Direct Investment and ‘Spillover’ Efficiency Benefits in Canadian Manufacturing Industries. The Canadian Journal of Economics, 12, 42-56.
Goncalves, Reinaldo. (1986). ‘Technological Spillovers and Manpower Training: A Comparative Analysis of Multinational and National Enterprises in Brazilian Manufacturing’. Journal of Development Economics, 11(1), 119–32
Haddad, M. and A. Harrison. (1993). ‘Are there Positive Spill-overs from Direct Foreign Investment? Evidence from Panel Data for Morocco’. Journal of Development Economics, 42, 51-74.
Javorick, B. S. (2004). ‘Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages’. American Economic Review, 94(3), 605-627.
Levinsohn, J., & Petrin, A. (2003). ‘Estimating production functions using inputs to control for unobservables’. Review of Economics Studies, 70,317−342.
Olley, G., & Pakes, A. (1996). ‘The dynamics of productivity in the telecommunication equipment industry’. Econometrica, 64, 1263−1297.
Teece, D. J. (1981). ‘The Multinational Enterprise: Market Failure and Market Power Consideration’. Sloan Management Review, 22, 3-17.
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139
Section N: Foreign Direct Investment
Empirical Evidence on the Relationship between Foreign Direct
Investment & Economic Growth: A Cross-Country Exploration in
Asia
Samrat Roy* and Kumarjit Mandal@
*Assistant Professor in Economics St. Xavier’s College (Autonomous) Kolkata
E-mail: [email protected]
@Associate Professor Department of Economics
University of Calcutta
Foreign Direct Investment (FDI) is one of the most contentious economic issues in
emerging countries and viewed as a stimulus to economic growth. Against this backdrop,
this paper examines dynamics between economic growth and foreign direct investment
for a selected group of Asian economies namely India, China, Singapore, Hong Kong,
Malaysia, Indonesia, South Korea, Japan, Thailand and Philippines during 1975 to 2009.
The selection of countries is done on the basis of their industrialization experience. The
groups are categorized with respect to the directions of industrialization process. The
economies of Singapore and Hong Kong belong to Group-I characterized by private
investment directed industrialization policy, the economies of South Korea and Japan
belong to Group-II characterized by State-directed industrialization policy, the
economies of Indonesia, Malaysia, Thailand and Philippines belong to Group-III
characterized by liberal and free market policy directed industrialization process and
finally, the economies of India and China belong to Group-IV characterized by Soviet
model of economic planning directed industrialization policy. An integrated empirical
framework is conducted to capture the interrelationship between short run and long run
behaviour of FDI and economic growth. A cointegration approach is used to study this
relationship. The grouping of the Asian economies in terms of industrialization
140
experience is justified from the empirical results. Both Singapore and Japan exhibit
similar nature of relationship between foreign direct investment and growth. The
economies of South Korea and Japan do not exhibit long run relationship as far as foreign
investment-growth nexus is concerned. This paper also provides interesting results for
Group-III countries. In this case, except Malaysia, the remaining economies exhibit long
run dynamics as far as production function is concerned. Further, the economies of India
and China reflect similar behaviour. The findings confirm that policy recommendations
relating to FDI and economic growth may not be uniform for the entire Asian region due
to diversified industrialization experience.
Keywords: Foreign Direct Investment, Economic Growth, Cointegration, Granger
Causality
JEL Classification Codes: F21, F23, C22
References
Agosin, MR and Ricardo Mayer (2000). ‘Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?’ UNCTAD Discussion Paper, No.146, Geneva: UNCTAD.
Alfaro, L. Chanda, Kalemeli-Ozcan, S.,and Sayek, S. (2004). ‘FDI and economic growth: the role of local financial markets’, Journal of International Economics, 64(1), 89-112.
Artheye, S and S. Kapur (2001). ‘Private Foreign Investment in India: Pain or Panacea?’, The World Economy, 24:399-424.
Balasubramanyam, V.N,M.Salisu,and D.Sapsford (1999). ‘Foreign Direct Investment as an Engine of Growth’, Journal of International Trade and Development, 8, 27-40.
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Chowdhury, A ., and Mavrotas , G.,(2005). ‘FDI and Growth: A Causal Relationship’, United Nations University, WIDER Research Paper No. 2005/25.
