No. 357

October 2009

Vol XC

ISSN 0019-5170

The Indian Journal of
Economics
 

University of Allahabad

Contents



Implementation of VAT in the Indian States with Special
Reference to Orissa: An Analysis

Prashanta Ch. Panda* and Durjyodhan Nayak**


The Paper makes an attempt to analyse the positive aspects of VAT introduction and its advantages over the Sales Tax System that existed in the States. Post VAT situation in revenue collection vis-a-vis Sales Tax regime in major states' of India is analysed with particular reference to the State of Orissa. There is strong economic reason to believe that if growth in collection of taxis equal to or higher than SDP growth, the reason may be due to higher tax compliance. The inbuilt system of VAT has also helped in reducing the cost of tax administration. The paper recommends measures for more effective governance and suggests means to tackle tax evasion. It further suggests better focus on tax payer services; as such services are elementary conditions for effective and efficient tax administration. The paper suggests studies relate to gaps in the collection of VAT by looking into aggregate data on consumer spending and the VAT rates on commodities to the potential tax against actual tax collection. This will help in making a realistic enforcement of plans and realization of targets for augmentation of tax revenue.

* Associate Professor in Economics, School of Management, KIlT University, Bhubaneswar, Orissa.

** Ph.D Scholar in KIlT University, currently working as FA & CAO, OSCSC LTD., Bhubaneswar, Orissa.


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Merger Benefits of Taiwan's farmers' Credit Unions:
The Spline and Fourier Cost Functions Approach

Pai-Lung Chou*, Jia-Jun Lin*, Chen-Hua Yao* and Wei-Chun Chen*


This article shows the key factor of using more flexible cost function specification when analyzing merger benefits and estimating the cost saving of mergers. The inflexibility of the translog cost function is illustrated and results are compared to flexible Fourier and Spline cost functions. Applying the main approach we predict the ex ante effect on average cost from mergers using a balanced panel of 279 Taiwan's farmers' credit unions. The results show that, after considering all possibilities of consolidation of these unions using counties as basic units, there are cost savings among almost all counties. Cost saving effects by output levels are also estimated and exceed cost reductions associated with mergers.

Keywords: Merger benefits; Farmers' credit unions; Spline cost function; Fourier cost function.
JEL Classification: C52, D61, G32, L21

* Department of Risk Management and Insurance, National Kaohsiung First University of Science and Technology, Taiwan, RO.C. Address: 2 Jhuoyue Rd., Nanzih, Kaohsiung 811, Taiwan, RO.C. TEL:+886-7-6011000 ext. 3016, e-mail: plchou@Ccms.nkfust.edu.tw

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Foreign Financial Variables and Money Demand in Indonesia: New Evidence from Error-Correction Modelling

Marial A. Yol*


The study estimates the effects of exchange rate and foreign interest rates on money demand function by applying the error-correction and cointegration model on the quarterly data from Indonesia over period 1990-2005. While the cointegration test identifies two cointegration relations among the variables, the long-run income elasticity is significant and carries the expected theoretical positive sign. This coefficient is close to 1 as the quantity theory predicts. Although the coefficient of real exchange rate is insignificant, suggesting that real exchange rate has no influence on money demand in the long run, the coefficients of domestic and US interest rates are significant and carry correct negative and positive signs respectively. The findings imply that a monetary policy that ignores the effects of US interest rates or exchange rates may cause the demand for money to be mis-specified and limit the ability of monetary authorities to mitigate changes in capital inflows induced by changes in foreign and domestic interest rates.

JEL classification: E41; F 41
Keywords: Money demand; financial variables; cointegration test

*Department of Economics, University of Juba, Khartoum, Sudan & Department of Economics, Universiti Putra Malaysia, Serdang, Malaysia

Mailing address: Faculty of Economics and Management, University Putra Malaysia, 43400UPM, Serdang, Malaysia. Tel.: (603)-89467629, (60)-0129075610, e-mail address:yo140@yahoo.com.

