Dr.DEBESH BHOWMIK

Dr.DEBESH BHOWMIK

Tuesday 27 January 2015

US BUDGET 2014-2025

US  Budget 2014-2025


The federal budget deficit, which has fallen sharply during the past few years, is projected to hold steady relative to the size of the economy through 2018. Beyond that point, however, the gap between spending and revenues is projected to grow, further increasing federal debt relative to the size of the economy—which is already historically high.
Those projections by CBO, based on the assumption that current laws governing taxes and spending will generally remain unchanged, are built upon the agency’s economic forecast. According to that forecast, the economy will expand at a solid pace in 2015 and for the next few years—to the point that the gap between the nation’s output and its potential (that is, maximum sustainable) output will be essentially eliminated by the end of 2017. As a result, the unemployment rate will fall a little further, and more people will be encouraged to enter or stay in the labor force. Beyond 2017, CBO projects, real (inflation-adjusted) gross domestic product (GDP) will grow at a rate that is notably less than the average growth during the 1980s and 1990s.

Rising Deficits After 2018 Are Projected to Gradually Boost Debt Relative to GDP

CBO estimates that the deficit for this fiscal year will amount to $468 billion, slightly less than the deficit in 2014 (see the table below). At 2.6 percent of GDP, this year’s deficit is projected to be the smallest relative to the nation’s output since 2007 but close to the 2.7 percent that deficits have averaged over the past 50 years.
CBO's Baseline Budget Projections
Although the deficits in CBO’s baseline projections remain roughly stable as a percentage of GDP through 2018, they rise after that. The deficit in 2025 is projected to be $1.1 trillion, or 4.0 percent of GDP, and cumulative deficits over the 2016–2025 period are projected to total $7.6 trillion. CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950 (see figure below). By 2025, in CBO’s baseline projections, federal debt rises to nearly 79 percent of GDP.
Federal Debt Held by the Public
Outlays
In CBO’s projections, outlays rise from a little more than 20 percent of GDP this year (which is about what federal spending has averaged over the past 50 years) to a little more than 22 percent in 2025 (see figure below). Four key factors underlie that increase:
  • The retirement of the baby-boom generation,
  • The expansion of federal subsidies for health insurance,
  • Increasing health care costs per beneficiary, and
  • Rising interest rates on federal debt.
Total Revenues and Outlays
Consequently, under current law, spending will grow faster than the economy for Social Security; the major health care programs, including Medicare, Medicaid, and subsidies offered through insurance exchanges; and net interest costs. In contrast, mandatory spending other than that for Social Security and health care, as well as both defense and nondefense discretionary spending, will shrink relative to the size of the economy. By 2019, outlays in those three categories taken together will fall below the percentage of GDP they were from 1998 through 2001, when such spending was the lowest since at least 1940 (the earliest year for which comparable data have been reported).
Revenues
Revenues are projected to rise significantly by 2016, buoyed by the expiration of several provisions of law that reduced tax liabilities and by the ongoing economic expansion. In CBO’s projections, based on current law, revenues equal about 18½ percent of GDP in 2016 and remain between 18 percent and 18½ percent through 2025. Revenues at that level would represent a greater share of the economy than their 50-year average of about 17½ percent of GDP but would still be less than outlays by growing amounts over the course of the decade. Revenues from the individual income tax are expected to rise relative to GDP—mostly because people’s income will move into higher tax brackets as income gains outpace inflation, to which those brackets are indexed. But those increases are expected to be offset by reductions relative to GDP in revenues from the corporate income tax and other sources.
Changes From CBO’s Previous Budget Projections
The deficit that CBO now estimates for 2015 is essentially the same as what the agency projected in August. CBO’s estimate of outlays this year has declined by $94 billion, or about 3 percent, from the August projection because of a number of developments, including higher-than-expected receipts from auctions of licenses to use the electromagnetic spectrum for commercial purposes. But CBO’s estimate of revenues has dropped almost as much—by $93 billion, also about 3 percent—mostly because of the enactment of legislation that retroactively extended a host of expired tax provisions through December 2014.
Over the 2015–2024 period, deficits are now projected to total about $175 billion less than CBO’s August estimate for that period. The current projections of revenues and outlays for those years are both lower than previously estimated, outlays a little more so.
The Longer-Term Outlook
When CBO last issued long-term budget projections (in July 2014), it projected that, under current law, debt would exceed 100 percent of GDP 25 years from now and would continue on an upward trajectory thereafter—a trend that could not be sustained. (The 10-year projections presented here do not materially change that outlook.) Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.

