Capital inflows and Silver Standard in India
THE FOLLOWING ARTICLE IS PUBLISHED IN THE CHANDIGARH CONFERENCE ON 09-11 MARCH,2017,CONDUCTED BY IMRF
VOLUME-3 ,ISSUE-1,73-80
THE FOLLOWING ARTICLE IS PUBLISHED IN THE CHANDIGARH CONFERENCE ON 09-11 MARCH,2017,CONDUCTED BY IMRF
VOLUME-3 ,ISSUE-1,73-80
Capital
inflows and Silver Standard in India
Dr.Debesh
Bhowmik (Retired Principal and Ex.Associate Editor-Arthabeekshan-Journal of
Bengal Economic Association)
Abstract
In this paper author tries to relate gold and silver
inflows with GDP,GDP per capita,export, import and gold silver price ratio in
India during silver standard regime from 1851 to 1893. Author used
semi-log,double-log regression models, Johansen cointegration and VAR models (1991,1996)
and Bai-Perron model(2003) for structural change taking data from
Maddison(2006) and Ambedkar(1923). The paper concludes that gold inflows during
1851-1893 had decreased at the rate of 0.34% per year insignificantly but it
was nonstationary, convergent and had no structural breaks. Silver inflows during
1851-1893 had increased at the rate of 1.51% per year insignificantly and found
nonstationary and convergent and had one
upward structural break in 1857.No cointegration among gold or silver inflows
with GDP,GDP per capita, export, import and gold silver price ratio was found
during 1851-1893 where VAR model was unstable and nonstationary and impulse
response functions were diverging. Semi-log linear regression model among
silver inflows and gold inflows with those variables were also insignificant although
GDP, export, import,and gold silver price ratio had been increasing at the
rates of 0.52%,9.14% ,5.16% and 0.77% per year significantly. But double-log
linear regression model suggested that gold inflows had significant impact from
GDP,GDP per capita, export, and gold-silver price ratio but had no significant
impact of silver inflows from those variables during 1851-1893 respectively. Yet,there
is bidirectional causality among gold inflows, GDP, GDP per capita, export, import
and gold silver price ratio significantly during the given period. Even, there
were sharp depreciation of rupee sterling rate,falling silver price ,silver
production and rising gold price and gold production during the silver standard
regime. Thus, gold and silver inflows could not synthesize the silver standard
more effective in macro-dynamic adjustment during 1851-1893 although the series
of managerial experiments of the commissions and government are equally
responsible for instability of the silver standard in India which was equally
identical with gold standard in England
Key
words-Net gold inflows, net silver inflows, silver standard, GDP, export, import,
cointegration, VAR
JEL-E42,F33,N10,N20
I.Introduction
Silver standard in India was introduced in 1835 but
the act of XVII and the act of XXI in 1835 declared both silver coin and copper
coins as legal tender ,on the other hand , gold coin was not legal tender yet
it was circulated. Later on, in 1861 by Act of XIX , gold coin was treated as
legal tender. In 1861,the paper currency notes were circulated. The gold:silver
was 1:15.5 and rupee sterling rate was fixed at 1s10.5d where exchange was
governed by relative values of gold and silver.
During long 400 years from 1493 to 1893 , gold and
silver production were more or less uniform but during 1600-1700,index of gold
rose from 130 to 176,which rose to 270 during 1700-1800.In 1870,the index of
gold production stipulated to 2124 as compared to 450 for silver. Even the
rupee sterling rate depreciated and price of gold silver ratio appreciated to a
lager extend. India was one of chief producer of the silver and gold but she
was the net importer of both gold and silver which were volatile. Although
silver standard during 1873-1893 in India was as like as gold standard in
England during 1873-1893,yet British government introduced several policies of
mints, currency circulation as well as
bimetallism as an experimental basis which made the silver standard unstable
.During this period, most of the countries in the world started to introduce
gold standard including British colonies. In India, gold supplies and its
prices were stipulating compared to silver, but British Government denied to
introduce gold standard in spite of numerous positive signals of implementing
gold standard by many commissions. In 1893, England declared gold exchange
standard in India where gold was not convertible to rupee but rupee was
convertible to sterling which was fixed parity with gold. Therefore , success
story of silver standard is little yet there is no vital disturbance in working
the system of silver standard in India.
