Development in India (eBook)

S. Mahendra Dev is Director, Indira Gandhi Institute of Development Research (IGIDR), Mumbai, India. After obtaining his Ph.D. from Delhi School of Economics (New Delhi, India), he did his post-doctoral research at Yale University, USA. He is also the Chair of the Committee on Terms of Trade on Agriculture constituted by the Indian Ministry of Agriculture. He previously chaired the Commission for Agricultural Costs and Prices at the Ministry of Agriculture, and served as Director of the Centre for Economic and Social Studies (CESS) in Hyderabad. His research interests include Development economics, Indian economy, Macro policies, Inclusive growth, Agricultural policies, Poverty and inequality and Rural development.P G Babu is Professor at IGIDR, Mumbai coordinator of the Erasmus Mundus European Graduate Programs in Law and Economics, and Managing Editor of Journal of Quantitative Economics, official journal of The Indian Econometric Society (TIES) published by Springer. He has held visiting professorships at the Universities of Aix-Marseille, Bayreuth (as Adam Smith Chair Guest Professor of Philosophy and Economics), Hamburg, IIM Ahmedabad, Madras School of Economics, Erasmus University Rotterdam and Warsaw School of Economics. He obtained his Ph.D. from Indian Institute of Science, Bangalore, India. His research interests include Microeconomics and Game Theory with interdisciplinary applications to environment, law, philosophy and politics. About Contributors:Dilip Abreu, Princeton University, Princeton, USADilip R. Ahuja, National Institute of Advanced Studies, Bangalore, IndiaP. Binswanger-Mkhize , China Agricultural UniversityArka Roy Chaudhuri, University of British Columbia, Vancouver, CanadaAvinash K. Dixit, Princeton University, Princeton, USAProbal P. Ghosh, IRADe, Delhi, IndiaPriyank Jindal, IRADe, Delhi, IndiaRavi Kanbur, Cornell University, Ithaca, USAAshok Kotwal, University of British Columbia, Vancouver, CanadaSugatoMarjit, CSSS, Kolkata, IndiaAnil Markandya, University of Bath, Bath, UK; Basque Centre for Climate Change, Bilbao, SpainKaivanMunshi, University of Cambridge, Cambridge, UKMilindMurugkar, PragatiAbhiyan, Nasik, IndiaJyoti K. Parikh, IRADe, Delhi, IndiaKirit S. Parikh, IRADe, Delhi, IndiaMihirRakshit, ICRA, Kolkata, IndiaBharat Ramaswami, Indian Statistical Institute Delhi, New Delhi, IndiaGeeta Sandal, IRADe, New Delhi, IndiaNirvikar Singh, University of California, Santa Cruz, USAT.N. Srinivasan, Yale University, New Haven, USAMarti G. Subrahmanyam, New York University, New York, USAShyam Sunder, Yale University, New Haven, USADragon Yongjun Tang, University of Hong Kong, Hong KongSarah Qian Wang, University of Warwick, UK

Preface 6
Contents 8
Editors and Contributors 11
1 Introduction to Development in India: Micro and Macro Perspectives 14
1.1 Part 1: Formal and Informal Institutions 15
1.2 Part 2: Aid and Poverty 16
1.3 Part 3: Indian Agriculture: Growth and Distribution 17
1.4 Part 4: Financial Markets and Macro Economy 18
1.5 Part 5: Technological Change, Trade, and Development 21
1.6 Part 6: Ecosystems and Energy 22
References 23
Part IFormal and Informal Institutions 24
2 Caste Networks in the Modern Indian Economy 25
2.1 Introduction 25
2.2 Caste Networks in Rural and Urban India 28
2.3 Caste Networks and the Misallocation of Factors of Production 32
2.4 Caste Networks and Occupational Mobility 33
2.5 Caste Networks and Restrictions on Mobility in Urban India 37
2.6 Caste Networks and Restrictions on Mobility in Rural India 39
2.7 New Roles for Caste Networks 41
2.8 Network Decay 44
2.9 Conclusion 47
References 47
3 Evolution of Judicial Activism: The Supreme Court of India 50
3.1 Introduction 50
3.2 Judicial Activism: The Run-up to the Emergency of 1975--77 52
3.2.1 Absence of Judicial Activism in India Prior to the Emergency 52
3.2.2 Tussle Between Judiciary and Legislative Branches 53
3.2.3 The Declaration of Emergency: July 25, 1975 54
3.3 The Expansive Path of Judicial Activism Since the Emergency 56