The Economy Will Grow at a Solid Pace Over the Next Few Years

CBO anticipates that, under current law, economic activity will expand at a solid pace in 2015 and over the next few years—reducing the amount of underused resources, or “slack,” in the economy.
Economic Growth Over the Next Few Years
In CBO’s estimation, increases in consumer spending, business investment, and residential investment will drive the economic expansion this year and over the next few years. The growth in those categories of spending will derive mainly from increases in hourly compensation, rising wealth, the recent decline in crude oil prices, and a step-up in the rate of household formation (as people are more willing and able to set up new homes). As measured by the change from the fourth quarter of the previous year, real GDP will grow by about 3 percent in 2015 and 2016 and by 2½ percent in 2017, CBO expects (see figure below).
Actual Values and CBO's Projections of Key Economic Indicators
The Degree of Slack in the Economy Over the Next Few Years
The difference between actual GDP and CBO’s estimate of potential GDP—which is a measure of slack for the whole economy—was about 2 percent of potential GDP at the end of 2014. During the next few years, CBO expects, actual GDP will rise more rapidly than its potential, gradually eliminating that slack. For the labor market in particular, CBO anticipates that slack will dissipate by the end of 2017. By CBO’s projections, increased hiring will reduce the unemployment rate from 5.7 percent in the fourth quarter of 2014 to 5.3 percent in the fourth quarter of 2017, which is close to the expected natural rate of unemployment (that is, the rate arising from all sources except fluctuations in the overall demand for goods and services). That increased hiring will also encourage more people to enter or stay in the labor force, boosting the labor force participation rate (which is the percentage of people who are working or actively looking for work).
Economic Growth in Later Years
The agency’s projections beyond the next few years are not based on estimates of cyclical developments in the economy, because the agency does not attempt to predict economic fluctuations that far into the future; instead, those projections are based on estimates of underlying factors that affect the economy’s productive capacity.
For 2020 through 2025, CBO projects that real GDP will grow by an average of 2.2 percent per year—a rate that matches the agency’s estimate of the potential growth of the economy in those years. Potential output is expected to grow much more slowly than it did during the 1980s and 1990s primarily because the labor force is anticipated to expand more slowly than it did then. Growth in the potential labor force will be held down by the ongoing retirement of the baby boomers; by a relatively stable labor force participation rate among working-age women, after sharp increases from the 1960s to the mid-1990s; and by federal tax and spending policies set in current law.
Inflation and Interest Rates
The elimination of slack in the economy will eventually remove the downward pressure on the rate of inflation and on interest rates that has existed for the past several years. By CBO’s estimates, the rate of inflation as measured by the price index for personal consumption expenditures will move up gradually to the Federal Reserve’s goal of 2 percent, hitting that mark in 2017 and beyond. Interest rates on Treasury securities, which have been exceptionally low since the recession, will rise considerably in the next few years, CBO expects, but remain lower than they were, on average, in previous decades. Between 2020 and 2025, the projected interest rates on 3-month Treasury bills and 10-year Treasury notes are 3.4 percent and 4.6 percent, respectively.
Changes From CBO’s Previous Economic Projections
Last August, CBO projected real GDP growth averaging 2.7 percent per year for 2014 through 2018; CBO now anticipates that real GDP growth will average 2.5 percent annually over that period. The revision mainly reflects a reduction in CBO’s estimate of potential output and therefore of the current amount of slack in the economy. On the basis of the current projection of potential output, CBO now forecasts that real GDP in 2024 will be roughly 1 percent lower than the level estimated in August. In addition, the sharper-than-anticipated drop in the unemployment rate in the second half of last year caused CBO to lower its projection of that rate for the next few years.

