18136 Mohanty Reddy India Explorations Into Growth Process Demand-side Epw

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Economic & Political Weekly EPW october 9, 2010 vol xlv no 41 47

Some Explorations into India’s Post-Independence Growth Process, 1950/51-2002/03: The Demand Side

Mritiunjoy Mohanty, V N Reddy

Aggregate demand growth in India during 1950-51 to

2002-03 has been consumption-driven at the margin,

with the relative contribution of consumption having

risen in the high growth phase covering the period

1980-81 to 2002-03. In this phase, consumption growth

accelerated and the gap between rates of growth of

investment and consumption narrowed substantially.

Further, in this high growth phase, aggregate demand

growth was consumption-driven not because of

increases in the private final consumption expenditure

ratio but because of increases in the government final

consumption expenditure ratio.

This paper has benefi ted enormously from comments from and/or discussions with Amitava Bose, Anindya Sen, Arnab Mukherji, Ashok Dhareshwar, A V Jose, Chiranjib Sen, Debashish Bhattacharjee, Gaurav Khanna, Nirmal Chandra, Rathin Roy, Santosh Sangem, Soumyen Sikdar, Subrata Guha, Sudip Chaudhuri and Sushil Khanna. Unfortunately none of the above is in any way implicated in the outcome.

Mritiunjoy Mohanty ([email protected]) is with the Indian Institute of Management Calcutta. V N Reddy ([email protected]) is with the IBS Hyderabad.

This paper is an attempt to understand better the character-istics of aggregate demand growth of the Indian economy over the period 1980-81 to 2002-03, in comparison with

1950-51 to 1980-81. It has been widely argued that 1980-81 marked a break in the trend rate of economic growth, with the economy settling at a higher trend rate of around 5.5% pa. It is hoped that the paper will provide a more nuanced understanding of this so-called higher growth phase and what might be necessary to in-crease and sustain the rate of growth of per capita income.

The paper reaches two broad sets of conclusions. First, both in the low and higher growth phase of the India’s economy, aggre-gate demand is, at the margin, consumption-driven and only weakly investment-driven over some of that period. Moreover, at the margin, aggregate demand is more consumption-driven in the higher growth phase than in the 1950s and early 1960s. Particularly, in the post-reform period, unlike any other period (including the 1980s), not only is aggregate demand consumption-driven but is not even weakly investment-driven. This is because, in the higher growth phase, consumption exhibits signifi cant acceleration in trend rate of growth. This acceleration in con-sumption growth and its impact on the growth process has not been discussed in the literature and is a particular contribution of this paper. Second, demand growth is consumption-driven be-cause of the changing composition of government expenditure as a source of autonomous demand. But this very shift towards in-creased government consumption expenditure also adversely affects the inducement to invest and therefore output growth.

The paper is divided into fi ve sections. Section 1 discusses why the composition of aggregate demand is an important issue and its relationship with the market question. Section 2 has a brief discussion of some growth empirics about India in the comparative context of some developing economies that have been successful in per capita income catch-up. Section 3 details the methodology adopted in analysing data and sets out the growth model that has been used. Section 4 looks at the behaviour of aggregate demand and its components over both the higher and the low growth phases of the economy and the evolution of government expenditure as a source of autonomous demand. Section 5 concludes by situating our results in the overall context of India’s growth literature for this period.

1 Composition of Aggregate Demand and the Market Question

Why should we worry about the composition of demand as be-tween consumption and investment if aggregate demand growth

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october 9, 2010 vol xlv no 41 EPW Economic & Political Weekly48

is robust enough as it has been since 1980-81? Because the composition of demand and specifi cally the nature of investment demand lies at the heart of income distribution and what is called “the market question”, specifi cally in its manifestation in the form of “the inducement to invest”.1 In our understanding, the nature of the solution to the market question is an important reason why India’s growth remains inequitable and relatively slow, both in comparison with others and her own requirements.2As Kalecki (1965) argues, “The crucial problem facing underdeveloped countries is thus to increase investment considerably, not for the sake of generating effective demand…but in order to accelerate expansion of productive capacity indispensable for the rapid growth of national income” (p 13).

