DRAFTFOR STAFF USE ONLY.
(COPING WITH INTERNAL AND EXTERNAL EXOGENOUS SHOCKS;INDIA, 1973-74 TO 1933-834
Pradeep K. MitraSuresh D. Tendulkar (Consultant)
CPO Discussion Paper No. 1986-21April 1986
CPD Discussion Papers report on work in progress and are cirCulated for Bankstaff use to stimulate discussion and comment. The views and interpretationsare those of the authors.
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First Draft
Comments Welcome
COPING WITH INTERNAL AND EXTERNAL EXOGENOUS SHOCKS:INDIA, 1973-74 to 1983-84
Pradeep K. Mitra -
and
Suresh D. Tendulkar 2/
April 1986
This paper has been done for World Bank Research Project No. 672-74,Adjustment in Oil Importing Countries. We are much indebted to Hector Sierrafor numerically implementing the model used in this paper with extraordinaryspeed, and to him, Shyamalendu Pal and Derek McGreal for setting up andrunning the simulations. Thanks are also due to them and to Shanta Devarajanfor many useful conversations and to T. N. Srinivasan for discussions on thedistributional aspects of the model. We also owe a special debt to AlexMeeraus and Arne Drud for advice on implementing the model in the GeneralAlgebraic Modelling System (GAMS), on the use of the algorithm CONOPT, and oncomputational aspects generally. The usual disclaimer applies.
The World Bank does not accept responsibility for the views expressed hereinwhich are those of the authors and should not be attributed to the World Bankor to its affiliated organizations. The findings, interpretations, andconclusions are the results of research supported by the Bank; they do notnecessarily represent official policy of the Bank. The designations employed,the presentation of material and any maps used in this document are solely forthe convenience of the reader and do not imply the expression of any opinionwhatsoever on the part of the World Bank or its affiliates concerning thelegal status of any country, territory, city, area, or of its authorities, orconcerning the delimitation of its boundaries, or national affiliation.
1/ Senior Economist, Country Policy Department, The World Bank, 1818 HStreet, N.W., Washington, D.C. 20433, U.S.A.
2/ Professor of Economics, Delhi School of Economics, rJniversity of Delhi,Delhi - 110007, India
Coping with Internal and External Exogenous Shocks: India1973-74 to 1983-84
by
Pradeep K. Mitra -/ and Suresh D. Tendulkar -/
Abstract
This paper (1) analyzes and interprets the adjustment of theIndian economy to the twin exogenous shocks of oil price increases andharvest failure during the period 1973-74 to 1983-84; (2) implements asix-sector economywide general equilibrium model to a consistent dataset for 1973-74; (3) uses the model to approximate the principaldevelopments in the Indian economy during 1973-74 to 1983-84; and (4)explores the consequences for the macroeconomic aggregates,intersectoral resource allocation and income distribution of differentpolicy packages for adjusting to various kinds of shocks.
Counterfactual policy experiments with the model allow thefollowing conclusions to be drawn. First, workers' remittances,borrowing from oil facilities and concessional aid more than offset theadverse impact of terms of trade losses following the two oil shocks,making possible higher consumption and investment and lending to higherexternal debt. Second, a more 'expansionarv" investment strategy in1974-75, comparable to that of 1979-80, combined with selective importsof essential consumer goods to maintain domestic per capitaavailability, would have led to higher GDP and private consumption andincreased domestic production of capital goods at the expense ofconsumer goods. As before, it would also have left the economy withmore external debt. Third, a less cautious policy of reserveaccumujlation between 1976-77 and 1979-80 would have led to similareffects but with a lower external debt burden because the hiaherinvestment would have been financed in part by reserve decumulationrather than inflows of foreign capital. Fourth, the cumulative effectsof weather-related agricultural peaks dominated those of the troughsover the 1973-74 to 1983-84 period, resulting in greater availability ofwage goods and higher savings, investment and terminal capital stock.
(Continued)
1/ Senior Economist, Country Policy Department, The World Bank, 1.818 HStreet, N.W., Washington, D. C. 20433, U.S.A.
2/ Professor of Economics, Delhi .7chool. of Economics, University ofDelhi, Delhi - 110007, India
-2-
Finally, the paper begins to explore the question of how investment isbest reallocated among sectors in response to exogenous shocks. Aseemingly plausible but myopic rule of reallocating investment acrosssectors in response to differences in short-run profitability would haveraised GDP and private consumption, while pulling resources out ofnontradeables and towards the tradeable sectors of the economy.However, it would have worsened the current account position and led toa higher external debt burden.
A disaggregated treatment of rural and urban households allowsattention to be focused on the consequences of different policies Lorthe size and functional distribution of income. The impact of thealternative policies described above on the size distribution of incomeand consumption in rural and urban areas was not significant.
COPING WITH INTERNAL AND ETERNAL EXOGENOUS SHOCKS:INDIA, 1973-74 to 1983-84
Table of Contents
Page
SUMMARY AND CONCLUSIONS ............................................. i
I. SHOCKS AND ADJUSTMENTBackground ............................................ iThe First Oil Shock ................................... iThe Intervening Years ................................ iiThe Second Oil Shock ................................. ii.
II. CONCLUSIONS ...............................................iii
Chapter 1: OVERVIEW ................................................
I. INTRODUCTION................................................1
II. ADJUSTMENT TO SHOCKS: GENERAL CONSIDERATIONS .............. 2
III. INDIAN ECONOMY BEFORE 1973-74: A PERSPECTIVE .............. 4
IV. ADJUSTMENT TO THE FIRST OIL SHOCK OF 1973/74 ............... 8
V. ADJUSTMENT TO THE SECOND OIL SHOCK:1979/80 TO 1983/84........................................ 21
VI. OVERALL ASSESSMENT ........................................ 31
Chapter 2: THE MODEL ...................................... 42
Production ........................................... 42Income Generation .................................... 45Final Demands ........................................ 46
Trade ................................................ 46Market Clearance (Goods) ............................. 47Factors .............................................. 47Investment and Savings ............................... 48Government...........................................48Dynamics............................................. 49Debt.................................................. 49
Table of Contents (Continued)
Page
Chapter 3 THE MODEL A! WORK................................... 50
I. INTRODUCTION .............................................. 50
II. COMPARATIVE STATICS
Changing Internal Variables...................... 51Agricultural Harvest Failure ......................... 51Consumer Goods Sector ........................ .... 53Capital Goods and Intermediates............ 53Infrastructure and Services .,...............e......... 54Decreasing the Savings Propensity of Households...... 55A 10 Percent Increase in Real Wages..................56Changing External Variables .e..@... .o.... 57A 30 Percent Increase in Export Prices...............57A 50 Percent Rise in Import Prices ...................58A 10 Percent Increase in Export Volume ............... 59A 100 Percent Increase in Foreign Savings ............ 60
III. TRACKING HISTORY........................... ............... 6
Methodology..................................... 62Input Data ........................................... 63Discussion of Tracking ............................... 65Features of the Historical Run ....................... 73
Chapter 4e SIMULATIONS WITH THE MODEL ........... .......... .... 85
I. INTRODUCTION .................. ............ 85
Experiment 1: No External Shock-Cum-AccommodatingBorrowing..................... . 86
Experiment 2: Alternative Adjtustment Strategy.......90Experiment 3: No Agricultural Shocks ................ 93
Experiment 4: Reserve Decumulation Between1976-77 and 1979-80................... 94
Experiment 5: Investment Reallocation ............... 097Adjustment and Income Distribution .................. 100
Table of Contents (Continued)
Page
Chapter 5: CONCLUSIONS ...................................... 116
I. INTRODUCTION ............................... 116
II. RESULTS OF THE POLICY SIMULATIONS ........................... 116
No External Shock-Cum-Accommodating Borrowing..........116Alternative Adjustment Strategy ........................ 117No Agricultural Fluctuations ........................... 118Reserve Decumulation ................................... 118Investment Reallocation ................................ 1l9
Adjustment to Exogenous Shocks and IncomeDistribution ........................................... 120
III. CONCLUDING REMARKS........................................... 121
Appendix 1: Equations of the Model .................................. 124Notation: ........................................................ 150Appendix 2: The Debt Module ......................................... 159Appendix 3: The Bivariate Lognormal Distribution .................... 163Appendix 4: Data Base ............................................... 172
iv -
Table of Contents
Page
List of Tables
Chapter 1 Tables
Table 1.1 Trend Rate of Growth Per Annum for Selected Periodsand Items ................................................ 10
Table 1.2 Surplus (+)/Deficit (-) on Current Account ............... 13
Table 1.3 Terms of Trade Effect .................................... 14
Table 1.4 Export and Import Outlays .................................15
Table 1.5 Indices of Imports and Exports ........................... 16
Table 1.6 Crude Oil: Import-Bill, Net Import-AvailabilityRatios and Production-Consumption Ratios ................. 17
Table 1.7 Selected Items on Invisibles in Current Account .......... 18
Table 1.8 Gross Domestic Fixed Capital Formation ................... 24
Table 1.9 Rates of Gross Domestic Capital Formation ................ 25
Table 1.10 Growth Rates of Index of Industrial Production ........... 26
Table 1.11 Trend Rates of Appreciation (+)/Depreciation (-)of Exchange Rates ........................................ 34
Table 1.12 Trend Rates of Appreciation (+)/Depreciation (-)of Exchange Rates.................................... 35
Table 1.13 Trend Growth Rates of Export-Earnings from Goods at
Current Prices ............................................ 36
Table 1.14 Trend Growth Rates in Exports and Imports ................ 37
Table 1.15 Trend Growth Rates in Exports & Imports: Volumeand Unit Values ........................................... 38
Table 1.16 Trend Growth Rates of Crude Oil: Domestic Outputand Net Imports (in million tonnes) ...................... 39
Table 1.17 Trend Growth Rates in Real GDP & Gross FixedCapital Formation ........................................ 40
Table 1.18 Trend Rates of Growth of W.holesale Prices ................ 41
Table of Contents (Continued)
PLage
List of Tables (Continued)
Chapter 3 Tbles
Table 3.1 INDIA: Selected Features of the Economy, 1973-74........75
Table 3.2 INDIA: Selected Features of the Economy, 1973-74Share of Consumption by Sector and Group(Constant prices)............................... 76
Table 3.3 INDIA: Comparative Statics Experiments on "Internal"Variables, 1973-74 (Percentage deviation frombase period).. ....................... . ............ 77
Table 3.4 INDIA: Comparative Statics Experiments on "External"Variables, 1973-74 (Percentage deviation frombase period) ............................................. 78
Table 3.5 INDIA: Input Data for Tracking. ...................... 79/80
Table 3.6 INDIA: Tracking Indicators............................81
Table 3.7 INDIA: Selected Features of the Historical Run(N4odel-generated) ......................................... 82
Table 3.8 INDIA: Debt Profile: Historical Run (tens ofmillions of 1973-74 rupees)........................... 83
Table 3.9 INDIA: Total Debt Service: Historical Run (tens ofmillions of 1973-74 rupees).............. ........ 84
Chapter 4 Tables
Table 4.1 INDIA: No External Shock-Cum-Accommodating BorrowingExperiment: Selected Features (tens of millions ofrupees) ..................................................101
Table 4.2 INDIA: No External Shock-Cum-Accommodating BorrowingExperiment: (Percentage deviation from historical run)..102
Table 4.3 INDIA: No External Shock-Cum-Accommodating BorrowingExperiment: Distributional Characteristics (Percentagedeviation from historical run) ...........................103
- vi -
Table of Contents (Continued)
Page
List of Tables (Continued)
Chapter 4 Tables (Continued)
Table 4.4 INDIA: Makeup of Sector 5 from 115 Sector Input-Output Table, 1973-74 ...................... 104
Table 4.5 INDIA: Alternative Adjustment Strategy (Percentagedeviation from historical run).......................... 105
Table 4.6 INDIA: Alternative Adjustment StrategyDistributional Characteristics (Percentage deviationfrom historical run) .................................... 106
Table 4.7 INDIA: No Agricultural Shock Experiment(Percentage deviation from historical run) .............. 107
Table 4.8 INDIA: No Agricultural Shock ExperimentDistributional Characteristics (Based onhistorical run) ......................................... 108
Table 4.9 INDIA: Reserves Experiments (Basic Data) ............... 109
Table 4.10 INDIA: Reserves Experiment (Bold)(Percentage deviation from historical run) .............. 110
Table 4.11 INDIA: Reserves Experiment (Bold)Distributional Characteristics (Percentage deviationfrom historical run) .................... ................ 111
Table 4.12 INDIA: Reserves Experiment (Conservative)(Percentage deviation from historical run) .............. 112
Table 4.13 INDIA: Reserves Experiment (Conservative)Distributional Characteristics (Percentagedeviation from historical run) ........................... 113
Table 4.14 INDIA: Investment Reallocation Experiment(Percentage deviation from historical run).............. 114
Table 4.15 INDIA: Investment Reallocation ExperimentDistributional Characteristics (Percentagedeviation from historical run) ................... 115
- vii -
Table of Contents (Continued)
Page
Appendix 4 Tables
Table 1. Mapping Scheme for Sectoral Aggregatione............177
Table 2. Domestic Input Output Table (tens of millions of
rupees) ................................................. 178
Table 3. Derived Aggregated Use-Pattern of CSO-NAS IOTT-Based Sectoral Imports (Rs. lakhs) ................... 179
Table 4. Sector-specific Estimates of Depreciation and of Net and
Gross Value Added ....................................... 181
Table 5. Assumptions Made Regarding the Services Sub-sectors for
Pre-tax Factor Incomes ............................. .183
Table 6. Factor Income Matrix ..................... 186
Table 7. Per Capita and Aggregate Pre-tax Incomes for Rural andUrban Populations...........e.........................187
Table 8. Derivation of Rural and Urban Factor Incomes ............ 188
Table 9. Distribution of Work-Force by Sectors.................... 90
Table 10. Estimates of Sectoral Capital Stock, Gross Pre-tax Rates ofReturn and the Ratio of Capital Stock to ValueAdded............. ............ ............. ........... 92,
Table 11. Estimates of Trade and Transport Margins in FinalConsumption Expenditure.................................. 194
Table 12. Sector-specific Margins Plus Indirect Taxes asPercentages of Final Consumer Expenditure at ProducerPrices ................................................. 195
Table 13. Price Indices used for Converting LES Parametersto 1973-74 Market Prices Matrix (6x9)....................196
Table 14. Transformation Matrix for Mapping L" Commodity Groupsinto I-0 Sectoral Classification ......................... 197
Table 15. Sector-specific Rates of Indirect Taxes by Types ofTaxes .................................................. 200
Table 16. Sector-specific Rates of Indirect Taxes on Domestically
Produced and Imported Intermediate Inputs and FinalDemand .................................................. 201
Table of Contents (Continued)
Page
List of Charts
Chart 1 INDIA: Tracking 1973-74 to 1983-84
GDP at Market Prices (Growth Rates) . ..................... 66
Chart 2 INDIA: Tracking 1973-74 to 1983-84
GDP at Market Prices (1973=1) ............................ 66
Chart 3 INDIA: Tracking 1973-74 to 1983-84
Private Consumption (Growth Rate) ........................ 67
Chart 4 INDIA: Tracking 1973-74 to 1983-84
Private Consumption (1973=1) ........................... 67
Chart 5 INDIA: Tracking 1973-74 to 1983-84Total Investments (Growth Rate) ........................... 68
Chart 6 INDIA: Tracking 1973-74 to 1983-84
Total Investments (1973=1) .............................. 68
Chart 7 INDIA: Tracking 1973-74 to 1983-84
Exports (Growth Rate) ...................... ............69
Chart 8 INDIA: Tracking 1973-74 to 1983-84
Exports (1973=1) ........................... ............. 69
Chart 9 INDIA: Tracking 1973-74 to 1983-84
Imports (Growth Rates) ................................... 70
Chart 10 INDIA: Tracking 1973-74 to 1983-84
Imports (1973=1)................................70
SUMIMARY AND CONCLUSIONS
I. SHOCKS AND ADJUSTMENT
Background
The two kinds of exogenous shocks to which the Indian economy
had been subjected in the 1960s were: (1) harvest failure and (2) abrupt
cessation of foreign assistance. Adjustment to the first took the form
of foodgrains imports under PL480 and moves towards self-sufficiency via
extension of irrigation and adoption of chemical-biological
technology. Adjustment to the second was effected through cutting
public investment.
The First Oil Shock
The early seventies witnessed a peak harvest in 1970-71, a
severe drought in 1972-73 and a sequence of indifferent harvests which
was not to be reversed till 1975-76. A steep rise in defense
expenditure during the creation of Bangladesh led to accelerating
inflation. The quadrupling of oil prices in 1973-74 against this
background was probably perceived as temporary and responding to it
deemed less important than arresting inflation. The policy response to
these shocks was (1) to reduce private disposable inccme through a
series of fiscal and other measures; (2) to import wage goods in years
of domestic shortfalls; (3) to encourage export expansion which was made
possible by underutilized capacity in manufacturing and real exchange
rate depreciation; and (4) to resort to foreign assistance, to a large
extent from the IMF. The balance of payments was further helped by a
slowdown in the imports of intermediate and capital goods and a
continuous rise in workers' remittances. By these means, a record
current account deficit in 1974-75 was converted into a surplus in 1975-
76 and remained so before turning into a small deficit on the eve of the
second oil shock of 1979-80. However, wnen view-ed in the historical
perspective of 1950-51 to 1965-66, there was a deceleration in the rate
of growth of investment and virtually no change in the rate of growth of
GDP. In summary, it appears as if the balance-of-payments adjustment
and curtailment of inflationary pressures were achieved at the expense
of growth in investment.
The Intervening Years
Two bumper harvests in 1977-78 and 1978-79 and the.
unanticipated growth of private remittances led to the accumulation of
food and foreign exchange reserves. However, the experience with
inflation in 1972-73 and 1974-75 and some uncertainty regarding how long
reserves would continue to accumulate inhibited policy makers from
stepping up industrial investment and imports of capital goods.
The Second Oil Shock
The combination of a more than doubling of oil prices and a
severe drought in 1979-80 potentially fuelled inflationary pressures as
well as adding very substantially to the POL (petroleum, oil and
lubricants) import bill. However, the background against which this
occurred was very different from that of the first oIl shock, since
India had comfortable reserves of food and foreign exchange. It was
partly because cf this, as well as a growing realization that the oil
- ii -
price increase was a relatively secular phenomenon, that the policy
response was different. Adjustment comprised (1) import liberalization
to promote doxnestic efficiency via international competition; (2)
domestic oil exploration; (3) measures to switch eneray use away from
POL and towards domestically available coal and electricity; (4)
increased public investment and a concomitant rise in imports of capital
goods and intermediates (especially iron and steel); and, (5) imports of
food, edible oil and fibre to contain inflationary pressures. The
increased current account deficit arising from these policies was
financed through a variety of short- and medium-term facilities of the
IMF as well as workers' remittances.
These policies, and other developments, left the economy with
(a) more effective control over the rate of inflation; (b) some
deceleration in industrial growth in 1979-83, due to a combination of
import competition and infrastructural bottlenecks; (c) a decline in the
rate of real gross investment, due partly to lack of buoyancy in private
investment; (d) halting progress towards a more internationally
competitive industrial structure; and, (e) a much faster increase in
imports compared to export earnings. Overall, the economy has not
reaained the growth momentum attained prior to 1964-65; furthermore
recent growth has been dominated by the tertiary sector alone.
II. CONCLUSIONS
The above narrative suggests a number of hypotheses which have
been examined in our study of adjustment to shocks during this period.
- iii -
First, what net impact did external shocks and the policy
response to them have on investment and growth? This is answered by
examining the consequences of removing external shocks and particular
accomodating policies deemed to be pursued in response to those shocks,
while keeping remittances unchanged at their 1973-74 level. It is seen
that accommodating borrowing from the IMF and various oil-related
development institutions after the first oil shock and the Extended Fund
Facility with the IMF after the second oil shock more than offset the
deleterious impact of terms of trade movements. GDP, private
consumption and investment would have been lower in the no external
shock-cum-accommodating borrowing scenario: indeed the capital stock in
1984-85 and would have been 8 percent lower. Domestic production of
consumer good, and infrastructure would have gone up at the expense of
capital goods. This would to some extent have intensified rather than
allayed concerns that have been expressed about the stagnation of
investment compared to the pre-1964-65 years. However, as expected, the
debt burden would also have been lower - by nearly 48 percent at the
beginning of 1983-84.
Second, what would have been the consequences of stepping up
investment in response to the first oil shock and containing potentially
inflationary pressures through imports of essential consumer goods? The
higher investment would have led to a capital stock in 1984-85 which was
nearly 2 percent higher than in the historical run. GDP and private
consumption were also higher. Domestic production of capital goods
would have gone up at the expense of infrastructure and consumer
goods. In the absence of any other measures, however, the economy would
- iv -
have been left with a 27 percent higher stock of debt by the beginning
of 1983-84.
Third, how would the economy have developed in the absence of
exogenous agricultural shocks? The peaks and troughs in GDP,
consumption, and investment in this policy experiment mirrored those in
the exogenous variable which proxied weather-related fluctuations.
Thus, the above macroeconomic variables would have been higher if
weather-related dips had not occurred; their behavior would have been
the opposite in the absence of weather-related peaks. The 1984-85
capital stock would also have been lower - by 6.5 percent - under the no
agricultural shock scenario. The assumed connection between
agricultural shocks and the preceived need to effect deflationary
adjustment makes it instructive to ask what a "no agricultural shock-
cum-deflationary adjustment" would have implied for the economy. This,
however, simply involves adding the present experiment to the previous
one. It is an obvious counterpart to the "no external shock-cum-
borrowing" experiment, described above.
Reference has already 'cen made to the stagnation of investment
in the 1970s in historical perspective. The first experiment reported
above shows that investment would have been lower than in the historical
run in that case. This indicates that external shocks and accommodating
borrowing were not directly responsible for the deceleration in
investment: indeed the opposite is true. Furthermore, the no-
agricultural shock scenario, when run from 1973-74 to 1983-84, would
also have resulted in lower investment and terminal capital stock.
- v -
However, in as much as the demand-deflationary measures of 1974-75 and
1975-76 were prompted by agricultural shocks and their potential for
generating inflation, it is possible that investment would have been
higher than in the historical run on a "no agricultural shock-cum-
deflationary adjustment" counterfactual. This line of argument suggests
that the stabilization program designed to curb inflation contributed to
the stagnation of investment in the 1970s.
Fourth, what would have been the economywide impact of
following a less cautious policy on reserve accumulation, i.e.9 using
".excess" reserves to finance higher investment and imports during 1976-
77 to 1979-80? Specifically, reserves are decumulated in the years
1976-77 to 1979-80 to four months' level of imports in a "bold" scenario
and at six months' level of imports in a "conservative" scenario; the
resulting differences with actual reserves are added to foreign
savings. This generates a substantially higher profile of GDP, private
consumption and investment, leading to a nearly 3 percent increase in
the capital stock by 1980-81, an increase in produetion of capital goods
and infrastructure at the expense of consumer goods and some widening in
urban-to-rural per capita income levels. Since "excess" reserves were
available in those years, they would have allowed the economy to sustain
a less deflationary adjustment strategy of the kind formulated in the
last experiment. However, since the extra foreign savings would have
come out of reserves rather than fresh borrowing, the debt burden would
have been lower than in the previous experiment. The question could be
answered by combining the themes of those two policy experiments.
- vi -
Fifth, would adjustment based on a different sectoral
allocation of investment have led to markedly superior outcomes in terms
of arowth and the balance of payments? A seemingly plausible but myopic
policy of allowing investment allocation to take advantage of sectoral
differences in current profitability is implemented. This leads to
higher GDP and private consumption and a capital stock which is 1.7
percent higher in 1984-85 compared to the historical run, while pulling
resources out of nontradeables and towards the tradeable sectors of the
economy. But it also leaves the economy with a stock of debt which is
27 percent higher at the beginning of 1983-84. This is the result both
of higher import intensity of sectors towards which investment is
redirected, as well as an increase in domestic demand pressure and a
consequent bidding up of domestic vis-a-vis international prices. This
experiment, however, is only a start towards examining the question of
how investment is best reallocated among sectors in response to
exogenous shocks.
Finally, an interesting feature of all the policy simulations
is the virtually uniform impact on all groups of households. Indeed,
there is hardly any movement in the Gini coefficient of income or
consumption inequality. The cost of living indices do not move
significantly differently for the ten aroups of households separately
identified by the model. Nor is there any movement in the share of the
bottom 40 percent in income and consumption. Thus, the impact of the
alternative policies described above on the size distribution of income
and consumption is not significant. These remarks, however, do not
necessarily apply to the regional or functional distribution of
income.
- vii -
Chapter 1: OVERVIEW
I. T1TRODUCTION
This paper
(1) analyses and interprets the adjustment of the Indian
economy to the twin exogenous shocks of oil price
increases and harvest failure during the period 1973-74
to 1983-84 (chapter 1);
(2) implements a six-sector economywide general equilibrium
model to a consistent data set for 1973-74 (Chapter 2 and
Appendices 1 to 4);
(3) uses the model to approximate the principal developments
in the Indian economy during 1973-74 to 1983-84 (Chapter
3);
(4) explores the consequences for the macroeconomic
aggregates, intersectoral resource allocation and income
distribution of different policy packages for adjusting
to various kinds of shocks (Chapter 4); and
(5) summarizes the main conclusions (Chapter 5).
Chap-I(India Shocks):4-11-86:pp
-2-
TI. ADJUSTMENT TO SHOCKS. GENERAL CONSIDERATIONS
Every erzonomy is subject to certain exogenous shocks which
disturb the growth process or accentuate the constraints operating upon
that process. Weather-induced failure of the agricultural harvest in
predominantly agrarian economies is an example of an internal exogenous
shock. Sudden emergence of war abroad which interrupts the supplies of
certain essential commodities in an open economy is an example of an
external exogenous shock. By contrast, an example of a policy-induced
(and hence not exogenous) shock is provided by profligate government
spending or, in some cases, excessively tight demand management.
Furthermore, within these two categories of shocks, i.e., exogenous and
policy-induced, it is possible to distinguish between temporary and
permanent shocks.
The mode of adjustment to an exogenous shock depends on the
perception of the policy-makers regarding its nature. A shock which is
perceived to be transient in nature may call for borrowing (as with a
temporary shortfall in export earnings) a change in the monetary-fiscal
policy mix (if priority attaches to containing inflationary pressures
arising from a poor harvest, but without deleterious effects on
investment) or a temporary reallocation of available supply outside tha
market mechanism. On the other hand, longer-term adjustment is deemed
necessary if the shock is perceived to be persistent in nature (for
example, increased oil price or a secular slowdown in productivity
growth in the industrial countries).
Chap-l(India Shocks):4-11-86:pp
-3-
The ability of an economy to respond to exogenous shocks
without seriously compromising its growth prospects depends on (1)
initial conditions, e.g., its agrarian or non-agrarian character, the
extent of its dependence on international trade and the facility with
which resources can be shifted across uses; (2) the appropriateness of
the economy's perception of the nature of shocks; and (3) the policies
adopted and the relative weight of those affected by such policies.
This chapter analyzes and interprets the adjustment of the
Indian economy to exogenous external shocks in the form of two steep oil
price increases in the seventies and their repercussions. In the Indian
context, both the external shocks coincided with the internal exogenous
shock of harvest failure and the policy response was aimed at adjusting
to both the shocks simultaneously. In the review of actual adjustment,
therefore, it is not always possible to separate out policies aimed at
the two shocks. Furthermore, in as much as end-results in the form of
certain performance indicators are shaped by policies as well as
exogenous forces, an assessment of their relative roles requires the
exercise of some judgement.
With these general considerations, the next section (Section
III) reviews the developments in the Indian economy prior to the
Chap-l(India Shocks):4-11-86:pp
-4-
external shocks. This provides a perspective against which the
developments in the adjustment period can be placed. Section IV is
devoted to the discussion of the first oil shock of 1973 and the
adjustment to it during the period from 1973-74 to 1978-79. Section V
examines the period of the second oil shock of 1979, from 1979/80 to
1983/84. An overall assessment is presented in Section VI. -
Ut. TnDAt ECONOMY BEFORE 1973-74: A PERSPECTIVE
The Indian economy can be characterized as a densely
populated, low income, large and predominantly agrarian economy.
GenerrLly, relatively limited reliance on international trade marks the
large economies - defined in terms of population and diversified
natural resources - from the average of all developing countries. 1/
In the context of the Indian economy, this limited reliance on foreign
trade had been further restricted by the strategy of import-
substitution-led industrialisation that was adopted possibly in the
light of 'export-pessimism' prevailing in the nineteen-fifties.
Recurrent foreign exchange crises -- arising partly out of the adopted
policy package itself - further strengthened the import and foreign
exchange restrictions of various kinds. These restrictions, combined
with an overvalued exchange rate provided protection to domestic
producers of import-competing products and, notwithstanding certain ad
/ See Chenerv, H. B. (1982), "Industrialization and Growth: the Experience
of Large Countries," World Bank Staff Working Paper, Number 539.
-5.
hoc concessions, discriminated against exports.-L During this period,
foreign assistance substituted for export expansion as a source of
foreign exchange. While import restrictions protected domestic
producers from international competition, industrial licencing
restricted entry of other domestic producers and prevented the emergence
of internal competition. This constellation of policies gave rise
to a diversified yet a highly protected industrial structure and an
economy that was effectively instulated from the international
environment. In this situation, the exogenous shocks interrupting the
growth process were of two kinds: the weather-induced failure of
agricultural harvests and unexpected cuts in foreign assistance. The
former could trigger an inflationary price spiral in a virtually closed
and predominantly agrarian economy whereas the latter could lead to
significant cuts in public investment.
The growth process that was initiated in the early-fifties was
broken by two successive droughts in the agricultural years (July-June)
1965/66 and 1966/67, together with a cessation of American foreign aid
following the war with Pakistan in 1965. A comparison of the trend
/ For a discussion of the policies and their consequences, seeJ. N, Bhagwati and P. Desai: India: Planning for Industrialisation,Oxford University Press, London, (1970).
J. N. Bhagwati and T. N. Srinivasan: Foreign Trade Regimes and EconomicDevelopment: India, National Bureau of Economic Research, New York (1975)
I. Little, T. Scitovsky and M. Scott: Industry and Trade in SomeDeveloping Countries: A ComDarative Study, Oxford UTniversity Press,London (1970)
- 6 -
growth rates over the period from 1950/51 to 1964/65 (period I) with
those over the period from 1964/65 to the onset of the first oil crisis
in 1973-74 (period II) is presented in Table 1.1 for a number of macro-
variables. This comparison indicates that period II covering a decade
prior to the first oil crisis is marked by a deceleration in the trend
rate of growth of almost all the macro-variables. The only sectors
which register a higher growth rate in period II than in period I are
(a) GDP in Agriculture (line 3); (b) the primary sector of which
agriculture is a dominant component (line 6); (c) finance and real
estate (line 10); and (d) public administration and defence (line 12).
Among the remaining macrovariables there was a virtual stagnation in
period II in gross fixed capital formation in the public sector as also
gross investment going into registered manufacturing (for which trend
growth is not given in Table 1.1). A sharp deceleration in the trend
growth rate is experienced by the following: gross investment in total
(registered plus unregistered) manufacturing (line 16), gross domestic
as well as fixed capital formation-L (lines 13 and 14), and GDP
originating in registered as well as total manufacturing (lines 4 and
5). It should thus be obvious that period II was generally marked by a
much lower trend growth rate than period I.
/ Trend growth rates are not indicated for these items for period II becausethe levels were virtually stagnant during the period.