( courtesy- www.cbo.gov)

Friday 16 January 2015

Book Review



FINANCIAL SECTOR LIBERALISATION IN INDIA –THEORY   AND EMPIRICS
---Regal Publications,NewDelhi,page,xi+352, Price- Rs.1480/-


This edited volume is the outcome of presented and selected papers of the Mid Year Seminar of Bengal Economic Association held in the Vidyasagar University,Midnapore on 6th October,2012.
It contains 21 articles  which explained the theoretical as well as empirical findings in the financial sector liberalisation in India.The book helps in understanding of interplay of various issues and forces that are emerging in this sector at present time.
Hiranya Lahiri,Chandana Ghosh and Ambar Nath Ghosh in their paper”Financial Sector Liberalisation and RBI’s policy Dilemma” argues that a rate cut by RBI  is likely to reduce growth rate and raise the rate of inflation through a model.
Prof.Biswajit Chatterjee in the paper , “ Financial inclusion:Issues and Challenges with Special Reference to India’s North –East” explained that financial inclusion should emphasise the low income people.
P.S. Das in his paper,” Economic and Financial Stability in the Post-reform India in context of global financial crises” considering the world economy  and the Indian economy .
Arindam Gupta in his paper on “Inclusion Driven Reform in Indian Banking Sector:The Government and the people” examined the role of the banking sector in promoting financial inclusion.
Asim Kumar Karmakar in his paper “liberalisation of the financial sector in India and China:An Overview” seeks to describe financial liberalisation and development in both India and China emphasising on banking sector liberalisation.
Dhiraj Kumar Bandopadhaya in his paper “ Financial Sector Liberalisation in India –An Examination of Linkage between Financial and Real Sectors” reviewed macro economic policies of RBI during the reform period.
Partha Sarker on his paper,”India’s Experiences with financial liberalisation” evaluated reform policies of the financial markets which became healthier due to liberalisation.
Anindya Mukherjee in his paper, “ Financial sector liberalisation in India vis-a-vis the political economy of our epoch” showed the fall out of hegemony of international finance capital.
Saktinath Bandopadyaya on his paper , “ The regulatory affairs of the Indian Financial System in the Backdrop of the 2008 financial crisis” identified reasons of the crisis and its regulation in India.
Anupam Parua in his paper “ Scam –prone India Inc:A study of impact of reforms  measures” attempted to list different reform measures in security market in recent years as well as to trace the impact of such measures.
Debasish Mukherjee in his paper , “ Financial sector reforms in India with special emphasis on the Banking sector reforms” gave brief account of the financial sector reforms in India identifying the emerging issues and exploring the prospects for further reform and assess the reform programme.
Ramesh Chandra Das, on his paper, “Interlinking among NPA,investment in government securities and credit-deposit ratio : A case study for India in reform period” examined trends of credit deposit ratio during reform period and found no causality between NPA and security investment.
Bratati Dasgupta in her paper,”Inclusive growth  and urban cooperative banks in the light of financial sector reforms in India” attempted the need for financial inclusion along with measures  and suggested to include environment problems including urban cooperative banks.
Sebak Jana and Kaberi Sarker in their paper , “Efficiency analysis of the district central cooperative banks in WestBengal” found variation in respect of different key financial indicators for the DCCB using DEA methodology during last decade.
Sarbapriyo Ray and Mihir Kumar Pal in their paper , “Exploring inflation and stock price behaviour in selected Asian Economics”  examined relationship between inflation and  stock prices in Hongkong, Singapore,Japan,Korea  and India and found causality and cointegrating relationships.
Rajnarayan Gupta in his paper, “ An empirical investigation into the Linkage between commodity derivative and spot market in India” investigates into the rationale behind such a conservative attitude towards the market and examines the ill effect of the market on the economy.
Bikas Das in his paper , “ Moving of Mutual Fund from infancy to Adolescence through liberalisation”  tracks various performances of mutual funds in India.
Kalpataru Bandopadhyaya and Tarak Nath Sahu in their paper, “ A critical view on rate of interest in microfinance sector in India” examined the riskiness of microfinance and ample scope to reduce interest rate.They want  review  of this sector.
Mahasweta Bhattacharjee in her paper , “ Impact of liberalisation on financial performances of public sector GIS in India” revealed that the major impacts on public sector non-life insurance companies due to theventry of private players to this area and how they are tackling the challenges from the private players and how successful they have been in facing such challenges.