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141
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142
On Dynamic Relationship between Foreign Direct Investment
(FDI) & Macro-Economic Factors: The Indian Experience
Vanita Tripathia, Ritika Sethb and Varun Bhandaric
a Assistant Professor Department of Commerce Delhi School of Economics University of Delhi, India
E-mail: [email protected] b Assistant Professor
Motilal Nehru College University of Delhi, India
E-mail: [email protected] c PhD Research Scholar
Department of Commerce Delhi School of Economics University of Delhi, India
E-mail: [email protected]
FDI in India has – in a lot of ways – enabled India to achieve a certain degree of financial
stability, growth and development. According to Ernst and Young's 2010 European
Attractiveness Survey, India is ranked as the fourth most attractive foreign direct
investment destination in 2010. The factors that attracted investment in India are stable
economic policies, availability of cheap and quality human resources, and opportunities
of new unexplored markets. Mostly FDI are flowing in service sector and manufacturing
sector recorded very low investments. Besides these factors, there are a number of
macroeconomic factors that are expected to affect FDI in India.
This paper examines the relationship between FDI and six macroeconomic factors -
Exchange rate (Rs. per $), Inflation (WPI), GDP/IIP (proxy for Market size), Interest rate
(91days T-bills), Trade Openness and S&P 500 Index (profitability) using monthly and
quarterly data for the period starting from July 1997 to December 2011. Besides using the
standard techniques such as ADF and PP Unit root stationarity test, Bi-variate and Multi-
variate Regression analysis and Granger Causality test, we use advanced econometric
143
techniques such as Johansen’s Co-integration test, Vector Auto Regression (VAR) and
Impulse Response analysis to check for long run and short run dynamic relationship.
We find a significant correlation between FDI and macroeconomic factors (except for
Exchange rate). Regarding causality results IIP/GDP, WPI and S&P 500 Index are granger
causing FDI inflows in India, Trade Openness is granger caused by the same. All the
macroeconomic variables considered (except Exchange rate) are significantly affecting
FDI inflows and the overall explanatory power of the regression model is 75.7%. The
results of Johansen’s Co-integration test reveal that there is long run causal relation
between FDI and IIP; FDI and S&P 500, FDI and Trade Openness and FDI and WPI. This
implies that select macroeconomic factors have direct long run equilibrium relationship
with FDI. Vector Autoregression and Impulse response analysis show that FDI is caused
more by its own lagged values rather than past values of other macroeconomic factors. A
shock generated in real economy (IIP or GDP, Exchange rate and Interest rate) has a
negative effect on FDI inflows which lasts for about two months, while the response of
FDI to shocks created in foreign trade policy and stock market is positive and significant.
The research findings have important implications for policy makers and foreign
investors. Policy makers need to push reform agenda in domestic market so as to attract
more FDI in the Indian economy. Since, there is positive relationship between FDI and
stock returns, a higher investor’s confidence in domestic market acts as a stimulus in
attracting FDI inflows.
Keywords: Foreign Direct Investment, Macro-economic factors, Unit root stationarity,
Granger causality test, Johansen’s Co-integration test, vector auto regression, Impulse
Response analysis
JEL Classification Code: F23, E11, C22, C19, C32
144
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147
Section O: Shorter Abstracts
Does Corruption Always Sand the Wheels of Growth? A Cross-
National Study in Non-Linear Frame Work
Shrabani Saha* and Girijasankar Mallik@
* School of Accounting, Finance and Economics
Edith Cowan University, Perth, Australia
E-mail: [email protected]
@ School of Economics and Finance
University of Western Sydney, Sydney, Australia
E-mail: [email protected]
This article evaluates the relationship between corruption and growth using system
generalised methods of moments of over 150 countries for the period 1984-2009. The
principal part of the analysis draws on level of corruption reported by International
Country Risk Guide. The study supplements this with an additional analysis of a second
dataset on corruption prepared by Transparency International. Results show that the
corruption-growth relationship is non-linear. Corruption typically enhances economic
growth when the level of corruption is low but the effect of corruption on growth is
detrimental when corruption past a threshold level.
Keywords: Corruption, Growth, SGMM
JEL Classification: K42, O57, O50.
148
Capital goods imports and economic growth: does the composition
of imports matter?