-7-
The recurrent harvest failures and their adverse implications
for wage-good availability and the resulting constraint on the growth
process had indeed been perceived in the late fifties. Conseqtuently,
self-sufficiency in foodgrains featured for the first time as one of the
major objectives of the Third Five Year Plan formulated in 1960. The
programs for intensive development of crop output by concentrating on
selected favorably placed regions were initiated in the early sixties.
The immediate response to the two successive droughts of the mid-sixties
consisted of foodgrains imports under PL480. Simultaneously, certain
steps were also initiated towards stabilising and stepping up of
domestic output of grains through the extension of irrigation and the
incentives for the adoption of chemical-biologicaL technology.
Consequently, the trend growth rate of GDP originating in agriculture
could be marginally stepped up from 2.40 percent in period I to 2.79
percent in period II. Despite greater variability around a higher trend
growth rate, the achievement can be regarded as remarkable as it
occurred in the face of deceleration in the growth of net sown area.
Adjustment to the abrupt cessation of foreign assistance took
the form of a cut in public investment in particular and a decline in
the rate of gross domestic investment in general.
The net result of both the shocks is reflected in a slow-down
in the trend growth rate of aggregate GDP from 3.85 percent to 3.32
percent and of per capita GDP from 1.86 percent to 1.08 percent, with a
much hiaher variability around the trend growth rate in period II than
in period T,
IV. ADJUSTMENT TO THE FIRST OIL SHOCK OF 1973/74
Before the onset of the first oil shock in 1973, the peak
agricultural harvest of 1970-71 was followed by a slight reduction in
1971-72 and a severe drought in 1972-73 when real income originating in
agriculture declined by 6.36 percent compared to the previous
indifferent harvest. The influx of refugees from what was then East
Pakistan, resulting in the creation of Bangladesh, in 1971 led to a
steep rise in defence expenditure. Consequently, the annual rate of
inflation -/ as measured by the wholesale price index accelerated
progressively from 2 percent around April 1971 to about 17 percent by
September 1973 the beginning of the oil price hike.
The oil price more than auadrupled from ITSS2.70 per barrel in
September 1973 to UJSS11.20 per barrel in March 1974. Simultaneously,
the agricuiltural harvest of 1973-74 managed only to restore the real
income in agriculture to the peak of 1970-71 only to dip marginally
again in 1974-75. The internal and external shocks together accentuated
the inflationary tendencies which had been accumulating since '972. The
annual inflation rate increased further from 17 percent in September
1973 to the highest ever rate of nearly 34 percent by September 1974.
Reading through the Economic Surveys of this period from the tinistry of
/The estimates of annual rates of inflation auoted here, and subsequently,
are based on the chart of annual rates of inflation from April 1971 toOctober 1983 appearing between pages 36 and 37 in the Economic Survey1983-84 published by the Government of India.
Finance, one gets the impression that the policy-makers perceived the
internal shock resulting from downward variations in agricultural
harvest, and not the oil price increase, to be the primary cause of the
inflationary pressures. In fact, the oil price increase was perceived
to be a mere aberration that was unlikely to persist and hence treated
as a purely transient phenemenon requiring only short-term adjustment.
As a consequence of the oil price increase, import outlays on
POL (petroleum, oil, lubricants) shot up from Rs 207 crores in 1973/74
to Rs 541 crores in 1973/74 and more than doubled in 1974/75 to reach Rs
1246 crores - an increase of 132 percent per annum over two years.
Relative to this high base, the growth rate over the next three years
1975/76 to 1978/79 was reduced to less than 11 percent per annum. It is
worth noting that imports of crude, as well as petroleum products, in
physical terms increased at the rate of 10 to 11 percent per annum
between 1975/76 and 1978/79 -- more or less in line with import
outlays. In contrast, between 1972/73 and 1974/75, import outlays more
than quadrupled although in physical units, the growth rate of crude
imports was 7.7 percent per annum whereas imports of petroleum products
declined at the rate of 13.33 percent per annum. -/
1/ The statements in this paragraph are based on figures available in variousEconomic Surveys published by the Ministrv of Finance, Government ofIndia.
Table 1.1
Trenid Rate of Growth Per Annum for Selected Periods and Items
Period I Period II1950-51 1964-65 gighest ROG Observed Over
to to 1964-65 to 1.98'-82
1964-65 1973-14 2
Item ROG (5%) 2 ROG (%) r ROG M r Period(2) (3) (4) (5) (6) (7) (8) (9)
1. Aggregate CDP 3.85 O9891 3.32 0.9003 3.59 0.9777 1964-65 to 1983-84
2. Per Capita CDP 1.86 0.9614 1.08 0.4836 1.34 0.7811 1964-65 to 1978-791.34 0.8505 1964-65 to 1983-84
3. GDP ivx Agriculture 2.40 0.9208 2.79 0.6120 2.84 0.8163 1964-65 to 1978-79
4. CDP in MIfg. (Total) 6.75 0.9884 3.47 0.9294 4.08 0.9642 1964-65 to 1979-804.08 0.9745 1964-65 to 1981-82
5. GDP in Mfg. (1Reg t d.) 7.98 0.9806 3.78 0.8839 4.27 0.9652 1964-65 to 1981-82
C 6. CG)P in Primary sector 2.50 0.9370 2.78 0.6509 2.82 0.8383 1964-65 to 1978-79
H 7. GDP in Secondary secror 6.67 0.9794 3.53 0.9732 3.92 0.9646 1964-65 to 1978-790.9707 1964-65 to 1979-80
8. CDP in Tertiary sector 4.87 0.9897 4.01 0.9951 4.72 0.9890 1964-65 to 1981-82
9. CDP in Trade & Communicatilons 5.78 0.9877 3.94 0.9901 4.76 0.9863 1974-65 to 1981-82
10. GDP in Fi:nance & Real Estate 3.94 0.9898 4.58 0.9928 4.57 0.9845 1964-65 to 1979-90
11. CDP in Community and 4.06 0.9900 3.79 0.9867 4.75 0.9733 1964-65 to 1981-82
Personial Services12 GDP in Public Administration 6.26 0.9602 6.50 0.9885 7.13 0.9863 1964-65 to 1981-82
13. Cr Fixed Cap. Formation (GFCF) 6.68 0.8795 4.12 0.9389 1964-65 to 1978-79
14. Cr. Dom. Cap. Formation (GDCF) 7.16 0.8026 4.87 0.9625 1964-65 to 1978-79
15. Public Sector GFCF 11.40 0.9762 4.20 0.7880 1964-65 to 1981-82
16. Gr. Inv. Mfg. (destination) 10.52 0.6149 3.40 0.2899 5.25 0.7465 1964-65 to 1981-82
17. Gr.Iniv.Regd.Mlfg.(destiinatiotn) 10.55 0.5260 -0.30 0.0024 6.83 0.1475 1964-65 to 1977-78
Note: 1. Cross fixed capital format:ion and gross domestic capit:al formatiotn (rows 13 anid 14) are measulred at
1960-61 prices. All ot:her Itlems are at 1970-71 prices2. R05 (%) = tretnd rate of growth ini percent. pet annutim.
r=squared correlation. coefficienit between time and the logarithmic tranisform of the variablelisted in columni (2).
3. Trentd rate of growth is given by thie coefficietit oF the tinme variable when logarithmic transformv ofa givent variable (columni (2)) is regressed agailnst time.
In relation to export earnings, POL imports amounted to 10.35
percent in 1972/73. This share more than doubled in 1973/74 to 22¢20
percent and rose further to nearly 35 percent in 1974/75. In the
subsequent four years - 1975/76 to 1978/79, the share fluctuated
between 28 and 31 percent (see Table 1.6).
The oil price increase in 1973/74 was accompanied by a rise in
the unit values of imports and exports which continued in subsequent
years despite the oil price remaining stable. As a result of the
changes in the commodity composition as well as in the composition of
partner countries, the net barter terms of trade (1970/71 = 100)
deteriorated from 116.98 in 1972/73 to 66.04 in 1975/76, improved
somewhat to 89.62 in 1977/78 only to dip again to 84.91 in 1978/79
(Table 15). The resulting terms of trade effect transformed itself
from 0.30 percent gain during 1970/71 and 1973/74 to a loss amounting to
1.45 percent in 1974-75 and 1.9 percent in the subsequent two years
(Table 1.3).
The heavy import bill on account of POL combined with a
deterioration in n'et barter terms of trade transformed a small surplus
of Rs 176 crores on account of goods and non-factor services in 1972/73
into a deficit of Rs 346 crores in 1973/74, a record deficit of Rs 944
crores in 1974/75 and a slightly lower one at Rs 852 crores in
1975/76. Combined with other invisible items which were in deficit till
1974-75, the current account deficit of Rs 327 crores in 1972/73 rose to
Rs 425 crores in 1973/74 and a record level of Rs 748 crores in
- 12 -
1974/75. The magnitude of the current account deficit was 1.18 percent
of GDP in 1974/75 compared to an average of 0.20 percent over the four
years prior to 1974/75 (Table 1.2). While the relative magnitude of the
current account deficit was significant in the Indian context, it could
not be regarded as significant when compared to other oil-importing
developing countries.
Formally, the record current account deficit of 1974/75 was
converted into a current account surplus in 1975/76 and remained so for
the next two years before turning into a small deficit on the eve of the
second oil shock of 1979/80 (see Table 1.2). W;hat were the factors
behind this remarkably rapid turn around in the current account?
First, at the policy level, the government initiated certain
post-budget measures in 1974/75 to reduce private disposable income,
especially to curb the long accumulating inflationary pressures
indicated earlier. These consisted of: (i) freezing all wage increases
and half of additional cost of living increases in the public sector;
(ii) limitations on dividend distributions by companies; (iii) a new
scheme of compulsory (frozen) deposits on the basis of a graduated slab
for all income taxpayers; (iv) raising excise duties and railway freight
rates and; (v) taxing interest income o.7 commercial banks. This strong
dose of demand management occurred in the face of bumper agricultural
harvests in 1975/76, 1977/78 and 197 8/7P and selective imports of
certain key consumer goods in temporary short supply such as foodgrains,
edible oils and fibres. This constellation of policies and circum-
Table 1.2
Surplus (+)/Deficlt (-) on Current Account
Rs Crores Columns (2) to (6)
Surplus on Surplus on Surplus on Surplus on GDP @On A/C of Current tMerchandise Merclhandtse Current % % % %
Goods & N.F. A/C (NAS) A/C (NAS) A/C (Eco. Mkt Prices (2) (3) (4) (5)Year Services Survey) (6) (6) (6) (6)(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1970-71 -45 -424 -99 -99 36736 -0.12 -1.15 -0.26 -0.261971-72 -212 -519 N.A. -216 39263 -0.54 -1.32 N.A. -0.551972-73 +176 -327 -104 -103 43241 +0.41 -0.76 -0.24 -0.241973-74 -346 -425 -432 -432 53772 -0.64 -0.79 -0.80 -0.8(1974-75 -944 -748 -1190 -1190 63263 -1.49 -1.18 -1.88 -1.881975-76 -852 +77 -1222 -1222 66370 -1.28 +0.12 -1.84 -1.841976-77 +525 +1275 +72 +69 71464 +0.73 +1.78 +0.10 +0.101977-78 +84 +1417 -621 -616 80666 +0.10 +1.76 -0.78 -0.761978-79 -311 -180 -1088 -1085 87046 -0.36 -0.21 -1.25 -1.251979-80 -1478 -627 -2449 -2724 94978 -1.56 -0.66 -2.58 -2.871980-81 -4550 -2151 -5813 -5839. 113584 -4.01 -1.89 -5.12 -5.141981-82 -4626 -2665 -5868 -5802 130583 -3.54 -2.04 -4.49 -4.411982-83 N.A. N.A. N.A. -5448 144393 N.A. N.A. N.A. -3.771983-84 N.A. N.A. N.A. -5897 173420 N.A. N.A. N.A. -3.40
Sources:Columns (2) to (4) and (6) are based on National Accounts.
Column (5) is based on data In the Economic Survey.
t I
*Table 1.3
Terms of Trade Effect
[Rs. crores for Cols. (2) to (4)]
Terms of Trade GDP Gross Disp.Effect (Rs. Crores (at 1970-71 Income (2) (4)
Year At 1970-71 Prices Mkt Prices) [(2) + (3)] %(1) (2) (3) (4) (5)
1970-71 0 40623 40623 0.001971-72 168 41196 41364 0.411972-73 328 40901 41229 0.801973-74 0 42370 42370 0.001974-75 -608 42437 41829 -1.451975-76 -879 46574 45695 -1.921976-77 -877 47124 46247 -1.901977-78 -309 51017 50708 -0.611978-79 -486 54407 53921 -0.901979-80 -1421 51598 50177 -2.831980-81 -1102 55098 53996 -2.041981-82 -743 58292 57549 -1.29
1970-71 to 1973-74 496 165,586 0.301974-75 to 1978-79 -3159 238,400 -1.331979-80 to 1981-82 -3266 161,722 -2.021974-75 to 1981-82 -6425 400,122 -1.61
Note: Terms of trade effect indicates a surplus (+) or deficit (-) of import capacity in relation to volume ofexports, or
- x
m x
wlhere X = value of exportsPm = unit value index for imports
Px = unit value index for exports
Table 1.4
Export and Import Outlays
Export of Goods Imports of Goods Total Export of AdjustedYear & Services at & Services at Goods at as % of
Current 1970-71 Current 1970-71 Current Prices UJnadjustedPrices Prices Prices Prices Unadjusted Adjusted (7) * (6)
(1) (2) (3) (4) (5) (6) (7) (8)
1970-71 1771 1771 1816 1816 1535.36 1510.59 1.601971-72 1794 1760 2006 2157 1608.20 1558.41 3.101972-73 2225 1965 2049 2112 1970.80 1829.73 7.161973-74 2830 2055 3176 2301 2523.40 2441.08 3.261974-75 3835 2221 4779 2000 3328.80 2914.28 12.451975-76 4812 2589 5664 2023 4042.25 3384.18 16.28
r4 1976-77 6139 3099 5614 2019 5143.20 4962.60 3.511977-78 6636 2981 6552 2631 5404.26 5073.59 6.121978-79 7115 3223 7426 2856 5726.26 5260.21 8.141979-80 8381 3764 9859 2739 6458.76 6111.40 5.381980-81 9029 3753 13579 4017 6683.17 6266.42 6.241981-82 10253 3748 14879 4338 7805.90 7408.52 5.091982-83 N.A. N.A. N.A. N.A. 8829.80 7129.10 19.26
Sources: Column (2) and (4) from the National Accounts Statistics- Column (2) deflated by unit value indexfor exports (1970-71 = 100) is given in column (3). Column (4) deflated by unit value index forimports. (1970-71 = 100) is given in Column (5). Coilumns (6) and (7) are from S. K. Verghese, partII, Table 10, p. 1152.
- 16 -
Table 1.5
Indices of Imoort8 and Exports
Volume Indices Unit Value Indices Net Barter
Export Import Export Import terms of trade
1970-71 100.00 100.00 100.00 100.00 100.001971-72 100.94 120.69 101.89 93.00 109.431972-73 113.21 113.79 113.21 97.00 116.981973-74 117.92 131.03 137.74 138.00 100.001974-75 125.47 114.94 172.64 239.00 72.641975-76 138.68 127.59 185.85 280.00 66.041976-77 164.15 111.49 198.11 278.00 71.701977-78 158.49 149.42 222.64 249.00 89.621978-79 169.81 160.92 220.75 260.00 84.911979-80 187.74 155.17 222.64 360.00 62.261980-81 183.02 228e74 240.57 338.00 70.751981-82 186.79 244.83 273.58 343.00 80.19
1973-74 to 198>182
Mean 159.12 158.24 208.28 276.11 77.57s.d. 26.3236 47.8314 39.8862 67.8296 12.1535c.v. % 16.54 30.23 19.15 24.57 15.67
1970-71 to 1981-82
Mean 145.52 146.55 182,47 231.25 85.38s.d. 33.4545 46.1626 57.8510 99.6732 17.8927c.v. % 22.99 31.50 31.70 43.10 20.96
Notes: s.d.: standard deviationc.v.: coefficient of variation
- 17 -
Table 1.6
Crude Oil: Import-Bill, Net Import-AvailabilityRatios and Production-Consumption Ratios
Import Bill on Petroleum Domestic Crude Oil Ratio of Net ImportOil & Lubricants as X of Production as x to Availability
Year Total Merch- Total Merch- of Domestic Cons- both in millionandise Imports andise Exports umption in Crude tons for crude
Equivalent(1) (2) (3) (4) (5)
1970-71 8.34 8.88 35.45 63.141971-72 10.64 12.07 33.83 63.951972-73 10.92 10.35 31.09 62.271973-74 18.96 22.20 29.93 65.861974-75 25.61 34e76 32.28 64.611975-76 23.86 31.12 35.19 61.711976-77 27.86 27.49 34.41 61.221977-78 25.78 28.70 39.29 57.421978-79 24.69 29.36 38.36 55.761979-80 35.77 50.95 36.98 57.801980-81 41.97 78.48 31.75 60.721981-82 38.14 66.48 46.53 45.691982-83 39.04 62.92 56.93 28.151983-84 30.64 48.9% 68.18 18.71
Sources: (1) Columns (2) and (3) based on value of merchandise imports andexports given in the Economic Survey.
(2) Column (4) is from Table 13 from M. S. Ahluwalia, "Balance ofPayments Adjustment in India, 1970-71 to 1983-84" UNCTAD.
(3) Column (5) based on the Economic Survey.
Table 1.7
Selected Items on Invisibles in Current Account
Net get Gross Private TransferYear Foreign Private Transfer Receipts
Travel Payments(1) (2) (3) (4) (5)
1970-71 10.1 67.3 136 80.51971-72 12.0 99.5 175 111.81972-73 18.6 92.8 165 104.11973-74 39.5 130.4 204 142.41974-75 78.9 214.0 280 220.21975-76 167.6 410.3 541 423.71976-77 246.3 616.9 746 623.71977-78 485.6 910.8 1029 917.31978-79 500.1 927.0 1059 943.81979-80 831.2 1464.4 1632 1472.11980-81 1075.3 2118.1 2269 2129.71981-82 918.9 2066.4 2237 2082.91982-83 945.5 2416.7 N.A. 2430.8
Sources: Columns (2), (3) and (5) from Economic SurveyColumn (4) from National Accounts Statistics
Notes: Differences between columns (4) and (5) for the same item persist.The reason are not clear. Since the National Accounts figures areinvariably higher than those in Economic Survey, we can take thelatter figures (available till 1982-83) as lower bounds.
- 19 -
stances managed to curb the rate of domestic inflation. The annual rate
of inflation started to decline from a peak level of 34 percent per
annum in September 1974 and reached less thant 10 percent by May 1975 and
negative levels by September 1975. After reaching the lowest rate of
arounO, 6.5 percent per annum by March 1975, it started rising but
barring a brief period February to June 1977, during the indifferent
agricultural harvest of 1976/77, it never crossed a double-di,git rate
until June 1979.
Secondly, this period of adjustment is also marked by a
persistent deceleration in rate of growth of real gross domestic (total
as well as fixed) capital formation (Table 1.1, lines 13 and 14), public
sector gross fixed capital formation (line 15) as well as gross
investment in registered and total manufacturing. The same is true for
real GDP originating in total as registered manufacturing (lines 4 and 5
in Table 1.1, columns [7] to [9]). In fact, the real gross domestic
capital formation in relation to real GDP at market prices reached a
peak of 20.9 percent (in 1966/67) over the period from 1950/51 to
1966/67. This peak could be restored only by 1973/74 (21.4 percent)
(since 1966/67), to fall again and to be regained by 1978/79 (21.4
percent). In other words, there was a slowdown in the rate of real
gross domestic capital formation during the adjustment period (See
Table 1.9).
Finally, on the external front, adjustment was facilitated by
the following factors:
- 20
(a) Almost half of the current account deficit in 1974/75 could be
finianced from unconditional or low conditionality facilities of
the IMF. I/
(b) There was a rise in the rate of growth of export earnings
exceeding 25 percent starting from a pre-oil-shock year of
1972/73 to 1976/77. Out of these five years, the first three
were marked by rising unit values rather than volume, whereas
in the last two years, the situation was reversed (see Table
1.5). This export expansion was made possible by the existence
of underutilised capacity in the manufacturing sector and
appeared to be due to effective exchange rate depreciation over
the period aided, especially in the later years, by domestic
price stability noted earlier. The rate of growth of export
earnings slowed down considerably in 1977/78 and 1978/79.
(c) The adjustment period was also marked by a slowdown in imports
especially of intermediate and capital goods. Their combined
share in total import outlays declined from 52 percent during
1970/71 and 1973/74 to 39 percent during 1974/75 and 1978/79.
In constant 1970/71 prices, the peak level imports of capital
goods in 1973/74 was not restored even by 1979-80.
(d) Finally, there was an unanticipated yet continuous rise in
current private transfers from abroad which more than
compensated for a slowdown in export-earnings in 1977/78 and
See M.S. Ahluwalia, "'Balance of Payments Adjustment in India: 1970/71 to
1 1983/84" UNCTAD, (no date), pp. 5-6.
- 21 -
1978/79 noted above, thereby helping keep the current account
balance in surplus.
Thus, adjua>tment to the first oil shock was marked partially
by internal demand management prompted by internal inflationary
pressure, a slowdown in the rate of real gross domestic investment, some
short term external financing, acceleration in export earnings combined
with a slowqdown in imports and finally current private transfers,
especially remittances from migrants to the oil-exporting countries. As
mentioned earlier, the accent on short-run adjustment policies with
reference tc the balance of payments perhaps reflected policv-makers'
judgment that the oil price increase was unlikely to persist and hence
required no major supply side adjustments. Although year-to-year growth
rates of real GDP showed some increase, the last three columns of Table
1.1 indicate that they did not make much difference to the trend growth
rate of real aggregate or per capita GDP.
V. ADJtJSTMENT TO THE SECOND OIL SHOCKz 1979180 TO 1983/84
The second major increase in the price of oil was from IJS$13
per barrel in late 1979 to USS30 per barrel in early 1980. This shock
also coincided with a severe drought in 1979-80 when real income
originating in agriculture dropped by over 13 percent from the record
level of the previous year. The combined consequence of these two
shocks was to generate inflationary pressures. The annual rate of
inflation rose from around 5 percent in April 1979 to a peak of 25
percent by January 1980.
As a consequence of the oil price increase, the import bill
for POL doubled from Rs 1681 crores in 1978/79 to R.s 3270 crores in
- 22 -
1979/80 and further to Rs 5267 crores in 1980/81. The POL import-bill
formed 51 percent of export earnings in 1979/80 and 78 percent in
1980/81. The corresponding average share of POL imports in export
earnings was only 29 percent during the first oil shock period from
1974/75 to 1978/79 (see Table 1.6).
The trade deficit on merchandise account also rose from 1.25
percent of GDP at market prices in 1978/79 to 2.87 percent in 1979/80
and a new record level of 5.14 percent in 1980/81. Although it declined
gradually to 3.4 percent by 1983/84, its level was twice as high as the
record level of 1.9 percent during the period of the earlier oil price
increase. Because of continuing remittances, the deficit on current
account could be contained to around 2 percent of GDP in 1979/80 and
1980/81 although this itself was a steep rise compared to 0.66 percent
recorded in 1979/80 (Table 1.2).
The deterioration in the barter terms of trade resul-ted in a
terms of trade loss (in real terms) of 0.90 percent in 1978/79, rising
to 2.83 percent in 1979/80. The relative rmtagnitude of the loss was
higher than the highest level of 1.92 percent in 1975/76 experienced
during the first oil shock (Table 1.3).
As of 1983/84 -- [the latest year for which data are
available] - the trade deficit on the merchandise account continued to
be over Rs 5800 crores, or nearly 3.5 percent of GDP. The deficit in
the current account showed no signs of being converted into a surplus as
it did by 1975/76 after the first oil shock.
- 23 -
It is important to note that the initial conditions facing the
Indian economy were more favorable at the time of the second oil shock
compared to the first one.
(a) India had continuously accumulated foreign exchange reserves -
the result of unanticipated private remittances between 1974/75
and 1978/79.
(b) Following the two bumper harvests of 1977/78 and 1978/79, the
foodgrains stocks with the government had .-eached a record
level of 21.5 million by the end of July 1979.
(c) As mentioned already, the annual rate of inflation had come
down to less than 10 percent per annum on the eve of the second
oil shock.
The first two initial conditions (a) and (b) implied that the
two major perceived constraints of the growth process since the mid-
fifties, namely, the acute scarcity of wage goods and that of foreign
exchange, appeared to have been relaxed. It is important to note,
however , that the accumulation of food and foreign exchange reserves had
taken place in the face of the followi-ng circumstances. First, capital
goods imports had remained virtually stagnant in real terms.-/ Second,
the rate of gross domestic investment kept fluctuating around 20 percent
(Table 1.9); so did real private gross investment, especially in the
registered
/ See Ahluwalia, op. cit. Table 6. Notice there has been no trend in
capital goods imports in real terms especially from 1970-71 to 1979-80
(Table 1.14, line 11).
Table 1.8
Gross Domestic Fixed Capital Formation
(Rs Crores)
At Current Prices At 1970-71 PricesPublic Private Total Public Private Total
1970-71 2394 3911 6305 2394 3911 63051971-72 2802 4272 7074 2648 4038 66861972-73 3619 4447 8066 3166 3893 70591973-74 4009 5020 9029 3134 3926 70601974-75 4272 6658 10930 2680 4176 68561975-76 5600 7648 13248 3176 4338 75141976-77 7048 8219 15267 3918 4567 84851977-78 7697 9449 17146 4181 5134 93151978-79 8376 10449 18825 4186 5223 94091979-80 9974 10928 20902 4312 4726 90381980-81 11629 13588 25217 4486 5242 97281981-82 14563 14910 29473 4880 4997 98771982-83 18233 1.5428 33661 5569 4712 102811983-84 20517 20150 40667 5506 5408 10914
Source: Central Statistical Organisation: National Accounts Statistics, variousissues.
- 25 -
Table 1.9
Rates of Gross Domestic Capital Formation
At 1970-71 PricesGross Domestic GDP at Rate of Gross
Capital Formation Market Prices Capital Formation
1970-71 7344 40263 18.241971-72 7959 41196 19.32
1972-73 7479 40901 180291973-74 8739 42370 20.631974-75 8947 42437 21.081975-76 9388 46574 20.161976-77 9847 47124 20.901977-78 10096 51017 19.79
1978-79 11633 54407 21.381979-80 11489 51598 22.27
1980-81 12192 55098 22.131981-82 12218 58292 20.961982-83 12230 59953 20.401983-84 12998 64543 20.14
Source: Central Statistical Organisation: National Accounts Statisticsvarious issues.
- 26 -
Table 1.10
Growth Rates of Index of Industrial Production
Ser. Description 1970-74 1974-79 1979-82 1979-83No.(1) (2) (3) (4) (5) (6)
1. General index of industrial production 4.49 5.58 4.78 4.71
2. Manufacturing subgroup 2.85 5.26 4.03 3.82Selected components of mfg. group:(a) Chemical & chemical products 4.88 8.77 5.03 4.61(b) Petroleum products 3.10 6.30 4.45 5.20(c) Basic metals industries 1.03 6.30 4.43 3.32(d) Metal products except machinery 5.10 5.93 -1001 0.65(e) Non-electrical machinery 11.20 6.03 5.29 5.15(f) Electrical machinery 3.13 7.62 3.34 2.08(g) Transport equipment 2.18 2.86 4.30 4.10(h) Miscellaneous 3.15 5.58 8.18 na
3. Use-based classification
(a) Basic industries 3.38 7.87 7.00 6.62(b) Capital goods 6.68 4.37 3.94 4.04(c) Intermediate goods 2.94 4.43 2.13 3.54(d) Consumer goods 2.34 4.28 4.75 3.64
(i) Durable 4.60 4.60 2.33 1.79(ii) Non-durable 1.90 4.24 5.09 3.91
4. Input-based classification
(a) Agro-based 1.10 3.99 4.23 4.24(b) Metal-based 5.97 4.57 3.03 3.14(c) Chemical-based 5.31 8.28 5.27 4.67
5. Sectoral Indicators
(a) Transport equip. & allied industries 4.31 2.58 4.55 5.16(b) Electricity & allied industries 6.24 7.42 5.77 5.05(c) Energy output 4.51 7.54 8.22 7.96
Note: These are point-to-point growth rates per annum because continuous time-series were not available to compute trend growth rates.
- 27 -
manufacturing sector. - Third, the acceleration in the industrial
growth rate from 2.85 percent during 1970-74 to 5.26 percent during
1974-79 was achieved more by better capacity utilization than by new
capacity creation. Fourth, the accelerated industrial growth rate of
5.26 percent was lower than the 8 to 10 percent growth rate achieved
during the 10 years preceding 1965. From these circumstances, it
follows that the accumulation of food and foreign exchange reserves
occurred precisely because of the economy's inability to utilize them
for stepping up industrial investment. Part of tne reason for this
phenomenon may be attributed to policy-makers' perceptions. Reserves
were not used to step up productive investment because of the perceived
uncertainty regarding the continuation of both food and foreign exchange
reserves. It was apparently felt that a bold industrial investment
program would lead to uncontrollable inflationary pressures in the event
of rapid exhaustion of food stocks. And depletion of foreign exchange
rest -' would make it difficult to relieve this situation via food
imports. Being extremely sensitive to the inflationary pressures
especially after the experience during 1972/73 and 1974/75, the policy
makers opted for a conservative approach of maintaining price stability
with stagnation in industrial investment, rather than take the risk of
inflation with a step-up in industrial investment. This is admittedly a
speculative ex-post rationalization of events.
1/ This statement is based on the time-series of real gross investment by
industry of use, given in variouis issues of the National Accounts
Statistics released by the Central Statistical Organization.
- 28
Although the food and foreign exchange reserves were not being
uitilised at the time of their build-up during 1974-78 period, they
provided favourable initial conditions when the second oil shock took
place. Possibly because of these favourable initial conditions, the
policy response to the second oil shock was bolder than that to the
first shock. The policy response consisted of the following
ingredients.
(1) Liberalization of imports was undertaken in the interest of
promoting efficiency bv exposing domestic producers to
international competition.
(2) Domestic oil exploration efforts were stepped up to reduce the
dependence on imported crude.
(3) Measures were undertaken to switch energy use away from POL and
towards domestically available coal and electricity.
(4) Efforts were made not only to maintain public sector fixed
capital formation but to raise its level in real terms.
(5) The policy of importing food, edible oil and fibre in case of
shortages was continued in order to curb inflationary
pressures.
These measures were indicative of the acceptance of the oil
crisis as a persistent feature to which policies had to be directed with
the objective of making medium-term adjustments. Even the
liberalization of imports was promnpted mainly by the need to ensure
international competitiveness in order to bring about an expansion of
exports. There appears to have been a realisation that the Indian
economy could not, unlike in the years before 1973/74, remain semi-
- 29 -
closed and insulated from external shocks. This perception could have
been shaped by the persistent nature of the high and intermittently
rising oil prices, continuing and progressively rising terms of trade
losses (see Table 3), and the rising share of imports and exports in GNP
during the post-1973 period in comparison with the pre-1973 period.
The end-results of these policies have been mixed.
First, the rate of domestic inflation was brought down from
the peak level of 25 percent in January 1980 to near 2 percent by May
1982. The recovery in foodgrain output from tRe drouight level of 109.7
million in 1979/80 to 129.6 million in 1980/81 and a new record level of
133.3 million in 1981/82, combined with imports, was a major factor in
this connection. Following another drought in 1982/83, the rate of
inflation rose to near 10 percent by May-June 1983 and fluctuated around
10 percent despite another bumper harvest of 151.5 million in 1983/84
before showing a downward trend. Tn other words, the inflationary
pressures have been checked more effectively and more quickly after the
second oil shock.
