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Author

Atul A. Dar

Date of Award

1981

Degree Type

Thesis

Degree Name

Doctor of Philosophy (PhD)

Department

Economics / Economic Policy

Supervisor

F.T. Denton

Abstract

In this study, a macroeconometric model of the Indian economy is constructed and estimated for the period 1957-1976. The model is evaluated in terms of its ability to forecast major endogenous variables through historic simulation, and is then used in a set of experiments to examine the short and long period effects of changes in various important exogenous variables.

The model is growth-oriented, and focuses on the process of capital accumulation which is amongst other things, an important determinant of growth in labour-surplus economies such as India. Supply factors play a major role in determining capital formation and output. Thus, the constraint imposed by the availability of resources - viz., saving and capital imports - is an important factor in the process of capital accumulation. Keynesian-type demand phenomena playa minor role in determining output. The forces of demand, however, are involved in determining prices which partly determine real resource supplies which in turn affect the rate of capital formation and hence the growth rate of output.

In order to articulate important institutional and economic characteristics of the economy the role of the government sector in the process of accumulation is separately and endogenously examined, the economy is disaggregated into four major sectors and the process of capital accumulation and other determinants of sectoral output are separately analysed. The sectoral rates of capital formation are determined within the context of an overall constraint on aggregate capital formation imposed by the real volume of resources - viz., saving and foreign capital.

The study also attempts to look at some additional aspects of foreign capital. Thus, one, question that is examined is whether foreign resource inflows adversely affect the domestic resource mobilization effort - viz., the saving effort (of the government) for a given level and structure of taxation, prices and income, and/or the taxation effort itself. Further, a sub-model of the foodgrains sector is constructed and integrated with the rest of the system to examine specific as well as economy-wide effects of Public Law (PL 480) foodgrain aid to India. Of interest are the effects on foodgrain and agricultural output and investment., as well on output in other sectors.

To deal with the simultaneity problem the model is estimated by a two-stage procedure based on principal components. The tracking ability of the model is found to be reasonably good in respect of major endogenous variables.

There is some evidence of weak (adverse) effects of foreign resource inflows on government saving, though no such evidence is found for the tax effort. PL 480 foodgrain aid is found to be a less-than-perfect substitute for commercial foodgrain imports, thereby implying that there is some foreign exchange saving implicit in each unit of PL 480 imports.

Our simulation experiments suggest that an increase in foreign capital inflows over a short period have only temporary favourable effects on the growth rate of the economy though the time-path of national output is permanently raised. Moderate increases in foreign capital inflows sustained over a longer period, merely raise the time-path of output but have no significant effects on the rate of growth. Reduced PL 480 aid compensated by increased foreign exchange aid has favourable effects on foodgrain and agricultural output, as well as on national income. If there is no compensating increase in foreign exchange aid, but a corresponding decline in capital transfers to the government, there are economy-wide contractionary effects. In both cases, ther supply of foodgrains in the economy is adversely affected. Other simulation experiments suggest the presence of the "Please Effect" in that increased direct taxation leaves the aggregate volume of saving unchanged, while increased government spending based on money creation is largely absorbed through rising prices.

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