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INDIAN MACROECONOMIC DATA BASE IN A CONSISTENCY ACCOUNTING FRAMEWORK ( TO ): IDENTIFYING EMPIRICAL PATTERNS AND REGULARITIES

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INDIAN MACROECONOMIC DATA BASE IN A CONSISTENCY ACCOUNTING FRAMEWORK ( TO ): IDENTIFYING EMPIRICAL PATTERNS AND REGULARITIES M.J. Manohar Rao Archana P. Samant Nina L. Asher
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INDIAN MACROECONOMIC DATA BASE IN A CONSISTENCY ACCOUNTING FRAMEWORK ( TO ): IDENTIFYING EMPIRICAL PATTERNS AND REGULARITIES M.J. Manohar Rao Archana P. Samant Nina L. Asher DISCUSSION PAPER NO. 1/99 DR. BABASAHEB AMBEDKAR CHAIR: RBI UNIT IN POLITICAL ECONOMY DEPARTMENT OF ECONOMICS UNIVERSITY OF MUMBAI DISCUSSION PAPER SERIES DR. BABASAHEB AMBEDKAR CHAIR: RBI UNIT IN POLITICAL ECONOMY DEPARTMENT OF ECONOMICS UNIVERSITY OF MUMBAI Documentation Sheet Title INDIAN MACROECONOMIC DATABASE IN A CONSISTENCY ACCOUNTING FRAMEWORK ( TO ): IDENTIFYING EMPIRICAL PATTERNS AND REGULARITIES Author(s): M.J. Manohar Rao Archana P. Samant Nina L. Asher DP No. 1/99 Date of Issue: May 1999 Abstract 2 External Participation: General Economics Unit Department of Economics University of Mumbai Contents: 68 p; 8 t; 26 f; 18 r No. of Copies: 100 This study presents for the first time in the Indian context a consistent set of annual macroeconomic data from to by integrating the national accounts statistics of the CSO with the balance of payments and the monetary data of the RBI as well as with the fiscal data of the Government of India. This is done by using a consistency accounting matrix which specifies the linkages between sources and uses of funds as well as between institutional sector accounts. It is seen that the resulting framework ensures the numerical consistency of data drawn from different sources in such a way that, both, the sectoral budget constraints as well as the overall economy-wide budget constraints are simultaneously satisfied. Despite certain minor problems of definitions and measurements left unresolved by this exercise, the resulting integration helped us to detect the structural changes that have occurred in the real and financial sectors of the Indian economy over the entire sample period, in general, and between the pre- and post-liberalization phases, in particular. In such a context, we identified many important empirical patterns and regularities, notably the existence of business cycles, the counter-cyclical nature of inflation, the cyclical variations in income distribution, the twin deficits problem, the impact of absorption on reserves, the evolution of the debt-income ratio, the relationship between real interest rates and growth, the sustainability of the fiscal stance, amongst others, which could act as theoretical guideposts for the formulation of issues in the role and conduct of macroeconomic stabilization policy. Key Words: consistency accounting framework, flow-of-funds matrix, sectoral and economy-wide budget constraints, database integration, detection of patterns JEL Code(s): C8, E3, O5 CONTENTS 1. Introduction 1 2. The Need For Consistency 3 3. Elements of a Consistency Accounting Framework Current Account Transactions Capital Account Transactions 8 4. Macroeconomic Identities and Sectoral Budget Constraints The National Income Accounting Identity The Government Budget Constraint The Private Sector Budget Constraint The External Sector Budget Constraint Assets and Liabilities of the Monetary System The Savings-Investment Balance Data Sources and Methodology Data Sources Basic Methodology Consistency Checks Gross Domestic Product and Expenditure Account National Disposable Income and its Appropriation Capital Finance Account Capital Flows, Credit Expansion and Domestic Absorption What Does the Data Reveal?: Identifying Empirical Patterns and Regularities Components of GDP Expenditure Components of National Disposable Income Appropriation The Twin Deficits Problem Absorption and Reserves Sources and Disposition of Government Income Sources and Disposition of Private Income Financing Current Account Deficits Financing Public Sector Investment Sources of Private Sector Funds Private Sector Portfolio Distribution The Gross Fiscal Deficit, Interest Payments and the Primary Deficit The CAD, Investment Income and the Non-Interest Current Account The Three Gaps in Practice Real Exchange Rates and CADs Structure of Interest Rates Evolution of the Debt-Income Ratio Real Interest Rates and ICORs Real Interest Rates and Growth Growth and Inflation Inflation, Growth and Income Distribution Conclusions 56 Appendix I: Estimating Net Operating Surplus of the Government 58 Appendix II: Estimating the Intersectoral Distribution of Investment Income 59 3 Appendix III: Estimating Net Factor Payments From Abroad 60 Appendix IV: Estimating Domestic Borrowings and Government Investment: A Note 60 Appendix V: Estimating the Consistency Accounting Matrix for Appendix VI: Some Supplementary Macroeconomic Statistics for the Indian Economy 62 Endnotes 65 References 68 LIST OF TABLES 