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No. 344

JULY 2006


ISSN 0019-5170



Optimal Bank Cash Reserve, Disintermediation, and Strategic Competition

Shih-Heng Pao*, Li-Hung Wu**
Jyh-Horng Lin***

This paper explores the determinants of bank cash reserves based on a simple firm-theoretical model with conjectural variations and disintermediation. We find that the bank's optimal cash reserve is positively related to its deposits when the disintermediation in the imperfectly competitive deposit market is relatively active. A decrease in the regulatory required reserve rate is more likely to have a negative effect on the bank's deposit amount. The bank may not choose the cost-minimizing level of cash reserve to maximize its expected profit. Our findings provide alternative explanations for the evidence concerning bank cash reserve behaviour, not only from the viewpoint of sources-and-uses but also from the viewpoint of strategic competition.

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Potential Impact of a
Freer Investment Regime
in India: Some Empirical Results

Debashis Chakraborty
Arup Guha **


The efficiency of imposing controls on capital flows in a country is a long-debated question, which has not been resolved even after the East Asian Crisis (1997). It is argued that the liberal capital control regime boosts the confidence of the international community on the domestic economy and becomes Instrumental for ensuring capital inflows. On the contrary, It Is also widely held that controls on capital flows insure a developing country from a potential currency crisis. In the recent period, a number of economists have argued that developing countries should link capital mobility with labour mobility a multilateral negotiations, by which they stand to gain considerably. While India has liberalized capital inflow substantially in the recent period, it is following no time-bound schedule to implement Capital account convertibility (CAC). Looking into the interrelation between current and capital account in India, the paper attempts to explore whether India has reached a stage to go for CAC and use it as a policy tool at multilateral negotiations.

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Probability of Detection Based
Determination of Deterrent Scales
of Penalty for Concealment of Income

S. N. Chaturvedi*
A. K. Srivastava**


The underlying idea of the paper is based on the proposition that the probability of detection as perceived by the tax payers is the prime determinant of deterrent penalties for concealment of income. The level of effective deterrent is reached when the prescribed penalty equals the reciprocal of the probability of detection as reduced by one and further multiplied by 100. At the deterrent level of penalty the probability of detection is equal to the proportion which the amount of tax sought to be evaded bears to the post-detection tax liability. Consequently the taxpayer may be induced to evade so long as the probability of being detected in the event of concealment of the income is less than the proportion under reference. The existing scales of penalty for concealment of income in India ranging between 100 percent and 300 percent of the tax sought to be evaded are quite short of the required level of deterrence. It is a matter of common knowledge that the chances of detection in India are nowhere close to the one out of four attempts of evasion necessary for ensuring the adequate degree of deterrence in the prescribed maximum limit of penalties at 300 percent, leave alone the 50 percent probability of detection required for making the minimum level of penalty at 100 per cent fully deterrent. It is, therefore, suggested that the Government of India should increase the penalties for concealment of income upto the level which corresponds to the probability of detection widely perceived by the tax payers. Besides, the sustainability of penalty orders at the stage of appeals also needs to be improved through more adept monitoring of such cases before the appellate authorities.


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Liberalization : Efficiency, Productivity and
Production Function Behaviour in Indian
Manufacturing Sector 

Rakesh Kumar*


This study has been carried out for the period of 1980-2000, a decade before the new policy reforms introduced and a decade after. To verify the hypothesis of considerable improvement in efficiency, productivity, and change in production function behaviour, various statistical and econometric techniques have been used. Manufacturing sector, during the liberalized period had experienced deceleration in its total factor productivity growth, but explanation for this deceleration does lie in liberalization measuring variables rather somewhere else. Even, manufacturing sector did not experience much change in efficiency. For the manufacturing sector as a whole, translog production technology has been rejected. Cobb-Douglas production function has been accepted. except for neutral technology assumption, by applying likelihood ratio test. Production function behaviour did not witness much change even after introduction of binary variable for post-reform period.

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Public Expenditure and Economic Growth
in Africa

Omo Aregbeyen*


This paper examines the growth effects of government expenditures for a panel of 40 African countries from 1970-2000. An African countries specific study is meant to correct the lapses and gap in the existing literature and provide a better understanding of the process by which fiscal policy and particularly public expenditure policies can be used to shape the prospects of economic growth in the continent. The approach to the empirical analysis mirrored closely the standard analytical procedure as applied in some previous studies. The procedure involves identifying a number of variables that determine economic growth and classifying the variables into distinct sets (conditioning variables, variables capturing monetary & trade policies and market distortions, and fiscal variables) which are then built into an econometric model/regression equation to explain growth. The choice of estimation technique was guided by theory and practice.