C. Veeramani
Indira Gandhi Institute of Development Research
Mumbai – 400065, India
Email: [email protected]
Capital goods are very heterogeneous in terms of their vintages and level of embodied
knowledge. Countries can potentially choose to import from wide varieties that are
available in different sources and this choice has a bearing on their growth rates. The
present paper analyses the hypothesis that the types of capital goods imported and the
sources of their origin matters for growth. Using a quantitative index, denoted as
KNOWjk, we measure the level of knowledge embodied in each variety, the country of
origin being taken as the demarcation of a variety. The central idea intrinsic to the
construction of this index is that richer countries hold a comparative advantage in
producing the most knowledge-intensive varieties. Using the KNOWjk values, we
construct another index, denoted as IMKNOW (import-weighted average of KNOWjk),
which measures the extent of knowledge embodied in a country’s imports of capital
goods. Using instrumental variable method, we find that a higher initial value of the
IMKNOW index (for the year 1995) leads to a faster growth rate of income per capita in
the subsequent years (during 1995–2005). The results imply that a 10 per cent increase in
IMKNOW increases growth by about 2 to 3 percentage points. We compute IMKNOW
indices separately for capital goods and intermediate manufactures and show that the
former exerts a stronger impact on growth than the latter
Key words: Imports, Capital Goods, Economic Growth, Knowledge Spillovers
JEL Code(s): F10, F14, F43.
149
India & SAARC Trade: Empirical Evidence Using the Augmented
Gravity Model
Amrita Saha* and Arjun Kumar Singh@
* Commonwealth Fellow and PhD Scholar at University of Sussex, U.K. E-mail:
@ Doctoral Fellow at Indian Council of Social Science Research and PhD Scholar at Jawaharlal Nehru University.
E-mail:
Trade under SAARC was initially facilitated by the South Asian Preferential Trading
Arrangement (SAPTA) in 1995 that gave way to the agreement on South Asian Free Trade
Area (SAFTA) in 2006. Recent times have witnessed a perceptible optimism evident in the
volume of ongoing negotiations and exchanges in trade within South Asia. Data from
1988 to 2009 is used to study the progress and prospects of India s trade with the SAARC
nations and 10 of the Top Trading partners (Non-SAARC) of India to ascertain the role
and importance of Geography, Historical and Institutional ties, Political Arrangements
and Economic growth and development determining India s Export and Import flows.
The performance and prospects of SAFTA for India is also observed. We attempt to use
the Augmented Gravity Model for Exports and Imports separately to help explain salient
features of India s trade particularly with South Asia to derive suggestions for significant
policy implications.
150
Contribution of Trade Costs, Transport Costs or Income Similarity
on India's Trade: A Gravity Model Approach
Archana Srivastava* and Somesh Kumar Mathur@
* Senior Research Student, Department of Humanities and Social Sciences, Indian Institute of Technology, Kanpur, India
E-mail: [email protected], [email protected] @ Faculty, Department of Humanities and Social Sciences,
Indian Institute of Technology, Kanpur, India E-mail: [email protected]
The paper attempts to disentangle the effect of trade costs, transportation costs and
Income similarity on India’s bilateral trade through gravity model of Baier and
Bergstrand. The study is done for the year 2009 taking 120 partner countries into
consideration. Both ordinary least squares as well as non-linear least squares approach is
used for the same. The results find support for the model.
Keywords: Baier and Bergstrand, Gravity Approach, Trade Costs, Income Similarity.
JEL Classification Code: F, F1, F4, C2
151
How does gravity explain the trade in services of Africa?
Michael Tedla
Research Officer International Food Policy Research Institute (IFPRI)
E-mail: [email protected] Tel: 251(0) 911 145 928
Despite its stage of infancy, trade in services in Africa is expected to improve the poor
diversification of trade portfolio and trade destination. In order this to happen, there is a
need to study the determinants and the directions of Africa’s trade in services. This paper
intends to study the factors that affect the bilateral trade in services using a gravity model
approach for a 5 year data spanning from 2003-2007. The finding of this research reveals
that GDP per capita and total labor force of the African nations and their partnering
nations positively affect the trade in services. An improved access to the internet in Africa
also promotes the continents trade in services. Contrary to this, distance has also a
negative impact on service. In terms of the direction of service trade, African nations tend
to trade more with their ex-colonial masters.
Key words: Trade in services, Services, Gravity Model, Africa, Colonization
JEL Classification code: F14, F54, L8
152
Preferential Trading Agreements and the Gravity Model: Early
Results for China & India
Rahul Sen*, Sadhana Srivastava* and Don J Webber@
* Department of Economics, Auckland University of Technology,
Auckland, New Zealand @ Department of Accountancy,
Economics and Finance, University of the West of England, Bristol, UK
The two most populous countries of the world have embarked upon an extensive array of
preferential trading agreements in recent decades. This paper investigates the impacts on
trade creation and trade diversion of China’s and India’s eight main preferential trading
agreements using an augmented gravity model and a negative binomial regression
approach. By examining the impacts on exports and imports of preferential trading
agreements with their respective trading partners over time, the paper reveals
asymmetries, lessons and implications for ongoing efforts towards economic integration
that have ramifications for the wider Asian continent and for world trading patterns.