In the context of Indian growth literature, Bagchi (1970) was the fi rst to suggest market size as a constraint to growth, arguing that increasing inequality constrained the growth of the market through the under-consumption channel. Among others, this was taken forward and developed by Raj (1976) and Nayyar (1978). However, drawing on Kalecki (1965), Chakravarty (1979), broach-ing the relationship between the market question and the compo-sition of aggregate demand, argued that “[t]he market question is not usually an independent problem to be tackled by methods which operate only on the demand side” (p 1235).3 Patnaik (1984) formalised Chakravarty (1979) and argued that over-consumption rather than under-consumption might be the problem.

Once we drop the assumptions that there is no distinction between savers and investors and that Say’s law holds (in this instance, that all savings are automatically invested),4 the market problem manifests itself, as Chakravarty (1979) says, as an “inducement to invest” and cannot, as Patnaik (1984) notes, be solved by endogenous stimuli. In addition, the lack of an induce-ment to invest, as Patnaik (1984) observes, is not a function of assuming that economies are necessarily demand constrained in every period. Indeed, as he points out, in Goodwin (1951), insuf-fi cient investment in equipment in earlier periods means that booms get choked off because of a supply constraint – the lack of capital goods.

The inherent cyclicality5 of capitalist growth is well recog-nised. But it is normally assumed that relative prices adjust not only to choke off booms but also to grow out of slumps. But once we make a distinction between savers and investors, there is very little to tether the inducement to invest at the bottom of a slump because the process of correction itself reduces effective demand. And if there is some degree of complementarity in investors’ expectation functions, then the issue becomes even more complicated because of a lack of a coordinating mechanism for individual investment decisions (Chamley and Gale 1994). Hence, the need for exogenous stimuli such as government expenditure, exports and demand arising because of innovations or what in Keynesian language would be called elements of autonomous demand.

Sources of Autonomous Demand and Growth: In Patnaik (1984), income distribution changes lead to over-consumption and the resulting decline in autonomous government investment expenditure pushes the economy onto a lower growth path. But

what if there is no complementarity between public and private investment and government has only consumption expenditure? Indeed the Keynesian paradox of thrift would tell us that in the short period, an increase in autonomous consumption expendi-ture, working through the multiplier, is expansionary. And, working through the accelerator, the expansion could induce an investment response and therefore spark off a virtuous cycle of growth. That is to say what if the world is what Bhaduri and Marglin (1990) call “stagnationist” (i e, the profi t rate, not the profi t share, is an important determinant of the investment func-tion)? Indeed, notice that the market question has been solved, as far as the inducement to invest is concerned, because autono-mous government consumption expenditure sustains and under-pins private investment expenditure.

But as Bhaduri and Marglin (1990) also suggest, the stagna-tionist6 (both capitalists and workers gain) outcome is only one of many possible outcomes. What if the economy is “exhilarationist” (i e, the profi t share, as opposed to the profi t rate, is an important determinant of the investment function)? What if the economy is not only “exhilarationist” but also “confl ictual”?7 What if private sector investment is not induced (when the government increases consumption expenditure) because the profi t share is an impor-tant determinant of the investment function and capitalists believe that the government will fi nance the budget defi cit through a tax on profi ts? And, if there is no private sector invest-ment response then expansionary fi scal policy will raise the level of output but not alter its rate of growth (Michl 2002).

