Showing papers by "Indira Gandhi Institute of Development Research published in 2006"

Stock market and aggregate economic activity: evidence from Australia

Abstract: Using the multivariate cointegration methodology, this article documents the evidence of long-run relationships between real stock price and measures of aggregate real activity including real GDP, real private consumption, real money and the real price of oil in the Australian market. Real stock return in Australia is related to temporary departures from the long-run relationship and to changes in real macroeconomic activity. The results also document that the information provided by the cointegration contain some additional information that is not already present in other sources of return variation such as term spread, future GDP growth or shocks to term spread. On the other hand, the influence of other markets, especially stock return variation in the US and New Zealand markets, significantly affects Australian stock return movements.

Determination of Executive Compensation in an Emerging Economy. Evidence from India

Abstract: Most studies of the determination of executive compensation are based on the experience of developed countries, and mainly focus on Chief Executive Officer (CEO) compensation. Determination of board compensation is relatively ignored in the literature. This paper examines the effect of corporate governance, firm performance, and corporate diversification on the board, as well as CEO compensation and its components, in the context of an emerging economy-India-where a managerial market has yet to develop. Data for 462 firms for 1997-2002 in the Indian manufacturing sector have been used. This paper finds that board compensation largely depends on current- and past-year performance and diversification of the firm, whereas CEO compensation depends on current-year firm performance only. Among the personal attributes of the CEO, only in-firm experience has significant influence on CEO compensation. This finding contradicts the existing studies, where current- and past-year firm performance, as well as age, expe...

Labor Markets in India: Issues and Perspectives

Abstract: Market-oriented structural reforms in India, begun in the 1980s and intensified in the 1990s, are widely believed to have put the economy on a path of higher growth. But there are concerns that outcomes in labor markets have not improved for large segments of the labor force. Many observers of India’s labor markets are bothered by the slow growth of employment in the organized sector—where the “good” jobs are. Despite growth of around 5% in GDP per capita between 1993/94 and 1999/2000, the share of the organized sector in total employment decreased from 7.3% to 7.1%.1 At the same time, jobs in the organized sector have themselves been undergoing a change, with contract labor getting a growing share of employment. More broadly, workers on daily or periodic contracts have increased their share of total wage and salary employment, in what some observers have described as the “casualization” of the Indian workforce.

Ownership Concentration and Firm Value: A Study from Indian Corporate Sector

Abstract: The paper contributes to the understanding of corporate governance issues in emerging economies by examining the role of blockholders in influencing firm value. Using a much disaggregated and uniform database from Indian corporate sector for the year 2001, we present a deeper understanding of interaction between ownership structure and firm value in the following ways. Unlike most existing research which studies the aggregated level of ownership, we include a wider set of mechanisms, such as identity and ownership concentration of outside blockholders controlling at least 5% of total equity of the firm. We analyze the role played by these shareholders with substantial voting power in situations when equity holding is less vis-a-vis more concentrated in the hands of promoters. We also attempt to see if these investors coordinate among themselves to constrain the insiders from expropriating corporate resources. We find a significant curvilinear relationship between firm value and the fraction of voting rights owned by insiders. The curve slopes downward until the insider ownership reaches approximately between 45% and 63% and then slopes upward. Empirical results on ownership concentration by minority blockholders do not support the monitoring hypothesis of these investors. Furthermore, the coordinated behavior of largest two minority blockholders has value increasing (decreasing) impact on firm value when the collective control is located in the lower (higher) range. Coordination problem exacerbates if the largest two are private corporate bodies.

Corporate Social Responsibility as a Signalling Device for Foreign Direct Investment

Abstract: A rise in CSR (corporate social responsibility) has accompanied rise in foreign direct investment (FDI) to developing countries in the 1990s. CSR may be serving a signalling function when the entering firm is of an unknown type. Although countries are now competing keenly to attract foreign firms, even so, excessive tax or excess transfers by firms can still cause a Prisoner’s Dilemma structure to the payoffs resulting in an inefficient Nash equilibrium. CSR allows the accommodating firm to reveal its type, making cooperation the equilibrium outcome. The game differs from standard models since signalling changes the payoffs. A unique separating equilibrium exists where only the accommodating firms signal. But, under certain parameter values, a pooling equilibrium where all firms signal, becomes possible. A number of results are derived including the size of CSR expenditure required as a fraction of profits. An example demonstrates their relevance in practical situations.

