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No. 337

October 2004




Notes and Memoranda


Tax Evasion, Monopoly, and Tax Neutrality


This paper re-examines the issue of profit tax evasion and monopoly output decisions in the uncertainty model with endogenous probability of audition. This paper incorporates a notion where a rational monopolist tends to reduce its assessed taxable profit by investing in self-insurance. The result shows that neutrality mayor may not hold, it depends on the magnitude of the marginal value of the monopolist's self-insurance activities, which explains why some of the monopolists produce more than the profit-maximizing output level but some don't.

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 Capital Inflows to India in the Nineties Implications for Overheating and the Monetary Policy Response


Capital inflows are known to cause overheating in countries following an exchange rate regime of managed float. Sterilized intervention is one of the important tools used by monetary authorities in emerging markets to check overheating of the economy in several countries. However, sterilized intervention is associated with rising fiscal costs in the countries where it has been used. Findings of this paper reveals that India has only occasionally chooses to sterilize the capital inflows. More often the RBI has resorted to non-sterilized intervention as a policy response to capital inflows. This paper further analyses the impact of India's policy stance of non-sterilized intervention to ascertain if we have been able to escape the fiscal costs associated with sterilization. The findings are that despite non-sterilized intervention, our fiscal burden in the period between 1993 and 2002 had increased. This is largely due to the distortion in the interest rate structure in the economy which has two sets of interest rates-market determined (which have been falling in response to rising money supply) and administered interest rates on some government instruments of saving (which have been higher than the market-determined rates). This has led to a growing preference of the households for saving in government instruments increasing the fiscal burden of the government.

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Causal Nexus Between Foreign Investment and Economic Growth in India


Granger Causality test was employed to examine the causal nexus between foreign investment and economic growth in India. Besides, Dickey-Fuller test was also employed to examine the stationarity of the series. The data series were quarterly basis and collected from various issues of Reserve Bank of India Bulletin, World Investment Report and Centre of Monitoring Indian Economy for the year 1990-2002. The analysis revealed an independent relationship between foreign investment and economic growth in India. The possible reasons are : (a) In India, foreign investment is only 0.9 per cent of Gross Domestic Product and its high transaction cost in the form of corruption and unnecessary regulatory requirements. (b) Lack of full integratiol1 of capital and financial markets, and (c) Higher levels of economic growth may not attract foreign investment due to lack of stability of Indian rupee in international market. The present study calls for the following policy options to enhance economic growth through foreign direct investment and vice versa: (i) there is a need for further liberalization of Foreign Direct Investment and much emphasis should be given for outward oriented trade policies, (iii) strengthening the regional economic integration such as ASEAN and NAFTA, and (iii) maintenance of stability of Indian rupee in terms of foreign currency.

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Purchasing Power Parity: A Review of the Co-integration Evidence


If persistence of a theory is an indication of success, purchasing power parity (PPP) has been a very successful theory. The core mechanism of PPP is arbitrage lending to equal prices of traded goods across countries. Tests of PPP depend on the degree of exchange rate control, the price indices, frequency of the data, the period of time, and the particular counties involved. The present paper reviews the recent co-integration literature on PPP. comparing data sets and outcomes. Tests are more likely to have positive outcomes, with a wholesale price index and floating exchange rates.

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Retail-Loans by Financial Institutions


Until the early 1990 the role of financial system in India was primarily restricted to channelizing resources from surplus to deficit sectors. However, after the adoption of New Economic Policy of 1991, bank deposits have considerably increased and so also the availability of surplus funds with banks. Earlier only some private sector institutions were engaged in granting retail loans and that to on a very high rate of interest. However, with the increasing entry of commercial banks in the area of retail loans, more & more people are resorting to retail and personal loans to improve their living standard. The increasing wave of consumerism on account of globalization has further intensified the demand for such loans.
Today, virtually every player in the market, from the retail savvy foreign banks who target high net worth individuals, to the public sector banks, with the common man as the target customer, is chasing the retail segment in a big way. Fierce competition in the retail finance has seen interest rates across a host of consumer finance categories leveling out to a narrow band width and out throat competition has resulted in drop in interest rates. Affordability is seen as a keen driver of such loans.
However, one precaution needs to be taken. In most cases, interest rates on retail loans are related to prime lending rates and in actuality, an average borrower has to pay much higher interest rate than what is being advertised.