II.Objective
of the paper
In this paper author endeavours to analysis the
working of capital inflows in the silver standard in India and its impact on
the GDP ,GDP per capita and on international trade and even on the gold silver
price ratio during 1851-1893.The net gold import and net silver import were
considered as capital flows for the specified period.
III.Methodology
and data
Net gold import and net silver import were treated
as capital flows in India during 1851-1893.The trend lines of gold inflows, silver
inflows, export, import, GDP,GDP per capital, ratio of gold and silver price
were calculated by semi-log linear model. Stationary was observed through ARIMA
model, structural change was shown by Bai-Perron model(2003).Double-log
multiple regression model was used for showing relationship among those
variables with gold and silver inflows for the specified period. Since there is
no cointegration with gold inflows and other variables and silver inflows with
other variables ,author used Johansen VAR model(1991,1996) for showing
relationship analysing residual tests and impulse response functions. Even,Granger
(1969) model was tested for causality.Data for GDP and per capita GDP were
collected from Maddison(2006) and data for all other variables were taken from
B.R.Ambedkar(1923). Assume,x1=GDP,x2=GDP per capita,X3=export,x4=import,x5=gold
silver price ratio,y1=net gold import,y2=net silver
import
IV.Some
observations of the model
During the silver standard regime in India from 1851
to 1893,net gold inflows had been decreasing at the 0.34 per cent per year
which was insignificant.
Log(y1)=14.770-0.003433t
(58.54)* (-0.34)
R2=0.0028,F=0.118 ,DW=0.46 , y1=
net gold inflows(imports) ,*=significant at 5% level.
Net gold inflow from 1851 to 1893
is convergent but nonstationary because its AR(1) is convergent and stationary
but its MA(1) is convergent and nonstationary.
Log(y1t)=14.63648+0.7232log(y1t-1)+εt+0.083569εt-1+0.26009σ2
(40.19)* (3.46)* (0.24) (6.76)*
R2=0.58 ,F=18.57
,DW=1.97 ,inverted AR root=0.72 ,
inverted MA root=-0.08 ,*=significant at 5% level.
This series has no structural breaks during the
period.
On the other hand, net inflow of silver in India
during silver standard from 1851 to 1893 had been stipulating at the rate of
1.51% per year which was insignificant.
Log(y2)=15.034+0.015138t
(43.84)* (1.115)
R2=0.029 ,F=1.24 , DW=1.36 , y2=net
inflow of silver ,*=significant at 5%.
The net inflow of silver in India during 1851-1893
is nonstationary but convergent which is shown by ARIMA(1,1,1) model.It is not
a good fit yet it is stable.
Log(y2t)=15.363+0.48873log(y2t-1)+εt-0.183616εt-1+1.0639σ2
(35.71)* (0.96) (-0.34) (7.32)*
R2=0.11 , F=1.64,DW=1.96,inverted AR
root=0.49,inverted MA root=0.18 ,*=significant at 5% level.
Net inflow of silver has one upward
structural breaks in 1857 only.This is verified by Bai-Perron test(2003)in
which HAC standard errors and covariance was assumed and trimming 0.15 with
maximum 5 beaks is assumed.
Table-1: Structural breaks of net
inflow of silver
|
Variables
|
Coefficient
|
Standard
error
|
T
statistic
|
Prob
|
|
|
1851-1856=6
obs
|
|
|
|
|
c
|
14.2328
|
0.3368
|
42.25
|
0.00
|
|
|
1857-1893=37
obs
|
|
|
|
|
c
|
15.537
|
0.218
|
71.30
|
0.00
|
R2=0.17
,F=8.64* ,DW=1.62;Source-Computed
by author
Double log multivariate regression model showed that
One per cent increase in GDP,GDP per capita, export, import, gold silver price
ratio and net silver inflow led to 12.68% decrease ,19.27% increase,1.89%
increase ,1.47% increase,9.93% decrease and 0.13% increase in net inflows of
gold per year respectively where relation between gold inflows and GDP,GDP per
capita,export, gold silver price ratio are significant at 5% level.