Secondly, the rate of industrial growth showed some
deceleration during 1979-83 compared to the 1974-79 period. The
deceleration was experienced by most groups of industries (Table
1.10). Liberalisation of imports -- in the then prevailing environment
of falling international prices in the face of recession in the
developed industrial countries -- provided a partial explanation of
deceleration, especially in certain high-cost import-competing
industries. With exports being relatively unimportant in relation to
- 30 -
the domestic market, fluctuations in agricultural harvests brought about
corresponding fluctuations in the market for industrial goods. The two
droughts of 1979-80 and 1982-83 adversely affected hydel power
generation. They accentuated the infrastructural bottlenecks
originating in the coal-railway-power complex during the 1979-83
period. The combination of supply and domestic demand constraints
worked in the same direction of adversely affecting industrial output.
Thirdly, the rate of real gross investment declined from 22
percent during 1979-81 to 20 percent by 1983/84 (Table 1.9). The real
fixed investment of the private sector also did not show any buoyancy
(Table 1.8).
Fourthly, the growth rate of export-earnings slowed down
pafitly due to the rccession in industrial countries. Fifth, the import-
substitution in oil brought down the net import-availability ratio from
61 percent in 1980 to nearly 19 percent in 1983/84 (Table 1.6,
Column 5). -/ This also brought down import outlays on POL in relation
to merchandise export earnings from the record level of 78.50 percent in
1980/81 to nearly 49 percent in 1983/84. But even this level of 49
percent was considerably higher than the previous peak level of nearly
35 percent recorded in 1974/75. In other words, the import- bill of POL
rose faster than export-earnings since 1979/80 (Table 1.6).
1/ Table 1.16 presents the trend growth rates of domestic output and netimports of crude. Notice a virtual absence of any trend in the netimports of crude (lines 7 and 8) up to 1983-84 and the correspondingstrong positive trend growth rate in domestic output (lines 3 and 4).
- 31 -
Sixth, the import liberalisation measures, heavy import-bill
of POL and imports in the interest of controlling inflation, combined
with a step-up in the imports of capital goods and intermediates
(especially iron and steel) led to imports rising much faster than
export-earnings. Consequently, the trade deficit widened considerably
during the 1979/80 to 1983/84 period (Table 1.2).
The adjustment on the current account in the face of a
widening trade deficit was facilitated by two factors. First, India
negotiated a variety of short and medium term facilities with the
International Monetary Fund. In the four year period 1980/81 to
1983/84 "India obtained a total of about Rs 4700 crores from IMF
sources which is about 55 percent of the cumulative deficit in those
years." I The second factor was a continued increase in private
remittances (Table 1.7). Nevertheless, the the current account deficit
persisted as late as 1983/84 and showed no signs of decline.
VI. OVERALL ASSESSMENT
How do we assess the adjustment of the Indian economy to the
two oil shocks over the period from 1973-74 to 1983-84?
The differences in the two situations have already been
discussed. To recapitulate brieflv, the first shock was not perceived
to be permanent and hence the response was in terms of certain short-run
adjustments. The continuation of the high price of oil and the second
major increase in 1979/80 served to change that perception. This
- Ahluwalia, op. cit, p. 79.
- 32 -
brought about not only import substitution efforts in oil L/ but also
efforts to alter certain other policies, especially because of the
favourable initial conditions on the eve of the second shock in 1979.
The need for achieving an internationally competitive industrial
structure has been recognised and certain policy initiatives have been
taken in that direction. The process of transition from the existing
industrial structure to the internationally competitive one has been
proceeding slowly and with hesitation. What is the end result of these
efforts?
We have already seen from Table 1.1 that compared to the
period prior to 1964/65, the economy has not managed to regain the
growth momentum since 1964/65. Even if we confine ourselves to the
period 1973/74 to 1983/84, we find that while the real gross fixed
capital formation in public sector grew around 6.8 percent per annum,
the growth rate of the private sector GFCF (in real terms) was hardly
around 2.5 percent per annum. Overall GDP in real terms showed a trend
growth rate of 3.97 percent per annum. However, the character of that
growth was dominated by the tertiary sector alone (Table 1.17, lines 4,
18 and 19).
The major achievements of this period may be listed as
follows:
1/ The Union Budget for 1985/86 (presented on March 15, 1985) mentions thatdomestic crude output has reached a plateau and underlines the need forexport expansion in order to finance oil imports which are anticipated torise progressively.
- 33 -
(i) The trend rate of growth of wholesale prices (all commodities)
was around 7.66 percent per annum despite a significant rise in
energy prices (Table 1.18).
(ii) While the net barter terms of trade for India, vis-a-vis the
rest of the world, deteriorated at around 1.5 percent per annum
during 1973/74 to 1981/82, the income terms of trade actually
improved at the trend rate of 4.5 percent per annum because of
the volume expansion of exports (Table 1.15). The phenomenal
export expansion - that has taken place especially since 1972-
73 can be mainly attributed to a continuous depreciation in
real exchange rates in general (Table 1.11) and with reference
to its US dollar and pound sterling in particular (Table
1.12). This is not to deny the possible role played by a
variety of other export incentives. However, the fortuitous
factors in the expansion of exports is a cause for concern
(Table 1.4, columns (6) to (8)). Adjustment for these elements
not only brings down the trend growth rate of export-earnings
but also increases variability around the lower trend growth
rate (see Table 1.13, compare first three lines with the next
three lines).
See Table 14 for trend growth rates of nominal and real exports andimports of goods and services. Notice that exports increased at the rateof 15 percent per annum in nominal terms and 8 percent per annum in realterms in the post 1973-74 period.
- 34 -
Table 1.11
Trend Rates of Appreciation (+)/Depreciation (-) of Exchange Rates
Ser. Description of Period Type Trend Growth 2 SourceNo. Exchange Rate Rate % pea. r(1) (2) (3) (4) (5) (6) (7)
1. Export wted. 1970-83 Nominal -2.49 0.9335 Ahluwalia(4 currencies) Table 7
2. Export wted. 1975-83 Nominal -1.82 0.9110 Ahluwalia(4 currencies) Table 7
3. Export wted. 1970-83 Real -2.22 0.7302 Ahluwalia(4 currencies) Table 7
4% Export wted. 1975-83 Real -0.86 0.1758 Ahluwalia(4 currencies) Table 7
5. Export wted. 1975-83 Nominal 0.47 0.6956 Verghese(15 currencies) Pt.I, Table 6
6. Export wted. 1975-83 Real -0.99 0.1768 Verghese(15 currencies) Pt. I, Table 6
7. Import wted. 1975-83 Nlominal -0.43 0.3306 Verghese(15 currencies) Pt. I, Table 6
8. Import wted. 1975-83 Real -1.59 0.4535 Verghese(15 currencies) Pt. I, Table 6
9. Total-traded wted. 1975-83 Nominal -0.42 0.4593 Verghese(15 currencies) Pt. I, Table 6
10. Total-traded wted. 1975-83 Real -1.32 0.3289 Verghese(15 currencies Pt. I, Table 6
Sources: Lines 1 to 4 based on Table 7 in M. S. Ahluwalia "Balance of Payments inIndia, 1970-71 to 1983" (mimeographed, no date).
Lines 5 to 10 based on Table 6, p. 1099 in S. K. Verghese, 'Managementof Exchange Rate of Rupee Since its Basket Link," Part I, Economic &Political Weekly, Vol. XIX, No. 28, July 14, 1984, pp. 1096-1102.
- 35 -
'Table 1.12
Trend Rate of Appreciation (+)/Depreciation (-) of Exchange Rates
Ser. Description of Period Type Trend Growth r 2
No. Exchange Rate Rate % p.a.(1) (2) (3) (4) (5) (6)
1. US $ per Rs 100 1971-83 Nominal -1.66 0.57142. US $ per Rs 100 1975-83 Nominal -1.37 0.23563. US $ per Rs 100 1971-83 Real -2.32 0.54474. US $ per Rs 100 1975-83 Real -2.72 0.52885. dS per Rs 100 1971-83 Nominal 1.29 0.36326. £ per Rs 100 1975-83 Nominal 0.39 0.02147. £ per Rs 100 1971-73 Real -4.19 0.71148. £ per Rs 100 1975-83 Real -4.46 0.58649. DM per Rs 100 1971-83 Nominal -4.88 0.7371
10. DM per Rs 100 1975-83 Nominal -1.77 0.323111. DM per Rs 100 1971-73 Real -2.14 0.313012. DM per Rs 100 1975-83 Real 0.71 0.029813. Yen per Rs 100 1971-83 Nominal -4.54 0.829014. Yen per Rs 100 1975-83 Nominal -3.67 0.596215. Yen per Rs 100 1971-83 Real -4.82 0.642716. Yen per Rs 100 1975-83 Real -1.93 0.1290
Source: Based on data in Table 8 p. 1100 in S. K. Verghese, "Management of ExchangeRate of Rupee since its Basket Link," Part I, Economic z.nd Political Weekly,vol. xix, no. 28, July 14, 1984, pp. 1096-1102.
39 -
Table 1. 13
Trend Growth Rates of Export-Earnings fromi Goods at Current Prices
2Ser Description Period Trend Growth r
No. Rate (% p.a.)
(1) (2) (3) (5) (6)
1. Export-earnings: unadjusted 1970-71 to 1976-77 21.41 0.9822
2. Export-earnings: unadjusted - 1976-77 to 1982-83 8.97 0.9668
3. Export-earnings: unadjusted 1970-71 to 1982-83 15.10 0.9552
4. Export-earnings: adjusted 1970-71 to 1976-77 19.95 0.9633
5. Export-earnings: adjusted 1976-77 to 1982-83 7.21 0.9237
6. Export earnings adjusted 1970-71 to 1982-83 14.48 0.9470
Source: Based on Table 10, p. 1152 in S. K. Verghese, Part II.
Note: Exports earnings in lines 4 to 6 are adjusted for fortuitous factors such as
grant financed exports to Bangladesh, administrative decisions such as
lifting of ban on silver exports, unprecedented rise in the international
price of sugar, and ad hoc increases in exports due to acute scartd.ty
conditions abroad and exports of crude petroleum for processing abroad. (See
Verghese, Part II, p. 1152 for details).
- 37 -
Table 1.14
Trend Growth Rates in Exports and Imports
Price Trend growth 2
Ser Description Base Period rate rNo. (% p.a.)(1) (2) (3) (4) (5) (6)
1. Exports of goods & services] current 1970-71 to 1981-82 17235 0.96582. Exports of goods & services] prices 1973-74 to 1981-82 14.96 0.9477
3. Exports of goods & services] 1970-71 1970-71 to 1981-82 8.02 0.96044. Exports of goods & services] prices 1973-74 to 1981-82 7.94 0.9179
5. Imports of goods & services] current 1970-71 to 1981-82 19.77 0.96996. Imports of goods & services] prices 1973-74 to 1981-82 17.83 0.9566
7. Imports of goods & services] 1970-71 1970-71 to 1981-82 6.60 0.72888. Imports of goods & services] prices 1973-74 to 1981-82 9.30 0.77679. Imports of goods & services] 1970-71 to 1979-80 3.87 0.5904
10. Imports of Capital Goods] 1970-71 1970-71 to 1982-83 5.76 0.489011. Imports of Capital Goods] prices 1970-71 to 1979-80 -0.20 0.0035
Source: Lines 1-9 based on National Accounts Data and Unit Value Indices of Importsand Exports from S. K. Verghese, Part II.
Lines 10-11 based on M. S. Ahluwalia, Table 6.
- 38 -
Table 1.15
Trend Growth Rates in ExDorts & Imports: Volume and Unit Values
Ser. Description Period Trend growth r2No. rate (% p.a.)(1) (2) (3) (4) (5)
1. Exports: Volume 1970-71 to 1981-82 6.46 0.9553
2. Exports: Volume 1973-74 to 1981-82 6.02 0.9006
3. Imports: Volume 1970-71 to 1981-82 6.80 0.7614
4. Imports: Volume 1973-74 to 1981-82 8.87 0.7557
5. Exports: Unit Value 1970-71 to 1981-82 9.34 0.9307
6 Exports: Unit Value 1973-74 to 1981-82 7.02 0.9050
7. Imports: Unit Value 1970-71 to 1981-82 13.16 0.8267
8. Imports: Unit Value 1973-74 to 1981-82 8.53 0.6564
Source: Based on Table 11, p. 1154 (with updating) in S. K. Verghese: "Managementof Exchange Rate of Rupee since its Basket Link," Part II, Economic &Political Weeklv, vol. xix, no. 2, July 21, 1985, pp. 1151-58.
- 39 -
Table 1.6
Tr-nd Growth Rates of Crude Oil:Domestic Output and Net Imports (in million tonnes)
Ser. Description Period Trend Growth r
No. Rate (% p.a.)
(1) (2) (3) (4) (5)
1. Crude Oil: Domestic 1973-74 to 1981-82 8.53 0.8562
production
2. Crude Oil: Domestic 1970-71 to 1981-82 6.84 0.8654
production
3. Crude Oil: Domestic 1973-74 to 1983-84 11.67 0.8796
production
4. Crude Oil: Domestic 1970-71 to 1983-84 9.26 0.8547
production
5. Net Imports of Crude 1973-74 to 1981-82 1.66 0.5213
6. Net Imports of Crude 1970-71 to 1981-82 2.39 0.7589
7. Net Imports of Crude 1973-74 to 1983-84 -1.18 0.1066
8. Net Imports of Crude 1970-71 to 1983-84 0.40 0.0192
Source: Based on the data available in the various issues of the Economic Survey
published by the Ministry of Finance.
- 40 -
Table 1.17
Trend Growth Rates in Real GDP & Gross Fixed Capital Formation
Ser. Description Period Trend Growth r2No. Rate (% p.a.)
(1) (2) (3) (4) (5)
1. Agrregate GDP 1970-71 to 1981-82 3.59 0.9446
2. Aggregate GDP 1973-74 to 1981-82 3.98 0.9300
3. Aggregate GDP 1970-71 to 1983-84 3.68 0.9635
4. Aggregate GDP 1973-74 to 1983-84 3.97 0.95785. GFCF, public sector 1970-71 to 1981-82 6.20 0.89106. GFCF, public sector 1973-74 to 1981-82 6.66 0.8401
7. GFCF, public sector 1970-71 to 1983-84 6.30 0.92768. GFCF, public sector 1973-74 to 1983-64 6.67 0.90109. GFCF, private sector 1970-71 to 1981-82 2.97 0.8185
10. GFCF, private sector 1973-74 to 1981-82 3.25 0.721411. GFCF, private sector 1970-71 to 1983-84 2.52 0.770712. GFCF, privrate sector 1973-74 to 1983-84 2.46 0.6206
13. GFCF public & private 1970-71 to 1981-82 4.37 0.918414. GFCF public & private 1973-74 to 1981-82 4.78 0.860415. GFC'? public & private 1970-71 to 1983-84 4.24 0.9417
16. GFCF public & private 1973-74 to 1983-84 4.42 0.899217. GFCF in primary sector 1973-74 to 1983-84 2.24 0.699218. GDP in secondary sector 1973-74 to 1983-84 4.15 0.937619. GDP in tertiary sector 1973-74 to 1983-84 5.95 0. 9968
Source: Based on the data available in the various issues of National AccountsStatistics published by the Central Statistical Organisation.
- 41 -
Table 1.18
Trend Rates of Growth of W4holesale Prices
2Ser. Wholesale Price Index Period Trend Growth rNo. Specification Rate (% p.a.)(1) (2) 3)
(4) (5)
1. All Commodities 1970-71 to 1981-82 8.89 0.94542. All Commodities 1973-74 to 1981-82 7.45 0.88713. All Commodities 1973-74 to 1983-84 7.66 0.93764. All Commodities 1970-71 to 1983-84 8.69 0.96265. All Commodities 1970-71 to 1981-82 13.34 0.95066. Administered Prices 1970-71 to 1981-82 11.72 0.90277. Administered Prices 1973-74 to 1981-82 11.36 0.93768. Administered Prices 1973-74 to 1983-84 12.75 0.96099. Crude Petroleum & 1970-71 to 1981-82 27.79 0.9208
Natural Gas10. Crude Petroleum & 1973-74 to 1981-82 20.56 0.8769
Natural Gas11. Crude Petroleum & 1973-74 to 1983-84 17.06 0.8517
Natural Gas12. Crude Petroleum & 1970-71 to 1983-84 23.89 0.890913. Petroleum Products 1970-71 to 1981-82 14.16 0.919114. Petroleum Products 1973-74 to 1981-82 11.75 0.829815. Petroleum Products 1973-74 to 1983-84 11.59 0.895016. Petroleum Products 1970-71 to 1983-84 13.52 0.938517. Electricity 1970-71 to 1981-82 9.55 0.999818. Electricity 1973-74 to 1981-82 10.45 0.977519. Electricity 1973-74 to 1983-84 10.69 0.987220. Electricity 1970-71 to 1983-84 10.21 0.987021. Coal & Lignite 1970-71 to 1981-82 12.95 0.964422. Coal & Lignite 1973-74 to 1981-82 14.13 0.947823. Coal & Lignite 1973-74 to 1983-84 14.67 0.970824. Coal & Lignite 1970-71 to 1983-84 13.59 0.9755
Source: Based on the data compiled from official sources by the Centre for theMonitoring of Indian Economy, Bombay.
- 42 -
Chapter 2: TIE MODEL
This chapter contains a heuristic description of the model
used to study questions of adjustment to external and internal shocks in
India. A formal statement appears in Appendix 1.
Production
The production side of the model distinguishes six sectors:
(1) Agriculture, (2) Consumer goods, (3) Capital goods (including
construction), (4) Intermediates, (5) Public Infrastructure, and (6)
Services. The sectoring follows agriculture-industry-services lines.
Industry is disaggregated into use-based categories (2), (3) and (4), to
capture the differential impact of policies on different parts of the
industrial sector. Infrastructure is singled out to help focus on
possible bottlenecks to expansion of traded goods sectors necessary for
adjustment. The number of sectors is large enough to pose the questions
of interest to the study and yet small enough to keep the exercise
manageable. The precise details of the aggregation from the underlying
input output table to the six sectors appears below in Appendix 4 (see
Table 1 of that appendix).
In sector 1 (agriculture), the production structure is
represented by a nested CES tree as follows:
Chap-2/Disc-26(India Shocks:4/11/86:pp
43 -
Z G
Is Lw "D
Output, X is a function of H (land), Ls (self-employed labor), LW (hired
labor), ND (domestically produced intermediate goods from all sectors
ot'-r than 5 into the sector in question), NM (imported intermediate
goods from all sectors other than 5 into the sector in question), and G
(the flow of infrastructure, i.e., output of sector 5 going into the
sector in question). The particular tree structure chosen imposes some
separability on the production function. Much, although not all land,
is owner-cultivated to some extent: the resulting sub-aggregate S is
combined with hired labor (Lw) to produce value added (V) 11 ND is a
fixed-proportions bundle of domestically produced intermediates
excluding sector 5; similarly, N14 is a fixed-proportions bundle of
imported intermediates, again excluding sector 5. Some substitution is
allowed between ND and NM; their aggregate, N combines with value added
to produce Z. Infrastructural services, G, which are publicly provided
in most countries, are identified separately and combined with Z to
produce output, X. Since G is an integral part of the tree structure,
1/ In empirical implementation, H includes both land and capital inagriculture.
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 44 -
the formulation captures the contribution of infrastructure to the
production process.
In sectors 2 to 6, the portion of the CES tree below value
added is as follows:
V
K Ls Lw
Capital and the two categories of labour continue directly to
produce value added in these sectors.
In sectors with significant auantities of almost-finished
imports, there is an extra layer at the top of the tree as follows:
cx
Thus imported final goods (M) are less than perfect substitutes for the
domestically produced variety (X); final output (CX) is considered to be
a CES aggregate of the two. This formulation holds in sector 3.
The choice of a nested CES function is made on a priori
grounds. It is however intuitively easy to understand and encompasses a
wide range of substitution possibilities at every level. The
sensitivity of some of the model results to changes in the degree of
substitution will also be explored.
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 45 -
Income Generation
In an effort to capture the impact of adjustment policies on
income distribution in as much detail as available data will allow, we
model the distributional aspects of the economy in the elaborate way.
The production svstem distinguishes four categories of income, viz., (1)
income from self-employment, (2) wage income, (3) land/capital income,
and (4) income from implicit government subsidies on publicly provided
infrastructure. To this must be added nonproduction-related income,
comprising such items as (a) interest on national debt, (b) domestic
current transfers, (c) net factor income from abroad and (d) net current
transfers from the rest of the world. The model maps those incomes
according to fixed rules into fifteen asset owning classes each in rural
and urban areas. In parallel with the treatment in Narayana, Parikh and
Srinivasan, income per capita and expenditure per capita are assumed to
be jointly lognormally distributed. -L/ This distribution, when
empirically implemented, makes it possible to calculate the shares of
total population, consumption and income accruing to households with per
capita expenditures at different segments of the distribution and
standard measures ot consumption and income inequality such as the Gini
coefficient. /
1/ Cf. N. S. Narayana, K. S. Parikh and T. N. Srinivasan, "An IndianAgricultural, Policy Model: Preliminary Results of an Analysis of SomeRedistributive Policies," (ISI Discussion paper, Bangalore, 1984).
2/ The technical details are provided in Appendix 1.
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 46 -
Final Demands
Final demands comprise private consumption, public
consumption, exports and investment. Household incomes are mapped into
private consumption via a savings function. Private consumption demand
for the output of the six production sectors is generated by a linear
expenditure system for each of the rural and urban households identified
in the section on income generation; these are functions of prices and
incomes. Public consumption of each sectu's output is exogenous.
Export demand is a function of income in the rest of the world as well
as the ratio of export prices to those of substitutes in international
markets. Investment demand is almost entirely directed at sector 3
(capital goods, including construction).
Trade
It is worth noting that the trade side incorporates price-
responsive export and import relationships. The derived demand for both
intermediate and final imports depends on the level of output and the
import price to the user relative to that of the domestically produced
variety, where appropriate. -1/ Similarly, exports depend on the state
of demand in the rest of the world (world income) and export prices
relative to that of substitutes. Import prices are given, so that the
country is small in the relevant market. By contrast, the country is
assumed to be able to vary its export sales by changing its export
1/ For imported goods which have no domestically produced substitute, importdemand depends only on the level of production of output.
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 47
prices. In any event, the model is equipped to simulate the effects of
tariffs and subsidy policies on the trade side.
Market Clearance
Goods
Gross output in each of the six sectors must equal the sum of
final demands, intermediate demands and changes in stocks, less
imports. Since each of these components is either exogenous or price-
responslve, the market clearance conditions determine prices.
The allocation of public infrastructural flows for
intermediate use in each of the production sectors is fixed by policy,
while production and final demand are price-responsive. Intermediate
users are typically not charged the market price for infrastructure.
This allows an exploration of the effects of changing the rates of cost
recovery on public infrastructure as well as of the policy-determined
allocations to intermediate users.
Factors
The operation of factor markets can be expected to have an
important bearing on the efficacy of alternative policies pursued in
response to shocks. The wage of hired labor in sectors 2 to 6 is
indexed to the consumer price index, hence determining the demand for
them. This leads to rationing of jobs: those who are unable to find
employment swell the ranks of the low productivity self-employed whose
returns must be depressed to clear the market. In this sense, there is
no open urban unemployment. In sector 1 (agriculture), wages of hired
labor are fixed as well. But since much self-employment is on own land,
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 48 -
the stock of self-employed is postulated to be fixed with returns
varying to clear the market. Those unable to find jobs at the fixed
agricultural wage become openly unemployed. On grounds of its
quantitative insignificance in India, there is no rural-urban migration,
so that rural and urban labor markets are not linked on the supply side.
The amount of land in sector 1 and the stock of capital in
each of sectors 2 to 6 is fixed within periods but augmented across
periods as investment takes place.
Investment and Savings
The relation between household incomes and consumption
determines household savings. Covernment savings are the difference
between government income and expenditure. In the so-called "savings-
driven" version of the model, foreign savings are exogenously
specified. The sum of these three sources of saving equals investment,
which is therefore residually determined. Alternatively, in the
"investment-driven" version, investment is exogenously specified, and
foreign savings must adjust residually to satisfy the savings investment
equality. The model is run in either mode depending on the question at
hand. But it needs to be stressed that these different specifications
can make a substantial difference to qualitative behavior, a feature
worth bearing in mind when interpreting the numerical results.
Government
The sum of tax and tariff revenue, the return on public
infrastructure net of subsidies and other income, less the value of
government consumption equals government saving. This is the
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 49 -
government's budget constraint but it does not need separate
formulation, since it may derived from the other equations of the
system.
Dynamics
The breakdown of investment by sector of origin is given by
base year input output data; it typically comes entirely from sector
3. Its breakdown by sector of destination is taken from national
accounts data, when available. Otherwise, it is chosen to rieproduce
base year proportions or to move In response to differences in sectoral
rates of return to capital, or a combination of both. A more explicit
modeling of private investment and credit market behavior would be
desirable, but is left for future work.
Debt
The model incorporates a debt module which keeps track of the
effect of foreign borrowing on the stock of debt and debt service
payments (amortization and interest) corresponding to medium- and long-
term (official and private) and short-term debt. Details are provided
in Appendix 2.
Chap-2/Disc-26(India Shocks:4/11/86:pp
- 50 -
Chapter 3: TEE MODEL AT WORK
I. INTRODUCTtON
This chapter and the next explore the consequences of
different configurations of shocks and policy responses. However, since
different outcomes need to be compared against a benchmark, it is
necessary, as an intermediate step, to define a "historical run' between
1973-74 and 1983-84 which broadly replicates the principal developments
in the economy during this period. To understand how this is done, and
appreciate why the numerical policy simulations come out the way they
do, it is important, in the first instance, to understand how the model
responds to changes in exogenous. variables.
To this end, we begin by performing a number of comparative
statics exercises with the model. We next describe how the 1973-74 to
1983-84 base path (or "historical run") is constructed, a procedure
which may be seen as a sequence of comparative statics experiments, and
look at the main features of the historical run. Chapter 4 reports the
results of intertemporal policy simulations with the model. I/
II. COMPARATIVE STATICS
The comparative statics experiments are performed in the base
year, i.e., 1973-74. Tables 3.1 and 3.2 report selected features of the
base period which may be seen as the initial conditions describing the
1/ The reader who is interested only in the results of the policyexperiments may wish to look at the tables at the end of this
chapter as well as the charts before proceeding directly to Chapter4.
Chap-3disc-26:India Shocks:4-1L/86/:pp
e 51 -
Indian economy at the beginning of our analysis. In performing the
comparative statics experiments, the model is run in its "savings
driven" version.
Changing Internal Variables
The first set of experiments examines the consequences of an
exogenous productivity decline in each sector of the economy. -Y This
can be given various interpretations -- in Sector 1, harvest failure; in
Sector 5, decline in the efficiency of p'iblic management and so on.
Agricultural Harvest Failure
This is modeled via a 10 percent cutback in the efficiency
parameter of the agricultural production function. This moves the
supply curve of agricultural output backwards and, given that the price
elasticity of private consumption demand for food ranges across
different groups from -0.13 to -0.26, raises its price relatively more,
increasing the amount spent on food. Given that the share of food in
total consumption is never less than 40 percent and exceeds 70 percent
for the poorest urban and rural groups, the adverse income effect of the
rise in the price of food shifts the demand curve inward, further
reducing output, but moderating the rise in the food price., The value
of agricultural output rises by 29 percent.
Since the elasticity of substitution between value added and
other inputs Is nearly unity, the share of nominal value added to
nominal value of output must remain practically constant (at 76 percent)
1/ This is formally accomplished by scaling the production functiondownwards in Hicks-neutral fashion.
Chap-3disc-26:India Shocks:4-11/86/:pp
- 52 -
and income paid out as value added in agriculture must rise. Virtually
all of this is a rise in the price of value added, principally because
wages, which account for 19 percent of vralue added, increase on account
of indexation vis-a-vis the consumer price index.
Table 3.3 shows that the dip in agriculture leads to a fall in
demand for all other commodities in the economy. Sectors 2 and 6
account for 22 percent and 14 percent of the value of total consumption
respectively in the economy as a whole and hence suffer from output
contraction. But the sectors which are hardest hit by harvest failure
are capital goods and intermediates: their outputs fall by 60 percent
and 31 percent, respectively. This may be explained as follows. The
consumption deflator (in which food looms large) rises by 33 percent as
opposed to a 20 percent rise in the GDP deflator. This reduces
household savings by 70 percent and investment (since it is savings-
driven) by 66 percent. Since virtually all investment demand is
sazisfied by the capital goods sector, its output falls sharply. This,
in turn, hits intermediate goods particularly hard.
Turning to the macroeconomic agaregates, the harvest failure
has an adverse effect on GDP (-6 percent) and, as discussed above, on
consumption and investment. The adverse supply shock from agriculture
worsens the relative competitivreness of exports which fall by 26
percent. Since foreign savings are lixed, this is reflected in a drop
in imports -- by 14 percent.
The impact effect of an agricultural shortfall on the true
cost of living index is regressive; it rises by around 37 percent for
the poorest households and by roughly 30 percent for the richest
Chap-3disc-26:Tidia %ocks:4-11/86/ pp
- 53 -
households. - The Gini coefficient of consumption as well as income
inequality increases by between 2 to 3 percent in both rural and urban
areas and is accompanied by a decline in the share of the bottom 40
percent in consumption and income. 2/
Consumer Goods Sector
A decline in productivity in the consumer goods sector has
many similar effects. However, the fact that Sector 2 accounts for no
more than 25 percent of consumer budgets across different groups implies
that the adverse income effects are smaller. GDP falls by Just over one
percent, consumption by less than 1 percent, household savings by 21
percent and, hence investment by over 17 percent. Sector 2 accounts for
half of all exports in the base year; the experiment cuts total exports
by 12 percent.
Capital Goods and Intermediates
A fall in productivity in capital goods production may be
analyzed in the same way. The backward movement in the supply curve
raises the output price by 12 percent, with output falling by 7
percent. Since capital good items are unimportant in Einal consumption,
there is no reason to expect significant changes in wages and other
1/ The true cost of living index here and in Chapter 4 is the cost ofattaining "pre-experiment" utility levels at "post-experiment"prices, expressed as a ratio to the cost of attaining the sameutility level at "pre-experiment" prices.
2/ It should be understood that this example merely serves toillustrate the working of the model. A government, faced with asevere harvest failure, would presumably choose to increase food
imports rather than allow the impoverishment consequent upon a sharpincrease in the relative consumer price of food.
hap-3disc-26:India 9ocks:4-11/86/ .pp
- 54 -
factor prices, so that the price of value added changes little -- by
1.6 percent. Since the share of nominal value added in nominal output
must vemain virtually constant by the assumption of nearly unitary
elasticity of substitution, real value added rises by 2.5 percent. 1/
The principal macroeconomic impact is expectedly on investment, which
declines by over nine percent, almost matching the productivity decline.
Since intermediates have more pervasive linkages with the rest
of the economy, the effects of a fall in productivity in that sector are
stronger. There is a greater increase in the output price and, hence, a
larger divergence in the opposite movements of gross output
(-10 percent) and value added (6 percent). The cost-push effect of the
16 percent increase in the price of intermediates is reflected in the
macroeconomic aggregates: investment falls by 13 percent and exports by
3 percent.
Infrastructure and Services
A fall in productivity in public infrastructure has similar
consequences. It is noticeable that government income from import
duties rises significantly. This is because of profits made on
controlled imports in Sector 5. The government continues to import the
same quantity of M at the unchanged international price but is able
to resell it domestically at a price which, as a result of the decline
in productivity, is nearly 19 percent higher. There is, however, an
increase in the implicit subsidy to infrastructure for the same
/ This is a somewhat more approximate statement for Sector 3 than for
the other sectors, since the final imports of capital goods add anextra layer to the production trea (recall the description of themodel in Chapter 2). However, its share in gross output was lessthan five percent in 1973-74.