Major findings of the study show that (i) productive expenditures (capital and public investment expenditures) with significant positive impact on growth commanded less proportion of the government total expenditure relative to the unproductive expenditures (current and government consumption expenditures) with strong negative impacts; (ii) the growth impact elasticity of capital expenditure increased while that of public investment expenditure reduced following the incorporation of the government budget constraint into the analysis; (iii) high population growth rate has significant growth reducing impact; (iv) initial human capital has engendered growth decline rather than been a spur to growth; and (v) surprisingly, despite the high profile governments budgets deficits the
I contributions to economic growth performance in the countries is very negligible. The study concludes that there is need to refocus government expenditures, curtail deficits financing, control Population growth and ensure greater utilization of available human capital. Recommendations are made in these areas accordingly.

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Economics and Input Use Productivity of
Paddy Crop in Different Agro-Climatic
Zones of Punjab  

N. S. Dhaliwal, R. S. Bawa.
D. K. Grover*

The study brought out that the gross returns as well as returns over total costs excluding land in Zone III was more as compared to other zones i.e. zone I and II. The study also reveals that the gross returns as well as returns over total costs excluding land in paddy varied directly with farm size in the overall study. The human labour was found to significant on small farms in overall study. The weedicide, Phosphatic fertilizer and machine labour was found to be significant on medium farms in overall study.
The marginal value productivity analysis brought out the need to increase the expenditure on seed, weedicides and plant protection measures in paddy cultivation on all categories of farm farms in overall study. The co-efficient of Phosphatic fertilizer and human Labour found to be negative on small farm which indicates that the expenditure on these variables should be reduced. The farm size group analysis shows that the overall realized potential yield varies directly with the farm size. The highest economic losses due to non- adoption of recommended technology was observed to be observed on small farm of Zone I (Sub-Montane zone).

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Public Debt in India : Need to Separate Debt
from Monetary Management 

Charan Singh*


In India, traditionally, a large component of domestic government debt was incurred at low rates of interest, which was statutorily prescribed for subscription by the institutional investors. A substantial amount of domestic debt was also monetised. In the last decade, due to financial sector reforms undertaken since 1991, the money and government securities markets have developed with the offering of market-related rates of interest on government securities, introduction of new instruments, setting up of trading institutions, and improved regulatory and technological developments. The interest rates in the financial markets are converging and the markets are becoming integrated. The debt management functions and practices have also developed substantially since 1991. In view of the developments in the markets and the commitment on the part of the central government to contain the fiscal deficit, it would be prudent to consider now the separation of monetary and debt management. The separation would provide the central bank with necessary independence in monetary management and an environment to pursue an inflation target, if assigned by the government. The separation of debt management would provide focus to the task of asset-liability management of government liabilities, undertake risk analysis and also help to priorities government expenditure through higher awareness of interest costs.


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The Pula-Dollar Exchange Rate and the
Purchasing Power Parity in Botswana

M. Thomas Paul*
G. R. Motlaleng**

For the small open economy of Botswana the PPP theory is validated in both the absolute and relative version for the Pula-Dollar exchange rate during the sample period 1992 third quarter to 2002 fourth quarter. The Pula-Dollar exchange rate is determined by the long-term trends in Botswana's CPI the USA's CPl. The influence of the USA CPI is considerable. In the long-run there is no trade off between export competitiveness through devaluation and inflation. But as the speed of adjustment in the short-term towards long-term is slow; there is some flexibility for the exchange rate policy. The monetary policy can be used in the short-run to counter the inflation. As the real exchange rate is found to be stationary and follows the PPP theory, there is no real appreciation of the Pula, contradicting the portfolio balance theory which advocates that for a trade account surplus economy like Botswana the real exchange rate will appreciates through the limited demand for foreign assets.

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Role of the Social Capital in Economic
Development : A Case of (the East European)

Anmony Lopez
Kishore G. Kulkarni


The traditional measures of economic development do not see the importance of social capital. For example GDP measures only the market value of goods and services produced in an economy. This paper defines the salient features of social capital and how it is an integral part of a broader measure of economic development. By discussing the case of East European Georgia, the paper makes it clear that social capital production and its preservation are pre-conditions for economic growth. The effective governmental policies therefore have to pay attention to the social capital stock of the economy.

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