Indeed, as Shaikh (2009) demonstrates, if expansionary fi scal policy is fi nanced through a defi cit and there is no investment re-sponse, given that the savings ratio is lowered, then working through the Harrod (Domar) effect, the warranted trend rate of growth is also lowered. Obviously, the Keynesian story of the im-portance of fi scal policy in maintaining effective demand be-comes a little more complicated in the Harrodian framework.8

Shaikh (2009) suggests that one way of reconciling the Keyne-sian focus on expected profi tability as the driver of accumulation with the Harrodian focus on long run minimum cost is, following Marx (1959) and Robinson (1962), to endogenise business savings (retained earnings).9 If some part of fi rm investment is fi nanced through business savings, then an increase in the rate of accumu-lation (and therefore desired investment being greater than existing savings) may be partly fi nanced through an increase in business savings, allowing the actual savings (household plus business savings) rate to respond to the needs of accumulation.10 Once business savings are endogenous, Shaikh suggests, it is pos-sible to “have both profi t-driven accumulation and normal capac-ity utilisation” (Shaikh 2009: 479).

In the Shaikh (2009) world, however, the government has no investment expenditure and therefore, the nature of private sector investment response becomes critical. If, however, autono-mous demand injection by the government has an important investment component and there is complementarity between public and private investment, then it is feasible that both the autonomous demand injection to GDP ratio and the investment ratio (including both public and private) will rise, allowing for an increase in both the level and rate of growth of GDP.

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The complementarity might induce the private sector to invest even if the government fi nances some part of its expenditure through a tax on profi ts.

Of course, autonomous demand comprises demand arising from export growth and innovations as well. Whereas the in-ducement to invest may be underpinned by export growth, what matters for economic growth is growth in net exports. There is evidence from comparative growth experience that in some in-stances net exports have been a signifi cant component of auto-nomous demand growth. It should be underlined that in these instances what was critical was the mutually reinforcing rise in export and investment ratios (to GDP). 11

Therefore, without accompanying investment growth, export growth on its own would not have solved the market question. Critical to the ability of export growth to induce private invest-ment is the ability of the exporting country to tilt terms of trade in its favour using both economic and non-economic means, as has been done by advanced capitalism12 or where that is not possible, the ability of the state to ensure profi tability of private investment by using its price setting capability and/or non-price mechanisms and at the same time forcing individual capitalists to compete either for the local or the export market, as has happened in the east Asian experience.13

Patnaik (1995) revisits the issue of composition of aggregate demand but does not pose it as an inducement to invest issue and concludes that “[A]ny tendency of the composition of aggregate demand to shift in favour of consumption would have a growth reducing effect” (p 8). There are a couple of points worth noting. First, as we have noted earlier, if the world is “stagnationist”, then a shift in favour of consumption will yield an investment response and hence will not have an adverse effect on the growth rate. However, as we have also seen, if the world is not “stagnationist”, then the Patnaik (1995) conclusion goes through. Therefore, in our view, it is best to pose the issue of composition of aggregate demand as one of an inducement to invest.

Second, in the 1995 position quoted above, we interpret “[s]hift in favour” to mean an increase in C/Y and a decline in I/Y. We, however, would like to make a somewhat stronger claim. Even if C/Y is declining and both I/Y and I/C are increasing (i e, investment growth is greater than consumption growth), given certain parameters, it is still possible that demand growth is consumption-led (we will defi ne consumption-led more rigor-ously below). And if, so defi ned, a growth process is consump-tion-led then the over-consumption hypothesis goes through even though I/Y and I/C might be rising.

To the extent that consumption and investment demand have important autonomous components, the solution of the market question through a defi cit fi nanced increase in government ex-penditure may therefore be critically dependent upon the mix between consumption and investment. Therefore, there can be no presumption that an increase in autonomous demand will necessarily improve expectations of private profi tability and if it does not, then in a capitalist economy, the market question has not been solved.

In sum then, as Kalecki (following Marx) has said, investment is the key to accumulation and growth, and in a capitalist

economy, therefore, the inducement to invest is an important variable explaining rates of growth. In turn, the inducement to invest is strongly infl uenced by the evolution of autonomous demand and its impact on private profi tability, i e, on how the market question is solved, the nature of the investment function and the role of the state (either directly or indirectly) in under-pinning expectations of private profi tability. And as Chakravarty (1979) notes, the manner in which the market question is solved will determine the feasibility of equitable growth.