1. Consistency Accounting Matrix 6 2. Methodology for Estimating a Set of Consistent Macroeconomic Data for the Indian Economy Consistent Macroeconomic Statistics for the Indian Economy ( ) Consistency Accounting Matrix for the Indian Economy ( ) Different Sources of Discrepancies in the GDP and Expenditure Account National Disposable Income and its Appropriation Capital Flows, Credit Expansion and Domestic Absorption Supplementary Macroeconomic Statistics for the Indian Economy 63 LIST OF FIGURES 1.1 Public Sector Investment Private Sector Investment Components of GDP Expenditure Components of National Disposable Income Appropriation Feldstein-Horioka Proposition: Validated Dornbusch-Helmers Proposition: Invalidated Absorption and Reserves - I Absorption and Reserves - II Sources of Government Income Disposition of Government Income Sources of Private Sector Income Disposition of Private Sector Income Financing Current Account Deficits Financing Public Sector Investment Sources of Private Sector Funds Private Sector Portfolio Distribution Gross Fiscal Deficits, Interest Payments and Primary Deficits Current Account Deficits, Investment Income and the NICA The Three Gaps in Practice Current Account Deficits and Real Exchange Rates Structure of Interest Rates Evolution of the Debt-Income Ratio Real Interest Rates and ICORs Real Interest Rates and Growth Growth and Inflation Cyclical Movements in Income Distribution 55 4 LISTING OF VARIABLES The following is the listing of the 64 macroeconomic variables (inclusive of the symbols used) on which annual time series data from to have been provided in the paper. Symbol Phenomenon Symbol Phenomenon OS g Net operating surplus of the government C p Private sector consumption D g Depreciation allowances (public sector) Z Imports of goods and services Yfc g Share of government in GDP at factor CEA Total current expenditure abroad cost at current prices X Exports of goods and services Ti Indirect taxes CAD Current account deficit Sb Subsidies R Change in foreign exchange reserves (Ti Sb) Net indirect taxes (IMF+SDR) IMF purchases plus SDR allocations Ymp g Share of government in GDP at current R* Change in foreign exchange reserves inclusive market prices of IMF purchases and SDR allocations Td c Corporate taxes F g Change in net foreign borrowings of the Td h Household taxes government MR Miscellaneous receipts of the government F p Change in net foreign borrowings of the Td Total direct taxes private sector NTR eg Net transfers from external sector to the DC g Change in bank credit to the government government DC p Change in bank credit to the private sector Y g Total government income M Change in broad money supply NTR gp Net transfers from government to the B Change in net domestic borrowings of the private sector government INT gp Interest on public debt I g Public sector investment NP gp Total payments from government to I p Private sector investment the private sector I Total investment INV ge Investment income of the government NYfc NDP at factor cost at current prices S g Gross savings of the public sector Yfc GDP at factor cost at current prices C g Government consumption Ymp GDP at current market prices (W+Π) Share of private sector in NDP at factor Yfc(r) GDP at factor cost at prices cost at current prices NYfc(r) NDP at factor cost at prices D p Depreciation allowances (private sector) K Net fixed capital stock at prices Yfc p Share of private sector in GDP at factor M3 Broad money supply cost at current prices P GDP deflator ( = 1) NTR ep Net transfers from external sector to the i Nominal interest rate (1-year deposit rate) the private sector E Nominal exchange rate (Rs. per US $) NFP ep Net factor income from abroad RER Real exchange rate NER ep Total receipts from external sector to the IDc Internal debt (central government) private sector IDs Internal debt (state governments) Y p Total private sector income ID Total internal debt INV pe Investment income of the private sector ED External debt (central government) S ph Household savings INT ge Interest payments on external debt of the S pc Corporate savings central government S p Total private sector savings GI Gini Index INDIAN MACROECONOMIC DATA BASE IN A CONSISTENCY 5 ACCOUNTING FRAMEWORK ( TO ): IDENTIFYING EMPIRICAL PATTERNS AND REGULARITIES M. J. Manohar Rao Archana P. Samant Nina L. Asher Department of Economics, University of Mumbai Is consistency the hobgoblin of little minds? Ralph Waldo Emerson 1. Introduction The consolidated accounts of the nation presented by the Central Statistical Organisation (CSO) in their National Account Statistics (NAS) is a system of statistical statements depicting values of final products originating in different industries and those of income generated and outlays expended in the personal and private and also public sectors, which are consolidated with sources and uses of finance or accumulation accounts and closed with accounts of external transactions. Based upon this CSO data set, the Economic and Political Weekly Research Foundation (EPWRF) has since 1996 brought out annually a comprehensive