Log(y1)=-19.359-12.683log(x1)+19.275log(x2)+1.89log(x3)+1.47log(x4)-9.938log(x5)+0.1319log(y2)
(-0.56) (-1.99)* (2.86)* (2.54)* (1.53) (-3.35)*
(1.35)
R2= 0.48, F=5.67* ,DW=1.24 , where x1=GDP,x2=GDP
per capita,x3=export,x4=import,x5= gold silver
price ratio,y2= net inflows of silver
Similarly, one per cent increase in GDP,GDP per
capita, export, import, gold silver price ratio and net gold inflow per year led
to11.11% fall,12.13% rise,1.86% increase,0.045% rise,1.47% increase and 0.37%
increase in net silver inflows in India per year during 1851-1893 in silver
standard regime which are all insignificant.
Log(y2)=2.739-11.1162log(x1)+12.139log(x2)+1.86log(x3)-0.045log(x4)+1.47log(x5)+0.37log(y1)
(0.047) (-1.10)
(0.98) (1.416) (-0.027) (0.25) (1.35)
R2=0.24 ,F=1.89 , DW=1.59 ,
To show linear combination of silver inflows with
other variables, Johansen Cointegration test suggests that there is no
cointegrating vector shown by Trace and Max Eigen Statistic (Table-2).
Table-2:Cointegration test
|
Hypothesised
no of CEs
|
Eigen
value
|
Trace
statistic
|
0.05
CV
|
Prob*
|
|
None
|
0.524
|
113.692
|
125.615
|
0.211
|
|
At
most 1
|
0.445
|
83.189
|
95.753
|
0.266
|
|
At
most2
|
0.412
|
58.993
|
69.818
|
0.267
|
|
At
most3
|
0.299
|
37.219
|
47.856
|
0.337
|
|
At
most4
|
0.245
|
22.630
|
29.797
|
0.264
|
|
At
most5
|
0.236
|
11.095
|
15.494
|
0.205
|
|
At
most6
|
0.0006
|
0.026
|
3.841
|
0.87
|
|
Hypothesised
no of CEs
|
Eigen
value
|
Max
Eigen statistic
|
0.05
CV
|
Prob*
|
|
None
|
0.524
|
30.502
|
46.231
|
0.75
|
|
At
most 1
|
0.445
|
24.196
|
40.077
|
0.825
|
|
At
most2
|
0.412
|
21.774
|
33.876
|
0.625
|
|
At
most3
|
0.299
|
14.588
|
27.584
|
0.779
|
|
At
most4
|
0.245
|
11.534
|
21.131
|
0.593
|
|
At
most5
|
0.236
|
11.068
|
14.264
|
0.150
|
|
At
most6
|
0.0006
|
0.0266
|
3.841
|
0.870
|
|
|
|
|
|
|
*=Mackinnon Haug Michelis(1999) p values
Since there is no cointegration ,The estimated VAR
model is given below.