Modelling Inflation in India: A Critique of the Structuralist Approach

Abstract: We estimate an augmented Phillips curve to examine the effects of supply shocks on inflation in India. Our results suggest that supply shocks only have a transitory effect on both headline and core measures of inflation. The evidence is robust to a variety of re-specifications and core inflation measures. The potential explanation for this is that monetary policy has not provided the basis for a sustained change in the inflation process by accommodating supply shocks i.e., expanding money supply in response to negative supply shocks. Thus, monetary authorities have implicitly focused on a core measure of inflation by discounting price movements that are expected to be reversed in the short-run. In short, what is crucial in inflation determination is not supply shocks per se but how policymakers respond to these shocks.

Primary Education as a Fundamental Right: Cost Implications

Abstract: In an attempt to attain the goal of universal primary education, many developing country governments, including India, have abolished official fees in primary education. The 86th amendment to the Indian Constitution made free and compulsory education a fundamental right for all children in the age group 6-14 years. There are other direct and indirect costs that can deter children from going to school. In this paper, using a rich nationwide data set, the authors construct the incompressible direct costs of attending primary school in India. After controlling for the opportunity cost of going to school (as proxied by the ratio of children's wages to adult's wages), it is found that the direct costs of education adversely affect the probability of children going to school, more so for children from poorer households. The results show that relative to boys, girls are more likely to be affected by the direct costs of schooling. The authors show that making primary education completely free will not increase the attendance rates to 100 per cent. They find that the government will have to incur an additional minimum expenditure of over Rs 2,900 crore every year in order to defray the basic or incompressible cost of attending school.

Fragmented landholding, productivity, and resilience management

Abstract: The operation of a number of non-contiguous parcels of land as a single farming unit is known as land fragmentation. It is a widespread and persistent phenomenon and, at the same time, widely criticized by development agencies. Available evidence clearly suggests that the unqualified faith in the merit of consolidation is not justified; fragmentation may have some rationale. This paper substantiates the latter position with a case study of an irrigated agricultural system. Thereafter, it locates fragmentation within the broader context and analyses its role within a hierarchy of phenomena in the linked social and ecological local system. For this analysis an evolutionary game model is used. It is shown that fragmentation increases the resilience of the system of cooperation. The study concludes by suggesting an appropriate strategy for resilience management.

WTO, the Trips and Indian Pharmaceutical Industry

Abstract: This paper analyzes the efficiency of firms in Indian Pharmaceutical Industry before and after the Trade Related Intellectual Property Rights (TRIPs) agreement. The analysis reveals that the efficiency of firms has increased after the Indian legislature has passed the bill for accepting patent applications in early 1999. We find that R&D intensity and market share influence efficiency of firms. The impact of import intensity enhances inefficiency. Our result indicates absence of ownership effects after the Indian legislature had passed the bill for accepting patent applications.

Through a Glass Darkly: Deciphering the Impact of Oil Price Shocks

Abstract: In order to examine if the impact of oil price shocks depends on the structure of an economy, a vertical (VSC) and a horizontal (HSC) long-run supply curve identification are successively imposed on a three variable VAR with Indian time series data. While core inflation is measured with the VSC, the HSC requires a new concept of demand-driven inflation: Residual (demand) inflation, which gives the impact of short and medium run demand shocks on inflation. Core and residual inflation are both estimated. The data favors the HSC, but both identifications imply that policy demand squeeze aggravated international oil price shocks.