3.3.1 Public Interest Litigation (PIL) 57
3.3.2 Expansive Reading of Article 21 on ``Life and Personal Liberty'' 58
3.4 Economic Spill Overs of Judicial Decisions 61
3.4.1 Economic Logic of the Separation of Fundamental Rights (Part III) and Directive Principles of State Policy (Part IV) 62
3.5 Concluding Remarks 65
References 66
4 Corruption: Supply-Side and Demand-Side Solutions 68
4.1 Community-Based Institutions in Other Contexts 69
4.2 Community-Based Collective Action Against Corruption 71
4.3 Further Requirements 73
4.4 Start-up Problems 75
4.5 The Role of Culture 75
4.6 Other Government Action 76
4.7 Limitations 78
4.8 Challenge to Research and Action 78
References 79
Part IIAid and Poverty 80
5 Can a Country Be a Donor and a Recipient of Aid? 81
5.1 Introduction 81
5.2 The Salience of the Nation State: Global Rawlsians Versus Rawls 83
5.3 Global Utilitarianism and Anti-poverty Targeting 85
5.4 Some Operational Considerations: The Case of IDA 88
5.5 Conclusion 90
References 91
6 Why is Poverty Declining so Slowly in India? 92
6.1 Introduction 92
6.2 Empirical Picture 93
6.3 Structure of Indian Economy 94
6.3.1 Growth Drivers and Employment 97
6.3.2 Growth Drivers 102
6.4 Demand Pattern 103
6.4.1 Education 105
6.5 Conclusions 107
Acknowledgements 108
References 108
Part IIIIndian Agriculture: Growth andDistribution 109
7 Agriculture and Structural Transformation 1960--2040: Implications for Double-Digit Inclusive Growth 110
7.1 The Issues 110
7.2 The Approach 111
7.3 The Results 113
7.3.1 The Reference Run 113
7.3.2 The Changing Structure of Food Consumption 114
7.3.3 Maximizing Growth Has Major Implications 115
7.3.4 Attaining Inclusive Double-Digit Growth 118
7.3.4.1 Agricultural Productivity Growth 118
7.3.4.2 Importance of Water Use Efficiency and Irrigation 119
7.3.4.3 Import and Land Constraints Have Economy-Wide Impacts 120
7.3.4.4 Impact of Higher Trade Bounds 121
7.3.4.5 Impact of High Irrigation, High TFPG, and Larger Imports 123
7.3.5 Impacts on Poverty 123
7.3.6 Migration and Structural Transformation 123
7.4 Comparison to Past Trends 124
7.5 Summary and Conclusions 127
References 129
8 Incremental Reforms in Food Policy: What Are the Possibilities? 131
8.1 Introduction 131
8.2 The Theory and Practice of Food Policy Interventions 133
8.3 Reforming the PDS: The Debate 138
8.4 Storage and Logistics: How Much Capacity Is Needed? 139
8.5 Matching Storage Capacity to Procurement 143
8.6 Procurement Reforms: Computerizing the Procurement Network 147
8.7 Distribution Reforms 148
8.8 Individual State Experiences 152
8.8.1 Chhattisgarh 152
8.8.2 Gujarat 154
8.8.3 Madhya Pradesh 155
8.9 Conclusions 156
Acknowledgment 158
References 159
Part IVFinancial Markets and MacroEconomy 160
9 A Model of Bubbles and Crashes 161
9.1 Exogenous Crashes 165
9.2 Endogenous Crashes 167
9.3 Synchronizing Events 169
9.4 Common Knowledge and ``Classical'' Impossibilities 170
9.5 Conclusion 170
References 170
10 Experimental Exploration into Macro Economics 172
10.1 Economics as an Experimental Science 172
10.2 What Have We Learned? 174
10.2.1 Properties of Competitive Markets 174
10.2.2 Rational Expectations Equilibria in Asset Markets 176
10.2.3 Information Aggregation in Markets 179
10.2.4 Cost of Information 182
10.2.5 Price Indeterminacy and Bubbles 183
10.2.6 Equilibrium Selection in Presence of Multiplicity 185
10.2.7 Fiat Money and Monetary Policy 186
10.2.8 From Research to Policy 188
10.2.9 Sunspot Equilibria 190
10.2.10 Default Penalty as an Equilibrium Selection Mechanism 191
10.2.11 Financing Public Goods Through Democratic Taxation 193
10.2.12 Role of Optimization in Economics 194
10.2.13 Market as Artifacts 198
10.3 Challenges and Open Questions 199
References 199
11 Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk 202
11.1 Related Literature and Testable Hypotheses 205
11.2 Dataset on CDS Trading and Bankruptcy 207
11.3 CDS Trading and Credit Risk: Empirical Results 210
11.3.1 Credit Ratings Before and After the Introduction of CDS 211
11.3.2 Baseline Hazard Model Results on Downgrading and Bankruptcy 213