Δx1t=8451.51+0.212Δx1t-1-2.161Δx2t-1+3.10E-06Δx3t-1+1.53E-05Δx4t-1+174.27Δx5t-1-9.07E-06Δy1t-1+7.32E-06Δy2t-1
(3.6)*
(1.02) (-0.54) (0.32) (1.27) (1.45) (-0.22) (0.51)
R2=0.92 ,F=56.29 , AIC=14.47
SC=14.80
Δx2t=313.711-0.025Δx1t-1+0.796Δx2t-1+1.20E-07Δx3t-1+3.32E-07Δx4t-1+7.67Δx5t-1-8.67E-07Δy1t-1+2.37E-07Δy2t-2
(3.97)* (-3.53)* (5.83)* (0.365) (0.807) (1.86) (-0.86) (0.48)
R2=0.765 , F=15.81 , AIC=7.72
, SC=8.05
Δx3t=-46481278+4953.34Δx1t-1-137563.9Δx2t-1+0.466Δx3t-1+0.068Δx4t-1+4792340Δx5t-1+1.919Δy1t-1-0.355Δy2t-1
(-1.08) (1.27) (-1.84) (2.59)* (0.305) (2.14)* (2.57)* (-1.33)
R2=0.96 ,F=130.0* , AIC=34.14 , SC=74.47
Δx4t=-1.11E+08+9232.72Δx1t-1-84374.41Δx2t-1+0.084Δx3t-1+0.3377Δx4t-1+3264343Δx5t-1+0.2086Δy1t-1-0.235Δy2t-1
(-3.92)* (3.61)* (-1.72) (0.713) (2.29)* (2.21)* (0.425) (-1.33)
R2=0.98 , F=247.81* , AIC=33.3
, SC=33.63
Δx5t=4.0918-8.24E-05Δx1t-1+0.00176Δx2t-1+4.27E-09Δx3t-1-2.07E-08Δx4t-1+0.716Δx5t-1-6.34E-08Δy1t-1+1.22-E08Δy2t-1
(1.8) (-0.401) (0.439) (0.45)
(1.75) (6.06)* (-1.73) (0.908)
R2=0.97 , F=212.09* , AIC=0.629
, SC=0.96
Δy1t=-8108862+636.61Δx1t-1+4042.18Δx2t-1-0.0215Δx3t-1-0.00204Δx4t-1-76501.53Δx5t-1+0.8244Δy1t-1+0.033Δy2t-1
(-0.81) (0.708) (0.23) (-0.51) (-0.03) (-0.14) (4.78)* (0.54)
R2=0.67 , F=10.28 ,
AIC=31.21 , SC=31.54
Δy2t=-63316662+3366.48Δx1t-1+311.52Δx2t-1-0.034Δx3t-1-0.204Δx4t-1+1705435Δx5t-1+1.036Δy1t-1+0.235Δy2t-1
(-2.56)* (0.50) (0.007) (-0.33)
(-1.58) (1.3) (2.42)* (1.53)
R2=0.42 , F=3.63 , AIC=33.03
, SC=33.36 , *=significant at 5% level
The estimated VAR model states that
[i] change of GDP per capita is negatively related with change of previous
period’s GDP and positively related with previous period’s GDP per capita,[ii]
change of export is positively related with change of previous period’s
export,ratio of gold and silver price,change of gold inflows,[iii] change of
import is positively related with change of previous period’s GDP,import and
gold silver price ratio,[iv]change of gold and silver inflows are positively
related with their previous period .Other relations are insignificant.
This VAR model is
unstable because one of its 7 roots is greater than one ,two roots are
imaginary and 4 roots are less than one (,ie
1.012998,0.853108±0.084339i,0.527198, 0.307550,0.272081),so all roots do not
lie inside the unit root circle.
The impulse response functions are diverging so that
it is nonstationary and unstable.The exogenous shocks could not tend the model
into equilibrium.
VII.Conclusion
The paper concludes that gold inflows during
1851-1893 had decreased at the rate of 0.34% per year insignificantly but it
was nonstationary,convergent and had no structural breaks.Silver inflows during
1851-1893 had increased at the rate of 1.51% per year insignificantly and found
nonstationary and convergent and had one
upward structural break in 1857.No cointegration among gold or silver inflows
with GDP,GDP per capita,export,import and gold silver price ratio was found
during 1851-1893 where VAR model was unstable and nonstationary and impulse
response functions were diverging.Semi-log linear regression model among silver
inflows and gold inflows with those variables were also insignificant although
GDP,export,import,and gold silver price ratio had been increasing at the rates
of 0.52%,9.14% ,5.16% and 0.77% per year significantly.But double-log linear
regression model suggested that gold inflows had significant impact from
GDP,GDP per capita,export,and gold-silver price ratio but had no significant
impact of silver inflows from those variables during 1851-1893
respectively.Yet,there is bidirectional causality among gold inflows,GDP,GDP
per capita,export,import and gold silver price ratio significantly during the
given period.Even,there were sharp depreciation of rupee sterling rate,silver
price and production and gold price increased with production during the silver
standard regime.Thus,gold and silver inflows could not synthesize the silver
standard more effective in macro-dynamic adjustment during 1851-1893 although
the series of managerial experiments of the commissions and government are
equally responsible for instability of the silver standard in India which was
equally identical with gold standard in England.
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