Debesh Bhowmik ( me) in his paper , “Fiscal reform in India : Convergence and cointegration”  attempted to test the fiscal convergence among Indian states taking fiscal deficit and debt/GDP  during 1990-91 – 2011-12 and showed cointegration.He found no fiscal convergence of Indian states.He also found cointegrating relationship among fiscal deficit ,growth rate,inflation rate,money supply,current account deficit, non developmental expenditure,government liabilities and revenue deficit.He commented that FRBMA needs reform for its ineffectiveness.     

Thursday 15 January 2015

51ST CONFERENCE OF THE INDIAN ECONOMETRIC SOCIETY


51st Conference of The Indian Econometric Society

The 51st conference of The Indian Ecomonetric Society held in the Department of Economics ,Punjabi University,Patiala  during 12-14 December,2014.The conference was inaugurated by Prof.M.S. Ahluwalia-the Ex .Deputy Chairman of the Planning Commission of India. Welcome address was given by Prof Sablok of Patiala University.The Presidential address was given by Vice President Prof. Pami Dua in stead of Prof. P.Pattanayak on Welfare Economics:Trends and its measurement.In the inaugural address,Prof Ahluwalia emphasised inclusiveness,labour laws reform,the policy to increase growth rates of the low income states of India,and to proper implementation of the 12th Five Year Plan.He also told that liberalisation may not harm to the backward states.But their growth rates must converge .In mentioning the poverty and inequality in India,he stressed that top 1% or 2% of the rich people may not matter the rest of the Indians.India should prioritise the scope of skill improvement.Lastly he expects that India must achieve the 8% growth rate of GDP.
Under the chairmanship of Prof.Biswajit Chatterjee,Prof.Satya Ranjan Chakraborty of ISI,Kolkata addressed on “Generalised Gini Polarization Indices for an Ordinal Dimension of Human Well –Being”
A panel discussion on the tribute of Prof. A.L.Nagar was held and Prof.K.L.Krishna,Prof.V.N. Pandit and Dr.Pami Dua showed their great tribute to Prof.Nagar.It was chaired by Prof.B.B.Bhattacharjee.
Prof. Chetan Ghate of ISI,Delhi gave a special lecture on Sectoral Infrastructure Investments in an Unbalaced Growing Economy which was chaired by Prof. R.B. Barman.(Ex.Executive  Director of RBI)
Prof.Mukul Majumder of Cornell University of USA gave special invited lecture on “Ruin Probabilities” which was chaired by Prof.K.L.Krishna.Prof.V.N.Pandit ,Former VC of SSIHL,addressed on “On Ethics,Economics and Finance” under chairmanship of Prof V.R.Panchamukhi.
Dr.Pami Dua of Delhi School of Economics, gave lecture on the topic “ Impact of Euro zone Crisis obn China and India” which was chaired by Dr.Shubhada Rao, Chief Economist,Yes Bank.
A special session on “Punjab Economy” was chairmed by S.Jaspal Singh ,Secretary,Govt. Of Punjab where Prof Upinder Sawhney of Punjab University lectured on “National Fiscal Issues with Special Reference to Punjab”, Prof. R.S. Sidhu of PAU,Ludhiana , lectured on “Agricultural economy of Punjab:Challenges and Way forward” and Prof. Sukhpal Singh of IIM,Ahmedabad, lectured on “Achieving Agro Industrial Development in Punjab:Potential ,Strategy and Mechanism”

There were six groups of technical sessions in which 290 papers on Economics and Econometrics were  presented so far ,all of which are high quality and innovative and of them most of them were discussed on recent issues on economics in both national and international contexts.
My paper (Dr.Debesh Bhowmik) was on the topic of “The determinants of Foreign Direct Investment :An econometric study with special reference to India” in which I took six variables namely, growth rate, openness, external debt, interest rate, and exchange rate and tested by cointegration and VECM  and good relation with unstable impulse response function.