From our standpoint, when government expenditure is an im-portant driver of autonomous demand and, as in the Indian case, there is complementarity between public and private invest-ment,14 then its composition as between consumption and invest-ment becomes a critical factor in the ability to underpin the inducement to invest.

2 Evidence from Growth Empirics

It is now accepted that the post-1980s growth experience in India in terms of rates of growth is signifi cantly different from the 30 or so odd years preceding it since independence. Equally importantly, contrary to views expressed, for example, by Srinivasan and Tendulkar (2003), there is also reasonable evi-dence to suggest that the reforms introduced in the early 1990s did not lead to a signifi cant break in the trend rate of growth, i e, the growth performance of the 1990s was largely a continuation of the trend of the 1980s (see e g, Williamson and Zagha 2002; Delong 2003; Wallack 2003; Hausman, Pritchett and Rodrik 2004; Rodrik and Subramaniam 2004; Virmani 2004; Nayyar 2006). In addition, Wallack (2003) fi nds that the highest value of the F-statistic associated with a break occurs in 1980. Our own analysis of structural breaks also corroborates Wallack’s fi ndings that, statistically speaking, the most signifi cant break took place in 1980.

It is worth reiterating, however, that characterising the entire period prior to the early 1980s as being “low growth” clearly mis-specifi es the Indian growth experience. As Bagchi (1970) notes (p 145), the period 1954-64 saw signifi cant acceleration in industrial growth. The petering out of this growth sparked the “the industrial stagnation debate” that tries to explain the inability to sustain high rates of growth. Not to recognise that decade long period of robust industrial growth is to miss a salient feature of India’s economic performance.15

Returning to the matter at hand, it is also worth noting that in the latter half of the 20th century whenever catch-up has occurred, it has been accompanied by historically unprecedented levels of investment and domestic savings. As Rodrik (2003) points out, despite unprecedented per capita income growth in developing countries over the period 1960-2000, the only regions that were able to play catch-up were those of east Asia and south-east Asia. For other regions, there have been periods of higher than average growth which unfortunately has not been sustained and hence they have fallen back in the catch-up race (Pritchett 2000). As Graphs 1 and 2 (p 51) (based on data from UN

SNA) attest, between 1960 and 2002, east and south-east Asia’s investment and saving effort was of a different order as com-pared, until recently, with that of India.

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Clearly then, catch-up for the economies of east and south-east Asia has happened with investment and savings ratios in the mid- to high 30s.16 For India things have been rather different as have her per capita income levels. We are not necessarily suggesting causality but the correlation between catch-up and high rates of investment and savings cannot be dismissed either.

Finally, we consider the speed of catch-up. As Table 1 suggests, starting from 1975 it took India 23 years to double her PCY. China took less than half that time to double her PCY whereas South Korea achieved it in little more than half. In addition, in some comparators, the time taken over subse-quent doubling has also reduced. For example, starting 1975 whereas China’s fi rst doubling takes 11 years, the next takes only nine and it almost doubles again eight years later.17

It might be argued that in all our examples demand growth was export-driven growth and net exports accounted for a sig-nifi cant proportion of total aggregate demand. Or, in other words, the market question was solved by accessing external markets just as neoliberal orthodoxy would prescribe. Be that as it may, in China, rapid GDP growth after 1978 was based primarily on its domestic market until around 1999, after which it became heavily dependent on the external market (Kotz and Zhu 2008).18 Therefore, integration into external markets is neither a necessary nor a suffi cient condition for rapid GDP and investment growth.