- 55 -
reason. The subsidy is calculated vis-a-vis the market price of
infrastructure which, as noted above, increases by 19 percent.
The corresponding experiment in the services sector does not
merit a separate discussion: the figures may be consulted in
Table 3.3. 1-
The next set of experiments alters certain behavioural
parameters of the system.
Decreasing the Savings Propensity of Households
The logarithm of mean per capita expenditure in either rural
or urban area, vc, is related to the logarithm of mean per capita
income in that same area, py, by the formula (see equation (6.10) in
Appendix 1):
lic = a + a 4c y
1/ All the productivity experiments reported above are characterised bya fall in Pz relative to PX (where it will be recalled from Chapter
2 that Z and G combine to produce output X). The reason is asfollows. P is a weighted average of PV and PN, while P reflectsthe impact ol the backward shift in the supply curve as wel as that
of the demand curve because of the income effect. Cost minimization
then leads to a rise in the (-g) ratio. We have seen that X fallsxin all sectors; whether Z will rise or fall is sector-specificdepending both on the share of Z in X in the base year and theelasticity of substitution between Z and G. It turns out that Z and
V move in the same direction in all sectors except intermediates.
As before the (v) ratio depends on the relative price ratiop z
pV
- 56 -
An exogenous decrease in $ may be interpreted as a rise in households'
savings propensity: this could be brought about by policies outside the
purview of the model, e.g., raising interest rates, instituting
compulsory deposit schemes and the like.
Table 3.3 reports the consecuences of two experiments raising
S in rural and urban areas separately by 5 percent. As is to be
expected, this raises private consumption at the expense of investment,
lowers GDP and makes exports less competitive. Changing the rural
has a more potent impact because of the disparity of population between
the two sectors; the numbers may be consulted in the table.
A 10 percent Increase in Real Wages
A 10 percent increase in the real wage of hired labour is
analogous to an adverse supply shock. Since sector 5 (respectively
sector 1) has the highest (respectively lowest) share of hired labour in
value added, its value added price rises the most (respectively least)
-- by 8.3 percent (respectively 1.48 percent). Real value added falls
in all sectors of the economy and is reflected in a nearly 3.5 percent
fall in GDP. There is a similar fall in gross output. The loss of
competitiveness, which mav be thought of as a real exchange rate
appreciation, leads to a 4 percent decline in exports and, given foreign
savings, in a 1 percent decline in imports. There is a 4 percent
decline in household savings, a 2.7 percent fall in private consumption
and an 8 percent decline in real investment.
Qiap-3disc-26:TIndia Shocks:4-11/86/:pp
- 57
The cost of living registers a 2 percent increase across the
board. Wage employment declines by 12 percent in sector 1 and by 11
percent in sectors 2 to 6. The CPI-deflated return to self employed
labour falls by 5 percent in sector 1 and by nearly 9 percent in sectors
2 to 6. The Gini coefficients of income and consumption inequality
increase by between 1 and 3 percentage points with the higher increase
occurring in rural areas.
Changing External Variables
The next set of experiments examines the consecuences of
varying certain external parameter; the results are summarized in
Table 3.4.
A 30 Percent Increase In Export Prices
With export volumes accounting for just over 2 percent of
gross output and barely 5 percent of GDP, a 30 percent increase in
export prices has a first round impact equalling 8 percent of GDP.
The resulting increase in demand for output, interacting with supply
elasticities arising from sectorally fixed capital stocks leads to ar
Increase of between 20 and 25 percent in output prices in all sectors of
the economy. This implies that the relative competitiveness of Indian
exports improves by between 4 percent and 8 percent. With a partial
equilibrium export price elasticity of 1.8, this translates into a
general equilibrium export price elasticity of between 0.24 and
1/ Exports rise by a factor of (1.3)1.8 1.6. With a share of 5percent this translates into a 8 percent rise in CDP.
Chap-3disc-26:India Shodcs:4-11/86/:pp
- 58-
0.50. Exports rise by nearly 10 percent; with fixed foreign savings,
imports rise by 36 percent.
The increase in output and consumer prices throughout the
economy boosts nominal magnitudes such as household savings (by 35
percent) and government revenue (by 34 percent). Although the cost of
living index rises by 25 percent for all groups, there is a negligible
negative movement in the GCni coefficients. Investment increases by 12
percent; this requires a greater than 10 percent increase in the output
of the capital goods sector. Gross outputs, as well as value added go
up in all sectors.
A 50 Percent Rise in Import Prices
The rise in import prices has two effects. First, it
impoverishes the economy, the extent of this being aiven by the share of
imports in GDP (at factor cost) - just over 7 percent. Fence the loss
in GDP is of the order of 10 percent. With an elasticity of consumption
with respect to Income of around 0.75, consumption demand would
1/ These figures are arrived at by noting that changes in value of
exports range from (1.04) and (1.08P 8 . Since the original
price change is 30 percent the elasticity lies between
(1.04).3 1 x 100 and (1.08.)3 1 x 100
Ciap-3disc-26:India Socks:4-11/86/ pp
- 59 -
potentially fall by 7.5 percent. This has the effect of depressing both
output prices and quantlties. Second, in as much as the prices of
imported intermediates go up, the economy's supply curve is shifted
backward, with the size of this effect depending on the share of
imported intermediates in urnit production costs - around 2.7 percent for
the economy as a whole. This reduces gross output and ralses output
prices. Both effects reduce output; the impact on prices is ambiguous.
The cost-push impact of dearer imported intermediates is felt
most strongly in sectors 3 and 4, where output prices rise by eight
percent. Imports fall by 37 percent. There is an 8 percent fall in
household savings and a 26 percent fall in government savings, the
latter caused by a substantial fall in profits on domestic
sales of imports. Hence, investment falls by 18 percent, leading to a
16 percent drop in the output of sector 3. GDP at market prices
declines by 2.3 percent. Gross output falls in all sectors of the
economy but value added rises in sectors 2 and 4, reflecting
substitution away from more expensive imported intermediates.
A 10 Percent Increase in Export Volume
This may be thought of as an exogenous expansion in export
markets in major partner countries. With sectorally fixed capital
stocks, the demand pull raises output prices by between 4 and 5 percent,
worsening competitiveness. This leads to exports rising by less than 2
percent. Household savings increase by 7 percent and government savings
by 21 percent. Investment goes up by 2.5 percent.
Uhap-3disc-26:1ndla Shocks:4-11/86/:pp
- 60 -
A 100 Percent Increase in Foreign Savings
This experiment doubles foreign saving in the base year. This
translates into a nearly 10% increase in total investment, and a
concomitant 9 percent increase in the gross output of capital goods.
Since expansion of domestic production requires sector 3 to bid variable
factors away from the other sectors of the economy, the output of sector
2 registers a slight decline while all the other sectors except
intermediates expand very modestly. The exception in the case of
intermediates arises because much intermediate demand originates from
the capital goods sector. The domestic production of capital goods
(X3) rises by 9 percent, while the imported component (M3) which
can substitute for it with almost unit elasticity, rises by over 18.
percent. While the cost of living increases by a uniform 8.8 percent
across the board, the Gini coefficients, once again, exhibit virtuallv
no change. The ratio of urban-to-rural per capita income increases very
slightly.
The increase in the domestic vis-a-vis international prices
triggers wage increases and the price of value added rises by between 9
and 11 percent in all sectors of the economy. This leads to significant
substitution towards imported intermediates; total imports rise by 14
percent. The price rise consequent on a doubling of foreign savings
leads to real exchange rate appreciation and cuts exports by 13
percent. GDP and private consumption rise by less than 1 percent. The
price increase generates an increase in household savings by 13 percent,
Cap-3disc-26:India Shocks:4-11/86/:pp
- 61 -
in government revenue by 15 percent and in government savings by 22
percent.
III. TRACKING HISTORY
In this section, we make an attempt to reproduce certain
salient historical developments in the Indian economy between 1973-74
and 1983-84 within the framework of the model. This simulation of
historical developments provides a benchmark against which the results
of counterfactual experiments carried out in Chapter 4 can be
compared. Inasmuch as counterfactual policy simulations need to be
compared againt a benchmark rather than with actual historical
experience, the derivation of a historical run is seen to be a necessary
intermediate step.
Attempts to simulate historical developments in the Indian
economy are plagued by two sets of difficulties. First, the model which
is implemented here assumes the economy to be in general economic
equilibrium year after year. A look at the year-to-year fluctuations of
the macroeconomic aggregates during the tracking period (see Table 3.6)
indicates that this assumption could only have been satisfied on average
over longer periods of time. Second, the model abstracts only certain
parts of reality - and those too only in the economic sphere - in a
quantifiable framework. It is necessary to bear this point in mind in
interpreting the policy experiments to be reported later: in particular,
how incorporation of lags in adjustment might modify the results.
Chap-3disc-26:Thdia hods:4-11/86/.pp
- 62 -
Methodology 1/
The tracking procedure chooses values for a set of pre-
specified parameters in order to minimize year-by-year the sum of
squared deviations between the data-specified growth rates of tracking
indicators and those generated by the model. -/ Exogenous variables for
which time series are available, e.g., unit value indices for imports
and exports, government consumption and the like, are set at their given
values throughout the period. By contrast, the parameters used in the
minimization are entities for which empirical information is not
available for years other than the base year: for example, rates of
productivity growth by sector and savings propensities of rural and
urban households. The tracking indicators are the growth rates in the
expenditure side of the national accounts at constant prices, viz., GDP
at market prices, private consumption, investment, imports and
exports. While such intertemporal calibration is standard practice
among applied general equilibrium modellers, we have formalized the
exercise by resorting to an explicit minimization. Although such a
procedure shares certain similarities with econometric estimation, it is
less systematic than the latter. The variation in the tracking
parameters - some of which are necessarily substantial in order to
1/ For technical detaiis, see H. Sierra An Intertemporal CalibrationProcedure for Applied General Equilibrium Models "(World Bank, 1986,in preparation.
2/ Since the model is calibrated to reproduce base year (1973-74) data,the tracking refers to the years 1974-75 onwards.
Chap-3disc-26:India Shocks:4-11/86/:pp
63 -
reproduce year-by-year fluctuations of the macroeconomy within an
equilibrium methodology - may be interpreted in ternis either of some
exogenous shocks or of certain policy instruments which are not
explicitly incorporated in the model. -/
Input Data
Table 3.5 presents the time-series of major exogenous
variables entering into the model. These variables are
(1) unit value indices for sector-specific imports and
exports;
(2) volume of policy-determined imports in sectors 1
(foodgrains), 2 (edible oils) and 5 (crude oil);
(3) foreign savings;
(4) domestic transfers (government transfers to
households and interest on public debt) and foreign
transfers (which comprise net (factor) income and
net current transfers from abroad);
(5) GDP deflators for US and India which are used to
convert nominal dollar and rupee transfers
respectively into real terms;
1/ There is no guarantee that the particular configuration ofparameters obtained in any year is the only one that would effect aclose correspondence in the tracking indicators. In other words,the minimization procedure used for tracking need not have a uniauesolution.
Chap-3disc-26:Tndia chocks:4-11/86/:pp
- 64 -
(6) growth of aross output of agriculture in real terms
(i.e. at 1973-74 pr,,i.v-es); 1/
(7) investment share by sector of destination for sector
1, the sum for sectors 2 to 4 i.e., manufacturing,
sector 5 and sector 6);
(8) the share of fixed investment in total investment;
and
(9) public consumption of goods and services at constant
(1973-74) prices.
Table 3.6 shows the expenditure side of the national accounts
at constant prices - GDP at market prices and its components, viz
private consumption, total investment, exports and imports. These have
been used as tracking indicators i.e., the variables whose growth rates
must be replicated as closely as possible by the tracking procedure.
A comparison between the realized growth rates and levels and
those generated by the model is presented in charts I to 10 for the
following macroeconomic variables at constant prices:
1/ Fixing the gross output of agriculture in real terms in tracking(while it is a variable in counterfactual experiments) requires thatsome parameter be allowed to vary. It is natural to choose theefficiency parameter of the agricultural production function to bevariable so that its (endogenous) movements may bo. expected tocapture weather-related fluctuations. In experiments, the grossout!t11t of agriculture is an endogenous variable, while theagricultural efficiency parameter Is kept at its "nistorical run"value.
Chap-3dIsc-26:Ihdia Sokcs:4-11/86/:pp
- 65 -
(i) Gross domestic product at market prices;
(ii) Private consumption expenditure;
(ifi) Total investment;
(iv) Exports;
(v) Imports.
In addition, Table 3.6 presents a combination of actual and model-
generated growth rates in the tracking indicators. It will be seen that
the correspondence with the growth rates is quite satisfactory, and,
turning to the levels, that the model captures turning points
successfully. This is to be expected, as the tracking procedure was set
up to minimize the squared deviations from actual growth rates rather
than levels.
Discussion of Tracking
A detailed account of the principal developments in the Indian
economy during this period was provided in Chapter 1 and will not be
repeated here. Instead, the focus is on the way in which the model
attempts to replicate those developments in order to generate a
historical.
Although every single exogenous variable has an impact on the
outcomes of the model, it proves convenient to restrict our attention to
the following three, viz., (1) the change in real agricultural output,
(2) the change in the economy's barter terms of trade; and (3) the rates
of foreign savings to gross domestic product. The time series for these
variables appears in Table 3.7.
Chap-3disc-26:India Socks:4-3.1/86/:pp
- 66 -
Chart 1
!ndia : Tracking 1 973-74 to 1 983-84GOP at Mcrkit Prices (Growth Rate)
O. 1 5 -
.12/t0.11
0.08 -1 /007-
0.05-i I
0.07 I
0 11
0-
-0.01
0 .0 j../
0.02
0. J
-0.04 -
-0.05-0:06 *
7374 7475 7576 7677 7778 7879 7980 8081 8182 8283 8384
YecrsO Model H 3istoric
India Tracking 1 97-74 to 1C983-84GOP at Mark.et Prices (1 9730w 1)
1.8
1.7 -~
1.2 -4
0. .9.2
1.744 77 5677 7377 9088 1288 .8- 1'
1.32 HstriChart.2
- 67 -
Chart 3
India : Tracking 1 973-74 to 1 983-84a- Private Consumption (Growth Rate)
0.14 -
0.12
0.1 -
0.08 t0.0
0.04
0.0
E 0.04-
-0.02
-0.02
-0.12
7374 7475 7576 7677 7778 7879 7980 8a081 8182 8283 83384
Y4eam
o Model + HbstorJc
India :Tracking 11973-74 to 1 983-84t.7 -PiaeConsumption (1973-1)
1.8
1.5c0
ES
IC
0.
7374 7475 7576 7677 7778 78379 79830 8081 8182 82813 8384
Yevarsa Model 4 Historic
Chart 4
- 68 -
Chart 5
indiQa Tracki ng 1 973-74 o I983--3Totct lrve3stments (Growth Rcte)
0.2 -
0.19 l
*0.o 1 7 --
0.184
0. 7i2
0.16 - r0.09-0.08-0.07-0.06-
0.04-
0.02 +
Years
indic rccking 197I 74- to 1 93-8Total Investrncnts (1 97v3-1 )
,,.
1.9 .
1.8 - -'~~-
,,-'
1.7 j S@
C:,.........
a, 1.6 i
E !/
1 -4'
1 .2 ,,1.2- /
1-- r---- v - -r,7Z, 34 7475 7576 7677 7773 7879 7980 8X081 8182 828.3 8384
Yearsr Moef -O 1 . ri c
rhart 6
- 69 -Chart 7
India Tracking 19723-74 to 1 983-84Exports (Growth Rote)
0.24 -
0.22-
0.2
0.16
0.16
0112 4 A4S77;77 72 E7978 O 1288
leg I '
x
0.06
0.02 -
-0.02
7374 7475 7576 7677 7778 7879 7980 8081 8182 8283 83384
Yeors
O Model + Hiatoric
india Tracking 1973-74 to 1C983-842 E:xports (1973-1)
1.9
1.7
1.6
CL&
1.3
1.2-
7374 7A.75 7576 7677 7778 7879 7980 8081 8182 8283 8384
YearsC Moa~ His3toric
Chart 8
- 70 -
Chart 9
India Tracking 1973-74 to 1983-84I0moorts (Growth Rate)
0.4
0.2~
0.21
0)
-0.1 -4 A* X~~
-0.2 -: 2 -7374 7AX75 78i6 7677 7778 7879 7980 2081 8182 8283 838S
;; Model r H1ator;c
India Tracking 1973-- 74 to 1983--84rmnorts (1973- 1)2
-
1.9e1
t.8j ,'- '
1.7 4
1.6 /.1 1
1.3j
1 -so ,1/
0.9-2
737a 7a-75 7576 7677- 7778 7879 7980 8081 8182 8283 838A
YeGNO Nodoi HVtoric
flhart 10
- 71 -
The period under consideration may be divided into two: (1)
those characterized by a dip in the agricultural harvest, viz., 1974-75,
1976-77, 1979-80 and 1982-83 and (2) those enjoying a recovery in
agricultural production, viz., 1975-76, 1977-78, 1978-79, 1980-81, 1981-
82 and 1983-84. In the first group, the downturn was the most seveee in
1979-80, followed by 1974-75 and 1976-77, whereas in the second, the
most pronounced increases occurred in 1975-76, 1977-78, 1980-81, and
1983-84. The following discussion looks at the those groups of years in
relation to terms of trade movements and foreign savings inflows.
In addition to harvest failures, 1974-75 and 1979-80 were both
characterized by sharp deterioration in the economy's terms of trade.
The extent of harvest failure was more severe in 1979-80. There was a
marked decline in GDP and private consumption, a fall in imports,
stagnation in investment and a growth in exports of 15 percent over the
previous year. In 1974-75 and 1976-77, by contrast, there was a modest
increase in model-generated GDP and a healthy increase in investment.
However, a major difference between those two years lay in the movement
of the terms of trade which led to a substantially more drastic
curtailment of imports in 1974-75. The surge in investment in 1974-75,
its respectable growth in 1976-77 in the face of a small current account
surplus and modestly rising income and a stagnation rather than decline
in investment in 1979-80 was generally brought about in the model
through a combination of increased productivity in capital goods and
consumer goods production, together with some increases in the
C'ap-3disc-26:Irdia Socks:4-11/86/.pp
72 -
productivity of intermediate goods production and, in 1975-76 and
1979-80, of the savings propensity of the private sector.
Turning to the years of agricultural recovery, it will be
noticed that the years 1975-76, 1977-78, 1980-81 and 1983-84 stand
out. GDP and private consumption increased very substantially in those
years. But there are striking differences on the foreign trade side.
Foreign savings, though positive, was much smaller in 1975-76 compared
to 1980-81 and 1983-84 (see Table 3.7). This was partly the result, as
discussed in Chapter 1, of a difference in adjustment strategy to the
first and second oil shocks and is reflected in the relative export and
import figures for those years. And the large improvement in the barter
terms of trade in 1977-78 allowed the country to sustain an import boom
despite a decline in exports brought about to some extent by the
pressure of domestic demand. The savings-investment balance for these
years was brought about by mechanisms analogous to those in periods of
agricultural decline. While 1975-76 was marked by a massive growth of
investment with comparatively limited foreign savings, precisely the
opposite was true for 1980-81 and 1983-84. This was brought about
throutgh some increase both in the productivity of capital goods
production and in the private savings propensity in 1975-76 and a
decline in both parameters in 1980-81. The productivity parameters also
fell in 1977-78 and 1983-84.
Chap-3disc-26:Thdia &ocks:4-11/86/.pp
- 73 -
In summary, the tracking in growth rates is achieved mainly by
allowing fluctuations in sector-specific productivity growth as well as
in private savings propensities. The reasons these have the expected
impact should be clear from the earlier discussion of comparative
statics experiments.
Features of the Historical Run
Table 3.7 displays the characteristics of the model-generated
historical run which is henceforth taken to be a reasonable replication
of the broad contours of development during the period. The proximity
of the ratios on the expenditure side of the national accounts to their
counterparts In the data is a function of the degree of success achieved
by the tracking procedure. The composition of value added among
agriculture, manufacturing (the sum of sectors 2, 3, and 4),
infrastructure and services was not used as a tracking indicator.
Nevertheless, the model successfully captures the declining share of
agriculture and the growing importance of services over time. However,
it understates the growth of manufacturing to some extent and overstates
the growth of infrastructure correspondingly. The table also dlsplays
the model-generated Gini coefficlents of income and consumption
inequality among the five urban and five rural groups of households in
the historical run. This indicates no change in inequality over this
period but it must be remembered that there is no data against which
this result can directly be checked. Finally, Tables 3.8 and 3.9
profile the stock of debt and debt service payments respectively in the
historical run, broken down by medium- and long-term debt both official
Qiap-3disc-26:India Riocks:4-I1/86/pp
- 74 -
and private, as well as short-term debt of maturity one year or less.
IMF debt is shown separately from 1980-81 onwards, when India negotiated
an Extended Fund Facility.
In the counterfactual policy simulations that follows, the
historical run is used as a benchmark from which deviations are
presented. During those experiments, therefore, we do not alter the
values of those parameters which are used by the tracking procedure to
generate the historical run. Experiments are defined only by changing
exogenous variables or policy parameters.
Chap-Edisc-26:Thdia Shocks:4-11/86/:pp
- 75 -
Table 3.1: INDIA: Selected Features of the Economay, 1973-74
Sector 1 Sector 2 Sector 3 Sector 4 Sector 5 Sector 6 Average
Share of Value Addedin Gross Output 0.76 0.23 0.32 0.30 0.53 0.71 0.37
Share of Hired WageIncome in Value Added 0.19 0.50 0.44 0.51 0.66 0.50 0.34
Share of IntermediaceImports in GrossOutput 0.01 0.04 0.04 0.12 0 0.01 0.03
Share of PrivateConsumption in GrossOutput 0.72 0.86 0.08 0.16 0.27 0.31 0.50
Share of Exports inGross Output 0.01 0.09 0.01 0.06 - - 0.03
Share of TotalConsumption Accountedfor by Sector 0.57 0.22 0.02 0.04 0.02 0.14 -
Share of Tocal ExportsAccounced for bySector 0.13 0.56 0.05 0.26 - -
- 76 -
Table 3.2: INDIA: Selected Features of the Economy, 1973-74Share of Consumption by Seccor and Group
(Constant prices)
Sector I Sector 2 Sector 3 Sector 4 Sector 5 Sector 6
Urban
ci 0.70 0.14 0.01 0.05 0.02 0.08C2 0.66 0.17 0.01 0.05 0.02 0.09C3 0.60 0.20 0.01 0.05 0.02 0.1.2C4 0.53 0.24 0.02 0.05 0.02 0.16C5 0.41 0.25 0.02 0.04 0.02 0.27
Rural
Cl 0.74 0.12 0.01 0.05 0.03 0.06C2 0.72 0.15 0.01 0.04 0.02 0.07C3 0.65 0.20 0.01 0.04 0.02 0.09C4 0.58 0.23 0.02 0.03 0.02 0.12C5 0.47 0.26 0.03 0.03 0.02 0.20
- 77 -
Table 3.3: INDIA: Comparacive Stacics Experiments on "Incernal" Variables, 1973-74(Percentage deviation from base period)
Ricrease in Increase i-n Tcrease inTrml 3 by Lrban a by tban & ra1Mcror 1 Sactor 2 Scor 3 Ibctor 4 Sctor 5 Secror 6 5,. 5% X b 1OZ
GDP (arket prices) -17.1 4.5 -2.2 -3.2 -0.7 4.2 -1.7 -0.6 -3.8Privace Consuapiton -3.6 -4J.8 0 -0.3 -0.2 0.3 4.3 2.1) -2.7Tnvest= -65.1 -17.2 -9.2 -13.1 -2.6 -17.7 -21.4 -9.5 -9.1Eports -26.1 -12.0 -1.9 -3.1 -1.0 -5.0 -7.4 -3.3 -4.1iTporrs -14.2 -6.1 1.4 -1. 0 -4).4 -2.8 -3.9 -1.7 -1.4
(Q:ss oitpit ofAgriculttre -1. 7 -0.6 -0.3 -1.3 -0.3 -1. 0 1.1 0.4 -2. 5GCsuter goods -12.8 -8.0 -0.6 -1.5 -0.5 -1.9 1.6 0.8 -3.8Capia. gyods -59.9 -15.5 -7.3 -12.5 -2.1 -16.7 -19.1 -8.5 -7.3Interwdiates -30.6 -6.8 -1.3 -10.1 -1.4 -9.9 -7.6 -3.2 -5.0Tfrastnxrure -5.4 -1. 0 -1.4 -1.8 -5.8 -1.4 2.7 1.2 -4.3Services -4.0 -0.4 -0.6 -3.1 -0.4 -8.1 1.8 1.3 -3.7
Value Added inAglru1acre -0.8 -0.4 -0.1 -0.6 -0.2 --(.6 0.5 0.2 -2.5Cbns,rer goods -1.5 3.8 -0.6 0 -0.3 -0.7 2.4 1.0 -5.5Capital goods -54.4 -13.2 2.5 -4.4 -1.4 -13.7 -17.4 -7.8 -6.8Tncermediates -28.6 -5.9 -0.8 5.1 -3.5 -7.2 -7.8 -3.3 -6.4Infrasmruture -12.7 -2.5 1.2 0.4 5.8 -0.2 0.1 0.1 -6.7Sevices -3.2 .4 -. 1 -0.6 -0.1 3.2 1.4 1.0 -4.2
Gni Cbefficienr.s
Incne:
Urban .03 0.61 -0.06 -0.02 -0.17 0.21 0.59 0.21 1.21rai. 2.40 0.55 0.05 0.39 0.10 0.26 "-.08 -0.08 2.35
CbnsuWtion:
Urban 3.21 0.65 -0.05 -0.03 -0.16 0.24 0.65 0.24 1.29R=al 2.50 0.59 0.07 0.43 0.10 0.26 -0.10 -4).07 2.44
Cost of LivingIndex
E"ban
ca 37.1 3.2 0. 6 -2.6 0.6 4.4 7.5 3.0 2.0C2 36.0 3.6 .).7 -2.6 0.6 4.6 7.4 3.0 2.1C3 34.4 4.0 0.7 -2.4 0.6 5.1 7.2 2.9 2.1C4 32.5 4.4 0.8 -2.2 0.6 5.7 6.9 2.8 2.2C; 28.2 4.3 1.0 -2.0 0.6 7.3 6.3 2.6 2.5
Cl 38.3 3.1 ).& -2.8 0.7 4.1 7.7 3.1 2.0C2 37.8 3.5 0.6 -2.9 0.6 4.2 7.7 3.1 2.0C3 36.2 4.1 ).7 -2.7 0.6 4.7 7.4 3.0 2.1C4 34.2 4.5 0.8 -2.6 0.6 5.3 7.1 2.9 2.2C5 30.9 4.6 1.0 -2.3 0.6 6.4 6.6 2.7 2.3
'I -,,
- 78
Table 3.4: INDLA: Comparative Stacics Experiments on "External"Variables, 1973-74
(Percentage deviation from base period)
30% Rise 50% Rise 10% Rise 100% Risein Export in Import in Export in ForeignPrices Prices Volume Savings
GDP (market prices) 1.1 -2.3 0.3 0.8Private Consumption 0.3 -0. 4 0.1 0.2Investment 12.3 -18.1 2.5 9.9Exports 9.7 -7.9 1.7 -13.2Imports 35.8 -37.1 6.5 13.9
Gross Output ofAgriculture 0.7 -1.0 0.1 0.2Consumer goods 2.2 -2.6 0.4 -0.5Capital goods 10.8 -16.0 2.2 8.7Intermediates 4.7 -6.5 0.9 2.3Infrastructure 1.4 -2.0 0.3 0.9Serv!ces 1.3 -1.7 0.3 0.1
Vaiue added inAgriculture 0.2 -0.3 0.1 01
Consumer goods 0 0.3 0 -1.1Capital goods 4.1 -7.2 0.9 5.3Intermediates -1.0 1.3 -0.2 01Infrastructure 0.3 -0.4 0.1 0.6Services 0.3 -0. 0.1 -0.3
Gini CoefficiencsIncome:
Urban -0.11 0.17 -0.02 -0.11Rural -0.26 0.31 -0.05 -0.08
ConsumotionUrban -0.11 0.19 0 -0.08Rural -0.26 0.33 -0.07 -0.10
Cost of Living Indices
UrbanC1 25.3 2.6 4.8 8.8C2 25 2 2.6 4,8 8.3C3 25.2 2.7 4.8 8.8C4 25.1 2.8 4.8 8.8CS 25.0 2.9 4.8 8c8
RuralC1 25.3 2.5 4.8 8.8C2 25.3 2.5 4.8 8.8C3 25.2 2.6 4.8 8.8C4 25.2 2.7 4.8 8.8CS 25.1 2.8 4.8 8.8
- 79 -
Table 3.5: INDIA: Inpuc Data for Tracking
1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
ltnit Value Indcesfor Tzorts
P 1.00 1.16 1.28 1.17 1.09 1.09 1.23 1.02 0.82 0.71 0.68
1.00 1.77 1.27 1.33 1.11 1.03 1.18 071 0.73 0.59 0.642
P113 1.00 1.27 1.54 1.61 1.35 1.61 1.80 1.14 0.90 0.82 0.76
PM4 1.00 1.51 1.62 1.33 1.25 1.18 1.29 1.14 1.09 1.03 0.98
P 1.00 2.03 2.09 2.2. 2.15 2.00 2.93 4.09 4.43 3.94 3.41
PM6 1.00 0.92 0.8k 0.80 0.75 0.70 0.65 0.59 0.54 0.51 0.49
* 1.00 1.45 1.54 1.42 1.31 1.27 1.49 1.31 1.20 1.07 0.96P,I(average)
Cnit Value Tndicesfor Exoorts
P 1 1.00 1.21 1.10 1.04 1.44 0.95 0.52 0.77 0.84 0.65 0.62
P 1.00 1.14 1.10 1.23 1.37 1.33 1.28 1.25 1.20 1.11 1.02
PI3 1.00 0.82 1.08 1.03 1.04 0.93 1.00 0.80 0.87 0.80 0.74
I4 1.00 1.27 1.21 1.18 1.11 1.05 1.07 1.05 1.13 1.04 0.98
PI (average) 1.00 1.16 1.;12 .19 1.34 1.27 L.25 1.21 1.17 1.08 0.99
Policvy-ecerniredL-ports (tens of
mLUl.iLns)316.0 406.9 593.6 397.9 56.8 37.6 37.4 39.0 155.1 136.9 216.650.4 17.6 22.8 56.8 219.5 136.4 86.2 202.3 164.8 119.3 163.1
417.1 421.4 409.6 422.3 436.2 440.6 484.7 488.5 460.0 404.2 290.7
Foreign avin F(tens of Alliis) 479 961 579 -1031. -03 -575 -299 1996 2412 2370 2650
Donestic transfers(tens of millincs)
GTRA 477 340 4iL91 601 697 934 .1008 1490 1842 2704 2704*'N 909 1150 L350 1547 1762 2005 2392 2835 3311 4005 4005*
Foreirn Transfers(tens of nLUl.ns)
NFI -325 -291 -255 -233 -233 -156 153 298 -7 -681 -681*r 192 274 528 739 1202 1042 1624 2257 2221 2527 2527*
* 1983-84 figures wre Lmavailable and set ar their 1982-83 n1lues.