Keywords: Trade creation; Trade diversion; Distance; Trade agreements
JEL Classification code: F15; R12
153
Asymmetry and Symmetry in Gravity: Taxation and Trade in the
OECD
Christopher Balding* and Estelle Dauchy@
* E-mail: [email protected] @
To study the potentially distortionary impact of differing corporate tax rates on
international trade flows, we use a new specification of the Baldwin and Taglioni gravity
model. Holding all other things constant in a gravity model, one should theoretically
expect differing corporate tax rates to have a significant impact on global trade flows.
However, gravity models have explicitly assumed that trade barriers are symmetric
between countries. We find that tax rates do not impact international flows between
countries because, given the existence of asymmetric barriers, countries equalize their
competitiveness by reducing their asymmetric (dis)advantages. By incorporating
asymmetric trade barriers into the standard gravity model, we demonstrate that tax rates
do not have a significant impact on trade. Our empirical results support the theoretical
model and our findings are robust to a variety of specifications.
154
Trade Reform, Intermediation and Corruption
Biswajit Mondal* and Sugata Marjit@
* Department of Economics & Politics Visva-Bharati University
Santiniketan, India
E-mail: [email protected], [email protected] @ Centre for Studies in Social Sciences
Kolkata, India
E-mail: [email protected]
The study construct a general equilibrium model with a protected intermediate sector
and analyze the effectiveness of trade reform for a small open economy where
bureaucratic corruption arises because of trade protection. Intermediaries are employed
by the producers in order to avoid paying the import tariff. We use HOSV kind of
framework to prove whether trade liberalization necessarily leads to a decline in
intermediation activities. The study finds that labor intensity of the exportable
commodity which uses the intermediate good is critical in determining the extent of
corruption. It is essentially a tug of war between higher tariff revenue and higher wage in
the new equilibrium. Thus trade liberalization may or may not lead to les corruption.
Key words: Corruption, International Trade, Tariff Reform, General Equilibrium
JEL classification code: D73, F1, F11, D5
155
Demand Constraints in a Perfectly Competitive Microcredit Market
Bibek Roy Chaudhuri* and Ranajoy Bhattacharyya@
Indian Institute of Foreign Trade Kolkata, India
* E-mail: [email protected] @ E-mail: [email protected]
Group lending has been less successful in backward areas compared to more advanced
areas. In this paper we argue that group formation eases the supply constraint on loans as
the bank’s probability of getting back loans increases but as expected joint liability
payment of the risky borrowers increases their demand for loans decline. As a result it is
possible that the equilibrium level of loans decline if the proportion of risky borrowers is
disproportionately high in any area and their probability of success is low. We argue that
people living in backward areas are more risk prone due to low levels of infrastructural
support such as roads, electricity, water supply, health centers, low levels of education
etc. and hence the result can be used to explain the above empirical observation.
Keywords: microfinance, group lending, adverse selection, demand constraint
JEL classification code: G21, O12
156
Technology Spillover and Determinants of Foreign Direct
Investment: An Analysis of Indian Manufacturing Industries
Smruti Ranjan Behera
Department of Economics, Shyamlal College, University of Delhi,
Delhi-110032, India
Email: [email protected]
This paper examines the spillover effect of foreign direct investment (FDI) and
determinant of FDI across Indian manufacturing industries. The result, based on two-
equation model that allows for the two-way link between labour productivity of locally
owned industries and foreign presence provide evidence that foreign presence brings new
channels of knowledge and technology spillover to domestic industrial firms. We find
that intermediate factors like R&D intensity and technology import intensity can impact
positively the productivity of domestic firms. Furthermore, we find that bigger market
size and highly productive domestic sectors are likely to attract more foreign capital into
Indian industries.
Keywords: Foreign Direct Investment; Technology Spillover; Manufacturing; Panel
Cointegration; Unit Root Tests.