Hydrogen Energy for Indian Transport Sector: A Well-to-Wheel Techno-Economic and Environmental Feasibility Analysis

Abstract: With the alarming rate of growth in vehicle population and travel demand, the energy consumption has increased significantly contributing to the rise of GHG emissions. Therefore, the development of a viable environmentally benign technology/fuel, which minimises both global and local environmental impacts, is the need of the hour. There are four interconnected reasons for propagating a shift towards alternative fuels/technologies : (i) Energy Supply : world oil reserves are rapidly diminishing, (ii) Environment : local pollution from vehicles is creating an atmosphere that is increasingly damaging public health and environment, (iii) Economic competitiveness : the cost of producing oil and regulating the by-products of oil consumption continues to increase, and (iv) Energy security : the military and political costs of maintaining energy security in international markets are becoming untenable. Hydrogen energy has been demonstrated as a viable alternative automotive fuel in three technological modes : internal combustion engines connected mechanically to conventional vehicles; fuel cells that produce electricity to power electric vehicles; and hybrids that involve combinations of engines or fuel cells with electrical storage systems, such as batteries The present study provides a well-to-wheel analysis of the economic and environmental implications of technologies to deliver the hydrogen energy to the vehicles. The main objectives of the study are : (i) prioritization of technologies of hydrogen production, transportation, storage and refueling, (ii) economic analysis of prioritized technology alternatives to estimate the delivered cost of hydrogen at the end-use point, and (iii) estimating the environmental impacts. To achieve the desired objectives, various quantitative life-cycle-cost analyses have been carried out for numerous pathways (i.e. technologies and processes) for hydrogen production, storage, transportation/distribution and dispensing. The total cost implications are arrived at by combining the costs of hydrogen (at end-use point) and the estimated demand for hydrogen for transport. The environmental benefits (potential to abate GHG emissions) of alternative hydrogen energy technology pathways have been worked out by using the standard emission factors. Finally, the GHG emission levels of hydrogen supply pathways are compared with those of diesel and petrol pathways. The application of this systematic methodology will simulate a realistic decision-making process.

Regulation and Deregulation of the Stock Market in India

Abstract: Liberalization requires de- and re-regulation, since with internationalization government controls become ineffective, and with the use of new technologies new governance structures are required. The functioning of the reformed Indian regulatory structure is examined in the context of the basic principles of regulation, the special regulatory requirements of capital markets, and the features of Indian markets. The regulator's aim was to achieve international best practices, and encourage market -integrity through clear and self-enforcing rules of the game while encouraging the game itself. It contributed to implementing world-class technology and processes in the markets. Following general principles allowed flexible response to arbitrage and change. Insider groups lost power as the liquidity advantage tipped in favour of automated systems, but there were imperfections in implementation due to design inadequacies. As these are addressed, and markets revive with growth, thinness of participation and in depth of securities may be overcome.

Basel II and bank lending behavior: some likely implications for monetary policy

Abstract: The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks’ balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

Household's Tobacco Consumption Decisions Evidence from India

Abstract: This article analyses consumption patterns, socio-economic distribution and household choice of a variety of tobacco products across rural and urban India. Using a multinomial logit model, we examine the choice behaviour of a household in deciding whether and which tobacco products to consume. Household-level data covering 120,309 households have been used for this. We find that most forms of tobacco consumption are higher among socially disadvantaged and low-income groups in the country. Variables such as education, sex ratio, alcohol and pan consumption were found to be significant factors determining tobacco consumption habits of Indian households. The effect of some of the factors on the probability of consumption differs for certain types of tobacco products, increasing some and decreasing others. Addictive goods such as alcohol and pan were found to be complementary to tobacco consumption.

Extractive bribe and default in subsidized credit programs

Abstract: We present a dynamic model of subsidized credit provision to examine how asymmetric information exacerbates inefficiency caused by corruption. If a borrower and a corrupt official interact with symmetric information, credit terms can be so designed that corruption will affect only the borrower’s profit, but not repayment. With private information on the borrower’s productivity this result changes. Because of dynamic information rents, the official may induce one type of the borrower to default. The government can improve the repayment rate, but will have to under-provide credit. In contrast, some allowance of default permits a greater supply of credit.

Dynamics of environmental problems in Mumbai

Abstract: This paper presents the dynamics of environmental problems in Mumbai city. An evolution concept is applied to study the present environmental status of Mumbai. In order to study its dynamics, the entire process of environmental evolution is divided into four types viz. poverty-related environmental issues, industrialization- and urbanization-related environmental issues, rapid economic growth-related environmental issues and wealthy lifestyle-related environmental issues. Dynamics of suitable indicators for all the above issues over the economic development has been studied. Temporal representation of respective indicator for each type of the environmental problem presented the distribution of these types of environmental problems on a longitudinal scale. In the analysis it is found that, at present Mumbai has prevalence to rapid economic development-related environmental problems. Poverty-related environmental issues show very little significance. Industrialization- and urban-related environmental issues coexist with rapid economic development-related environmental issues. This provides the necessary inputs to city planner so as to avoid various environmental costs that other cities have already experienced.