80
Table 3.5. INDIA: Input Data for Tracking (concinued)
1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
GE DeflatorUs 1.00 L09 1.19 1.25 1.33 1.43 1.55 1.68 1.84 1.96 2e04Tnda 1.00 1.17 1.12 1.19 1.24 1.26 1.46 1.62 1.78 1.91 2.14
Gross Qctput ofAgriculture, XI
(rate of grawh) 0 -6.3% 11.6% -5.0% 11.0% 3.1% -10.2% 10.4% 3.6% -2.0% 3.6%InvetsEIt Slamre _Iesination
Agriculture 0.18 0.15 0.15 0.21 0.21 0.21 0.18 0.19 0.17 0.16 0.16Mufacturing 0.29 0.37 0.30 0.23 028 0.29 0.34 0.29 0.30 0.28 (0.27Ifrastructure 0.12 0.14 0.18 0.18 0.18 0.15 0.18 0.18 0.20 0.25 02.5Services 0.41 0.34 0.37 0.38 0.33 0.35 0.30 0.34 0.33 0.31 0.32Share of xeldTnveset inTotal Tnvesmnt,
K 0.80 0.76 0.82 0.87 0.93 0.83 0.81 0.83 0.83 0.86 0.86Goxernmer GnsuWtion(tens of nsLUons) 5042.7 51LLO 6454.6 6978.7 7022.4 7507.1 7547.4 8090.6 8566.4 9713.8 10084.9
- 81 -
Tab7, 3..6: NDITA: Thraddxg Tndicators
1974-75 1975-76 1976-77 1977-78 1978-79 1979-8 1980-61 1981-82 1982-83 1983-84
GDP (Nrket Prices)
Data -0.6 9.9 1.3 8.2 6.6 -5.2 7.2 5.5 4.3 7.6bdel 1.7 14.5 1.8 7.8 7.3 -2.1 7.6 3.4 4.3 9.1
Privare (bnspticn
Cara -4.2 3.7 -2.4 15.2 2.7 -10.1 10.8 6.4 3.4 8.8e4xl 1.0 10.7 -L.3 13.8 4.0 -4.5 10.9 3.4P 4.2 L1.1
flbtal Rnestme
Data 6.3 19.4 4.2 0 19.0 0.4 8.7 5.3 1.3 6.11 6.0 17.8 3.1 1.0 18.1 -0.2 10.2 4.2 0.2 5.4
Eports
Data 8.1 16.5 19.7 -3.8 8.2 16.8 -0.3 -0.2 3.2 4.9del 6.8 16.6 22.3 -2.9 7.6 15.0 -1.4 1.5 3.3 4.4
imports
Data -13.1 1.2 -0.2 30.3 8.5 -4.1 46.7 8.0 0.2 4.1,%del 41.2 -4.3 -3.6 30.3 8.7 -3.5 48.5 7.5 0.1 4.4
- 82 -
Table 3.7: INDLA: Selected Features of the Historical Run (Model-generated)
1973-74 1974-75 1975-76 1976-77 L977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
1. Ratics to GMT
Private CaisLuzpcin 0.72 0.70 0.68 0.66 0.69 0.67 0.65 0.67 0.67 0.67 0.69GolerrmSt (Stlption 0.08 0.08 0.09 0.10 0.09 0.09 0.09 0.09 0.09 0.10 0.10'bctal Uwesntm 0.22 0.23 0.24 0.24 0.22 0.2Z5 0.25 0.26 0.26 0.25 0.24Exports 0.04 0.05 0.05 0.06 0.05 0.05 0.06 0.05 0.05 0.05 0.05Imports 0.06 0.06 0.05 0.05 0.05 0.06 0.05 0.08 0.08 0.07 0.072. tios to Thtal
Value Aded
VA (Asriailture) 0.52 0.49 0,47 0.47 0.48 0.46 O.46 0.43 0.43 0.44 0O43VA (bnufactuing a! 0.17 0.19 0.15 0.17 0.16 0.16 0.18 0.20 0.19 0.16 0.17VA (Tnfrascructre) 0.03 0.04 0.05 0.04 0.04 0.05 0.05 0.05 0.04 0.05 0.04UA (Services) 0.28 0.28 0.33 0.32 0,32 0.33 0.31 0.32 0.34 0.36 0.363. Gini Coefficients
Incoe:urban 0.47 0.47 0.45 0.47 0.47 0.46 0.47 0.46 0.46 0.47 0.46Rural 0.38 0.39 0.38 0.38 0.38 0.37 0.38 0.38 0.37 0.37 0.36ConsaWion:Urbl 0.37 0.37 0.36 0.37 0.37 0.36 0.37 0.36 0.36 0.37 0.36amral 0.30 0.31 0.30 0.30 0.30 0.30 0.30 0.30 0.29 0.29 0.28
4. a1,E in GrossCurz,ic ofgiculture (7.) 0 -6.3 11.6 -5.0 11.0 3a1 -10.2 10.4 3.6 -2.0 13.6
5. (Lag in %t Brterrms of Trae (%) 0 -27 -3 -4 20 -9 -2820 8 -2
6. Foreign Savings toGDP at Xarket Prices(%) b/ 0.8 1.5 0.6 -40.7 -0.6 -0.3 -0.2 1.2 1.1 0.7 0.7
a/ Manufacturing is the sum of sectors 2, 3 and 4.
b/ The numerator is foreign savings at 1973-74 prices multiplied by the model-generaceac investmentinilacion; che denominator is u,ociel-generated GDP at current market prices.
- 83 -
Table 3.8: INDIA: Debt Profile: Historical Run(tens of millions of 1973-74 rupees)
Medium- and Long-TermIMF Official Private Short Term
1973-74 7897.35 208.241974-75 8017.29 198.871975-76 7847.67 193.781976-77 8075.38 183.461977-78 8375.01 204.031978-79 8253.23 182.94 141.521979-80 7786.90 169.23 124.411980-81 478.71 7881.33 247.83 170.211981-82 729.52 7281.54 320.87 238.941982-83 1566.89 7772.01 480.03 546.40
- 84 -
Table 3.9: INDIk: Tocal Dbt Service: Historical Run(tens of millions of 1973-74 rupees)
Medium- and Long-TermI Official Private Short Term
1973-74 437.91 70.011974-75 464.02 64.331975-76 444.09 50.371976-77 419.61 50.311977-78 433.51 46.771978-79 469.64 52.121979-80 473.72 46.36 142.321980-81 446.48 41.91 128.121981-82 12.26 397.05 36.48 177.471982-83 51.17 411.53 74.97 278.68
- 85 -
Chapter 4: SIMULATIONS WITH THE MODEL
I. INTRODUCTION
This chapter conducts five experiments with the India model.
Their design is motivated by the policy discussion of Chapter 1.
Specifically, we ask the following questions:
(1) How would the economy have evolved had it not experienced
terms of trade fluctuations and, correspondingly, not
undertaken accommodating borrowing? [Experiment 1]
(2) What would have been the implications of pursuing an
expansionary investment program in response to the first
oil shock, supplemented by higher imports of essential
consumer goods such as food and edible oils? [Experiment
2]
(3) What would have been the consequences of the period 1973-
74 to 1983-84 not being characterized by years of drought
as well as agricultural bounty? [Experiment 4]
(4) TWhat might have happened if accumulated foreign exchange
reserves between 1976-77 and 1979-80 had been used to
boost Investment? [Experiment 4]
(5) What would have been the impact of allocating the
economy's actual volume of investment across sectors of
destination in response to considerations of short-run
profitability? [Experiment 5]
Chap-4/India Shocks:4-11-86:pp
- 86 -
Results from each experiment are presented as deviations from
the 1973-74 to 1983-84 historical run. It was already mentioned in
Chapter 3 that the experiments do not alter the values of those
parameters which are used by the tracking procedure to generate the
historical run.
Before proceeding to the experiments, it is worth making two
observations. First, the formulation of an experiment necessarily
involves some judgment as to what configuration of exogenous variables
can reasonably be assumed to come together on a particular
counterfactual. This is a familiar problem in policy modelling but
nevertheless one to which attention deserves to be drawn. Second, the
experiments devised here are based on the advantage of hindsight which
was clearly not available to policy-makers in 1973-74. Thus, the
results should not be seen as proving particular policies to be right or
wrong. Instead, they outline the consequences of an alternative set of
options from the ones historically exercised. It is also important to
remember that those options are examined within a model framework which
abstracts certain features of reality to the exclusion of others. This
procedure has the methodological advantage of allowing us to focus on
the consequences of changes in policies alone, inasmuch as the
experiments as well as the historical run keep "other things absolutely
unchanged."
Experiment 1: No External Shock-Gum-Accommodating Borrowing
This experiment explores wqhat might have happened to the Indian
economy in the absence of exte-'nal shocks. The intention is to discover
Chap-4/India Shocks:4-11-86:pp
- 87 -
the net impact of external shocks and certain policy responses to them
on the principal macroeconomic and sectoral magnitudes. For this
purpose, the counterfactual is defined to be a situation where (1) terms
of trade remain at their 1973-74 level; - (2) (i) foreign savings are
set below their historical levels by an amount equal to the sum of the
IMF's Oil Facility, external assistance from the oil exporting countries
and borrowing from the IMF's Extended Futnd Facility, net of amortization
and interest charges; while (ii) net current transfers (which include
workers' remittances) are set at their 1973 level; (3) Government-
controlled oil imports are determined with reference to the growth in
GDP and the relative price of oil, using income and price elasticities
of 1.3 and -0.3 respectively. 2/ 3/
Table 4.1 reports the time-series of foreign savings, net
current transfers and oil imports in both the historical run as well as
the no-external-shock-cum-accommodating borrowing counterfactual. It
will be noticed that foreign savings are much lower compared to the
historical run, especially in
1/ Here, terms of trade are defined as the ratio of internationalprices of substitutes for India,-exports to prices of imports.
2/ These elasticities are based on estimates for developing countriesreported in the World Development Report, 1981 (Oxford UTniversityPress for the lWorld Bank).
3/ The slowdown in developed country trading partners is not correctedfor in this experiment; since this is not regarded as an importantfactor in the Indian dase, it is not expected to make a significantdifference to the results.
Chap-4/India Shocks:4-11-86:pp
1975-76 and in the years following the second oil shock. The
results of the experiment, displayed in Table 4.2, indicate that GDP,
consumption, investment and capital stock were all higher in the
historical run. The reason is as follows. While the historical run is
characterized by worsened terms of trade, it also has a substantially
lower deficit on trade and nonfactor services account. It is clear that
the lower foreign savings dominates the improvement in the terms of
trade, so that the differences between the historical run and the no
external shock counterfactual are analogouis to the differences between
the increased foreign savings experiment of Chapters 3 vis-a-vis the
base period 1973-74. GDP, consumption and investment are consistently
lower: the capital stock in 1984-85 is 8 percent lower in the no
external shock experiment. Table 4.3 also shows that the cost of living
is also lower, largely due to increased availabi±ity of food and
consumer goods. There is no change in the rini coefficients of
income and consumption inequality. The economy's stock of debt at the
beginning of 1983-84 would have been nearly 48% lower than in the
1/ The latter difference is entirely due to the Extended Fund Facility
from the IMF.
2/ The cost of living indices reported in these tables were defined in
Chapter 3. Here, they are calculated with reference to the utility
level attained in the corresponding year of the historical run.
Chap-4/India Shocks:4-11-86:pp
- 89 -
historical run. - Furthermore, the historical run vis-a-vis the no
external shock scenario exhibits no discrimination in the movement of
cost-of-living indices between rural and urban sectors and within each
of the sectors.
The sectoral composition of output has an interesting
pattern. Since investment is lower, there is a substantial reduction in
the output of capital goods. This releases variable factors such as
labor and intermediates. These are absorbed in consumer goods and,
except for the last two years, mainly in the infrastructure-producing
sector which, despite lower capital stocks, increases its output
greatly. Or, to put the matter another way, the historical run bids
resources away from consumer goods and, till 1981-82, from
infrastructure and channels them towards capital goods. This looks like
neaative import substitution in sector 5 in the historical run upto
1981-82 vis-a-vis the case of no external shocks. Ftowever, it is known
that domestic petroleum production increased substantially during this
period (see Table 1.6). Since crude petroleum and natural gas accounted
for only 5 percent of the gross output of sector 5, (see the components
of this sector in Table 4.4) the behavior of the sector in the
1/ The change in debt in any year resulting from a change in foreignsavings in that year is calculated as follows. It is assumed,somewhat arbitrarily, that marginal debt has the same maturitystructure as outstanding average debt in that year. The IMF'sExtended Fund Facility (EFF) is not included in this calculation,i.e., marginal debt has the maturity structure of outstanding non-EFF debt. Alternative assumptions could easily be incorporated intothe calculations. All terminal debt figures here and subsequentlyrefer to the beginning of 1983-84.
Chap-4/India Shocks:4-11-86:pp
90 -
historical run is certainly not inconsistent with positive import
substitution in petroleum.
The lower foreign savings are absorbed via lower domestic vis-
a-vis international prices,L/ 'higher exports and lower imports.
Experiment 2: Alternative Adjustment Strateay
The first oil shock was accompanied by a dip in the
agricultural harvest. As discussed in Chapter i1, policy makers
perceived the latter as being more important than the former, especially
given its potentially inflationary consequences, and applied a stiff
dose of demand management in response. This choked off investment,
generating a "deflationary" adjustment profile. This may be contrasted
with the more "expansionary" policy response to the 1979-80 roand of
shocks.
In this experiment we look at the consequences of following a
more expansionary investment strategy to the first round of shocks,
supplemented by imports of essential consumer goods such as food and
edible oils to combat inflationary pressures. The counterfactual is
defined to be a situation where (1) investment is chosen such that the
ratio of real investment to GDP at constant market prices is set (i) at
its 1978-79 historical run value for the years 1974-75 to 1977-78 and
(ii) from 1978-79 onwards at its historical run value for those
1/ This may be thought of as a depreciation in the real exchange rate.
Chap-4/India Shocks:4-11-86:pp
- 91 -
years - ; (2) government-controlled imports in sectors 1 and 2 are set
such that per capita domestic availability (production plus net imports
plus stocks) of sector 1 and 2 goods every year is at least as large as
per capita availability in the historical run for that year; and (3)
government-controlled oil imports are chosen such that their ratio to
GDP equals the historical run ratio for the corresponding year.
Since investment is determined by the requirement that it
satisfy the ratios outlined in (1) above, the model solves for the
amount of foreign savings consistent with equilibrium.
Table 4.5 displays the results. Since the investment to GDP
ratio is kept at its corresponding historical run value from 1978-79
onwards, the deviation of investment from the historical run by
definition equals that of GDP, starting in that year. The higher
investment and the need to maintain the domestic availability of sector
1 and sector 2 goods at levels at least as larae as those attained m
the historical run in general call for higher foreign savings. However,
since domestic availability can be met either by increasing imports or
by reducing exports, both options are, in the absence of any further
restrictions, exploited in the experiment.
I/ The ratio of investment to GDP at market prices in the historicalrun appears in Table 3.7.
Chap-4/India Shocks:4-11-86:pp
- 92 -
Two broad patterns are discernible, depending on whether price-
driven imports (i.e., those in sectors 3 and 4) dominate or are
dominated by policy-determined imports (i.e., those in sectors 1, 2 and
5). I/ Thus, corresponding to the former pattern, 1974-75 and 1977-78,
which have high investment compared to the historical run, compel the
economy to absorb the resulting foreign savings and price-driven imports
via a decrease in competitiveness and a concomitant reduction in
exports. The ircreased relative domestic prices implicit in such a loss
of competitiveness are reflected in those two years as well as to a much
lesser extent in 1981-82 (see Table 4.5). By cortrast, and
corresponding to the second pattern, years such as 1975-76, 1979-80,
1982-83 and 1983-84 are characterized by a large rise in exports; the
gain in competitiveness is not nullified by the extra imports which, for
those years, are mainly policy-determined rather than price-driven.
The behavior of the distributional characteristics is shown in
Tahle 4.6; the cost of living indices across the board are lower except
in the years of significantly higher investment. Turning to sectoral
aspects, the experiment channels variable factors such as labor and
1/ The fact that domestic availability can exceed or equalcorrespondirg historical run values raises the possibility ofmultiple solutions. While the two broad patterns identified herecan be expected to characterize other potential equilibria, theprecise configuration of exports and imports can be expected to varyacross equilibria.
Chap-4/India Shocks:4-11-86:pp
- 93 -
intennediates into capital goods production at the expense of
infrastructure and, to some extent, consumer goods. The economy is left
with a capital stock in 1984-85 which is 1.8 percent higher than in the
historical run. However, the stock of terminal debt is 27 percent
higher than in the historical run as well.
Experiment 3: No Agricultural Shocks
It has already been argued that a perception that internal
shocks were more important than external shocks shaped the policies
followed in the years after 1973-74. The previous experiment asked what
might have happened if different policies had been followed, for the
same set of shocks, in response to that perception. This experiment,
somewhat by contrast asks what would have been the outcome if internal
shocks had not occurred and the actual historical policies followed. In
this experiment, therefore, we set the efficiency parameter In the
agricultural production function, which is taken as a proxy for weather-
related flucttuations, equal to its base vear (1973-74) level of
unity. - This helps bring out clearly the impact of fluctuations in
agricultural output on the historical path of the economy. The results
of this experiment and the previous one could easily be combined to
answer the question: what would have been the consequences of pursuing
an "expansionary" adjustment policy if the economy had experienced only
external shocks between 1973-74 and 1983-84? Such a "no-agricultural-
1/ It would have been possible to give the efficiency parameter a"normal" time trend instead of holding it constant in thisexperiment.
Chap-4/India Shocks:4-11-86:pp
- 94 -
shock-cum-deflationary adjustment" experiment would be an obvious
counterpart to the "no external shock-cum-borrowing" experiment.
Table 4.7 reports che deviations from the historical run. In
the light of the adverse agricultural shock experiment reported in
Chapter 3, these have the expected pattern. As might he expected from
the sensitivity of investment to agricultural shortfalls noted in that
chapter, the economy's total capital stock is mostly lower than in the
historical run - indeed, 6.5 percent lower at the beginning of 1984-
85. This indicates that the cumulative effect of agricultural peaks
dominated those of the troughs in the historical run, resulting in a
relaxation of the wage goods constraint and thuis permitting higher
savings, investment and terminal capital stock.
The behavior of the cost-of-living indices is expected; they
increase (decrease) in those years when the agricultural efficiency
parameter declines (increases) relative to its historical run value for
the corresponding year (see Table 4.8). Furthermore, dips (increases)
in agricultural efficiency have a regressive (progressive) impact as
between rich and poor in both rural and urban areas without differing
between rural and urban areas as a whole.
Experiment 4: Reserve Decumulation Between 1976-77 and 1979-80
Referance has been made in Chapter 1 to the substantial
accumulation of reserves during the period 1976-77 to 1979-80. In the
following set of experiments we explore the economywide consequences of
following a less cautious policy in this regard. Specifically, we rtn
two experiments. The first, or "bold" version, asks what would have
Chap-4/India Shocks:4-11-8 6 :pp
- 95 -
happened had reserves in the years 1976-77 to 1979-80 been maintained at
a level equalling four months of imports. This is accomplished by
adding the difference between actual reserves and the "four months"
level of reserves to forelgn savings and running the model in its
"savings driven" mode. The second, or "conservative" version, maintains
reserves at a level equalling six months of imports, and adds its
difference with actual reserves to foreign savings.
The policy e\xperiment starts in 1976-77 with the historical run
level of capital stocks and reserves, so that the less cautious policy
is followed from this year onwards. Experiment 2, it will be recalled,
explored the consequences of following a more ambitious investment and
import policy from 1974-75 onwards. Some of the extra foreign savings
required there (see Table 4.5) could have come out of the decumulation
of reserves. Thus it would be both relatively straightforward and
instructive in future work to combine the themes of Experiment 2 and the
present experiment. However, since the issue of excess reserve
accumulation has featured in policy discussions in its own right (see
chapter 1), it was decided to devote a separate experiment to this
subject.
A better understanding of the ensuing results is facilitated by
referring back to the comparative statics experiment in Chapter 3 on
doubling the amount of foreign savings. It will be recalled that in the
experiment, extra foreign savings could be accommodated through a rise
in domestic vis-a-vis International prices, leading to a fall in exports
and a rise in imports. The rise in investment is met by a combination
Chap-4/India Shocks:4-11-86:pp
i 96
of expanded domestic capital goods production as well as imports of
capital goods which (starting from a low base) increase twice as fast as
domestic production. The expansion of domestic capital goods production
has a tendency to bid variable factors away from the rest of the
economy, leading to a modest decline in the output of consumer goods.
Table 4.9 reports the level of foreign savings in the
historical run as well as in the two scenarios for the reserves
experiment. It will be noticed that foreign savings are very
substantially higher in the "bold'" scenario. As expected, those savings
can be accommodated via a relative decline in domestic competitiveness,
resulting in an export profile which is much lower than in the
historical run. The opposite is true for imports. Table 4.10 profiles
investment and GDP - both are higher compared to the historical run - as
well as sectoral gross outputs. Imports of capital goods, which can
substitute for the domestically produced variety with an elasticity of
nearly unity, increase much more than domestic production. The
increased investment In the "bold" scenario leads to a capital stock at
the beginning of 1S00-81 that is higher than the corresponding figures
in the historical run by 6.4 percent. The pattern of sectoral output
indicates a massive expansion in the output of capital goods and a
modest decline in the consumer goods sector caused by the bidding away
of variable factors of production.
Table 4.11 shows that the reserves experiment has a large
impact on the cost-of-living vis-a-vis the historical run, expecially in
the years 1977-78 and 1978-79 in the "bold" scenario, although not on
Chap-4/India Shocks *4-11-86:pp
-97 -
the Gini coefficients. There is a roughly 1.5 percent increase in the
ratio of urban-to-rural per capita incomes but no difference in the
relative movements of urban and rural cost-of-living indices.
The "conservative" scenario is a muted version of the above;
the numbers may be consulted in Tables 4.12 and 4.13.
Experiment 5: Investment Reallocation
The amount of capital stock in each of the six sectors of the
economy is known for 1973-74. These are updated in subsequent years in
the historical run as follows. Data are available on the allocation of
investment in agriculture (sector 1), manufacturing (the sum of sectors
2, 3 and 4), infrastructure (sector 5) and services (sector 6). Those
data are used to allocate investment across those four broad sectors,
while investment going to manufacturing is divided within sectors 2, 3
and 4 in accordance with capital stock proportions among those sectors
in the base year, i.e., 1973-74. Thus, there is nothing in the model
which ensures that the marginal product of capital stock in each sector
of the economy is equalized.
The purpose of this experiment is to begin an exploration of
different ways of allocating investment to sectors as part of an
adjustment program. Specifically, it allows the allocation of
investment to the four sectors (agriculture, manufacturing,
Chap-4/India Shocks:4-11-86:pp
- 98
infrastructure, services) to respond to differences in rates of return
earned by capital in the various sectors of the economy. I/
Table 4.14 reports the results. The experiment pulls
investment out of infrastructure and services (which may broadly be
identified as nontradeables) and into manufacturing and, to a lesser
extent, agriculture. The somewhat more efficient allocation of
1/ To this end, we maintain the volume of investment every year in the
economy at its historical run level but vary its allocation
according to the rule:
Yi e 1I
where
Yi =share of new investment going to sector i
Pk.x - (i = 1, 2, 3, 4,
i tpI1 kg
i.e., xi is the normalized value of the implicit price of capital
in sector i where j runs over each subsector comprising sector i
(thus j would run over consumer goods, capital goods and
intermediate goods for i = 2, i.e., manufacturing). Since the
Yi must add upto one, X can be calibrated each year from the
data. This rule allocates more investment in a year to a sector
which has a higher current profitability in that year.
The application of this rule yields an allocation of investment to
the four broad sectors of the economy. To retain comparability with
the historical run, the division of manufacturing investment within
sectors, 2, 3 and 4 is done in accordance with capital stock
proportions among those sectors in the base year, i.e., 1973-74.
Chap-4/India Shocks:4-11-86:pp
- 99 -
investment raises GDP and private consumption. - The balance of
payments, however, deteriorates on two counts. First, the intermediate
goods sector, which is one of the beneficiaries of investment
reallocation, is substantially more intensive in the use of imported
intermediates than the infrastructure and services sector (see Table
3.1). Second, the extra indome generated raises domestic demands,
especially for agricultural and consumer goods, and, notwithstanding
some increase in domestic production, a rise in the prices of Indian
goods vis-a-vis that of international substitutes. Since consumer goods
account for the vast majority of exports, (see Table 3.1) this leads to
a reduction in competitiveness and a noticeable decline in exports.
The economy is left with a capital stock which is 1.7 percent
higher at the beginning of 1984-85 but a foreign debt which is also 27
percent higher at the beginning of 1983-84 compared to the historical
run. It will be noticed from Table 4.15 that the Gini coefficients rise
in urban and fall in rural areas, while the cost of living indices are
uniformly higher for all groups of households (see Table 4.15). Thus,
no straightforward comparison is possible between the historical run,
with its attendant investment allocation, and a seemingly plausible but
myopic rule where the allocation of investment in the experiment depends
only on short-run profitability. This experiment is to be seen as only
1/ The experiment holds the physical volume of investment at itshistorical run level. However, since prices are different in theexperiment, investment-at-constant-prices in the national accountssense can differ from the historical run.
Chap-4/India Shocks:4-11-86:pp
- 100 -
a first step towards examining the question of how investment is best
reallocated among sectors in response to exogenous shocks. Other, more
forward-looking rules need to be experimented with but are left for
future work.
Adjustment and Income Distribution
We have seen the Gini coefficients of income and consumption
inequality exhibit no noticeable change as between the historical run
and the experiments. The same is in general true of the share of the
bottom 40 percent in income and consumption. Thus, there is hardly any
change in overall inequality. This is commented on in Chapter 5.
Chap-4/India Shocks:4-11-86:pp
Table 4.1: INDIA: No Elxternal Shock-Ctum-Accommodating Borrowing Experiment: Selected Features(tens of millions of rupees)
1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 198283 1983-84
Foreign Savings a!
ilistorical lRn 479 %I 579 -1031 -903 -575 -299 1996 2412 2370 26501N External Sloclc 479 605 -36 -1277 -1111 -676 -361 1134 1747 505 1604
Net Qirrent Thanisfers a!
Historical Pbjn 192 274 528 739 1022 1042 1624 2257 2221 2527 2527H b External Riock 192 192 192 192 192 192 192 192 192 192 .192
Sector 5 Imports (M,)
Historical Rim 417 421 410 422 436 441 485 489 460 404 291No External Skck 417 347 302 319 342 311 307 348 375 380 447
a/ There are nominal magnitudes vMich are treated with the appropriate deflators in the nodel.