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Limited Warranties, Extended Warranties and Risk Sharing

T.V.S. Ramamohan Rao*


This study examines the extent to which warranties can represent risk sharing arrangements between consumers and the firm. In particular, we argue that this approach can explain limited warranties and limited warranty duration. The existing literature on warranties is ambivalent about the relationship between the quality of products and warranties. In contrast, we argue that there is a definite relationship between warranties, technological complexity of products, and the degree to which consumers can and do exercise due diligence in the use of the product. We also examine the relationship between warranty and the intensity of use by the consumer. It has also been demonstrated that risk aversion can explain the choice of extended warranties though the result is somewhat circumscribed. We also show that warranties and risk sharing aggravate the lemons problem instead of mitigating it.

Indian Institute of Technology, Kanpur

* The author is a retired professor. He can be contacted at rmrao@iitk.ac.in. The responsibility for the contents of this paper is solely his own .

1 A review of many aspects of this problem can be found in Murty and Djamaludin (2000)

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The Determinants of Bangladesh's Imports: A Gravity Model Analysis under Panel Data

Mohammad Mafizur RAHMAN*

This paper applies the generalized gravity model to analyze the Bangladesh's import trade with its major trading partners using the panel data estimation technique. Our results show that Bangladesh's imports are determined by the inflation rates, per capita income differentials and openness of the countries involved in trade. Also the country's imports are found to be influenced to a great extent by the border between India and Bangladesh. The country specific effects show that the influence of neighbouring countries is more than that of distant countries on Bangladesh's imports.

Keywords: Gravity Model, Panel Data, Bangladesh's Imports.

JEL Classification: C23, F10, F14.

* School of Accounting, Economics and Finance, Faculty of Business, University of Southern Queensland, Toowoomba, QLD 4350, AUSTRALIA.

Tel: 61 7 4631 1279, Fax: 61 7 4631 5594, Email: rahman@usg.edu.au

1. SAARC: South Asian Association for Regional Cooperation; member countries are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

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Farmers' Education and Farm Efficiency: A Non-Stochastic Frontier Production Approach

Rangalal Mohapatra*



Importance of Human Capital has gained much of its importance in the sphere of production in general and agricultural production in particular due to the diffusion of modern technology. In dynamically growing and technically developing agriculture, differences in the farm productivity and farm efficiency (technical and allocative efficiency) are observed due to many exogenous and endogenous factors. Education, in general, and levels of formal schooling completed of the effective farm Household in particular seems to be statistically significant factor to contribute. In this paper, an attempt is made to analyze the effect of the levels of schooling of the Effective farm Household on the efficiency level in HYV Paddy production in Orissa's agriculture. The farm Specific efficiency level Θ (theta) is estimated through the Non parametric. Data Envelopment Analysis (DEA) method. The obtained scores of (Θ) for each Decision Making farm Unit (DMU) under the assumption of Variable Return to Scale (VRS) are regressed with the Average education of the Family, Experience of the DMU and of the effective DMU. The levels of schooling of the DMU is also used as a dummy variable to estimate the significant change in the efficiency score of each DMU in response to the change in the levels of schooling of the DMU. The result suggests that education of the DMU has significant contribution on the efficiency score and more specifically the efficiency score of the DMU improves significantly for specific education dummy variable even though it shows negative effect on some other dummy.

Keywords: Technical efficiency, Constant returns to Scale, Variable Returns to Scale, Levels of schooling of the Effective DMU, Education of the family, Effective DMU, Education Dummy.

* Faculty member (Eco/QM) ICFAI University, Nagaland
   E-mail: rangalal@gmail.com and mrangalal@Yahoo.com

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Distributive Land Reforms in an Agrarian Economy: Experience from Bangladesh

Md. Abu Raihan*


Bangladesh is mainly an agricultural country where 80% people are engaged in agriculture. Land is the main asset or productive resource for the rural population. Land is also considered as a symbol of socioeconomic and political status. For a poor and marginal farmer a piece of land works as multiple instruments to change his lot. Since landlessness generates poverty, a radical change in the land tenure system is essential to ensure better utilization of land on the' one hand and to reduce the number of poor people on the other hand. Several land reform policies were undertaken in Bangladesh before and after liberation in order to establish the land right of the land- poor but all attempts have failed more or less with some eye-wash exceptions. Land is being continuously concentrated in the hands of large land owners giving rise to landless and marginal farmers. The landless household has increased from 19% in 1960 to 56% in 1996.