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 Infonnal Sector: Connotations, Characteristics and Potentials


Informal Sector encompasses a large number and a wide range of economic activities within its fold. These activities are also geographically dispersed allover. This fact is greatly supported by the fact that in most of the developing countries around 90 per cent of the total employment is generated by the informal sector through its various categories and sub-categories. For example, in India during 1999-2000 the total employment was 397 million, out of which the informal sector accounted for 368.89 million i.e., about 93 per cent of the total employment. The share of the formal sector was just 28.1 million i.e., about 7 per cent of the total employment in the country. The public sector accounted for about two-third of this seven per cent. In fact, over the years there has been a deceleration in the growth of employment in the formal sector due to many reasons including the decline in the rate of growth of public sector employment from 1.52 per cent per annum between 1983 and 1994 to a negative growth of (-) 0.03 per cent per annum during 1999-2000. Employment generation is just one potential of the informal sector.
There are many more. Because of the multi-faceted nature of this sector, it is quite often seen that it is not easy to strictly define this sector (Guerguil, 1988), and, as such, it is a 'fuzzy' concept (Peattie, 1987). But at the the same time, the different categories and sub categories of this sector can be strictly defined, essentially in terms of the number of persons they employ. Sometime, the amount of investment is also considered for such definitions, like in the case of non- directory enterprises in the terminology of the National Sample Survey Organization (NSSO). It is because of these reasons that most of the informal sector studies are subject to quantitative analysis.

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 A Var Approach to Growth Empirics : Evidence From Selected Sub- Sahara African Countries


The objective of this study was to evaluate the contributions of investment rates and export growth on per capita real GNP as opined by the endogenous growth literature. The Vector autogression method was employed. The basic findings were that impulse response analysis and variance decompositions suggested that investment rates and growth of exports have significant short-run effects on the growth rate of per capita output in Rwanda, Nigeria, South Africa and Kenya. However, while the effects of export disappear within three years which of investment phased out in the fourth year. These findings are consistent with the prediction of the Slow growth model. The study found no empirical support for endogenous growth theory.

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 Energy Use Pattern in Agriculture in Punjab


The present study based on secondary data made an endeavor to examine the energy use pattern in Punjab agriculture. The present study had shown that after the green revolution, Punjab farmers shifted from non-commercial energy sources to commercial energy sources for their various energy needs in agriculture. The consumption of commercial energy sources increased by 27.41 times from 1965-66 to 1998-99, whereas the use of non-commercial energy sources remained almost at the same level, i.e. increased by only 1.15 times during the same period. After 1965-66, the use of commercial energy inputs had been increasing every year and in 1998-99, its share in total energy used in agricultural production was 91.77 per cent, whereas the share of non- commercial energy inputs reduced merely to 8.23 per cent during the same year. Energy used per hectare in the state increased by 761.20 per cent from 1965-66 to 1998-99. Amongst the various commercial energy sources, electricity has shown maximum increase (95.41 times) followed by tractors (35.26 times) etc. from 1965-66 to 1998-99. All these figures depict the transformation of traditional agricu1ture to commercialization of agriculture and the still increasing use of commercial energy sources on Punjab farms draws our attention to reduce the excessive use of commercial energy sources.

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 Occupational Structure in Punjab


In the post independence period, several factors having a bearing on rural non-agricultural employment have shown major systematic changes. The importance of agriculture is declining at a fast rate in the recent past. The share of primary sector in the net state domestic product was 58.37 per cent in 1970-71 and came down to 41.46 per cent in 2000-0 I. This decline is mainly by fall in the share of agriculture between 1970-71 and 2000-01 to the extent of 17.28. The loss in the share of primary sector has resulted in a gain in the share of secondary and tertiary sectors. The principal gainer is the tertiary sector which increased its share from 26.32 per cent in 1970-71 to 36.66 per cent in 2000- 0 I. In 1970-71, the income per worker in agriculture and livestock was below the state average where it was considerably higher in non-agricultural sector. The difference in income in agriculture and non-agricultural workers widened both absolutely and relatively during the period 1970-71 to 1980-81. The difference in income in both the categories increased in absolute terms but slightly decreased in relative terms in 1990-91. The difference in income between agricultural and non-agricultural sector decreased both absolutely and relatively in 2000-01. During this period, per worker income in non-agricultural sector is less than agricultural sector because of the shift of greater number of workers in non-agricultural sector. Over the period of 30 years, sectoral differences in per worker income almost increased except in the year 2000-2001. The rising sectoral difference in income and increase in net sectoral income in favour of non-agricultural sector and particularly in tertiary sector created a strong economic incentive for shift of workers towards non-agricultural activities.
The analysis of the occupational shift gives the significant observations. In agricultural occupation such as cultivators, agricultural labourers and allied agricultural workers have experienced decline. Their combined share in total workers decline from 63.62 per cent in 1970-71 to 39.83 per cent in 2000- 01. The occupation which are non-agricultural have gained in their share of total workers from 36.38 per cent in 1970- 71 to 60.17 per cent in 2000-01. This signified the growth in wage- salary employment which weakens the traditional bounds and has a favourable impact on mobility of population in state. Since most of the non-agricultural employment is concentrated in towns and cities, an increase in percentage share of non-agricultural employment has implications for rural to urban migration in the state.

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