JEL classification code: O41; F43; E23; C22; C23
157
Performance Benchmarking of Foreign Banks - A Bilateral
Comparison
Ram Pratap Sinha
Associate Professor of Economics Government College of Engineering and Leather Technology
Lb Block, Salt Lake, Sector-III, Kolkata-700098 E Mail: [email protected]
The operation of foreign banks in India gathered renewed momentum in the post-1992
phase as a fall out of the initiation of banking sector reform and commitments given by
the Indian government to open up its banking sector to the foreign participants in a
gradual fashion. Against this backdrop, the present paper benchmarks the performance of
foreign banks operating in India relative to the private sector banks for the period 2006-
07 to 2010-11 through a ‘Bilateral Comparison Model’. The statistical inference drawn from
the exercise indicates convergence of performance of foreign and private sector banks
over the period of study.
Key Words: Foreign Banks; Performance Benchmarking; DEA; Bilateral Comparison.
JEL Classification Code: G21, C61.
158
A Reassessment of India’s Aggregate Import Demand Function: an
ARDL Approach
Dukhabandhu Sahoo
School of HSS & M, IITBBS Bhubaneswar, Odisha India-751013
E-mail: [email protected] and [email protected]
The present study re-estimated the import demand function for India on the basis of
annual time series data covering the period 1970-71 to 2010-11 by employing a more robust
and recently-developed estimation method, the ARDL (autoregressive distributed lag)
approach - popularized by Pesaran et al. (2001). The present study draws various
significant conclusions from the estimation of aggregate merchandized import demand
function. The ARDL analysis supports the proposition that in India there exist a long run
relationship among, import demand, real economic growth, real effective exchange rate
and volatility of real effective exchange rate. It further found that aggregate import
demand is income and price inelastic, implying that India’s imports comprises essential
goods (especially oil). The study found evidence to suggest that the volatility of the real
effective exchange rate has negative effect on import demand for India in the long run.
Finally, the present study suggests that a single policy of devaluation would not be
effective to reduce imports and therefore to improve balance of trade. When formulating
policies to promote India’s external sector, planners need to pay careful attention to the
issue of the effect of exchange rate volatility on trade. The government should promote
the development of domestic industries with low import contents, especially resource-
based industries.
Key words: Exchange rate volatility, Import demand, real effective exchange rate and
Autoregressive distributed lag technique
JEL Classification code: F10, F31, F41, C32.
159
Growth and Instability in India’s Current Account Balance: A
Policy Period Analysis
K. V. Bhanu Murthy* and Phool Chand@
* Department of Commerce Delhi School of Economics, Delhi University, India
E-mail: [email protected]
@ Department of Commerce PGDAV (D) College, Delhi University, India
The policy period analysis can be summed up in terms of the overall BOP. The high
growth rate in Period I appear to be a statistical phenomenon. We started at a lower level.
During WTO other countries could take full advantage of the new multilateralism, lower
tariff and the open access. But India could not do the same. World recovery gave a fillip
to trade and we gained but very soon the crisis period set in. Surprisingly the instability is
rising constantly.
With the help of PCA we created two composite indices – one for internal factors and the
other for external factors. The two equations for growth and instability in BoP clearly
establish that exchange rate, money supply and GDP (a mix of real and nominal variables)
are responsible for escalating instability. Ironically they have a negative impact on
growth. The elasticity of internal variables is less than one in both cases. On the whole
internal factors have a smaller impact than external factors.
Keywords: Current Account Balance, Liberalization, W.T.O, World Recovery, Global
Crisis, Growth Rate and Instability.
JEL Classification Code: F32, F 13, O4.
160
Do exchange rates affect consumer prices? A comparative analysis
for Australia, China and India
S. Saha* and Z. Y. Zhang*
* School of Accounting, Finance and Economics, Edith Cowan University,
270 Joondalup Drive, Joondalup, WA-6027, Australia E-mail: [email protected]
An important issue for exchange rate pass-through (ERPT) is the extent to which
exchange rate changes affect the prices of imported goods and the consumer prices. The
objectives of this study are to make a comparative study by exploring the literature
relating pass-through for import prices and domestic prices in Australia, China and India.
In particular, we test whether the exchange rate pass-through to import prices is
complete, estimate the pass-through to CPI to investigate whether there is any
association between the pass-through and the average inflation rate across these
countries. Using a structural VAR model we test the exchange rate pass-through over the
period 1990-2011. The impulse responses indicate that exchange rates have less effect in
the rising domestic prices in China and India. This will have important policy implication
for the monetary authorities.
