FINANCIAL SECTOR LIBERALISATION IN INDIA:THEORY AND EMPIRICS

Bengal Economic Association organised a Mid-Year Seminar2012 on "Financial Sector Liberalisation in India:Theory and Empirics" in Vidyasagar University ,Department of Economics, on 6th October,2012.The Keynote Speech was given by Prof.N.R.Bhanumurty,NIPFP,NewDelhi on "Financial Sector Reforms and Financial Access in India and the invited lecture was delivered by Prof.(Retired) P.C.Das,IIT,Kharagpur,on "Liberalisation of the Financial Sector in India and its impact on growth and stability".Various research papers were presented by many Assistant Professors and emminent speakers.
Arindam Gupta spoke about 'Inclusion Driven reform in the Indian Banking Sector:The Government and the people'.Kalpataru Bandopadhyay and Tarak Nath Sahu told on "Poverty,Government Policy and Rate of Interest in Microfinance".Bratati Dasgupta spoke on "Inclusive growth and urban cooperative banks in the light of financial sector reform in India".Sathi Malakar delivered about "Financial sector reform in India :Theory and Empirics".Asim Karmakar said on "Financial sector reform in India".Mahasweta Bhattacharjee told on "Impact of liberalisation on Financial performances of public sector general insurance in India".Partha Sarkar told about"India's experiences with financial liberalisation,Anupam Parua spoke on "Scam-Prone India Inc.:A study of impact of reform measures".Dhraj Bandopadhyay told on "Impact of financial liberalisation on Indian economy...",Partha Pratim Roy spoke on "Financial sector reform and functioning of regional rural banks in India".Sarbapriya Ray and M.K.Pal told on "Exploring inflation and stock price behaviour in selected asian economics".Debes Mukhopadhyay told about"Financial sector reform in India with special emphasis on the banking sector reform",Anindya Mukherjee spoke on "Financial sector liberalisation in India vis-a-vis the political economy of our epoch",Bikas Das said about"Moving mutual fund from infancy to adolescence through liberalisation",Sanchita De told on "India's Liberalisation process and development of the financial sector",Sebak Jana delivered on "Efficiency of the district co-operative banks in WestBengal",Abhijit and Tanya told on "Financial liberalisation"A catalyst in economic development, and "An empirical study of banking sector in India",Mahapatra,Banerjee,Agarwal told on "An ethical change at the banking sector after liberalisation".

Debesh Bhowmik delivered on "Fiscal reform in India:Convergence and Co-integration".
The abstract is given below.

FISCAL REFORM IN INDIA : CONVERGENCE AND COINTEGRATION

Dr. Debesh Bhowmik

(International Institute for Development Studies, Kolkata

and Executive member, Bengal Economic Association)

debeshbhowmik@rediffmail.com

JEL-E62, H60, H62, G18

Keywords-Fiscal deficit, fiscal convergence, co-integration

Abstract

India is confronted with a high degree of fiscal deficit as percent of GDP since the planning period. The semilog linear trend line model states that the fiscal deficit of India has been declining marginally at the rate of 1.45% per year from 1990-91 to 2012-13 which was found statistically significant. We can regress the series nonlinearly as given below,

X=е^{(0.9839-t2.182)}

R²=0.253  , DW=1.3287, t values of two constants are 8.64 and -2.182 which are statistically significant.

India is structurally a fiscal deficit country and she needs fiscal convergence. This paper tries to test fiscal convergence especially for fiscal deficit and debt/GDP of Indian states during reform period from 1990-91 to 2011-12.It also tries to find out the co-integration test for fiscal deficit in India.

Following Sala-i-Martin (1996),the tests signify that the fiscal deficits of Indian States during 1997-98-2011-12 showed Beta divergence which was statistically significant but it satisfied sigma convergence hypothesis showing insignificant result. The test of Beta convergence of debt/SDP of all states during 1997-98-2011-12 confirmed insignificant convergence hypothesis and sigma convergence hypothesis showed divergent and insignificant.

To test co-integration of fiscal deficit , we assumed GDP growth rate, inflation rate, money supply growth rate, current account deficit, non-developmental expenditure, government liabilities, and revenue deficit as the co-integrating variables. The Engle and Granger (1987) test of co-integration suggested that the variables are co-integrated in the order of (1,1) since ADF statistic is significant. The t test for growth rate, non-developmental expenditure ,government liabilities(debt) and revenue deficit showed significant result in the long run equilibrium model.

The Error Correction Model was found statistically significant where t values of the coefficients of changes of growth rate and revenue deficit showed statistically significant. The same results were found in the co-integration test in terms of logarithm model.

Lastly, FRBM should include the recommendations of 13^th Finance Commission, provide for suitable strategies for coping with short run fluctuations, set up fiscal council to monitor and review of fiscal consolidation of states and continue to increase transparency of fiscal policy.

Therefore, India needs fiscal convergence immediately including fiscal consolidation and fiscal federalism of states otherwise differential state and centre fiscal policies would destabilize balance of payment equilibrium mechanism and would face asymmetric shocks of exchange rate, current account balance, inflation rate , foreign capital inflows and GDP growth rate and all those variables might worse the fiscal deficit otherwise the ineffectiveness of FRBMA would continue to exist.