Table 4.2: INDIA: No External Shock-Cum-Accommodating Borrowing Experiment(Percentage deviation from historical run)
1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
C(DP 0 -1.1 -0.7 -1.3 -1.5 -0.8 -1.7 -- 2.1 -2.9 -4.9Private Cbnsumptlon 0.3 0 0 -0.3 -0.1 -0.4 -1.1 -1.2 -1.3 -3.0
nrtni,bnt -4.4 -10.2 -6.2 -11.8 -12.2 -10.0 -15.0 -18.4 -27.6 -32.1Ubports 8.7 14.0 7.0 14.7 13.6 .17.3 35.2 29.5 45.6 48.7Imports -8.6 -12.9 -8.5 -14.5 -14.9 -17.1 -28.2 -25.0 -32.6 -33.6
Gross Citputs ofAgriculture 3.5 0.2 0.2 0.1 0 0.1 -0.3 -0.6 -047 -1.8
4bnsuyer Goods 1.3 1.1 1.1 1.6 1.3 2.3 3.6 2.0 3.9 1.4Capital 0bods --3.5 -9.0 4-60 -11.3 -11.6 -9.2 -19.2 -18.4 -29.2 -34.2Intermediates 0.5 -0.8 0.5 -1.3 -1.4 0.7 -5.1 -5.8 -8.2 -13.0Infrastnrcture 12.3 15.6 14.7 11.6 16.4 27.2 17.6 8.3 -0.7 -2)0.0.Services 1.2 1.2 1.2 0.8 1.3 2.1 1.2 0 0.2 -2.5
Table 4.3: INDIA: No External Shock-Cum-Accommodating Borrowing ExperimentDistributional Cliaracteristics (Percentage deviation from historical rtin)
Cost of Living IndicesGroups 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
Irban
C1 -4.0 -7.0 -3.0 -7.0 -7.0 -9.0 -16.0 -14.0 -20.0 -23.0C2 -4.9 -7.0 -3.0 -7.0 -7.0 -9.0 -16.0 -14.0 -20.0 -22.0C3 -4.0 -7.0 -3.0 -7.0 -7.0 -8.0 -16.0 -14.0 -20.0 -22.0C4 -4.0 -7.4 -3.0 -7.0 -7.0 -8.0 -16.0 -14.0 -20.0 -22.0Cs -4.0 -7.4 -3.0 -7.0 -7.0 -9.0 -16.0 -14.0 -20.0 -22.0
Rural
C1 -4.0 -7.0 -3.0 -7.0 -7.0 -8.0 -- 16.0 -14.0 -20.0 -23.0C2 -4.0 -7.0 -3.0 -7.0 -7.0 -9.0 -16.0 -14.0 -20.0 -23.0C3 -4.0 -7.0 -3.0 -7.0 -7.0 -8.0 -16.0 -14.0 -20.0 -22.0C4 -4.o -7.0 -3.0 -7.0 -7.0 -8.2 -16.0 -14.0 -20.0 -22.0C5 -4.0 -7.0- -3.0 -7.0 -7.0 -8.0 -16.0 -14.0 -20.0 -22.0
Gini Coefficient
Urban
Income 0 -0.4 -0.4 -0.1 -0.4 -0.7 -0.4 -0.3 0.3 0Consumption 0 -0.4 -0.2 -0.1 -0.4 -0.8 -0.4 -0.3 0.3 0
Rural
Income -0.1 -0.1 -0.2 -0.2 -0.2 -0.4 -0.4 -0.1 -0.1 0.3Consumption -0.1 -0.2 -0.2 -0.2 -0.2 -0.4 -0.4 -0.1 -0.1 0.3
- 104 -
Table 4.4: INDIA: Makeup of Sector 5 from115 Sector Input-Output Table, 1973-74
Gross % of Sector 5Sector No. Name Output Gross Output
023 Coal and Lignite 30350 17.4
024 Crude petroleumiNatural Gas 9952 5e7
100 Electricity 99413 56.9
101 Gas 1098 0.6
102 Water Supply 7401 4.2
106 Communications 26626 15.2
TOTAL 174839 100.0
Table 4.5: INDIA: Alternative Adjustment Strategy(Percentage deviation froms historical run)
1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
GDP 0.6 1.3 1.2 2.1 6.4 0.4 0.2 0.1 2.2 0.8Private Conmnvption 0 0.4 0.3 0.4 0.3 0.3 0.3 0.2 1.4 0.4Investwmnt 8.0 5.8 4.4 12.4 6.4 0.4 0.2 0.1 2.2 0.8
Lflo Exports -18.3 7.7 3.9 -6.5 4.6 8.7 4.5 -1.5 15.3 9.0
Imports 8.2 14.3 5.3 11.5 -0.6 6.9 3.8 -0.4 1.0 1.6
Gross Output ofAgriculttwre 0.6 -0.7 0 0 0.2 0 0 0.5 1.4 0
(1bnsumer goods -1.4 1.1 0 0 0 -1.4 0 0 0 0Capital goods 7.5 5.7 4.6 12.4 0.8 0.7 0.5 0.2 3.1 1.2Internedtate 2.1 2.5 1.2 3.5 0.2 0.3 1.1 0.5 2.6 0.8Infrastructure 0.5 -0.6 -0.6 -0.4 -0.3 -0.1 0.5 0.5 0.7 -0.2Services -0.1 0.4 0.3 0.3 0.5 0.4 0.5 0.4 1.7 0.5
Foreign Savings 1295 1285 -652 42 -713 434 2380 2334 1990 2757(levels, tens ofmilion rupees)
Foreign Savings inHlstorical run 961 579 -1031 -903 -575 -299 1996 2412 2370 2650
(levels, tens ofmillion tupees)
t 9
Table 4.6: INDIA: Alternative Adjustment StrategyDiftributional Characteristics (PFrcentage deviation from historical nm)
Cost of Living Indices1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
Urban
Cl 13.0 -6.0 -2.0 4.2 -2.0 -5.0 -3.0 1.4 -7.0 -5.0C2 13.0 -6.0 -2.0 4.2 -2-0 -5.0 -3.0 1.3 -7.0 -5.0C3 13.0 -5.0 -2.0 4.2 -2.0 -5.0 -3.0 1.3 -8.0 -5.0C4 13.0 -5.0 -2.0 4.2 -2.0 -5.0 -3.0 1.1 -8.0 -5.0C5 13.0 -5.0 -2.0 4.3 -2.0 -5.0 -3.0 '. -8.0 -5.0
Rural
C1 13.0 -6.0 -2.0 4.2 -2.0 -5.0 -3.0 1.4 -7.0 -5.0C2 13.0 -6.0 -2.0 4.2 -2.0 -5.0 -3.0 1.4 -7.0 -5.0C3 13.0 -6.0 -2.0 4.2 -2.0 -5.0 -3.0 1.3 -8.0 -5.0C4 13.0 -5.0 -2.0 4.2 -2.0 -5.0 -3.0 1.3 -8.0 -5.0CS 13.0 -5.0 -2.0 4.2 -2.0 -5.0 -3.0 1.1 -8.0 -5.0
Ciii (befficdents
Urban
Inconr 0 -0.4 -0.1 -0.1 0.2 0.1 0 0.2 0.4 0(bnsuaption 0 -0.4 -0.1 -0.1 0.2 0.1 0 0.2 0.5 0
Rural
Incalm -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.4 -0.1(bisuop)tion -0.1 -0.1 -0.1 -).1 -0.1 0 -0.1 -0.1 -0.4 -0.1
Thble 4.7: INMIA: Nb Agricultural Iiock Fxperiment(Percentage deviation from historical run)
1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
2a. 2.9 -7.9 0.9 -3.3 -5.4; 5.9 -6.1 -4.4 1l.3 -3.3Private Consunption 0.9 -2.1 0.1 -0.7 -1.2 0.3 -2.0 -1.6 6.2 7.4Investimnt 8.9 -25.9 3.4 -11.9 -17.5 19.4 -15.3 -11.2 20.2 -31.3E,xrts 7.7 -15.0 2.0 -6.0 -9.4 17.9 -17.3 -10.0 16.5 -18.5Imprts 2.6 -5.7 0.8 -2.4 -2.8 3.1 -1.2 -1.9 2.9 -0.5
r14 Gross Output ofAgrictlture 2.2 -5.3 0.6 -1.7 -3.0 3.1 -4.1 -3.0 3.7 -6.8
Cbonsuner Goods 2.4 -5.4 0.5 -1.9 -3.7 4.1 -4.9 -3.6 4.7 -7.5Capital Goods 8.5 -25.5 3.5 -12.2 -18.1 20.1 -15.8 -11.7 22.1 -38.3Jiterlnediates 5.2 -13.6 1.5 -5.2 -8.3 10.1 -9.1 -6.9 10.7 -17.5
Infrastructure 1.3 -3.4 0 -1.3 -2.7 2.3 -2.8 -2.3 3.1 -4.7Srvices 0.4 -1.5 0 -. 5 -0.9 -0.5 -0.2 -0.9 1.5 -1.7
tnn ItemAgriculturl EfficiencyParanEter
Ilistoricalt RPn 0.97 1.05 0.99 1.01 1.02 0.96 1.04 1.02 0.97 1.06No Agricultural 9iock
Experiment 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Table 4.8: INDIA: No Agricultural Shodt ExerimentD1stributtonal liatracteristkcs (Based on htstorical run)
Cost of living IndicesGroups 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84
Urban
C1 -6.0 15.0 -2.0 5.0 8.0 ,-80 16.0 8.0 4.3 -2.0(12 -6.0 15.0 -2.0 5.0 8.0 -13.0 16.0 8.0 3.8 -1.0C3 -6.0 14.0 -2.0 5.0 8.0 -12.0 15.0 8.0 2.8 1.0MC4 -5.0 13.0 -2.0 5.0 7.0 -12.0 14.0 8.0 1.7 0co
C C5 -5.0 12.0 -2.0 4.0 7.0 -11.0 13.0 7.0 -0.3 1.4
Rural
CL -6.0 16.0 -2.0 5.0 9.0 -13.0 16.0 9.0 4.9 -3.0C2 -6.0 16.0 -2.0 5.0 9.0 -13.0 16.0 9.0 4.5 -2.0C3 -6.0 15.0 -2.0 5.0 9.0 -13.0 16.0 9.0 3.6 -2.0C14 -5.0 14.0 -2.0 5.0 8.0 -12.0 15.0 9.0 2.5 -1.0CS -5.0 13.0 -2.0 5.0 7.0 -12.0 14.0 9.0 0.8 0.3
Gin! (Cefficient
Urban
Incuie -0.4 1.6 -0.3 0.5 0.7 -1.4 1.1 0.6 -0.6 1.6Cbnsuwption -0.5 1.7 -0.3 0.5 0.8 -1.4 1.2 0.6 -{).6 1.1
Rural
Inco,e -0.4 4 -0.1 0.4 0.7 -0.6 0.9 0.8 -0.9 1.9(bnsuiption -0.4 1.4 -0.1 0.4 0.7 -0.6 0.9 0.8 -0.9 1.9
- 109 -
Table 4.9 INDIA: Reserves Experiments (Basic Data)
1976-77 1977-78 1978-79 1979-80
Foreign Savings a'
Historical Run -1031 -903 -575 -299
Bold Scenario -87 1561 2577 2115
ConservativeScenario -899 437 1282 413
a/ Nominal magnitudes (tens of millions)
- 110 -
Table 4.10: INDIA: Reserves Experiment (Bold)(Percentage deviation from historical run)
1976-77 1977-78 1978-79 1979-80 1980-81
GDP 1.7 3.6 4.1 3.7Private Consumption 0.1 0.5 0.9 1.0Investment 11.2 28.2 28.2 23.0Exports -10.3 -23.2 -26.2 -19.5Imports 10.9 33.1 38.3 29.0
Gross Outputs ofAgriculture 0.1 0.2 0.9 1.2
Consumer Goods -1.2 -1.9 -1.2 -1.0Capital Goods 11.4 28.2 28.4 23.6Intermediates 3.1 7.9 8e9 9.5Infrastructure 0.1 2.2 3.5 4.0Services -0.1 0.3 1.0 0.9
Domestic Productionof Capital Goods 10.7 26.4 26.3 22.1
Imported CapitalGoods 18.2 47.7 49.8 38.6
Total Capital Stock 0 8.3 2.9 5.0 6.4
Urban-t o-RuralPer Capita Ratios
Income 1.0 3.2 2.6 3.1Consumption 0 1.7 1.6 1.1
Table 4.11: INDIA: Reserves Experiment (Bold)Distributional Cnaracteristics (Parcentaae deviation from historical run)
Cost of Living IndicesGroups 1976-77 1977-78 1978-79 1979-80
Urban
C1 7.0 17.0 20.0 14.0C2 7.0 17.0 20.0 14.0C3 7.0 17.0 20.0 14.0C4 7.0 17.0 20.0 14.0C5 7.0 17.0 20.0 14.0
Rural
Cl 7.0 17.0 21.0 14.0C2 7.0 17.0 21.0 14.0C3 7.0 17.0 20.0 14.0C4 7.0 17.0 20.0 14.0C5 7.0 17.0 20.0 14.0
Gini Coefficient
Urban
Income -0.1 -0.2 -0.1 -0.1Consumption -0.1 -0.2 -0.1 -0.1
Rural
Income -0.1 -0.2 -0.3 -0.4Consumption -0.1 -0.2 -0.3 -0.4
- 112 -
Table 4.12: INDIA: Reserves Experiment (Conservative)(Percentage deviation from historical run)
1976-77 1977-78 1978-79 1979-80 1980-81
GDP 0.2 1.8 2.1 1.3Consumption 0 0.1 0.4 0.4Investment 1.3 14.5 15.6 7.1Exports -1.2 -13.3 -16.3 -5.9Imports 1.2 16.2 20.4 7.7
Gross Outputs ofAgriculture 0 0 0.3 0.4
Consumer Goods -0.1 -1.2 -1.1 -0.2Capital Goods 1.3 14.4 15.7 7.3Intermediates 0.4 3.9 4c7 3.0Infrastructure 0.1 1.0 1.8 1.4Services 0 0 0.4 0.4
Domestic Productionof Capital Goods 1.2 13.6 14.6 6.9
Imported CapitalGoods 2.0 23.4 26.5 10.9
Total Capital Stocks 0 0.1 1.2 2.4 2.9
Urban-to-Rural PerCapita Ratios
Income 0 1.6 1.6 1.0Consumption 0 0.8 0.8 1.1
- 113 -
Table 4.13: INDIA: Reserves Experiment (Conservative)
Distributional Characteristics (Percentage deviation from historical run)
Cost of Living IndicesGroup 1976-77 1977-78 1978-79 1979-80
Urban
C1 1.0 9.0 12.0 14.0
C2 1.0 9.0 12.0 14.0
C3 1.0 9.0 11.0 14.0
C4 1.0 9.0 11.0 14.0
C5 1.0 9.0 11.0 14.0
Rural
C1 1.0 9.0 12.0 4.0
C2 1.0 9.0 12.0 4.0
C3 1.0 9.0 12.0 4.0C4 1.0 9.0 11.0 4.0
C5 1.0 9.0 11.0 4.0
Gini Coefficient
Urban
Income 0 -0.1 0 0
Consumption 0 -0.1 0 0.1
Rural
Income 0 -0.1 -0.1 -0.1
Consumption 0 -0.1 -0.1 -0.1
- 114 -
Table 4.14: INDIA: Investnt lla1ocation Experiment(Percentage deviation from historical run)
GrxTps 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85
GDP 0.5 0.6 0.7 0.7 027 0.8 0.6 0.1 1.1 0.9Private Consumption 04 1.3 0.8 0.9 1.2 1.0 1.1 1.2 2.2 2.1Investnent 0.4 1.1 1.3 1.5 2.1 1.8 1.4 1.5 2.3 2.3Exports 1.7 -7.4 -1,4 -2.6 -6.4 -3.3 -5.2 -9.2 -7e2 -9.8lports -14 4.4 0.9 2.1 5.4 2.2 3.1 7.0 7.0 8.7
Gross Outputs ofAgriculture 0.2 0.4 0.3 0.3 0.2 0.4 0.5 0.3 0.6 0.6
Corusupr Goods 1.2 1.0 1.2 1.5 1.1 1.5 1.J 0.9 2.4 2.0Capital Goods 0.3 0.7 0.8 0.9 1.1 1.1 0.8 0.7 1.2 12Intermediates 0.5 -0.2 0.6 0.4 01 0.9 0.8 -0.2 0.7 0.4Infrastructure 0.2 0.5 0.1 0.0 -0.1 001 0.0 -0.3 0.6 03Services 0.0 -0.1 -0.5 -0.9 -1.1 -1.1 -1.2 -1.7 -0.6 -0.8
Capital Stocks inAgriculture 0.6 1.0 12 0.8 1.5 1.4 1.3 0.9 6.1 3e4
Consuer Goods 15.5 21.7 26.4 34.3 36.7 35.8 31.7 31.5 47.6 43.6Capital Goods 15.3 21.2 25.8 32.8 34.6 33.0 30.2 31.0 45.7 41.5Internediates 15.1 21.0 25.4 32.5 34.2 32.8 29.4 29.7 44.1 40.2Infrastructure -2.7 -4.8 -6.2 -8.4 -11.0 -9.6 -8.6 -9.7 -1.9 -8.1Services -5.2 -8.6 -11.8 -15.4 -17.7 -19.8 -21.1 -22.5 -16e3 -16.8
Ibtal 04) -0.2 -0.6 -10 -1.2 -1.6 -2.0 -2.4 5.5 3.1 L7
Foreig Saving(Level, tens of millions)
Historical Rm 961 579 -1031 -903 -575 -299 1996 2412 2370 2650nvesstment Peallo-
cation Experiment 905 889 -951 -741 4-4 -177 2153 3075 3347 4075
Terrs of Trade
Historical 1m 0.727 0.702 0.676 0.808 0.732 0.528 0.571 0.684 0.737 0.728Tnvestrient Reallo-cation Experiment 0.720 0.735 0.683 0.821 0.763 0.540 '.592 0.732 0.778 0.779
Table 4.15: INDIA: Investment 14-nallocatlo Erqerimn1:tDLstrihutlonal OiaracterisLics (Percentage deviationi froun historical nrn)
Cost of Living IndicesGroupl 197t-75 1975-76 1976-77 1977-78 1978-79 1979-80 198081 1981-82 1982-83 1983-84
Urban
ci 0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.5 9.0C2 0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.5 8.9C3 0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.4 8.9C/ 0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.5 9.0C5 0 6.0 3.0 4.0 6.0 5.0 6.0 8.0 7.4 8.9
Rural
c1 0 6.0 3.0 4.0 6.0 4.0 5.0 8o0 7.6 9.0(12 0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.5 9.0C3 0 6.0 2.0 4.0 6.0 4.0 5.0 8.0 7.5 8.9
0 6.0 3.0 4.0 6.0 4.0 5.0 8.0 7.5 9.0C5 0 6.0 3.0 4.0 6.0 5.0 5.0) 8.0 7.5 9.0
CLIi CefficientLs
Urban
Incone 0.4 1.4 0.6 0.6 0.7 "0.7 0;7 0.6 -i c"L 1.2 >' :U w u(Cbnstnrption 0.4 1.5 0.6 0.7 0.8 0.7 0.7 0.6 1.2 1.2
Rural
Incoe -{.1 0.1 -0.1 -0.1 -0t -0.2 -0.2 -0.1 -0.3 -0.3Constwption -0.1 0.1 -0.1 -0.1 -0.1 -0.1 -).2 -0.1 -0.3 -0.3
- 116 -
Chapter 5: CONCLUSIONS
I. IMIRODUCTION
This paper offered an overview of developments in the Indian
economy from 1973-74 to 1983-84 and placed them in historical
perspective (Chapter 1). It then formulated and calibrated a six sector
general equilibrium model characterized by a detailed treatment of
distributional issues and capable of articulating the implications of
different policies for the economy's debt burden distinguished by
maturity structure (Chapter '2 and Appendices 1-3). The model was
calibrated to a 1973-74 data set specially put together for that
purpose. (Appendix 4). The responsiveness of the model to various
parameters and exogenous varibles was then examined and the information
used to allow the model to replicate actual developments from 1973-74 to
1983-84 (Chapter 4). This historical run served as a benchmark against
which counterfactual policy simulations could be compared. Various such
simulations were run and their impact on the major macroeconomic
aggregates, sectoral output, income distribution and the economy's debt
profile examined (Chapter 5).
II. RESULTS OF THE POLICY SIMULATIONS
No External Shock-Cum-Accommodatina Borrowing
The experiments began by assessing the net impact of terms of
trade fluctuations and associated external borrowing on the Indian
economy. It was seen that accommodating borrowing from the IMF and
various oil-related development institutions after the first oil shock
Chap-5/(India Shocks:4-11-86:pp
- 117 -
and the Extended Fund Facility with the IMF after the second oil shock,
together with workers' remittances following both shocks, more than
offset the deleterious impact of terms of trade movements. GDP, private
consumption and investment would have been lower in the no external
shock-cum-accommodating borrowing scenario: indeed the capital stock in
1984-85 would have been 8 percent lower. Domestic production of
consumer goods and infrastructure would have gone up at the expense of
capital goods. This would to some extent have intensified rather than
allayed concerns that have been expressed (see Chapter 1) about the
stagnation of investment compared to the pre-1964-65 years. However, as
expected the debt burden would also have been lower - by nearly 48
percent at the beginning of 1983-84.
Alternative Adjustment Strategy
We also asked what might have happened had the ratio of
investment to GDP been stepped up following the first round of shocks,
with selective imports of consumer goods being used to combat
potentially inflationary pressures arising from harvest failure. The
higher investment would have led to a capital stock in 1984-85 which was
nearly 2 percent higher than in the historical run. GDP and private
consumption were also higher. Domestic production of capital goods
would have gone up at the expense of infrastructure and consumer
goods. In the absence of any other measures, however, the economy would
have been left with a 27 percent higher stock of debt by the beginning
of 1983-84.
Chap-5/(India Shocks:4-11-86:pp
- 118 -
No Agricultural Fluctuations
Since it is understood that the "deflationary" profile of
adjustment to the first round of shocks was shaped by a perception that
inflation arising from harvest failure needed to be controlled, we asked
what would have happened had agriculural shocks not occurred. The peaks
and troughs in GDP?, consumption and investment in that experiment
mirrored those in the exogenous variable which proxied weather-related
fluctuations. Thus, the above macroeconomic variables would have been
higher if weather-related dips had not occurred; their behavior would
have been the opposite in the absence of weather-related peaks. In the
light of the sensitivity o.f investment to agricultural shocks noted
earlier, the 1984-85 capital stock also have been lower - by 6.5 percent
under the no agricultural shock scenario. This shows that the
cumulative effect of agricultural peaks dominated those of the troughs
in the historical run, resulting in an enlarged supply of wage goods and
thus permitting higher savings, investment and terminal capital stock.
The assumed connection between agricultural shocks and the perceived
need to effect deflationary adjustment makes it instructive to ask what
a "no agricultural shock-cum-deflationary adjustment" would have implied
for the economy. This, however, simply involves adding the present
experiment t3 the previous one. It is an obvious counterpart to the "no
external shock-cum-borrowing" experiment.
Reserve Decumulation
The model was also used to explore the consequences of India's
following a less cautious policy with respect to reserve accumulation.
Chap-5/(India Shocks:4-11-86:pp
- 119 -
with actual reserves were added to foreign savings. This generated a
substantially higher profile of GUP, private consumption and investment
leading to a nearly 3 percent increase in the capital stock by 1980-81,
an increase in production of capital goods and infrastructure at the
expense of consumer goods and some widening in urban-to-rural per capita
income levels. Since "excess" reserves were available in those years,
they would have allowed the economy to sustain a less deflationary
adjustment strategy of the kind formulated in the last experiment .
However, since the extra foreign savings would have come out of reserves
rather than fresh borrowing, the debt burden would have been lower than
in the previous experiment. The question could be answered by combining
the themes of those two experiments.
Investment Reallocation
Attention was also devoted to the issue of varying the
allocation of investment across sectors as part of an overall policy of
adjusting to shocks. A seemingly plausible but myopic policy of
allowing investment allocation to take advantage of sectoral differences
in current profitability was implemented. This led to higher GDP,
consumption and capital stock, which was 1.7 percent higher in 1984-85
compared to the historical run, while pulling resources out of
nontradeables and towards the tradeable sectors of the economy. But it
also left the economy with a stock of debt which was 27 percent higher
at the beginning of 1983-84. This was the result both of higher import
intensity of sectors towards which investment was redirected, as well as
an increase in domestic demand pressure and a consequent bidding up of
Chap-5/(India Shocks:4-11-86:pp
- 120 -
domestiic vis-a-vis interrnational prices. This experiment, however, was
only a start towards examining the question of how investment is best
reallocated among sectors in response to exogenous shocks.
Adjustment to Exogenous Shocks and Income Distribution
An interesting feature of all the policy simulations is the
virtually uniform impact on all groups of households. Indeed, there is
hardly any movement in the Gini coefficient of income or consumption
inequality, which, under the assumption of lognormally distribuced
income and consumption, is an adequate measure of inequality. The cost
of living indices do not move significantly differently a!ross the ten
groups of households identified by the model,. Nor is there any movement
in the share of the bottom 40 percent in income and consumption. This
is partly due to the "full employment" character of the model, so that
there are roughly offsetting movements in returns to all households from
different soirces.-L Thus, while some factors gain and other lose as a
result of different policies, these do not, at our chosen level of
aggregation, make much difference to the relative incomes of
households. Since the segmented labor market-cum-full employment
assumption does not appear unreasonable and since the data do not permit
any further significant disaggregation of households, it seems
appropriate to conclude that the distributional impact of adjustment to
1/ Recall that the "full employment" assumption refers to no openunemployment of laborers. In fact, those who cannot find highpaying employment drift into low-productivity occupations where thewage must move to clear the market.
Chap-5/(India Shocks:4-11-86:pp
- 121 -
exogenous shocks in India was not significant. - If this conclusion is
correct, it is because the range of policies explored here do not
envisage redistribution of endowments, for example, of land and capital,
which policies would certainly change the distribution of income and
consumption. Since such redistribution was in fact not an element in
discussions of adjustment in India -iuring this period, our conclusions
on distribution appear to be warranted. It is important to stress
however that these remarks apply -:o th.e size distribution of income and
not necessarily to the regional or functional distribution of income.
As an example, we m><- point to the decumulation of reserves experiment
of Chapter 4, where the urban-to-rtural per capita income ratio changed
noticeably (see Table 4.10).
III. CONCLUDING REMARKS
In conclusion, there are three points which require explicit
mention. First, in keeping with its focus on medium-term issues such as
growth and distribution, our exercise has concentrated on the "real"
side of the economy. The exclusion of monetary considerations has been
deliberate. But it has implied that issues such as the consequences of
using deflationary monetary policy to combat cost-push
1/ Notice that we have been operating in a two-parameter lognormal
world where the entire Lor-enz curve is uniquely determined by the
distribution parameter a. Consequently, given a prior
specification of the poverty line, the Gini coefficient and the
headcount ratio measure of poverty would mostly move in the same
direction.
Chap-5/(India Shocks :4-11-86:pp
- 122 -
inflation versus adopting a more accommodating stance could not be
addressed here. I/
Second, there are certain areas which the model, as it currently
stands, is well capable of illuminating but where no experiments have
yet been done. Prominent among these are chanaes in taxes, both
domestic and trade-related, government transfers and public consumption
of goods and services. Measures such as changes in trade taxes as part
of import policy and in domestic taxes as part of resource mobilization
could easily be simulated, since consistency requires our economywide
model to keep track of components of the government budget. -/ They
could provide answers to interesting policy questions such as: by how
much would taxes have to be changed in order to finance higher
irnLvestment after the second oil shock without recourse to the IMF and
otii.eL' sources of external assistance? Indeed, the next set of issues
whf.cl-i. we intend to address using the model relate to the use of tax and
v).-taraLsfer policy both in response to exogenous shocks and, indeed, more
greerally.
Finally, the model has been run as a tool for simulation.
There remain interesting questions of optimality of adjustment and the
associated aspects of formulating forward-looking investment and current
1/ The only "anti-inflationary measure" modelled in the experiments isthe import of food and edible oils to maintain domestic availabilityat levels not falling short of those in the historical run.
2/ Thus we could have reported the impact of the Chapter 4 experimentson the government budget for every year.
Chap-5/(India Shocks:4-11-86:pp
- 123 -
account behavior. Intertemporal optimization of the India model as
currently formulated would be prohibitive at the present time. However,
work has been done as part of this research project on approximation
techniques which allow such experiments to be done. These have been
implemented in a preliminary way in a companion study on adjustment in
Thailand. 2/ We hope to apply those ideas to study the optimality of
adjustment in India in future work.
1/ H. Sierra and T. Condon," An Approximation Technique for Computing
Optimal Dynamic Paths." (Development Research Department, The World
Bank, October 1985, processed).
2/ S. Devarajan and H. Sierra, "Growth Without Adjustment: Thailand,
1973 to 1982," (Country Policy Department, Discussion Paper No.
1986-5), World Bank, December 1985.
Chap-5/(India Shocks:4-11-86:pp
- 124 -
Appendix 1: Equations of the Model I/ 2/
Production Equations:
Sector 1 (Agriculture)
Recall that the CES tree structure in agriculture is given by
x
z
V N
S \ ND NM
H Ls
1/The notation is described on pp. 150-158.
2/A standard reference on computable aeneral equilibrium models isK. Dervis, J. de Melo and S. Robinson, General Eouilibrium Models forDevelopment Policy (Cambridge University Press, 1982).
Appendixl/India Shocks/PMitra:4-11-86:pp
- 125 -
ax
Ix I - aaG 1X- Ia 1 7X IX a" (A l 1 -I a 1(1.1) Xz(.)X=(GBG G P XXA [(Al') P X
(supply of X)
(1.2) Z = X AX - 1 ) Xpz
(demand for Z)
X-I I
(1.3) pG = A P a (X)XXG G
(rental rate on G)
(1.4) V = Z pVV
(demand for V)
(1.5) N =- ~ cZN aN
(demand for N)
z 1 -a a 1- a 1 - a(16) Pz - (a PV Z+ aN P N
(pricing rule for Z)
Appendixi/India Shocks/PMitra:4-11-86:pp
- 126 -
(1.7) ND = N ( D N aN
D
(demand for ND)
(1.8) NM = N PNM JNM
(demand for NM)
(1-9) P [aN 1 +N Nl aNN l N
D ND
(pricing rule for N)
(110) ND a.P (1 + t ) where i is the using sectorD .5 XND
(pricing rule for ND)
(1.11) pNM M . Pi (I + tN + tRM where i is the using sector
(pricing rule for N)
Appendixl/India Shocks/PMitra:4-11-86:pp
- 127 -
ctP sp a.(1.12) S =V
(demand for S)
(1.13) LW = VBLR lP )LW
(demand for LW)
P1 - a, a 1 - a ~ 1-
(1.14) Pv s Ps + eg LRV
(pricing rule for V)
(1.15) LR -SSjL
(demand for LS)
(1.16) H S BHS 1H(C S
(demand for H)
p1as P 1 -a aSr L1I -~ I 1 as
Ps Ln ) S + aLS SB ) IH SL
(pricing rule for S)
Appendixl/India Shocks/PMitra:4-11-86 :pp
- 128
Equations (1.1) - (1.17) describe the production side of
sector 1, agriculture.
Equation (1.1) is a CES output supply function expressing X
as a function of the output price, P., input price, PZ and supply of
infrastructure, G where
A: rate of Hicks-neutral technical progress
B.: rate of factor j-augmenting technical progress
elasticity of substitution between Z and G.IX
Equation (1.2) is an input demand function for Z, while
equation (1.3) residually yields the rental rate earned by
infrastructure in the agricultural sector. Equations (1.4) and (1.5)
are the demand equations for value added and intermediates, while (1.6)
expresses Ez in terms of the prices of its constituent inputs, PV and
PN. Equations (1.7) and (1.8) are demand functions for ND and NM, while
(1.9) expresses PN in terms of the prices of ND and NM. Equations
(1.10) and (1.11) define P and PN as weighted averages of theirND N
component prices, with the weights being the input-output coefficients
making up those aggregates. Notice that the summations in (1.10) and
(1.11) exclude sector 5; the interindustrial flow from sector 5 (public
infrastructure) to any sector j is G. which appears at the upper
level of the CES tree. Equations (1.12) and (1.13) are the demands for
Appendixl/India Shocks/PMitra:4-11-86:pp
- 129 -
S and LW, while (1.14) is the price of value added. Again, (1.15) and
(1.16) are the demands for LW and H, with (1.17) being the price of S in
terms of its constituents.
Sectors 2, 4, 5, 6
Equation (1) to (11) are identical to those above.
Since the.portion of the tree below value added in sectors 2
to 6
is:V
K s lw
equations (12) - (16) are replaced by the following:
(2.12) K =V -1 ( e V )vpK
(demand for K)
(2.13) Lw V B LV W VLW
(demand for Lw)
(2.14) Ls V a 1 Vp
(demand for L5 )
Appendixl/India Shocks/PMitra :4-11-86 :pp
- 130
(2.15) PV = + a a ) L---aBK T VWU LuS'~
(pricing rule for V)
Sector 3
Equations (1) to (11) are identical to those above.
Equations (12) to (15) are identical to (2.12) - (2.15)
Since sector 3 has significant quantities of almost-finished
imports, M, it is necessary to add the following ecuations:
(3.16) X - (CX) (CX)-CX
(demand for X)
(3.17) M - (CX) (p + +~M1 tFM + RMM
(demand for M)
(3.18) PCX xa + - (PM (I + tFM)
(pricing rule for CX)
Consumer Prices
Consumer and producer prices are connected via indirect taxes
and trade margins. Define
(4.1) Po = Px for sectors 1, 2, 4, 5, 6; = P. for sector 3
Appendixl/India Shocks/PMitra:4-11-86 :pp
- 131 -
Then
(4.2) PC= P (I + tFT + t )c 0 FT) RMD
(consumer price of goods)
(4.3) PCLS = PLS (1 - tw)
(household return to self-employed labor)
(4.4) pCLW =LW (1 - tW)
(household return to wage labor)
(4-5) PcK PK
(household return to capital)
where tFD :tax rate on final demand
tRD :trade margins on final demands
tW :tax rate on wages
Appendixl/India Shocks/PMitra:4-11-86:pp
- 132 -
Income Generation
Five types of income are identified by the model
(5.1) Y = pCLS Ls
(income from self-employment net of depreciation)
(5.2) Y2 = pCLW Lw
(wage income)
Y3 PCH H (1 tp)
(land/capital incomenet of depreciation in sector 1)
Y3 PCK K (I -tp)
(capital income net of depreciation in sectors 2,3,4,6)
(5.3) y3 = p K ti (1 - tp)
(capital income net of depreciation in sector 5)
where tp = rate of profit tax
= proportion of capital in sector 5 (public which
Appendixl/lndia Shocks/PMitra:4-11-86:pp
- 133 -
is owned by the private sector.
(5.4) y P G (1 - 0)
(income from infrastructural flows)
where e = subsidy to intermediate users of infrastructure
(5.5) Y= GTRA + GTRB + NCT + NFI
(nonproduction-related income)
where
GTRA = interest on the national debt
GTRB = government transfers to households
NCT = net current transfers from the rest of the world
NFI = net factor income from the rest of the world
Depreciation is defined as
D1 = H PH H + 6I PLS LS
(5.6)
Di kPKK+ tSLS (i 2-.6)
where 6 is the rateof depreciation.
Appendixl/India Shocks/PMitra:4-11-86:pp
134 -
Demand Equations
Let Yij be the ith type of income generated in production sector j
(i = Self-employed, Wage, Capital, Infrastructural)
(6.1) i i (Y i2 +Yi 6) + 5
It is assumed that the ith type of production income in the
rural areas comprises all income from sector 1 (agriculture) and a
proportion N of those originating in sectors 2 and 6 (consumer goods
and services).
(6.2) 6 R1 j=1ij
This defines the ih type of urban income.
Thus, Y5 is divided between rural and urban areas in the proportionff to 1-Tr.
55
R 5 Ry z y
i=l
(6.3)
0 i=1Let Gih share of the ith type of income accruing to houseltold
income
class h in sector 0 ( E ih= 1 0 = R,U for each i)
Appendixl/India Shocks/PMitra:4-11-86:pp
- 135 -
There are fifteen income-earning household classes in each of
the rural and urban sectors.