This paper briefly describes the distributive land reforms so far undertaken in Bangladesh and enumerates the success and failures of those land reform measures. The paper also explores the underlying causes of the failures of land reforms in Bangladesh and suggests some recommendations to make land reforms more effective.

*Assistant Professor, Department of Economics, Islamic University, Kushtia-7003, Bangladesh.

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Fiscal Solvency and State Government's Debt: An Empirical Analysis

Dr. Geeta Jaglan*
and
Dr. Sudhir Sharma**

Conceptually solvency means to be able to discharge ones obligations in the long run, without eroding its net worth. When studied in the reference of government finances the concept of solvency states that "No-Ponzi Game condition" must be satisfied. If government is insolvent and still able to continue functioning without a break down then it is playing a Ponzi Game, i.e., discharging its liabilities by borrowing continuously. Solvency is a necessary condition for fiscal stance to be sustainable. Whether the fiscal indicators in any single period are sustainable or not, is concluded by the solvency analysis. The continuance of unsustainability over a long period of time makes an economy's situation insolvent. This paper reflects the growing insolvency of major Indian states through the values of discounted outstanding liabilities. Insolvency index makes this analysis comparable among states. The authenticity of results has been tried to ensure with stationarity test of outstanding liabilities.

Key Words: Solvency, Sustainability, No-Ponzi Game, Outstanding Liabilities.

* Senior Lecturer, Amity University, Noida, U.P. email: geetaeco@gmail.com
** Reader, Department of Economics, C.C.S. University, Meerut, U'P.

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Inequity in Rural Local Government Finance in India

Indranil De*


Wide variations have been observed in per capita revenue of the Panchayats across states and among the districts of West Bengal. Own revenue increases with increase in the income and literacy rate of the states. It declines with the increase in percentage of SC and ST population in the state. In West Bengal, own revenue of the Panchayats is higher in districts where percentage of BPL households is low. 'Other revenue' of Panchayats is distributed more in favour of less literate states and also in the districts of West Bengal. Moreover, 'other revenue' is higher in districts where percentage of SC and ST population is higher in West Bengal. However, the same relation is reverse in case 'of state- wise distribution. The state-wise allocation of 11th and 12th Finance Commission grants for Panchayats has been observed to be biased towards states where literacy rate is higher. On the other hand, the allocation of 11th Finance Commission grant is higher in districts where literacy rate is lower.

* 7K, Bancharam Mitra Lane, Vaishali Housing Complex (Building No.6)
   Flat No: 40, PO: Konnagar, Dist: Hooghly, West Bengal
   Email: india.indranil@gmail.com; fiku1976@Yahoo.com

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Trade and Environment in a Three Factor Two Commodity Heckscher-Ohlin Model: Relative Factor Intensity Once Again

Tirthankar Mandal*
and
Pinaki Chakraborti**


With the help of simple linear algebra we analyze the role of relative factor intensity in the Heckscher-Ohlin type model of international trade and environment. Using a general equilibrium model of international trade we analyze the effects when factors of production exceed two as an extension of conventional literature, We questioned the factor intensity assumptions in the context of Stolper-Samuelson theorem and Rybczynski theorem and worked out new results with our modified assumptions, which we call relative factor intensity, The model examine pattern of trade and environmental effects in a North-South framework then from the standard general equilibrium models and comparative static run on it, we have found new theoretical results.

Key words: Relative factor intensity, Stolper-Samuelson theorem, Rybczynski theorem.