Keywords: Exchange rate pass-through (ERPT), structural VAR model, Australia, China
and India
161
What Drives the Stock Market Return in India? An Exploration
with Dynamic Factor Model
Paramita Mukherjee* and Malabika Roy@
* Associate Professor, International Management Institute, Kolkata E-mail: [email protected]
@ Associate Professor, Jadavpur University E-mail: [email protected]
In the last few years, institutional investors like foreign institutional investors and
domestic mutual funds are thought to be the drivers of the growth in Indian equity
market. This paper examines the role of these institutional investors primarily. It also
incorporates the possible impact of some other related factors thought to be driving the
market returns. Two dynamic factor models, one for BSE Sensex and the other for BSE
500 returns are estimated for this purpose. The model is checked for stability and also
time variation in the relationships of explanatory variables is taken into account. The
study covers a long time period of 10 years in the recent past. The results point to some
interesting facts. First, there is no evidence of institutional investors driving the market
return before the pre-recession period; however, post-2008, there is some evidence that
their equity investment has some impact on market return. Second, stock market returns
like Japan, Singapore, Taiwan, US, South Korea and HongKong are continuously having a
positive influence on Indian stock market, both in pre and post-recession periods. Third,
even bond market return also has considerable influence on the equity market return
throughout the entire sample period. Fourth, some evidences point out that after the
onset of the recession, domestic and international interest rates have some impact on
market return. Fifth, the sample period has some structural breaks and the factors that
drive the return are not the same in each phase. Most interestingly, the recessionary
phase during 2008-09 has an impact on the relationship between the market return and
its determinants. It is quite evident that Indian stock market return is now explained by a
larger number of factors compared to the pre-recession period.
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Key words: institutional investors, mutual funds, international investors, dynamic factor
model, Indian equity market
JEL Classification Code: C53, G11, G21, F32
163
Is Indian Stock Market Co integrated with Other Global Stock
Markets? Evidences in the Presence of Endogenous Structural
Jaydeep Mukherjee* and Shegorika Rajwani@
*Assistant Professor, Indian Institute of Foreign Trade, New Delhi, India
Email: [email protected] @ Research Scholar,
Indian Institute of Foreign Trade, New Delhi, India Email: [email protected]
The objective of this paper is to examine the level of integration of the log-return of
Indian stock market with the returns of other world markets, namely, Hong Kong,
Indonesia, Japan, South Korea, Malaysia, Taiwan, China, US, UK, Canada, France and
Germany. The study under consideration spans over a period of 21 years (from January
1991 to December 2011). Such a study is particularly important because if the level of
integration among the returns is high, then investing in different markets will not
generate long term gains from portfolio diversification or reduction in risk.
Since the level of integration will be studied keeping in mind the different economical
phases like recession & boom, a significant aspect so far as the methodology to be used in
this study is concerned, is to incorporate the possibility of existence of structural breaks
in the individual stock return series as well as in their relationship. Accordingly, unit root
test in the presence of endogenous structural breaks (Lee and Strazicich, 2003, 2004) that
uses a Lagrange Multiplier (LM) test statistics and the Gregory and Hansen (1996)
cointegration technique that allows for endogenous determined structural break in the
relationship have been applied. We find that the log-return of Indian stock market is co-
integrated with all the returns of other global stock markets under study. We thus,
conclude that the Indian stock market is sensitive to the dynamics in these markets in the
long run.
Keywords: Stock Markets, Cointegration, Unit Root, Endogenous Structural Breaks
JEL Classification Code: C12, C32, G15
164
Location Substitution Effect and China
Nilanjan Banik* and Khanindra Ch. Das@
* Professor, Institute for Financial Management and Research (IFMR),
Chennai, India E-mail: [email protected]
@ Research Scholar, Institute for Financial Management and Research (IFMR),
Chennai, India
The notion that China is factory of the world is now changing. Factories in China are
shifting their production base to neighboring Asia, primarily because of higher input
costs in China, a volatile Chinese exchange rate, and protectionist measures targeted
against Chinese exports. In this paper, we examine the location substitution effect for
China: Chinese firms are exporting primary, intermediate and machinery items, meant for
producing final output in the Greater Mekong Subregion (GMS). Results suggest that
GMS countries are exporting finished items to China, that are increasingly getting
manufactured using primary and intermediate inputs imported from China.