Effects of trade liberalization on firm profits and social welfare: the role of technology

Abstract: The objective of this study is to analyse the effects of trade liberalization on profits of a capital-intensive exporting country and a labour-intensive one with different cost functions and the welfare of the importing country under an oligopolistic competition framework. The results show that output is increasing in the degree of trade liberalization and price falls with it. However, the effects of freer trade on profits of the exporting countries are ambiguous and depend on the net gains in profit from free trade. Given the same level of output for both countries, a suffciently high output would bring more profits to the capital-intensive country than to the labour-intensive country. Welfare of the importing country, at least within this framework, is increasing in the degree of trade liberalization, provided that the initial level of restrictions in trade are not too high.

Exchange Rate Regimes: Middling Through

Abstract: The appropriate exchange rate regime, in the context of integration of currency markets with financial markets and of large international capital flows, continues to be a policy dilemma. We find that the majority of countries are moving towards somewhat higher exchange and lower interest rate volatility. Features of foreign exchange (forex) markets could be partly motivating these choices. A model with noise trading, non-traded goods and price rigidities shows that bounds on the volatility of the exchange rate can lower noise trading in forex markets; decrease fundamental variance and improve real fundamentals in an emerging market economy (EME); and give more monetary policy autonomy. Central banks prefer secret interventions where they have an information advantage or fear destabilizing speculation. But in our model, short-term pre-announced interventions can control exchange rate volatility, pre-empt deviations in prices and real exchange rates, and allow markets to help central banks achieve their targets. The long-term crawl need not be announced. In conclusion, the regime's applicability to an EME is explored.

Determinants of Stock Trading Volume: Evidence from Indian Stock Markets

Abstract: This paper examines the determinants of trading volume for individual stocks in the emerging India's stock markets. Our results demonstrate that stock-specific characteristics explain a significant portion of the variation in Indian stock trading volume. We show that weekly turnover, expressed as a percentage of shares outstanding, is significantly related to firm's alpha and beta estimated from OLS market model, the standard deviation of residuals from the OLS market model, average price, size, first order auto covariance of returns, its institutional ownership and whether or not options trade is permitted on this stock. Stock trading volume first increases in the level of institutional ownership, reaching its peak at 33% (47%) respectively for the BSE (NSE) stocks and then decreases. We find the evidence that past price extremes influence investors' trading decisions. We document that trading volume is higher when a stock trades above the highest or below the lowest price attained during a 52 weeks benchmark period and then gradually subsides. This result suggests that behavioral factors affect investors' trading decisions in the Indian equity markets. The compulsory rolling settlement had a significant impact on stock's trading volume. We also saw that across a broad sample of stocks, trading volume for a firm depends on which industry the particular firm belongs.

Exchange Rate Regimes: Middling Through

Abstract: The appropriate exchange rate regime, in the context of integration of currency markets with financial markets and of large international capital flows, continues to be a policy dilemma. The revealed preference for most governments is for some kind of intermediate regime, suggesting a need to study these regimes more carefully. We find that the majority of countries are moving towards somewhat higher exchange and lower interest rate volatility. Features of forex markets could be partly motivating these choices. In a model with noise trading, non-traded goods, and price rigidities we show that bounds on the volatility of the exchange rate can lower noise trading in forex markets; decrease fundamental variance and improve real fundamentals in a developing economy; and give more monetary policy autonomy to smooth interest rates. Central banks prefer secret interventions where they have an information advantage or fear destabilizing speculation. But in our model, short-term pre-announced interventions can control exchange rate volatility, pre-empt deviations in prices and real exchange rates, and allow markets to help central banks achieve their targets. The long-term crawl need not be announced. We conclude with some discussion of the regime's applicability.