11.3.3 Selection and Endogeneity in CDS Trading 216
11.3.3.1 Determinants of CDS Trading 217
11.3.3.2 Propensity Score Matching 220
11.3.3.3 Full-Information Maximum Likelihood (FIML) 223
11.3.4 Channels and Mechanisms for the Effect of CDS on Credit Risk 225
11.3.4.1 CDS Contracts Outstanding 225
11.3.4.2 Likelihood of Bankruptcy Conditioning on Distress 226
11.3.4.3 ``No Restructuring'' CDS 228
11.3.4.4 Number of Creditors 233
11.4 Conclusion 235
Acknowledgement 236
A.1 Appendix. Credit Default Swaps' Credit Event Definitions 236
References 238
12 Financial Crisis and Liquidity Trap Some Theoretical and Policy Perspectives 240
12.1 Introduction 240
12.2 Liquidity Trap and Demand Deficiency 241
12.2.1 Nature of Liquidity Trap: Keynes, Keynesians and New Keynesians 242
12.3 Liquidity Trap: Some Stylized Facts 244
12.4 Sources of the Trap and Policy Failure 246
12.4.1 Nature of Imbalances 246
12.4.2 Imbalances and the Post-bubble Liquidity Trap 249
12.5 Policy Requirements 252
12.5.1 Repairing the Financial System 253
12.5.2 Monetary Policy 254
12.5.3 Fiscal Expansion and Consolidation 256
12.5.3.1 Escaping from the Liquidity Trap: A Policy Framework 261
12.5.4 Some Fiscal Policy Imperatives 263
12.6 Summary and Conclusion 267
A.1 Appendix 269
A.1.1 Ricardian Non-equivalence Under Liquidity Trap 269
References 270
Part VTechnological Change, Trade andDevelopment 271
13 Finite Change---Implication for Trade Theory, Policy and Development 272
13.1 Introduction and Preliminaries 272
13.2 Finite Change and Tariff-Quota Non-equivalence 276
13.3 A Complex Production Structure 278
13.4 International Factor Mobility, Wage Distribution and Finite Change 278
13.5 Conclusion 282
Acknowledgments 283
References 283
14 Information Technology and Its Role in India's Economic Development: A Review 284
14.1 Introduction 284
14.2 IT-BPO Industry 290
14.3 Rural Development 295
14.4 E-Commerce 301
14.5 Manufacturing 304
14.6 E-Governance 307
14.7 Conclusion 310
References 311
Part VIEcosystems and Energy 314
15 Value of Biodiversity and Ecosystem Services in South Asia and India: Past, Present and Future 315
15.1 Introduction 315
15.2 Estimating Changes in Ecosystem Services: 1900 to 2000 317
15.2.1 Change in MSA Area 318
15.2.2 Valuing the Changes in Ecosystem Services 319
15.2.2.1 Forests 323
15.2.2.2 Grassland and Steppe 327
15.2.2.3 The Total Economic Impact Related to a Loss of MSA Area 329
15.2.2.4 Net Economic Impacts on Annual Flows Provided by ES Taking Account of Agricultural Benefits 329
15.2.2.5 Conclusions on Impacts of Loss of Biodiversity 1900 to 2050 331
15.3 The Value of Current Ecosystem Services in India 333
15.3.1 Background and Introduction 333
15.3.2 Direct and Indirect Services of Forests 334
15.3.2.1 Carbon Sequestration in Indian Forests 334
15.3.2.2 Non-use Values Associated with Conservation Forests 337
15.3.3 Services from Grasslands, Wetlands, Mangroves and Coral Reefs 338
15.3.3.1 Services Derived from Grasslands 339
15.3.3.2 Services Derived from Wetlands 341
15.3.3.3 Services Derived From Mangroves 343
15.3.3.4 Services Derived from Coral Reefs 344
15.3.4 Summary of Values of Ecosystem Services in India 345
15.4 Conclusions 348
Acknowledgments 349
References 349
16 Climate Resilient Cities: Vulnerability Profiling of Twenty Indian Cities 351
16.1 Introduction 351
16.1.1 Climate Variability in India 351
16.1.2 Scope and Background of the Study 352
16.2 Methodology 353
16.3 Case Studies 357
16.4 Comparative Analysis 358
16.4.1 Recommendations 362
16.4.2 Climate Informed Urbanization and Enabling Policies 364
16.5 Concluding Remarks 364
References 365
17 Challenges for Sustainable Energy Development in India 366
17.1 Introduction 366
17.2 Introduction to the Energy Sector in India 366
17.3 The Enduring Nature of Energy-Environment Conflicts in India 368
17.4 Sustainable Energy Paradigm 369
17.5 How Far Is the Road for Renewable Energy Technologies? 372
17.6 Gingerly Steps Towards a Resolution 374
17.7 Concluding Remarks 375
Acknowledgements 376
References 376