Key Words: Trade, Location Substitution Effect, China, GMS
JEL Classification Code: F14, F15, F21
165
Anti-Dumping, Competitiveness and Consumer Welfare: A Study
on Commodity Prices with a Special Reference to India
Dibyendu Maiti
The University of the South Pacific, Suva, Fiji Islands E-mail: [email protected]
The usage of unconventional trade protections have been thriving worldwide and anti-
dumping initiation is one of them. India has appeared the highest initiator of anti-
dumping in the world during 1995-2010. The paper tries to investigate the impact of such
initiatives on trade flows and resultant welfare with a particular reference to Indian
economy. Anti-dumping initiative defends competition, protects domestic producers and
goes against consumer welfare in general, but the strategic initiative may lead to rise in
AD-jumping FDI flows, resulting to an improvement in domestic welfare. Theoretically,
we find that the possibility of AD-jumping FDI depends on the foreign price and labour
market conditions in the domestic economy. Closer to the oligopoly price in the domestic
economy lower would be the possibility and greater would be a loss of domestic welfare.
Moreover, in the presence of unions, such possibility goes down. The study uses industry
and firm level information empirically to see the impact. It is observed that the AD
initiation does not affect the imports significantly. FDI has grown but still very small. The
mark-up of AD intensive industries seems to be on the higher side and does not support
the AD-jumping FDI proposition effectively. A large share of Indian initiatives, similar to
other countries, has been against China and other neighboring countries, leading to rise
an issue of predatory pricing including the rules of origin applicable largely with them.
We suggest that AD investigation process should look at (i) the price formation and rules
of origin in the foreign markets, (ii) the extent of extra-legal employment and
environmental damage due to the increased import competition. Although Indian
government has been quite active in taking decision on any petition against dumping, the
existing laws favour only a small section of producers, do not apply uniform methods of
injury calculation and do not show any concern about labour and environment. We
166
suggest that the safeguard measure should be taken up first before using anti-dumping
measure in cased of dumping.
Key Words: Anti-Dumping, Welfare, Strategic Trade Policy, AD-jumping FDI,
International Relation
JEL Classification Code: F16, F51
167
Relation between Trade Openness & Government Size in India: An
Application of Bounds Testing Approach to Co integration
Vikas Dixit
Assistant Professor, Department of Economics, Jadavpur University, Kolkata, India
Email: [email protected]
It is generally argued that when an economy opens up, it is exposed to external risk and,
therefore, more government expenditure is demanded to compensate that risk and the
increasing level of economic inequalities associated to openness. On the other hand,
there is an opposite view which says that with higher capital openness, it would become
difficult for national governments to tax and to issue public debt to finance public
expenditures, as capital may easily move abroad. An attempt is, therefore, made in this
paper to understand the nature of relationship between trade openness and government
size in India over the period from 1980-81 to 2009-10. This study differs from earlier works
on the subject in that it employs the modern robust econometric techniques such as Ng-
Perron unit root test and ARDL-Bounds testing approach to cointegration so as to analyse
long run as well as short run behavior of the underlying relationship. The results of
bounds testing-ARDL approach to cointegration suggest a positive and significant
relationship between trade openness and government size, when government size is
measured by Central Government expenditure on social and community services and
total tax revenue of the Central as well as General Governments. However, the estimation
results do not provide enough evidence to support significant relationship between trade
openness and either of total public expenditure or expenditure on social and community
services of the General Government. In order to confirm the direction of causality, the
LA-VAR non-causality test is conducted which provides evidence of a bidirectional
causality between trade openness and expenditure on social and community services of
both Central as well as General Government.
168
On the other hand, unidirectional causality is observed from total tax revenue of both
Central and General Government to trade openness. The overall empirical results find
support for the compensation hypothesis and little evidence of efficiency hypothesis (and
that too only in the short run for some measures of government size) in case of India.
Key Words: Trade Openness; Government Size; Bounds Testing; ARDL Approach;
Cointegration; TYDL Causality
169
Growth and Pattern of Intra-Industry Trade between India and
Bangladesh: 1975-2010
Sushil Kumar* and Shahid Ahmed@
* Research scholar, Department of Economics, Jamia Millia Islamia,
New Delhi, India. Email: [email protected]
@ Professor,Department of Economics & Director, Centre for Jawaharlal Nehru Studies, Jamia Millia Islamia,
New Delhi, India. Email: [email protected]
The present study investigates the intra-Industry trade between India and Bangladesh
over the period 1975 to 2010. Grubel Lloyd Index (1975) is used to calculate IIT levels in
the study and bilateral trade data at the three-digit level of SITC between India and
Bangladesh. Marginal Intra Industry Trade has been calculated for three periods, 1980-
1990, 1990-2000, and 2000-2010. The extent of intra-industry trade between India and
Bangladesh in 1975 to2010 was high in sector like, Crude materials, inedible, except fuels,
Food and live animals.IIT index for most of the industries experienced a deceleration over
time and in some industries, it has alarming declined.