publication which presents the latest available statistics on the national accounts aggregates. However, their latest study entitled National Accounts Statistics of India: to (see EPWRF 1998) notes that (p.6), Incidentally, because of the independent nature of estimates for different macro-aggregates based on separate methods and separate sources of data, the consolidated accounts of the nation presented in the NAS contain large mismatches, discrepancies or errors and omissions. As it is difficult to pinpoint the specific sources of the discrepancies, no attempt is made, either by the CSO or by the EPWRF to adjust any of the estimates to achieve balance in different accounts; and, consequently, these differences are retained as discrepancies or errors and omissions. Needless to say, these mismatches would be all the more magnified if one attempted to integrate the NAS data with the other three major specialized statistical systems, namely, balance of payments accounts, money and banking data and government finance statistics. Thus, a major, and long pending, need of the hour is to bring about harmonization of all these four accounts and thereby promote the integration of various economic and related statistics. In such a context, an attempt is made in this study to present a comprehensive and consistent set of macroeconomic data for the Indian economy integrating the national 6 accounts statistics of the CSO with the balance of payments and monetary data of the Reserve Bank of India (RBI) as well as with the fiscal data pertaining to budget financing operations of the Ministry of Finance (MoF), Government of India, for the 48-year period from to (with efforts being made to preserve continuity in the later estimates in view of the recent base change and methodological revision announced by the CSO). This is done by specifying an alternative system of presenting the data generated in the national and related accounts in the form of a consistency accounting framework which is a flexible way of rearranging the data in a matrix form elaborating the linkages between sources and uses of funds as well as between institutional sector accounts. Such an accounting framework seeks to ensure the numerical consistency of data drawn from different sources in a way that the sectoral budget constraints are simultaneously satisfied for all the participants of the economy implying that the overall economy-wide budget constraints are also observed. This study initially discusses the elements of such a consistency accounting macroeconomic framework based on five principal accounts, i.e., national accounts, government sector accounts, private sector accounts, external sector accounts and monetary sector accounts, which are then integrated through a matrix of income, expenditure, savings, and asset and liability accumulation. The matrix describes the sources and uses of funds for these five sectors wherein the equality of sources and uses of funds (as distinguished between current and capital accounts) is emphasized. The methodology for estimating the individual elements of such a consistency accounting matrix for the Indian economy is then discussed and a comprehensive and consistent macroeconomic database for the years to is provided. In line with the inter-linkages between these four systems, the statistical statements presented in the study cover the following broad six time-series data sets: consolidated accounts of the nation encompassing expenditure on gross domestic product (GDP) as per the Keynesian macroeconomic identities and the relationship between national income and other key macroeconomic aggregates, appropriation of national and private sector disposable income, the capital finance account and the financial sources for gross accumulation, financing of government budgetary operations, consolidated BOP accounts comprising current and capital account transactions, and the balance sheet of the consolidated banking system. While the integrated system accepts most the official series as given, the use of such a consistency framework implies that the Errors and Omissions which, as noted earlier, are invariably used in standard practice to balance and reconcile the various macroeconomic identities are precisely apportioned between certain aggregates thereby treating them as residual items. It needs to be noted that the basis of our conceptual framework lies almost squarely within the UN-SNA, i.e., the United Nations System of National Accounts (see United Nations 1968), except for certain deviations which are primarily due to marginal methodological differences. Suffice it to say, despite these and certain other minor problems of definitions and measurements left unresolved by this exercise, the success achieved by us, at times with some compromises on the purity of concepts and theories, in integrating the basic time-series on national accounts with related aggregates should help to depict the growth of, both, the real and financial sectors of the Indian economy, as also its structural changes, over the years. In such a context, the identification of certain empirical patterns and (ir)regularities could facilitate translation of certain important theoretical constructs on structural adjustment problems into various policy relevant solutions and inter-relationships. 