Jel Classification: F18, Q56, Q34, C67

* Junior Research Fellow, Department of Economics, The University of Burdwan, West Bengal, India 713104, Email.econtirtha@gmail.com

** Department of Economics, The University of Burdwan, West Bengal, India-713 104.


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Do Government Bonds Represent Net Wealth-A Test

Amaresh Das*


By virtue of the Ricardian Equivalence proposition government bonds do not represent net wealth. Therefore, households savings will increase to offset the government policy. The paper econometrically tests if governments bonds do represent net wealth on the basis of the time series macro data from India spanning a time period from 1990 to 2005. While doing this, the paper explores the dynamic link between domestic government borrowing and private sector savings within a possibly cointegrated system where the joint endogeneity of the variables is allowed.

JEL E63, Key words and phrases: Co integrated system (cointegration), endogeneity.

* Southern University at New Orleans, University of New Orleans, New Orleans, LA 70126.

1. Modem theories of consumer behavior emphasize that, because consumers are forward-looking, consumption does not depend on current income alone. The Ricardian view of government debt applies, a la Franco Modigliani's life-cycle and Miton Friedman's permanent income hypotheses, the logic of the forward-looking consumer to analyze the impact of fiscal policy.

2. A concrete example, borrowed from Mankiw (1994) may be useful. Suppose the government borrows $ 1000 from a typical citizen to give that citizen a $1000 tax cut. In essence this policy is the same as giving the citizen a $1000 government bond as a gift. On side of the bond says," The government owes you, the bondholder, $1000 plus interest". The other side says, "you, the taxpayer, owe the government $1000 plus interest" Overall, the gift of a bond from the government to the typical citizen does not make the citizen richer or poorer, because the value of the bond is offset by the value of the future tax liability.

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The Impact of Globalization on Economic Growth of Pakistan

Mohammad Afzal*


The impact of globalization varies from country to country depending on the level of social, economic and political developments. LDCs have gained as well as suffered from globalization. Globalization is the need of the hour and no country can afford living in isolation. LDCs can counter the adverse impact of globalization if they unite and adopt policies that serve their genuine cause. This paper examined the impact of globalization on the economic growth of Pakistan's economy for the period 1960-2006. Pakistan's economy remained heavily regulated and protected during three decades (1950s, 1960s, and 1970s). Pakistan started liberalizing the economy in late 1980s. We used trade openness and financial integration measures to account for the impact of globalization on economic growth. Co-integration results indicate a robust long-run relationship between economic growth, trade openness and financial integration. Pakistan's economy will certainly benefit from globalization provided the country pursues sound policies.

JEL Classification: FOl, F4 C22
Key Words: Globalization, Economic growth, Cointegration, Causality, Pakistan.

* Department of Economics, Gomal University, D.L Khan (Pakistan).

1. Streeten (1999) has devoted three and a half pages to the definitions of globalization used by different authors. He has discussed at greater length different aspects of globalization.

2. An earlier version of this paper was presented at the 23rd annual meeting and conference of the Pakistan Society of Development Economists, Islamabad March 11-14, 2008,

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Estimating Import Demand Function of Bangladesh: A Time Series Analysis

Khan Md. Azizur Rahman*, Md. Zabid Iqbal** and Asma Ull Husna***


The paper has investigated the behavior of Bangladesh's imports during the period 1973 2005 using the Johansen and .Iuselies (JJ) cointegration technique both at aggregate and disaggregates level. The study explores that import volume are co-integrated with RGDP, relative import price, consumption expenditure, investment expenditure and exports. In the long run, in aggregate model, imports are income elastic and price inelastic, but estimated error correction model are not valid. In disaggregated model, exports and relative import prices are major determinants of movements in imports in the long run and we get a valid error correction model. In the short run, consumption expenditure, exports and relative import prices are inelastic and significant. On the whole, as implied in the estimation results, it can be conclilded that the disaggregate model is more appropriate to explain the import demand of Bangladesh.

Keywords: Estimation, Time-series, Import Demand Function, Cointegration

Jel Classification: C01, C22.