There is potential for trade between India and Bangladesh in the Beverages and tobacco,
Crude materials, inedible, except fuels, Chemicals and Commod. & transacts. Not class.
Accord. to kind. The share of specific industry to total export increased namely food and
live animals, Crude materials, inedible, except fuels, Chemicals, Manufacture goods
classified chiefly by material and Miscellaneous manufactured articles. Industries with
high growth rate of exports between India and Bangladesh were Animal and vegetable
oils and fats, Food and live animals, Mineral fuels, lubricants and related materials and
Commod. & transacts. Not class. The Marginal Intra Industry trade, Beverages, Crude
fertilizers and crude minerals, nes, Coal, coke and briquettes, the index takes on a much
170
lower value for all other product categories, indicating a greater role of inter industry
trade in the new trade created during the same period.
Key words: Grubel Lloyd Index, Trade Complementarity Index, Export Intensity Index
and Trade intensity Index.
JEL Classification Code: F14, F15
171
Heckscher Ohlin Vanek Theorem: An Excess Supply Approach
Archana Srivastava*, Somesh Kumar Mathur@
* Senior Research Student, Department of Humanities & Social Sciences, Indian Institute of Technology, Kanpur, India.
Email: [email protected], [email protected]. @ Faculty, Department of Humanities & Social Sciences,
Indian Institute of Technology, Kanpur, India. Email: [email protected].
The paper attempts to test the empirical validity of Heckscher Ohlin Vanek Theorem in
Indian context. The data is obtained from annual survey of industries database from the
year 1989 to 2009 across six major industries. These six industries are: engineering goods,
textile industry, chemical industry, leather industry, primary goods and miscellaneous
manufacturing services. Using fixed effect least squares dummy variable technique, the
results show that India is abundant in unskilled labour and capital while it is still scarce
in skilled labour, energy and services as an input to manufacturing sector.
Keywords: HOV Theorem; Partial Test Approach, Manufacturing Industries.
JEL Classification Codes: F1, F11, C2
172
An Empirical Estimation of Volatility Spillover from a Developed
Country USA to two Emerging economy India & China
Ayanangshu Sarkar* and Malabika Roy@
* Assistant Professor, Dept of Business Administration,
Pailan College of Management & Technology. E-mail: [email protected]
@ Associate Professor, Department of Economics, Jadavpur University.
E-mail: [email protected]
The issues of volatility and risk in recent times have gained in importance for financial
practitioners, market participants, regulators and researchers. Volatility is the most basic
statistical risk measure instrument. This paper empirically investigates the pattern of
volatility in the Indian and Chinese stock market during 2006-2011 in terms of its time
varying nature, presence of certain characteristics such as volatility clustering and
whether there exists any ‘spillover effect’ between the domestic and the US stock markets.
It contributes to the body of knowledge by providing a holistic treatment to the subject of
stock market volatility in India and providing evidence on its main characteristic features
with the help of econometric techniques and employing GARCH models. A comparative
analysis is made with the Chinese stock market taking Sanghai Composite Index (SCI).
173
Horizontal and Vertical Technology Spillover of Foreign Direct
Investment: An Evaluation across Indian Manufacturing Industries
Smruti Ranjan Beheraa, Pami Duab and Bishwanath GoldarC
a Department of Economics, Shyamlal College, University of Delhi, Delhi-110032, India
Email: [email protected] b Department of Economics, Delhi School of Economics, University of Delhi,
Delhi-110007, India Email: [email protected]
c V.K.R.V. Rao Centre for Studies in Globalization, Institute of Economic Growth, University Enclave, Delhi-110007, India
Email: [email protected]
This paper explores the horizontal and vertical technology spillover effect of foreign
direct investment (FDI) across Indian manufacturing industries. On the basis of Pedroni
cointegration tests, we find that technology spillovers can be transmitted via all kinds of
intermediate factors. We find that the horizontal foreign presence and inter-industry
foreign presence have exclusive penetration effect to spur labor productivity and
technology spillover across Indian industries. Furthermore, intermediate factors like
technology import intensity; inter-industry technology import intensity, R&D intensity
and inter-industry R&D intensity promote technology spillover and labor productivity
across Indian manufacturing industries.