Then the income accruing to class h is
(6-4) Y = =z hQ YQ
Define
( = share of total households in a household class hh(O = R,tJ; h = 1, 15)
The mean and variance of household income in each sector are given by
'5 Q(6-5) y = 0 hYh
h=1
o0 0 - 2(6.6) V = E (Y Q
15
Let (6.7) Y h=i be the per capita income for Sector Q.PO
To help match disparate data sources on savings and income on
the one hand with household consumption expenditure on the other, it is
assumed that the distribution of popuilation according to per capita
household consumption expenditure and income is bivariate lognormal. It
Appendixl/India Shocks/PMitra:4-11-86:pp
- 136 -
follows (see (15) - (20) in Appendix 3 on the bivariate lognormal
distribution) that the mean (1y) and standard deviation (ay) of the
logarithm of per capita incomes are given by
(6.8) 2 ay)
v0 1
( 6 e 9 ) a = u (log [1 + - 2
where u is a factor converting variance of the household income into
that for per capita incomes.
The corresponding mean (p i) and standard deviation (a ) of the
logarithm of per capita expenditure may be written -
1/ It follows from equations (8) and (9) of the appendix on the
bivarate lognormal distribution and the ensuing discussion that
a° -Q -2c y
0Q 0
yc a0y
Appendixl/India Shocks/PMitra :4-11-86 :pp
- 137 -
(6.10) Q - + SQ QC
(6.11) aQ = k a' (Q= R,U)
Let N(xJ0, 1) denote the cumulated area under the standard
normal distribution (with mean zero and standard deviation unity) up to
the variate value x. It can be shown that (see Appendix 3 on the
bivariate lognormal distribution)
(a) Share of total population up to per capita expenditure
level c is given by:
(6.12) N [co C - c10, 1 = r (c) given 11 and aa Ic cc
(b) Share of total consumption accruing to the of population
up to per capital expenditure level c is given by
log c - p(6.13) N c - alO,1j = (c) given p and a
c
(c) Share of total income accruing to the population up to per
capita expenditure level c is given by
(6.14) [log c - - yc a |0, 1] = 6 (c) given a a and pNdia a SYC: y C, y ycC
Appendixl/India Shockcs/PMitra:4-11-R6:pp
- 138 -
Five classes, generally indexed by k, are identified for the
ensuing analysis of consumption.
Let CR c's c1 , cR be the upper limit of the class intervals1' 2' 3'
for first four classes (rural)
and CUI C 2, C4 - do - (urban)
then (1) the proportion of total population in five classes is given by
nQ n ( (C0)
n2 ~n(C 0 ) - n (C0 )
(6.15) nQ = ni (C0) - n (co)3 2
nQ = n (C0 ) - n c4 3
nQ= n (co~) - (CQ)nQ = n (CQ) - (C4°)5 '5 '4
(2) the proportion of total consumption accruing to five classes is
given by
QQ = p(C0)
-2 = (co) - (C0)2 2 1
(6S.16) 03 = (C0 ) - Q (C0)33 2
0 = p (CQ) - (co)
Q0 + ((:Q) - (C4 )
Appendixl/India Shocks/PMitra:4-11-86:pp
- 139 -
(3) the proportion of total income accruing to five classes is given by
ro = 6 (C)1 1
0r = 6 (CQ) - 6 (CQ)22 1
(6.17) rQ = 6 (C0) - 6 (CO)33 2
ro = 6 (C) -6 (Co)44 3
rQ = 6 (Co) - 6 (C0 )5 5 4
Mean per capita consumer expenditure in each of the rural and urban
sectors (see equations (16) in Appendix 3) is given by
(6.18) CQ = exp [Q+ 1 (a0 2 , (O = R, IJ)
Derive the per capita levels of consumption and income in each household
consumption group (Ck, and 7n) as follows:
-0 00
(6.19) 0 COk (k 1,...,5)k 0nk
-o o(6.20) k (i 1,...,5)
where n k OQ and rQ have been defined in (6.15) - (6.17).
The linear expenditure system (LES) for expenditure class k
and sector j is given by
Appendixl/India Shocks/PMitra:4-11-86:pp
- 140 -
6(6.21) i Pc +b, (C Pc xk.) ,forgiven x,, and .
where Ckj = per capita expenditure on commodity/sector j
for the kth expenditure class (k = 1...5, j = 1...6).
where xk' is the committed quantity in LES for the kth expenditure
group (i = 1, 2, ...5) and jth sector-specific consumption (j = 1, 2,
...6) and b is the marginal budget share for the kth expenditure
group and jth sector specific consumption.
Estimates of the parameters (xkj. bkj) are available for k = 1..., 5,
j 1..., 6 and for rural and urban population separately.
Aggregate jth sector-specific household consumer expenditurxe is given by
5 NR5(6.22) C. = _ NECR + U-
( k=1 k kj k=1 k ki
where Nk is the size of population in kth expenditure class given byk
N0 = n k TOTPQk k
Net household savings are given by
5k=l k k k nk Pk k kk
k=1 k=I
R U tand Pk , Pk signify population in the k expenditure class, whence
Appendixi/ndia Shocks/PMitra:4-11-86:pp
- 141 -
(6.23) SAV =Tp- z nH R t )+TP , l tk=1 k tCtk=1 r k ~
System Constraints
Material Balances
Final demand equals the sum of private and public consumption
and the sum of net fixed and replacement investment by sector of origin.
(7.1) FDi C + GOV1+ FITi + RI
The sum of domestic production, stocks carried over from the
previous period and imports must equal the sum of final and intermediate
demands, export demand and changes in stocks this period. Sector 6 has
an extra source of demand arising from the application of trade and
transport margins in all sectors of the economy.
i + F.i + E a.. ND. - M. + E + 6 (i = 1,2,4)
t-l 6 G+6
X=+ D. + 6 G + iE. (i 3)
i i i i
i i * i j=1 1i i P- j=1
Appendixl/India Shocks/PMitra:4-11-86:pp
- 142 -
+ 9 Jti + £>P |+6 (in Sector 6)
Exports are a downward sloping function of export prices relative to
prices of international competitors, as weLl as incomes in the rest of
the world.
pe
(7.3) Ei = X\OLi (i = 1,2,3,4)
where e is the base year nominal exchange rate and asterisks signify
international export prices.
Export prices differ from output prices by export trade margins
(7i4) i t (i = 1,2,3,4)
1
Final imports in sectors 1, 2 and 5 are controlled by the government
M= M, (i = 1,2,5)(7.5)
= g (i = 3,4,6)
The flow of infrastructural services to intermediate users is controlled
by the government.
(7.6) G= (i = 1 .... 6)
Public consumption demand for each sector is given.
Appendixl/India Shocks/PMitra:4-11-86:pp
- 143 -
(7.7) GcVi GOJVi (i = 1..6)
Gross fixed investment demand for each sectors I output is afixed proportion yi of total fixed investment and is defined by
6-(7.8) C mi Yi [Pc I+ E D;i (i = I...6)i, i j=1
6where GFIi Fii + RIh, Z 1 and K is proportion of fixed
i=1investment in total gross investment.
Changes in stocks by sector bear a fixed proportion wi tototal changes in stocks and are defined by
6t(7.9) p E i = W. (1-K) [PO I + . D.J (i 1... 6)
6where Z u I
i=1
The amount of land, the stock of capital in each sector, thenumber of self employed in sector 1 and total labour in sectors 2 to 6
are given in the initial period.
(7.10) H JH
(7.11) Ki =K (i = 2....6)
Appendixl/India Shocks/PMitra:4-11-86:pp
- 144 -
(7.12) Ls =L1 '
6(7.13) Z (Ls + L ) LNAG
i=2 i
It is assumed that the economy starts with no carryover of
stocks from the pre-hase period
-i 0 (i = 1...6)
Wages of organized labour in rural and urban areas are indexed
to their respective CPI's
(7.14) i-) = X (i = 1....6)i Ii
0*iere X (< 1) captures the degree of indexation.
The consumer price indices to which wages are tied in sectors
1 and in 2 to 6 are simple geometric averages of specific price indexes
for rural and urban households respectively.
Cpk = I C CPkR)0.2 I =k=l
(7.15)
CPIi = ( E c CPIk ,U) (i-2,. ,6)
The group specific indices are defined by
Appendixl/India Shocks/PMitra:4-11-86:pp
145 -
(7.16) GCPIO0 - (O = R, U)
1=1
Import prices are internationally given:
(7.17) P = ePNj Nj
where asterisks signify international import prices.
The economy's balance of payments constraint is given by
6(8.1) Fe = [P Ni 1 +j I PMj NMi
PO(1 + tR ) * NCT - NFI
NCT net current transfers from the rest of the world
NFI net factor income from the rest of the world
The savings investment equality is
6 6(8.2) SAV + Fe + SG tK Yi pc+ (l-K) i di o I
where SG is government savings, the difference between government
revenue (REV) and expenditure (PUBEXP).
6 ~6 6REV~~2 = .P 0 N + t m~. P t N + t P FD + t E.j ji ° NDN Di Ni 3 M. N F n0 i E.
Appendixl/India Shocks/PMitra:4-11-86:pp
- 146
+tW(PLS L s+ P LW )+ (PGp -PC5 ) CTi i
(8.3)
P K 5 p pH T + tPPK K5 (l-I) + t Z P K
+ tFM PM M3 + i {Po - PM (1 + tRMM B Mi3 3 i•#3 i j j
Thus, government revenue is the sum of tax revenue on intermediates and
final goods, tariff revenue on intermediates and, where applicable,
exports and final imports, revenue from wage and capital income and
income from infrastructure.
6
(8.4) PUBEXP = GTRA + GTRB + E PC GOVi=l
the sum of interest on the national debt, transfers to households and
the value of government consumption.
Thus, government savings
(8.5) SG = REV - PUBEXP
But (8.5) is not separately imposed, since it may be derived from the
other equations of the system.
Appendixl/India Shocks/PMitra:4-11-86:pp
- 147 -
Finally, total investment is determined in (8.2) as the sum of
savings, whence change in stocks and fixed investment demand by sector
follow from equations (7.7) and (7.9).
It has implicitly been assumed that depreciation is used to
undertake replacement investment in the same year. Since Yi signifies
the proportion of all investment (whether net fixed or replacement)
which must be met by sector i (E = 1) , it is natural to definei
replacement investment by sector of destination as
D.(9.1) T 6 1
0 [° +tRMDj + tFD] Yjj=1 j J J
Fixed proportions of total net fixed investment augment
capital stocks in each sector, net of depreciation
6Z D.
t+1 tJ
14 H I K [I y.
t -H)-IR = 1 <I 6
j-l j cj
(9.2)
6E D.
(K K)-IR = Xi X [I + 6 (i= 2 ... 6)
j=1 J cj
where
Appendixl/India Shocks/PMitra:4-11-86:pp
- 148 -
6(9.3) £ 1
i=1-= .Xi
Time series of L LNAG are provided to update those variables.
TJpdating Income and Expenditure
Equations (5.1) to (5.5) delineate five sources of householdincome. In years other than the base year, these are deflated by thefollowing price indices:
p t pOCLS CLS for self-employment income
p L / P0 for wage IncomeCLW CLW
Pt / P 0 for land incomeCH CH~
r t 0PCK / PCK for capital income
pt pO for infrastructural income
Nonproduction related income is deflated using the GDP deflator.
Incomes, so deflated, are used to calculate means and
variances as in (6.6) to (6.9). The bivariate lognormal thus has the
Appendixi/India Shocks/PMitra:4-11-86.pp
- 149 -
interpretation of being a joint distribution of per capita real incomes
and real expenditures.
To calculate the per capita expenditure levels CK entering in
the linear expenditure system (6.21) for subsequent years, it is
necessary to update the base year class limits, using the following
formula:
tR 6 t R 6 0 6 P. bk(9.4) Ckt = P cj xkj + ICckO - P cj xkjI ' (I ) kjJ=1 = j=I P.
where
Ct : upper limdt of expenditure class interval k in sector Q in year t
QC%D: upper linit of expenditure class interval k in sector Q in year O
(9.4) ensures that Ckt generates the same utility at year t prices,()0 0Pi , as does Cko at year prices, Pj, provided the indirect utility
function corresponding to the linear expenditure system (6.21) is
cardinalised such that, for any set of consumer prices, utility isproportional to the value of endowments minus the value of committed
consumption levels.
Appendixl/India Shocks/PMitra:4-11-86:pp
- 150 -
Notation
a- =
aji domestic input output coefficients
A = rate of Hicks-neutral technical progress
bkj marginal budget share for jth sector consumption by
expenditure class k
B. = rate of factor j augmenting technical progress
Ci = total private consumption of good i
Ck per capita expenditure of expenditure class k
Ckj = per capita expenditure on commodity j by expenditure class
k
CQ= upper limit of expenditure class interval k in sector Q
CPI = consumer price index
CX = gross output of sector 3
D. ¢ depreciation in sector j
Appendixi/India Shocks/PMitra:4-11-86:pp
e base year nominal exchange rate (rupees per dollar)
Ei = exports of good i
F = foreign savings (in dollars)
FDi = final demand for good i
FIi = fixed investment demand for good i
G = flow of infrastructure
GCPI - group-specific consumer price index
GOVi = government consumption of good i
GFIi = gross fixed investment demand for sector i
GTRA = government transfers
GTRB = interest on national debt
H = land
I = aggregate net investment
Appendixl/India Shocks/PMitra:4-11-86:pp
- 152 -
IRi replacement investment by sector of destination i
k constant relating standard deviation of per capitaexpenditure to standard deviation of per capita income
K capital
LNAG m stock of nonagricultural labor
LS = self emploved labor
Lw = wage labor
mji import coefficients
Mi final imports of good i
nk proportion of population in expenditure class k, sector 0
N= CES subaggregate of domestic and imported intermediates
NCT net current transfers from abroad
ND = fixed proportions bundle of domestic intermediates
Appendixl/India Shocks/PNitra:4-11-86:pp
- 153 -
NFI - net factor income from abroad
NM = fixed proportions bundle of imported intermediates
P price
PC - consumer price
p= prices of Indian exportables
PI international export prices
P= output price
PM = price of imported intermediates (?)
0Pk= population in expenditure class k
0k= proportion of consumption in expenditure class k, sector Q
PUBEXP = government expenditures
rk = proportion of income in expenditure class k, sector Q
REV = government revenue
Appendixl/India Shocks/PMitra:4-11-86:pp
- 154 -
Ri = replacement investment demand for good i
S CES subaggregate of land and self-employed labor
SAV = household savings
SG government savings
tASi change in stocks of good i
tE rate of export tax
tFD tax rate on final demand
tFM = tax rate on final imports
TOTPQ = total population in sector 0
tp rate of profit tax
t = trade margin on final demand
tR1iE = trade margin on exports
Appendixl/India Shocks/PPNitra:4-11-86:pp
- 155 -
tRMM = trade margin on imports
tW= tax rate on wages
V value added
Vy = variance of per capita income in sector 0
Xkj commltted quantity of jth sector consumption by
expenditure class k
X = gross output (except in sector 3)
XVOL - income in trading partner countries
Q= income accruing to asset owning class h in sector 0
Yi type of income
Yk per capita income of expenditure class k
Y amount of ith type of income originating in production
sector j
Y0 = aggregate income in sector 0 (rural/urban)
Appendixl/India Shocks/PMitra:4-11-86:pp
- 156 -
y mean household income in sector q
=0Y per capita income for sector 0C
Z = CES subaggregate of value added and intermediates
a - share parameters in production function
Yi proportion of fixed investment demand directed at sector i
EC price elasticity of export demand
X = wage indexation parameter
0'1 - mean of logarithms of per capita consumption, sector 0
0p mean of logarithms of per capita incomes, sector Qy
py = coefficient of correlation between log y and log c
a = elasticity of substitution
a0 - standard deviation of logarithms of per capita
consumption, sector 0
Appendixl/India Shocks/PMitra:4-11-86:pp
- 157
= standard deviation of logarithms of per capita income,
sector Q
h proportion of households in asset owning class h
I proportion of capital in sector 5 which is owned by the
private sector
O= subsidy to intermediate uses of infrastructure
= rate of depreciation
= proportion of income originating in sectors 2 and 6 going
to rural households
"ih share of ith type of income going to asset owning class h
r = proportion of nonproduction related income going to ruralhouseholds
K = share of gross investment accounted for by fixed capitalformation.
xi proportion of changes in stocks accounted for by sector i
Appendixl/India Shocks/PMitra:4-11-86:pp
- 158 -
x proportion of total net capital formation going into
sector i
u a adjustment factor for number of individuals in a
household.
Appendixl/India Shocks/PMitra:4-11-86:pp
- 159 -
Appendix 2: The Debt Module
Let Dt be the total stock of debt in period t, and NF t net foreign
borrowing.
Then:
Dt = Dt-I + NFBt
where:
NFBt = CAt + It + t -DFIt
CA = current atcount deficit
I interest payments
a = change in reserves
DFI = direct foreign investment (the component for
repayment of past debt
Given CAt (from base run path), It, and St (obtained from
data), the value of DFIt (direct foreign investment) is residually
obtained so that NFBt reproduces historical data. All data have to be
expressed in base year local currency.
There is a different maturity structure for official and
private medium-term debt as well as for short-term debt. It is assumed
in the experiments that additional borrowing is split between medium
(official and private), and short-term debt according to the proportions
in the historical run.
Appendix2/India Shocks:PM:4-11-86:pp
- 160 -
For experiments, it is necessary to know how additional
borrowing in year t affects the stream of service payments (and hence
the current account deficit) in future years. It is assumed that the
interst rate, grace period and maturity period for additional borrowqing
in any year are the same as those the country faced for actual borrowing
in that year. Moreover, it is assumed that the stream of service
payments to repay a given loan is constant across the years in which the
payments are made. Thus, if the country borrows NFB in year 0 at an
interest rate r, with a grace period g and a maturity period m, then it
pays rNFB during years (1, 2 ... , g). For the remaining m-g years, -/
the country pays a constant service payment S per year. The present
value of this strean should equal NFB (the outstanding debt at year g)^
M S = NFBE (1+r)t g
t=g+l
or
S-r(l+r) >-gNFS NFB
To compute the allocation of S between interest and
amortization, notice that indebtedness follows the difference equation:
Dt = (l+r)D t- s - S
or
Note that we assume the maturity period of a loan includes thegrace period.
Appendix2/India Shocks :PM:4-11-86:pp
- 161 -
ft t-1D t (l+r) D - Z (1+r) Sft t=O
Thus the interest payment on this additional debt at time t is
It r = r(l+r) D - [(l+r) - 11.
The amortization payment at time t, At. then is the difference between S
and It"
Now, the actual service payment at t, St is the sum of service
payments on debt contracted at different years in the past. Hence,
ft-ilft
St Z ak NFB + Stk=O
where
rk if t - k < gk
t. rk (1 +rk k
ak if mk> t - k > gk +1(l+rk) m -g 1
if t - k > mk
Similarly, the interest payment at t, It, is given by the sum of the
interest payments on debt contracted earlier.
t-1 ,t1~ t ttlk-4It k=O (Yk NFBk (I + yktl ky St(( + tzt- I) AI
where
Appendix2/India Shocks:PM:4-11-86:pp
- 162 -
rk if t - k mkand Y 0 t mk
O if t - j>mkt t
S = aNFBk k
The elements St, It are parameters that are obtained residually so
that the values S., kI are equal to historical values.
Appendix2/India Shocks:PM:4-l1-86 :pp
- 163 -
Appendix 3: The Bivariate Lognormal Distribution
A standard treatment on the lognormal distribution is
Aitchison and Brown.-L The following exposition is self-contained.
The joint density
The probability density function (p.d.f.) of the joint
lognormal distribution of two variables y and c may be written:
A y,c) 1 - exp - 2 o- [- - 2yc a2yy c 2 92r 2(l-p ) y
~yc y
log y - log c - p logc- . 2
-2 Py c)( - ) + ()] 1a a ay c c
The marginal distribution of y is:
Ay(y) = r A (y,c) dc (2)
1/ J. Aitchison and J. A. C. Brown The Lognormail Distribution(Cambridge University Press, 1969),
Appendix3/India Shocks:PM:4-11-86:pp
- 164 -
The expression in square brackets in (1) is
log y - 2 log y lOgc log c lc 22Pyc ( a ) ( C)y y c c
log cc log y- u 2 lo p
c r , )l + (1 Q2 _ _ _
P3 a Pa )a t p
c y y
log e b 2 2 log y-
a + y c ac y
where b = Ic + Pyc (7) (log y- Yyy
Hence
log c-b 2 log 2
A (y) =f exp - 12 _ _ + ( yc ) a( d cy c ayaor/1-pyc 2Tr 2(1-pC) aY
(log y - u 2 - (log c - b) 2exp[- 2 a - ] exp a 2 -p
Y c PVC dc (3)y Ty V02 7r c a/1 - py 2 7r
Appendix3/India Shocks :PM:4-11-86 :pp
- 165 -
The integrand in (3) is the p. d. f. for a variable ca
distributed lognormally with mean b ( Vj + p c (log y - ii) and2 2 yvariance ac (1 - p C).
H?ence the integral is unity and
(log y - 2 )exp l- 2
2 a
AY(y) y a (4)
2.Hence y is distributed lognormally with mean p and variance a * Morey
compactly,
(A a 2) (5)y y
Similarly,
c A a ) (6)c c
Now,
A (y, c) = A (y) A (cjy) (7)
where A (c|y) is the conditional p.d.f. of c given y. The
manipulations leading up to (2) and (4) then show that
a2 2| y A (l + p - (log y - ij ) a 2(1 - p )2
A dc ycIa y c yc
Appendix3/India Shocks :PM:4-1 1-86 :pp
- 166 -
Thus
ycay
Since the coefficient of log y, in the above expression for the linear
conditional mean E(log c flog y) is P a , which is the product of thea y
correlation coefficient with a, it follows that py, is they
correlation coefficient between log y and log c.
It can be shown in analogous fashion that
yc A ( + p -a (log c - pc a 2 (1 -p2 (10)
Moments
The product moments of (1) about the origin are
1 = J y cq A(y,c) dy dc (11)
Substitute y = log y, c = log c to get
exp [py + qcj N(y,c) dy dc
where N(y,c) is the joint normal p.d.f. of y and c Thus,
Iiq f Jf [exp pyl N(y) [jI- [exp qc] N(c|y) dc] dy (12)
Appendix3/India Shocks:PM:4-11-86:pp
- 167 -
From the properties of the normal density,
aA q a (1p)ep [qcJ N(c|y) dc = exp {q I + p c (y - p) + C 2 C
yIt follows that 2 2
a qc p ) a A A
{1' OP-q p- qp I exp i Y(Lp p ')j N (y) dyyer y c a Y
The properties of the normal density again yield
2 2a A A
xp P[(p + qP py )y] N(y)d = exp {(p + qP a (P + qp aT y
Thus
2
2 2 2 (+q a C )a qa 2 (1 pC) a 2 ~ yclJq=exp {q vi - q p- + 2 e+p (p + qp -22 + a ______
pq c yc a y 2y yca vry 2
This may be simplified to
1a 2p 2+2p aapq +a~ 2q2V yc 1 exp ( i p + p q + 2 7 (13)
A d Iy c 2
Appendix3/India Shocks:PM:4-11-86:pp
- 168-
Substitution yields
2
-exp lly + 2
lo 2
14exp [p +
10I exp 2L,iy + a 2 (14)
10 2
exp 2[it + a
1a 2 + 2 a CT +ac 2111 exp [(i + v1 + 2 y C c
1y
Thus
2
y = exp [i.zy+ 2Y - ( 15)
2
c = exp [ IA + 2 ( 16)
1 1 2 -2 2 (17)
Va = 120 -( 10 y [x ay(7
-2. 2Var c = c [exp (aC)-l (18)
COV(y,c) 1 I 1 0 = Y [exp (Pyc a a) -1) (19)11 1 "yc y c
Cov(y,c)
Correlation coefficient Var y V Var c
Appendix3/India Shocks:PM:4-1 1-86:pp
- 169 -
exp [p a a - 1]
2 c 2 l2 (20)[exp ( a ) - ]2 [exp (ac) - 1]
W4e next establish the relations (6.12) - (6.14) appearing in
Appendix 1.
Let A(c) denote the marginal p.d.f. of c,
Then
JC A(c')dc' = n(c) is the share of the total population up to per0
capita expenditure level c. Hence
log c - PC 1 which establishes (6.12)n(c) = N [ a I 0,1]c
Jc c' A(c') dc'
Next, J c' A(c') dc' is the share of total consumption0
accruing to the population up to per capita expenditure level c.
Then
(log C CC c' A(c') dc' = C exp [ - c ] dc'o ocaCY2 r 2 ca
cC
(log c, 1 co c a V2X exp [log c' ,- c_2 dc'
c2
I. fcogciC, 2 2a exp(i+-2-) c { 2Clogc' + ac)r }dc'a Y2 r 2 0C' ~ 2 Ccc 2a
Appendix3/India Shocks:PM:4-11-86:pp
- 170 -
a 2
Since, t (163, r- ct AWc) dc' = (,u 0 + 2c3o c 2
c C
(C) = log c p ich establishes (6.13)
ic Ea C Iolc
Next ,
=E(vfo c' c)6(c) = . IE(Cy)
= EC(y - 02 log c' s log c)
E(y)
ECtI log c+pE< S log C' s log c) - -a p V' L(lop [ 0 c
(y -a~ T 00 y Pyca
~1 2 (1 P ~ ~C)l 2 C+ f aex1pP (logcxpd-glog c'-cd
Put x 3 t to get
Appendix3/India Shocks:PM:4-11-86:pp
- 171 -
E(y| - X log c' 6 log c) - exp [ + 2 a2(1-o2 )]
1 l1Og c ~ cy 2y1 2727 ac exp [...p c craxl dx
16g c -
= exp I lJ+ -ah-2 fy=T 2 y2] ac exp [ (x -p a )2] dx
2 YC [y
E(y) (Nlog c - - P 10JJ,il
Thu8s,
(d) = N ( a C p caj 0,1], which establishes (6.14).Ca S
Appendix3/India Shocks:PM:4-11-86:pp
- 172 -
Appendix 4: Data Base
Compilation of basic parameter estimates for the model is an
inherently complex task bristling with several difficulties. To start
with, official statistics are not always available according to the
concepts used in the model. Secondly, the breakdown of the available
conceptually appropriate statistics into certain components such as
rural-urban, different sectors or different classes of households is not
available. Thirdly, the available breakdown into components may refer
to a time-point or time period other than the one for which the model is
being computed. Consequerntly, in a large number of cases, a variety of
transformations and manipulations have to be carried out on the original
data involving assumptions which appear prima facie 'plausible'; and in
some cases, it is even necessary to make an educated guess regarding the
rplausible' parameters in the absence of any empirical studies and
data. All these operations inevitably involve subjective judgements
which may differ from researcher to researcher or even for the same
researcher at different points of time. In this appendix, we spell out
the data sources as well as the particular judgments made in making the
data consistent with the requirements of th;e model.
Appendix/India Shocks:4-11-86:pp
- 173 -
Alphabetical List of Abbreviations of Data Sources
Ahmad-Stern (Private Communication)
Chandhok H. L. Chandhbk: Wholesale PriceStatistics. India, 1947-1978. Economic andScientific Research Foundation, Delhi(1978) Volume I.
CMIE-BS Centre for the Monitoring of IndianEconomy: Basic Statistics Relating to theIndian Economy. Volume I (All India)(October 1979)
CSO-ASI Central Statistical Organization AnnualSurvey of Industries. Factory Sector 1973-74.
CSO-NAS Central Statistical Organization; NationalAccounts Statistics, various issues.
CSO-NAS-IOTT Central Statistical Organization; NationalAccounts Statistics: Input-OutputTransactions Table 1973-74, (Sept. 1381).
ILO-WLF-SEAL International Labor Organization, AsianEmployment Programme: Women in Labour ForceBangkok (1981) paper by K. C. Seal: "Womenin the Labour Force in India: A Macro-LevelStatistical Profile, pp. 21-92.
LB-RLE-1974-75 Labour Bureau: Rural Labour Enquiry: 1974-75 Final Report on Employment andUnemployment in Rural Labour Households,Part I.
NCAER-1975-76 National Council of Applied EconomicResearch: Household Income and ItsComposition 1975-76 (1980).
Appendix/India Shocks:4-11-86:pp
- 174 -
NSS-17th Round National Sample Survey Organization: 17thRound on Consumer Expenditure 1961-62
NSS-26th Round National Sample Survey Organization: 26thRound on Landholdings, 1971-72.
NSS-27th Round National Sample Survey Organization: 27thRound on Employment and TTn-Emplovment.1972-73.
NSS-29th Round National Sample Survey Organization. 29thRound on Self-employed Households in Non-agricultural Enterprises, 1974-75.
PPD-TN Perspective Planning Division: TechnicalNote on the Fifth Five Year Plan (1974-79)(1973).
R-M-LES R. Radhakrishna and K. N. Murty: Models ofComplete Expenditure Systems for India,IIASA, Laxenburg (May 1980).
RBI-1971-72 Reserve Bank of India: All India Debt andInvestment Survev 1971-72.
RBI-Raj Committee Reserve Bank of India: Capital Formationand Saving in India 1950-51 to 1979-80.Report of the Working Group on Savings(Chairman: K. N. Raj) (February 1982).
RG-CI-1971--ET Registrar General's Office: Census ofIndia, 1971, Establishment Tables
Appendix/India Shocks:4-11-86:pp
- 175 -
1 * SECTOR SPECIFICATION AND INPUT-OUTPUT MATRIX
Sector specification for the model has to take into account the
structural features of the economy under consideration as well as the
range of questions on which the model is expected to shed some light.
At the same time, sectoral detail is constrained by considerations of
data availability on other sectoral parameters and computational
costs. In the present exercise, we have divided the Indian economy into
the following six sectors:
(i) Agriculture including allied activities such as
forestry, fishery, logging, etc.;
(ii) Manufacturing of consumer goods;
(iii) Manufacturing of capitcal goods (including
construction);
(iv) Manufacturing of intermediates (including non-fuel
minerals);
(v) Public sector infrastructure;
(vi) Services.
The breakdown of the manufacturing sector into consumer goods,
capital goods and intermediates is based on the criterion of the
dominant use pattern of the gross output of sectors into the three
categories mentioned. Public sector infrastructure is taken to include
coal and lignite, crude petroleum and natural gas, electricity, gas and
water supply, railways and communications. Services other tharn public
sector infrastructure are included in sector 6.
Appendix/India Shocks:4--11-86:pp
- 176 -
The base year of the exercise was chosen to be 1973-74. This
choice was governed by two considerations. First, this is the latest
year for which a detailed input-output transactions table is
available. Secondly, it also happens to be a year towards the end of
which a major oil price hike took place and adjustment to this external
shock is the main purpose of the present study. Our presumption is that
this year would provide the best available approximation to the pre-oil-
crisis structure of the Indian economy.
The input-output transactions matrix was aggregated to our six
sectoral classification from the 115 sector table published by the
Central Statistical Organization (CSO-NA-;3-IOTT). See Tahle 1 for the
details of the mapping scheme. The aggregated transactions matrix is
given in Table 2.
2. IMFORT-FLOW MATRIX
For deriving the import-flow matrix correspnding to the input-
output transactions matrix, the source is PPD-TN from which we can
obtain the (projected) import-flow matrix for 1973-74 at 1971-72 prices
for a 66 sector breakdown. The following steps are involved in deriving
the required import-flow matrix:
Step 1: Aggregate the PPD-TN import-flow matrix to our six-sector
aggregation based on the mapping scheme given in Table 1.