Through a Glass Darkly - Deciphering the Impact of Oil Price Shocks

Abstract: In order to examine if the impact of oil price shocks depends on the structure of an economy, a vertical (VSC) and a horizontal (HSC) long-run supply curve identification are successively imposed on a three variable VAR with Indian time series data. While core inflation is measured with the VSC, the HSC requires a new concept of demand-driven inflation: Residual (demand) inflation, which gives the impact of short and medium run demand shocks on inflation. Core and residual inflation are both estimated. The data favors the HSC, but both identifications imply that policy demand squeeze aggravated international oil price shocks.

Distant Labour Supply, Skills and Induced Technical Change

Abstract: To analyze the consequences of new technologies, which make it possible to employ distant labour, we model a developed country with high and medium-skilled labour interacting with an emerging market economy (EME) with medium and low-skilled labour Expansion in labour supply induces medium-skill biased technical change, which raises the demand for such labour As a result, inequalities tend to fall in the developed country, skill premiums rise marginally in the EME, but equality rises because labour employed in the low-skilled sector shrinks Inequality falls across the countries since average wages, information and access rise in the EME

Developing Women: Why Technology Can Help

Abstract: The paper investigates why the Internet and communication technology (ICT) has the potential to increase the equity and efficiency of female participation in the labour force. Rigidities in female labour allocation can explain observed male-female earnings differentials. Although the static outcome is efficient, female earnings are below male earnings. The loss of potential learning-by-doing in the private good production leads to dynamic inefficiencies, which are reinforced by power relations, bargaining, perceptions and self-perceived limitations. ICT can reverse some of these effects and lower matching costs. Since perceptions take time to change, policy intervention is required.

Basel II and bank lending behavior: some likely implications for monetary policy

Abstract: The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks’ balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

Effect of Foreign Firms and Their Linkages on Domestic Firms in the Indian Manufacturing Industry: Evidence from 1989-2004

Abstract: Foreign Direct Investment (FDI) has been an area that has invoked interest both among researchers and policy makers. FDI is one of those areas, which has benefits both for the host country and the home country. Multinational corporations or foreign firms are supposed to have frontier technology, hence when they enter a market they are expected to have spillover effects on local firms. Most of the studies in India till now have focused on intra-industry spillovers and have found evidence for intra-industry spillovers in the Indian industry. The present study focus is on inter-industry spillovers (for e.g. auto components to assemblers) as literature expects inter-industry spillover to be unambiguously present than intra-industry spillovers and also as there are very few studies in this area. This paper establishes that there exist spillover effects on domestic firms due to horizontal, backward and forward Linkages with foreign firms in the Indian manufacturing industry that affect domestic firms productivity. An interesting result of this chapter is that inter-industry spillovers are found to be negative for few industries.

Suicide of Farmers in Maharashtra Background Papers (Submitted to the Government of Maharashtra)

Abstract: This paper has three parts. The first, an analysis of 192 news reports in a Marathi daily, Deshonnati, cites 320 cases of farmers’ suicides in Maharashtra reported during 2004. A study of circumstances reveals multiple risk factors – economic downfall, agrarian crisis, and social disgrace among others. Indebtedness, a manifestation of economic downfall, becomes acute with reliance on moneylenders. A comparison of news reports with government investigation indicates scope for subjective interpretation in the latter. The second part, on issues highlighted by the media in general, identifies several problems: adverse developments affecting the Monopoly Cotton Procurement Scheme (MCPS) since the mid-1990s, increasing price (and also yield) risk and reducing profitability in Cotton cultivation, withdrawal of the state from the rural agrarian scenario and the questions of market-driven Bt (Bacillus thuringiensis) versus cost-saving organic cotton. The third part is on suicide reportage, suggesting that media follow the World Health Organization (WHO) guidelines of DOs and DONTs.

Public inputs and the credit market

Abstract: This paper studies the impact of public goods provision in an adverse selection environment. Public inputs used collectively by firms have indirect spillovers in imperfect credit markets by affecting the random returns of borrowers in this market. Public inputs change the nature of the binding incentive constraint and mitigate distortions in the credit market. The magnitude of such indirect benefits depends upon the ‘type’ of the public input being considered. Public inputs targeted to benefit the less-efficient borrowers in the economy have greater indirect benefits as compared to pure public inputs that benefit all. These additional efficiency gains, emerging out of information-asymmetries in the credit market, should be considered in the cost-benefit analysis of such public inputs.