* Assistant Professor of Economics, Khulna University (Bangladesh)

** Research Associate, Bangladesh Institute of Development Studies.

*** Lecturer of Economics, Government Girls College, Magura, Bangladesh.

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Transaction Cost and land Conservation: A Note

Jugaratan Barman*


Many farmers in developing countries have neither adequate wealth nor access to credit to finance investment in agriculture. The only asset to a fanner is tis labor time. With intensive farming, agricultural land loses its fertility, topsoil gets degraded and farmer has to be content with reduced output in the absence of any land conservation program. He has to take investment program in land conservation with his labor time, thus foregoing current agricultural produce. Moreover, farmers in developing countries live in remote places with high transaction cost. He has to pay more than the market price for marketed goods as a buyer and receive less than the market price as a seller of agricultural produce. Lack of information or sheer distance from the market can be attributed for such transaction cost. However, increasing transport facility and increased level of education of the farmer can reduce these transaction cost to a great extent. In a two period model, it is found that with declining transaction cost, farmers increasingly take investment program in agriculture.

Key Words: Agricultural Investment, Labor Time, Transaction Cost

JEL Classification: Q1, J22, D23

* Department of Economics, Jadavpur University, Kolkata- 700032

Email: jugaratanb@hotmail.com

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The lCT's and the Access to Food

Bandana Mishra *


Food Security is the main concern of our policy makers since the time of independence. Even after more than five decades of Green revolution, with the multiplicity of food production, food security has remained a far cry in absolutely needful areas. The Public Distribution System (PDS) is influenced by the policies of Government regarding production, procurement, storage buffer stock, pricing and subsidies and the distribution mechanism of foodgrains. This article focuses on the role of Information and Communication technology in providing food security to the people. It has been providing food security to the people. It has been found that despite overflowing granaries and rotting of foodgrains, starvation deaths and suicide of farmers (due to debt) are reported from different part of the country, due to an inefficient distribution system, like PDS. Hence, the ICTs, though a considerably new area in the field of distribution system, will help in dealing with large scale adverse changes like drought, flood etc., by providing timely information.

This article argues for the use of Information and Communication Technologies for better accessibility to food.

Keywords: Information and Communication Technology, Public Distribution System, Millennium Development Goal, Food Security.

* Research Scholar in Economics, UtkaI University,

IRIS 8-203, Unnathi Gardens-I, Opp. Devdaya Nagar, Pokhran Road No-I, Thane (West) 400 606

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Economic Viability of Marginal and Small Farmers in Punjab

Mandeep Singh, A.S. Joshi* and A.S. Bhullar**


The economic and ecological crisis of Punjab agriculture has resulted in consistent rise in cost of production and dwindling profit margins. This raised the concern of economic sustenance of marginal and small farmers. The present study was undertaken in three districts viz., Ropar, Ludhiana and Bathinda representing three different agro-climatic regions of the state to have an in-depth analysis of economics of fanning on marginal and small farms. The study revealed that the crop farming generated negative returns on both the categories of farms in all the zones, except small farms in Central Punjab. The returns over cost C2 from crop production and dairy farming as a whole showed that the marginal and small farmers were in deficit in Kandi and Southwestern regions while they were left some surplus in central region after paying reward to the owned land and family labour. The study further highlighted that the marginal farmers in all the zones and even the small farmers in the Kandi zone are not economically viable depending only upon crops and dairy farming. Income from off-farm sources is the only factor, which helps them to be viable ones.

The main conclusions of the study indicate, that the off-farm income and dairy are the major resources, which can promote the viability of marginal and small fanners. The fanners will also have to rationalize their domestic expenditure by exploring more income-generating avenues.

*Extension Specialist (FM), Professor-cum-Head and Associate Professor respectively, Department of Economics, Punjab Agricultural University, Ludhiana - 141 004

** Professor cum Head, Department of Economics, Punjab Agricultural University, Ludhiana - 141 004

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University of Allahabad