Appendix/India Shocks:4-11-86:pp
- 177 -
Eable 1.. Lpping Schem for Sectoral Aggregation
1-scription 60-Sector 115-Sector 66-Sector
of the Sector Classification Classification Classification
of CS0-MAS-1981 CSO-ISS-I1T of PPD-TN
1. Agriculture 01 to 07 001 to 022 OL0to 05
2. Consuner Goods 12 to 17,19,21,24 033 to 045, 1:1 tol5,17,18,21047 to 050054,055
3. (pital GoodsIncl. Construction 38 to 43, 45 078 to 096, 099 40 to 57, 63
4. Intermediate 10,11,18,20,23, 025 to 032, 046 06 to 10,16,19,20
Goods 25 to 37, 44 051 to 053, OYo 22, 24 to 39
to 061,063 to 069 58 to 61070 to 077, 097,098, 110 to 103,106
5. PLblic Sector 08,09,45,47,48,51 023,024,100 to 102 06,09,62,64
Ilfrastructure 106
6. Services 49 to 60 excluding 104 to 105 Eccluding 65,66
51 106
Step 2: Unit value indices for imports for 1973-74 with 1971-72
100 are derived for the six-sectors. These are used to
update the import-values from PPD-TN to get sectoral
composition of imports at 1973-74 prrices. The comparison
of these imports with the actual imports derived from
CSO-NAS-IOTT indicated the following:
(a) UJpdated imports of sector 1 from PPD-TN are
much lower than CSO-NAS-IOTT because actual
imports of cereals during 1973-74 were not
anticipated at the time of PPD-TN matrix. We
Appendix/India Shocks :4-11-86 :pp
- 178 -
Table 2-: Domestic Input Output Table(tens of millions of rupees)
gricult Cbns-Good CPpuIod ntd P nfr Service
Agricult 5905.23954 3784.51775 710.24921 531.68783 0.10034 1011.21908Cons-Good 586.82633 1354.10141 28.76109 170.28924 7.35997 128.15986Cap-Cbod 232.63936 88.16267 640.47815 187.29123 381.59979 550.12085Int-Good 488.13250 593.66308 2854.34983 2480.13564 69.35998 1497.26245Pub-Infr 188.12000 140.39000 214.58000 999.52000 462.10000 269.42000Service 555.27227 1C69.95509 1231.97171 1355.99606 228.84991 1712.12776
assume that the difference between the CSONAS-IOTT-based
imports of sector 1 and the updated imports of sector 1
for intermediate use from PPD-TN accounts for imports of
cereals for private consumption.
(b) For the remaining sectors, we apply the percentage
composition of each row of imports between
intermediate and final use from PPD-TN to the CSO-
NAS-IOTT-based sectoral imports. We assume that all
final use imports of sectors 2 and 4 go into private
consumption, those of sector 3 into gross fixed
investment and those of sector 6 into public and
private consumption according to PPD-TN composition
for sector 6. The final aggregates are as follows.
Step 3: Column (2) in Table 3 is used as sectoral control total
for intermediate use while applying RAS procedure to PPD-
TN based intermediate import flow matrix. It may be
Appendix/India Shocks:4-11-86:pp
- 179 -
added that whatever biases that may have existed in PPD-
TN matrix are translated into the import-flow matrix that
we have derived.
Table 3. Derived Aggregated Use-Pattern ofCSO-NAS-IOTT-Based Sectoral Imports (Rs. lakhs)
Imports forSector Intermediate Private Public Gross Fixed Total
Use Consumption Consumption Investment (2) to (5)(1) (2) (3) (4) (5) (6)
1 28578 31599 - - 601772 6718 5043 - - 117613 2278 - - 52356 546344 103112 14911 - - 1180235 41709 - - - 417096 - 3339 5361 - 8700
Total 286304
Note: Column (6) is from CSO-NAS-IOTT transactions matrix.
3. DERIVNTION OF SECTOR-SPECIFIC DEPRECIATION
CSO-NAS-IOTT based transactions matrix provides sectoral
figures of gross value added (GVA for short) gross of depreciation.
These figures must be disaggregated into depreciation and incorae-types
for the CGE model. The first step in this connection consists of
deriving sector-specific depreciation estimates which are discussed in
this section.
For sectors 1 (agriculture) 5 (public sector infrastructure)
and 6 (services), depreciation estimates are directly available from the
disaggregated tables in CSO-NAS (1981). The major problem is to get the
Appendix/India Shocks:4-11-86:pp
- 180
separate depreciation estimates for the three categories (sectors 2, 3
and 4) of the manufacturing sector according to the classification
adopted in this study. For this purpose, we have drawn on the
disaggregated tables available in CSO-NAS (1981) and CSO-ASI (1973-74)
for the factory sector. CSO-NAS (1981) tables provide disaggregated
figures of net value added (NVA) for the registered segment of the
manufacturing sector according to our classification. However, the
disaggregated tables for the unregistered manufacturing from CSO-NAS
(1981) are not detailed enough to be reduced to our classification.
CSO-ASI (1973-74) indicate NVA as well as depreciation separately but
only for the registered segment with nearly full coverage. These
sources are combined in the following procedure which is applied to each
of the sectors 2, 3 and 4:
(i) Get the ratio of depreciation to NVA (to be denoted
as dR) from CSO-ASI (1973-74) for the factory
sector;
(ii) Multiply NVA for the registered sector from CSO-NAS
(1981) by dR from step (i) to deduce depreciation
which when added to NVA from CSO-NAS (1981) gives us
GVA for the registered segment (to be denoted as
GVAR);
(iii) Subtract GVAR from the aggregate (registered plus
unregistered) GVA from CSO-NAS-IOTT to derive GVA
for the unregistered sector (to be denoted as GVAIUR)
as a residual;
Appendix/India Shocks:4-11-86:pp
- 181 -
(iv) Get the ratio of depreciation to GVA for the
aggregate unregistered manufacturing segment (to be
denoted as UR) from CSO-NAS (1981);
(v) Multiply GVAIR. from step (iii) by DUR to get the
sector specific depreciation for the unregistered
segment of the sector;
(vi) Subtract sector-specific depreciation from step (v)
from GVAUR to deduce net value added for the
unregistered segment.
It may be noted that NVA and depreciation are available
separately from CSO-NAS (1981) disaggregated tables for construction (to
be included in sector 3) and non-fuel minerals (to he included in
sector 4). Final estimates are as follows:
Table 4: Sector-specific Estimates of Depreciation and of Netand Gross Value Added
Sector NVA Depreciation GVA (Rs. lakhs)
1 2 61 28 89 6 26 46 2 67 55 352 23 90 43 1 92 90 25 83 333 35 41 64 2 47 54 37 89 184 32 12 89 4 73 78 36 86 675 14 34 31 3 16 56 17 50 876 1 39 87 43 11 68 52 1 51 55 95
Total 5 06 95 59 30 25 76 5 37 21 35
Appendix/India Shocks :4-11-86:pp
- 182
4 DERIVATION OF THE MATRIX OF '-TAX FACTOR INCOMES
We distinguish the following factor incomes:
(1) compensation of employees;
(ii) interest;
(iii) rent;
(iv) profits and dividends;
(v) mixed income of the self-employed.
We derive 5 (income types) x 6 (sector) matrix in two stages.
In the first stage we make the following assumptions to break
down net value added (NVA) in each sector (derived in section 3) into
the five components.
Sectors 1: Percentage composition of NVA in the primary sectors
across factor income given in Table S-8 of CSO-NAS
(1981) is applied to NVA in sector 1.
Sectors 2, 3 and 4:
(i) Sector specific share of compensation of employees
in NVA from CSO-ASI (1973-74) is applied to the
sector-specific MIA for the registered sector.
(ii) Sector-specific non-wage income in the registered
sector derived as a residual has the same internal
composition across interest, rent and profit and
dividend as the factor incomes originating in the
private organized sector given in Table S-1O of
CSO-NAS (1981).
Appendix/India Shocks:4-11-86:pp
183 -
(iii) Sector-specific NVA in the unregistered segment has
the same composition across factor incomes as that
for the total unorganized sector given in Table S-9
of CSO-NAS (1981).
(iv) Within each sector, we pool the registered and
unregistered segment to arrive at the first stage
composition for the sector.
Sector 5: Percentage composition NVA across income types is
the same as that for departmental enterprises given
in Table S-18 of CSO-NAS (1981).
Sector 6: Services sector is broken into three subsectors for
each of which we assume a sub-segment-specific
composition of factor incomes. Details are as
follows:
Table 5: Assumptions Made Regarding the Services Sub-sectors forPre-tax Factor Incomes
Assumption Regarding Broad Sector WhoseFactor Income Composition is Applied to
Sub-sector of Services NVA in Sub-sector
6.1 Transport by other means Transport, Commerce and Trade(other than Railways) andStorage Trade, Hotels andRestaur, :'lts
6.2 Banking and Insurance, Finance and Real EstateReal Estate, Dwellingsand Business Services
6.3 Community and Personal Same as 6.3Services, GovernmentAdministration and
defense
bbte: Eight-and-side breakdown is taken t-tt Table S-8 in CSO-NAS (1981).
- 184
Sector-specific steps described above gives us the 5 (factor
incomes) x 6 (sector) first stage matrix whose column totals are sector-
specific NVA derived in the previous section. However, its new-totals
do not necessarily add up to the economywide factor-income composition
aiven in CSO-NAS (1981). In the second stage, we assume the columns
corresponding to sectors 1, 5 and 6 to be reliable as they are derived
on the basis of more or less direct information given in CSO-NAS. For
sectors 2 to 4 we have made assumptions on the basis of different
sources. We, therefore, subtract stage one factor-incomes from sectors
1, 5 and 6 from the economywide factor incomes to derive factor-income
control totals for the manufacturing sector as a whole which are
consistent with CSO-NAS (1981). We use these control totals in the
second stage to apply an RAS procedure to 5 (factor incomes) x 3
(manufacturing sectors) sub-matrix, keeping fixed the column totals.
This provides us with a 5x6 factor income matrix which is consistent
with sector-specific NVA derived in sector 3 and the economy-wide
factor-incomes from CSO-NAS (1981).
The resulting factor income matrix is given in table 5.
5. RURAL-URBAN DIVISION OF POST-TAX FACTOR INCOMES
The sectoral factor incomes generated in the process of production
need to be mapped into rural and urban segments of the population
because the estimated parameters of the Linear Expenditure System are
available not according to sectoral classification but according to
rural-urban division of the population.
Appendix/Ineia Shocks :4-11-86 :pp
- 185 -
For this purpose, it is necessary first to net out direct taxes from
the factor incomes derived in section 4. In this connection, we make
the following assumptions: (1) no direct tax is paid on agricultural
incomes; (2) corporate taxes are paid by non-wage non-self-employed
income-earners in non-agricultural sectors, and (3) direct taxes other
than land-revenue are paid by earners of wage and self-employed income
in non-agricultural sectors. Using the CSO-NAS (1981) figures, the
average direct tax rates are:
(i) 11.00 percent for non-wage, non-self-employed
incomes in non-agriculture; and,
(ii) 4.50 percent for wage and self-employed incomes in
agriculture.
Using the factor-incomes derived in the last sector, the overall
pre-tax income per capita per month works out at Rs. 71.84 for 1973-74.
The next step is to derive rural and urban per capita income.
-uLet a, XR and X be the per capita income for the entire (rural
plus urban) population, rural population and urban population
respectively.
-R RLet a and (1-a ) be the rural and urban shares of the population.
- R-R R -ITX = a X + (1-R) x
-R R R --[x [a + (1-a ) X R3 -Rx
so that X ------
x
Appendix/India Shocks :4-11-86:pp
- 186 -
Wle use the following estimates for 1973-74.
Table 6: Factor-income Matrix (Rse. lakhs)
Factor Income Sector 1 Sector 2 Sector 3 Sector 4
1. Compensationof Employees 48 36 46 12 56 05 16 27 77 17 07 22
2. Interest 7 9l 71 2 60 86 2 57 57 3 81 69
3. Rent 4 10 22 33 81 65 81 47 01
4. Profit &Dividends 4 33 74 3 45 98 2 19 99 4 28 09
5. MixedIncome 1 96 56 76 4 93 73 13 71 43 6 48 88
Total 2 61 28 89 23 90 43 35 41 64 32 12 89
Factor Income Sector 5 Sector 6 All Sectors
1. Compensationof Employees 9 94 12 73 78 60 1 77 99 22
2. Interest 2 87 01 7 68 86 27 47 70
3. Rent 28 83 15 48 54 21 34 29
4. Profits andDividends 1 24 35 4 50 32 20 02 47
5. Mixed Income - 38 41 11 2 60 11 91
Total 14 34 31 1 39 87 43 5 06 95 59
Appendix/India Shocks :4-11-86:pp
- 187 -
Total population: 580 million
Rural population: 458 million
Urban population: 122 million
R Rso that a - 0.79 and (1-a ) = 0.21 . TTsing these estimates, we
get
Table 7: Per Capita and Aggregate Pre-Tax Incomes for theRural and the Urhan Population
Per Capita Pre-Tax Income Aggregate Pre-Tax Income(Rupees) (Rs. Million)
Rural population 60.51 33 71 96.8Urban population 114.37 16 97 59.1Total population 71.84 50 69 55.9
The difference between the aggregate income for the rural
population and the factor incomes originating in agriculture, turns out
to be Rs 7 59 07.9 million. We assume that this difference is taken
away from sectors 2 and 6. The above difference is 46.35 percent of the
post-tax income originating in non-agricultural sectors 2 and 6. The
final division is presented in the following table.
Appendix/India Shocks: 4-11-86:pp
188 -
Table 8: Derivation of Rural and Urban Factor Incomes
( Rs. millions)
Wage Profit Self employedIncome Income Income Total
1. Total pre-tax factorincome originatingin non-agriculturalsectors 129627.6 52487.9 63551.5 245667.0
2. Pre-tax incomeoriginating insector 2 and 6 86346.5 34083.7 43348.4 163778.6
3. Post-tax income,line 1. 123794.4 46714.2 60691.7
4. Post-tax income,line 2. 82460.9 30334.5 41397.7
5. 53.65 percent ofline 4 44240.3 16274.5 22209.9
6. Line 3 minus line4 41333.5 16379.7 19294.0
7. Total post-taxurban income line5 plus line 6 85573.8 32654.2 41503.9 159731.9
8. 46.35 percent ofline 4 38220.6 14060.0 19187.8
9. Agriculturalincome 48364.6 64493.3 148431.0
10. Total post-taxrural income:line 8 plus line 9 86585.2 78553.3 167618.8 332757.3
Appendix/India Shocks :4-11-86 :pp
- 189 -
The figures in the above table are different from these earlier
presented for two reasons. First, the percentages used in line 5 and 8
and derived on the previous page are based on pre-tax income and are
applied to post-tax income. The error leads to a slightly different
rural-urban distribution of pre-tax income than that for post-tax income
presented on the previous page. Secondly, the self-employed or mixed
income in agriculture given in section 4 is divided into two
components: imputed labor income component under the assumption that
self-employed receive the same wage as the pure wage-employed in
agriculture and the residual capital income. The imputed labor-income
appears under the 'self-employed income' category whereas the residual
capital income is included in profit-income. The adjustment was based
on the number of agricultural laborers available in LB-RLE-1974-75 and
the total work-force in agriculture estimated in section 6 below.
6. DISTRIBUTION OF WORK-FORCE BY SECTORS FOR 1973-74
Total work-force estimate of 239.18 million is arrived at by
applying the work-force participation ratios of 0.4342 (rural) and
0.3305 (urban) from NSS-27th round to the estimated population (in
millions) of 488 (rural) and 122 (urban). Share of work-force in
agriculture from the usual status industrial distribution (USID) for the
NSS-27th round, namely, 73.6 percent, given in ILO-WLF-Seal was used to
get agricultural work force of 176.06 million. An estimate of the
number of agricultural laborers of 43.61 million from LB-RLE-1974-75 was
taken to apply to 1973-74 to get the self-employed workers as a
residual.
Appendix/India Shocks:4-11-86:pp
190 -
For the non-agricultural sectors, total work-force was derived
by applying the proportionate composition of USID work-force for the
27th round given in ILO-WLF-SEAL. The estimates of the organized sector
work-force were taken from CSO-ASI (1973-74) for the manufacturing
sectors 2 to 4 and CMIE-BS (1977) for sectors 5 and 6. The work-force
in the unorganized segment was derived as a residual. The resulting
estimates are as follows:
Table 9: Distribution of Work-Force by Sector(millions)
Sector No. Total Work Force Organized Segment
1 176X062 12.31 2.173 6.2X3 7.184 8.23 2.155 2.86 2.866 33.44 8.12Total 239.18 17.48
While we use the agricultural-non-agricultural breakdown of the
work-force in the base year calibration of the model, sectoral work-
force figures are derived on the basis of the labor market assumptions
*contained in the model. For this purpose, we assume that the
agricultural laborer gets the average wage of Rs. 1116 derived by
combining the wage income in agriculture with the work-force of
agricultural laborers derived on the assumption of the usual status
unemployment rate of 0.66 percent. The organized sector worker in non-
agriculture is assumed to receive a uniform average wage of Rs. 7400
Appendix/India Shocks:4-11-86:pp
* 191 -
(approximately) derived by combining wage-income in these sectors with
the organized sector work-force given above. Subject to these wage
rates, the model endogenously allocates the labor first to the wage-
labor segment in agriculture and the organized segments in non-
agricultural sectors. The residual absorption of work-force in the
self-employed or unorganized segments is derived under the assumption of
labor-market clearing wage rate in the self-employed segmentso
7. DERIVATION OF BASE-YE SECTORAL CAPITAL STOCTa
The empirical basis of these figures is somewhat weak. As a
first approximation we derived the capital stock for 1973-74 by
interpolating the figures given in RBI-Raj Committee for 1970-71 and
1979-80 for broad sectors and adjusted them to 1973-74 prices using the
investment deflators. We compared these estimates with the sectoral net
value added and non-wage income to see the implicit ratio of capital
stock to net value added and the gross pre-tax rate of return. The
results appeared 'reasonable' for sectors 2, 5 and 6 and absurd for the
rest. For sectors 1, 3 and 4, we arbitrarily assumed a gross rate of
return of 12.5 percent to derive the capital stock figures. The
resulting ratios of capital stock to net value added appeared
'reasonable' and hence were accepted. The final figures used are as
follows:
Appendix/India Shocks:4-11-86:pp
- 192
Table 10: Estimates of Sectoral Capital Stock, Gross Pre-tax
Rates of Return and the Ratio of Capital Stock to Value Added
Gross Pre-Tax Ratio of CapitalCapital Stock Rate of Return Stock to Net
Sector (Rs. Millions) (%) Value Added
1 515946.4 12.5 1.972 29 570.0 21s67 1.243 43475.2 12.5 1.234 68543.2 12.5 2.135 168695.0 2.61 11.76
6 417500.0 6.62 2.99Total 1243729.8 17.49 2.45
8 . HOUSEHOLD CONSUMER EXPENDITURE
It is necessary to establish a correspondence between:
(a) the vector of household consumer expenditure
available at 1973-74 producer prices from CSO-NAS-
IOTT according to the six-sector aggregation adopted
in the study; andy
(b) the parameters of the Linear Expenditure System (LES
for short) estimated at 1961-62 market prices
according to nine commodity breakdown for the five
aroups of consumers each (defined according to the
per capita expenditure classes at 1970-71 market
prices) for tha rural and urban population available
from R-M-LES.
The required correspondence involves the following major steps.
Appendix/India Shocks:4-11-8f6:pp
- 193
8.1 Conversion of the vector of household consumer expenditure in
(a) from producer prices to market prices. In this scheme, trade and
transport margins paid on sectoral consumer expenditure at producers'
prices are collected together in sector 5 (railway) and sector 6 (trade
and other transport services) whereas indirect taxes paid by consumers
are collected together as a separate entry. The details of consumer
expenditure at producer prices on these items are available from the
115-sector classification given in CSO-NAS-IOTT. While consumer
expenditure at producer prices on trade can be entirely taken to be the
intermediate trade margin, there can be final consumer expenditure on
railways as well as on other transport which has to be distinguished
from transport margins.
From CSO-NfAS (1981), we find that out of the gross earnings of
the government railways from 1973-74, shares of freight and passenger
transport are 65 and 35 percent respectively. No such evidence is
available for transport other than railways. We make the following
assumptions:
(i) 100 percent of consumer expenditure on trade (Rs.
2312.24 crores) consists of trade margins;
(ii) 65 percent of the consumer expenditure on railways
(Rs. 392.25 crores) consists of (railway) transport
margins;
(iii) 85 percent (arbitrarily) of consumer expenditure on
transport other than railways (Rs. 1613.09 crores)
consists of transport margins;
Appendix/India Shocks:4-11-86:pp
194 -
We subtract (i) and (iii) from sector 6 and (ii) from sector 5
to get the following expenditure on margins and indirect taxes.
Table 11: Estimates of Trade and Transport Margins in Final
Consumption Expenditures
Trade Rs. 2312.24 crores
Railways Rs. 255.20 crores
Transport other than railways Rs. 1371.13 crores
Indirect Taxes Rs. 1642.80 crores
Total Rs. 5581.37 crores
We have tried to distribute Rs 5581.37 crores across commodity
producing sectors 1 to 4 under the assumption that no margins arid
indirect taxes are paid by sectors 5 and 6.
Wie then attempted to get a 6-sector aggregation of consumer
expenditure at market prices from the disaggregated tables on consumer
expenditure given in CSO-NAS (1981). Wgherever these details were not
sufficient, we used the composition from the 115-Sector detail (at
producer prices) from CSO-NAS-IOTT to arrive at the first approximation
of the vector of consumer expenditure at market prices according to the
six-sector aggregation. A comparison with the input-output based vector
of consumer expenditure at producer prices yielded the first iteration
of implied margins plus indirect taxes. This did not succeed because
of crude approximations involved in matching the aggregation schemes.
Consequently, we ended up postulating the following 'reasonable' margin
plus indirect tax rates as percentages of final consumer expenditure at
producer prices.
Appendix/India Shocks:4-11-86 :pp
- 195 -
Table 12: Sector-specific Margins Plus Indirect Taxes asPercentages of Final Consumer Expenditure at Producer
Prices
Sectors Percent2 403 604 501 (residual) 8.12
The margins had to be iteratively adjusted during the process
of generating an overall consistent data set needed to calibrate the
model.
8.2 Conversion of P-M-LES parameters to 1973-74 market prices. As
mentioned at the beginning of this section, "committed quantities" for 5
groups of consumers each for the rural and the urban population are
available at 1961-62 market prices, whereas the per capita expenditure
limit (PCEL for short) defining the 5 grotups of consumers are at 1970-71
market prices. Both of these need to be converted to 1973-74 market
prices which is the base year of our exercise. In the absence of a
retail price index, the wholesale price index for appropriate commodity
groups from CHANDHOK with different rural-urban weights for sub-
categories from NSS-17th Round was utilized.
The following table gives the relevant indices for the nine-
commodity groups of R-M-LES for rural and urban population separately.
Appendix/India Shocks:4-11-86:pp
- 196
Table 13: Price Indices Used for Converting LES Parameters to1973-74 Market Prices
Indices for 1981-74 withService 1970-71 = 100 1961-62 = 100Number Commodity Group Rural TJrban Rural Urban
(1) (2) (3) (4) (5) (6)
1 Cereal & Cereal Substitutes 1.346 1.356 2.075 2.075
2 Milk & Milk Products 1.501 1.501 2.880 2.880
3 Edible Oils 1.897 1.897 3.485 3.485
4 Meat, Fish, Eggs 1.760 1.518 4.036 4.036
5 Sugar & Gur 1.106 1.139 3.221 2.554
6 Other Food Items 1.305 1.300 2.677 2.253
7 Clothing 2.151 2.151 1.858 1.860
8 Fuel & Light 1.329 1.329 2.151 2.151
9 Other Non-Food 1.329 1.329 2.056 2.056
The indices in columns (3) and (4) are used in updating PCEL
using formula (9.4) in Appendix 1 of Chapter 2 and those in columns (5)
and (6) are used to update the 'committed quantities' of LES. We assume
the same index to apply to all the 5 groups of consumers in the
rural/urban population.
8.3 Mapping of R-M-LES 9 commodity groups into 6-sectors of input-
output table. For this purpose, we used NSS-17th Round detailed data,
The transformation matrix is given in the following table.
Appendix/India Shocks :4-11-86:pp
* 197 -
Table 14. Thansformation kttrix for Mapping LES C(nmxoity Groups intoI-0 Classification
Input R-14IES COmoditv GroupOutputSector 1 2 3 4 5 6 7 8 9
1 1.0000 1.0000 0.0 1.000 0.6220 0.8644 0.0 0.0 0.00532 0.0 0.0 1.0000 0.0 0.3780 0.1356 1.0000 0.0 0.09053 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.03084 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5316 0.00525 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4684 0.04266 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.7656
The above transformation matrix was used to derive the 6-sector
aggregation of LES.
The 6-sector aggregation of LES was used along with the income
distribution module given in chapter 2 to arrive at an estimate of
aggregate consumption and savings consistent with CS0-NAS (1981). The
sectoral breakdown of this aggregate did not match with the sectoral
breakdown at market prices derived in section 8.1 above. This
adjustment was done as follows:
Let Cj be the aggregate consumer expenditure from 8.4 for consumer
group i, sector j and population group p
where i = 1, 2,....5
j 3 1, 2,...6
p = rural., urban
Appendix/India Shocks :4-11-86:pp
- 198 -
Ci' be the aggregate consumer expenditure from 8.11 and consistentij
with I-0 for consumer group i sector j and population p.
Data = Z C C from 8.1 above.i=1 j=1 P=R,U j j
Problem: To derive C j given Cii to make the LES parameters consistent
with CSO-NAS.
Step 1: Divide aggregate consumer expenditure Cj between rural
and urban in the same proport4on as
RU R UI Cl. and I C Let these be denoted by C; and C.
R UStep 2: Use C. and C. as row totals in an RAS procedure
applied to
[Cij and [C i] matrices to get [CiI and [C i'
Step 3: Let xP be per capita 'committed quantities' from 6-
sector aggregation of LES and CF and Cp be the perij ij
capita magnitudes corresponding
to Ci and C j in step 2 above.
Appendix/India Shocks:4-11-86:pp
- 199
-pLet xij and bij be the LES parameters consistent
with CSO-NAS (1981) totals.
then -P =P Cij i i
ii
and b = __ij 6
- (Ep- ip)J=1 ij ij
where i = 1, 5, j = 1, 6, p R, U
9 INDTLRECT TAXES ON INTERMEDIATE INPUTS AND FINAL DEMANDS
Ahmad-Stern provided the sectoral breakdown of import duties,
excise duties, other indirect taxes and subsidies according to the 115
sector classification in CSO-NAS-IOTT for the year 1973-74. Aggregating
this breakdown to six-sectors and relating import duties to imports,
excise duties to domestic gross output, other taxes to domestic gross
output plus imports and subsidies to domestic gross output, we obtained
the following tax rates.
Appendix/India Shocks:4-11-86:pp
- 200 -
Table 15: Sector-Specific Rates of Indirect Taxes byTypes of Taxes
Other indirectSectors Import Duties Excise Duties taxes Subsidies
1 0.0458 0.0048 0.0055 -0.01252 0.3340 0.1011 0.0275 -0.00393 0.5118 0.0138 0.0232 0.04 0.4783 0.1436 0.0444 -0.00265 0.0 0.0 0.0166 0.00816 0.0 0.0 0.0272 0.0076
For getting the indirect tax rates on domestic and imported
intermediate inputs, we applied the excise tax rates to the domestic
flow matrix and import duty rates to the import-flow matrix. The
resulting matrices were column-wise prorated to add to the total
indirect taxes available from CSO-NAS-IOTT. Adding the resulting
matrices row-wise and relating them to the intermediate inputs -
domestic and imported separately - the average tax rates on domestic and
imported intermediates were obtained. A similar procedure was applied
to each component vector of final demand - domestic and imported - to
arrive at indirect tax rates for final demand assuming that other
indirect taxes and subsidies were applicable to final demand. The
resulting tax rates are given below.
Appendix/India Shocks:4-11-86:pp
- 201 -
Table 16: Sector-specific Rates of Indirect Taxes on Domestically
Produced and Imported Intermediate Inputs and Final Demand
Indirect Tax Rate Indirect Tax RateSector On Intermediate Inputs On Final Demand
Domestic Imported Domestic Imported
1 0.0212 0.3134 -0.0025 0.07312 0.0865 0.1629 0,2495 0,6728
3 0.0972 0.4247 0.0287 0.37814 0.1212 0.2790 0.2469 0.7236
5 0.1268 0.8461 0.0 0.0
15 0.1056 0.6715 0.0 0.0
10. PARAMETERS RELATED TO INCOME DOUSTRIBUTION
Production-related post-tax factor incomes are of three
types: income from self-employment, income from wage-employment and
profit-income. In addition, there are two types of non-production-
related incomes: transferred rent from infrastructure and transfers -
domestic as well as international. These incomes are mapped into
fifteen types of households for the rural and urban population. The
rural household types are distinguished according to landholding sizes
which are given in NSS-26th Round and RBI-1971-72 whereas the urban
household types are first nine decile, next five percentile and the last
five one-percent fractiles given in NCAER-1975-76.
We make the following assumptions.
Rural: 1. Income from self-employment and rent from
infrastructure are distributed according to the
distribution of owned area in the landholding
categories as given in NSS-26th Round.
Appendix/India Shocks:4-11-86:pp
202 -
2. Licome from wage-employment is distributed according
to the distribution of agricultural labor households
in the landholding categories as given in RBI-1971-
72.
3. Profit income is distributed according to the
distribution of total value of non-land assets in
the landholding categories as given in RBI-1971-72.
4. Transfers are distributed according to the weighted
average of the proportions related to incomes from
self-employment, wage-employment and profit incomes.
Urban: 5. Income from self-employment and rent on
infrastructure are distributed among different
household types according- to the distribution of
total income given in NCAER-1975-76.
6. Income from wage employment is distributed among
different household types according to the
distribution of wage and salary income given in
NCAER-1975-7 60
7. Profit income is distributed according to the
distribution of total assets in the urban areas as
given in NCAER-1975-76.
8. Transfers are distributed according to the weighted
average of the proportions related to incomes from
self employment, wage employment and profit incomes.
Appendix/India Shocks:4-11-86;pp
- 203 -
The first-iteration value of a and S, k and pcy (see (6.10)
and (6.11) and .ootnote 1 relating to (6.10) in Appendix 1 to chapter 2)
are derived separately for the rural and the urban population from
NCAER-1975-76. For this purpose, we have used the size distributions
according to per capita incomes given on p. 202 (rural) and p. 203
(urban) in NCAER-1975-76- The final values adopted have been such as to
make the resulting aggregates consistent with CSO-NAS (1981) for the
year 1973-74.
11. TIR-SERIES OF EXOGENOUS VALRABLES
11.1 import and export prices are aggregated to the six-sector
classification from a more detailed breakdown available from the
Directorate General of Commercial Intelligence, Calcutta. Weights are
corresponding imports and exports available from 115-sector breakdown in
CSO-NAS-IOTT.
11.2 Exogenous imports of sectors 1, 2 and 5 are at 1973-74 prices
are derived by multiplying the base-year value by the corresponding
volume indices for a given year with 1973-74 = 1.00.
11.3 Volume of government consumption at 1973-74 prices. This is
obtained by deflating the current price value by the price-deflator for
hotisehold consumption for a given year with 1973-74 = 100. Source is
CSO-NAS.
11.4 Transfer incomes are distinguished according to the following
types: national debt interest, other domestic current transfers, net
factor income earned from abroad, net current transfers from the rest of
the world. These are taken from CSO-NAS.
Appendix/India Shocks: 4-1i-86:pp
- 204
11.5 Exchange rates are taken from the Economic Reoort of the World
Bank for India.
11.6 Percentage allocation of cross domestic capital formation by
sector of destination is taken directly from CSO-NAS Lor sectors 1, 2 to
4, 5 and 6.
1 .7 All the tracking indicators are compiled from CSO-NAS.
ADpendix/India Shocks :4-11-86 :pp