The valedictory session was chaired by Prof Inderjeet Singh-Head ,Deppt. Of Economics who gave  praises to prof and staff and students of the Department to succeed the conference.The secretary,Prof.Bhanumurthy assured their good completion of the conference and Tresurer , Prof. Samugan gave mementos to all  volunteers of the department scholars. The valedictory lecture was given by Dr.T.C.A.Anant –the Chief Statistician of India on the topic “Harnessing the data revolution for measuring social development” where he mentioned about the technological advancement of data availability and pointing to useful or unuseful purposes of data. 

Monday 5 January 2015

THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT: AN ECONOMETRIC STUDY WITH SPECIAL REFERENCE TO INDIA



The following paper was presented in the 51st conference of the Indian Econometrics Society at Punjabi University ,Patiala during 12-14 December,2014

THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT: AN ECONOMETRIC STUDY WITH SPECIAL REFERENCE TO INDIA
Dr. Debesh Bhowmik
JEL-F21,F23,O4,C12,C32
Key words – Foreign direct investment, determinants of foreign direct investment, co-integration,


Foreign direct investment (FDI) has assumed increasing importance over time, becoming a prime concern for policy makers and a trendy debatable topic for economists. The debate on FDI has several facets, but the particular aspect that policy makers in capital-starved countries are concerned with is the determinants of FDI inflows. Many countries have policies aimed at creating stronger incentives for foreign investors who are potentially capable of providing FDI flows. Understanding the determining factors of FDI inflows and unveiling the reasons why some countries are more successful than others in attracting FDI may provide policy makers with useful guidance for future policy prescription. The provision of incentives and the adoption of FDI-stimulating policies are motivated by the realisation that FDI is a more reliable source of capital than portfolio investment. Large number of (time series and cross section) studies have been conducted to identify the determinants of FDI (inflows) but no consensus view has emerged, in the sense that there is no widely accepted set of explanatory variables that can be regarded as the “true” determinants of FDI.

Taking GDP growth rate, degree of opennesss, total external debt, interest rate and exchange rate as the important determinants of FDI in India during 1990-2013, the paper verified that the Engle-Granger methodology showed that there is co-integrating relationship where degree of openness and interest rate are significant where as Johansen test proved that there are 5cointegrating vectors  in the level series, 5 cointegrating vectors in the first difference series and 5 cointegrating vectors in the log series respectively. The VECM verified  that there are serial correlation and ARCH error with non-normal distribution where all roots lie inside the unit circle including 5 unit roots but impulse response functions do not approach to zero and error correction terms and residual systems are explosive. Similarly, the same conclusions were drawn in case of log series.
As concluding remarks we like to mention that a country which has a stable macroeconomic condition with high and sustained growth rates will receive more FDI inflows than a more volatile economy. Therefore, it is expected that GDP growth rate, industrial production, and interest rates would influence FDI flows positively and the inflation rate would influence positively or negatively. Market size plays an important role in attracting foreign direct investment from abroad. Market size is measured by GDP. Market size tend to influence the inflows, as an increased customer base signifies more opportunities of being successful and also the fact that with the rampant development the purchasing power of the people has also been greatly influenced moving to many levels higher in comparison to what it was before the economic growth.
Among the major reasons which discourage the international investors from investing in India
despite of its consistent economic growth includes: 1) Politics and corruption 2) Lack of
infrastructure 3) Inadequate Legal system 4) Instability of Indian Social and Political
environment 5) Absence of Corporate governance practices 6) Maturity of the financial markets
All in all a more open policy frame is required which can be integrated with developing

economies’ policy frame so that India becomes the most attractive destination and actually receive Foreign Direct Investment in the sectors which has potential to grow from foreign capital. Further, more the integration at National level is required as sectors which are covered under automatic route are subject to other caveats imposed by State and respective Ministry.