2. The Need for Consistency 7 Because consistency is often tedious to enforce, it is important to remember for what purpose it is required in macroeconomics. Consistency is simply the requirement that budget constraints be observed for all participants of the economy. Budget constraints appear at the economy-wide level in the form of four familiar macroeconomic identities, viz., the national accounts identity, the fiscal identity, the balance of payments identity and the monetary sector identity. A basic consistency framework requires that all these four identities as well as the private sector budget constraint be simultaneously satisfied. If one or more of the identities is left out of an economic projection, the implicit values for the components of the missing identity may take unrealistic values. Even if all identities are included, they may be satisfied in an inconsistent way. For example, as is often the case, one estimate of the change in foreign exchange reserves might be used in the balance of payments identity while a completely different one might be used for the monetary sector identity. Consider the following hypothetical, albeit relevant, example which illustrates the consistency problems that are likely to arise if an integrated framework is not used. Suppose that the Planning Commission envisages an increase in the real growth rate from 5 percent to 7 percent over a 5-year planning horizon, without any reliance on foreign capital inflows. To support this increase in growth, the investment rate is projected to increase from 25 percent to 35 percent of GDP, thereby assuming that the incremental capital output ratio (ICOR) remains unchanged at 5; and in order to preempt crowding out, both public investment and public consumption are expected to stay constant at their existing levels of 10 percent and 15 percent of GDP, respectively. At the same time, the Ministry of Finance projects that the fiscal deficit of 6 percent of GDP is gradually reduced to zero over the plan, financed entirely by taxes; while the CAD is reduced from 2 percent to 1 percent of GDP. Finally, in such a context, the RBI intends to hold the annual inflation rate constant at 6 percent over the plan. While the above projections are certainly consistent, they are entirely unfeasible because they imply unrealistic private sector behaviour. The private investment rate must increase from 15 percent to 25 percent of GDP, since total investment is increasing while public investment is remaining constant. To finance the higher investment with the lower current account deficit, private savings must increase from 19 percent to 24 percent of GDP, while public savings must increase from 4 percent to 10 percent of GDP. However, as the higher public savings is financed by increasing taxes, this will decrease private disposable income from 81 percent to 75 percent of GDP. Thus, private savings as a percent of private disposable income will have to increase from an average rate of 23.5 percent to 32 percent. Given the growth and inflation projections, this would imply a staggering marginal propensity to save of almost 44 percent over the plan. It is difficult to conceive of any reasonable policy measures that would elicit such a powerful response in private savings. 1 These values of savings and investment also have implausible implications for financial aggregates. Supposing that 60 percent of private savings goes into financial asset accumulation; and also assuming that the income velocity of money and the interest rate remain constant at their existing levels of 1.5 and 10 percent, respectively. Then the resulting increase in savings and money growth rates would imply that government borrowings would have to be stepped up from 4.0 to 5.7 percent of GDP. The initial ratio of financial assets to GDP which is 100 percent, being the steady state value consistent with the initial savings and growth rates, would rise to 107 percent, implying that the debt-gdp ratio would increase from 33 to 40 percent. This, in conjunction with the given interest rate, would imply that the initial primary deficit of 2.7 percent of GDP would need to be converted into a primary 8 surplus of 4 percent. Since the public deficit is being reduced, the implications for credit allocation would be equally strong. Over the plan, the ratio of private sector credit to GDP would more than double from 7.4 to 15.4 percent of GDP; while that of the public sector would decrease from 2 percent of GDP to 5.7 percent of GDP, implying that the latter would end up by being a net creditor to the banking system. 2 While such an outcome is not mathematically impossible, it is very unlikely that the set of policy actions, private sector responses and external conditions would all be sufficiently strong to generate these results in an
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