To conclude this section then, there is reasonable consensus about a break in the trend rate of growth of the Indian economy taking place in the early 1980s. Over the long period of 1960-2000,

east and south-east Asia are the only regions of the world econ-omy that have successfully played catch-up. In addition, the speed of catch-up has increased. This process of catch-up has been associated with historically unprecedented levels of invest-ment and mobilisation of domestic savings.

3 The Model

With this as the backdrop, our paper seeks to explore demand growth in the Indian economy and to see if there are discernible differences between the higher growth and the low growth phases. We feel that if one can isolate demand drivers19 of growth it might help us in framing the “why” question a little better, or at least the direction in which to look for answers. We end the analysis in 2002-03 because in our assessment from 2003-04 onwards the Indian economy enters a qualitatively different phase for reasons that we hope will become apparent as the analysis progresses.

At the heart of our paper, is essentially an analysis of relative share of components of demand read in conjunction with their growth rates, e g, share of increase in consumption to increase in total aggregate demand (C/Y), given the growth rates of con-sumption and aggregate demand. That is to say, to understand the aggregate impact, we examine not only at the rates of growth of variables but also the base on which these operate.

As noted earlier, sustained increases in per capita income from very low levels are normally accompanied by an increase in in-vestment ratios, (I/Y) as well as (I/C), i e, rates of growth of invest-ment have to be greater than both the rates of growth of income as well as of consumption. However, even if rate of growth of in-vestment is greater than that of consumption, the closer the latter is to the former, the slower the rise in I/Y and I/C ratios. This is so because the closer the two rates are to each other, the smaller the ratio (I/Y) and therefore, assuming constant ICORs, the slower the increase I/Y and consequently of output rates of growth.

Therefore, if investment ratios are increasing very rapidly over a relatively short period, then not only will the rate of investment be greater than the rate of consumption, but one might also expect (I/Y) to dominate other elements of aggregate demand over that period. If this, i e, I>C and I>(X-M), is too stringent a condition to require of aggregate demand growth, then certainly over this period when the relative contribution of investment to growth is increasing, (C – I) and [(X-M) – I] should narrow. Therefore, we characterise a process of demand growth as being investment driven if (I/Y) dominates other elements of aggregate demand. In addition, we characterise it as being weakly investment driven if at least (C – I) and [(X-M) – I] 20 is narrowing.

Analogously, it is possible to characterise demand growth as being consumption-driven if (C/Y) dominates other elements of aggregate demand or as being weakly consumption-driven if (C – I) and [C–(X-M)] are both growing.

Similarly, we can characterise demand growth as being net exports-driven if [(X-M)/Y] dominates other elements of aggre-gate demand or as being weakly net exports-driven if [(X-M)C] and [(X-M)-I] to be growing.

Given that we are looking at the composition of the increment in aggregate demand we take into account rates of growth as well

Graph 1: Gross Capital Formation (%GDP)

0

10

20

30

40

50

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

China

India

Malaysia

Korea

Graph 2: Gross Domestic Savings (%GDP)

0

10

20

30

40

50

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

China

India

Malaysia

Korea

Table 1: The Speed of Catch-Up: The Doubling of Incomes between 1975 and 2003

China 11 years 9 years (595-1270) (1270-2702) (4726) 1986 1995 2003

S Korea 12 years 10 years (3498-7454) (7454-14071) (16977) 1987 1997 2003

India 23 years (1139-2244) (2731) 1998 2003Figures in parentheses refer to PCY in 2000 constant PPP $.Source: UN SNA database.

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as the base on which the rates are being calculated. We have also defi ned accelerations and decelerations in component growth depending upon movements in these second order ratios. Typically, when analysing growth experiences, the standard assumption is of linear relationships with respect to time, i e, while dx/dt is non-zero, d2x/dt2 is equal to zero. For example, Hausman et al in their 2004 paper on growth accelerations are essentially looking to explain points at which there has been a break in the trend rate, i e, a change in dx/dt. We, on the other hand, are ex-ploring if there are phases during which both dx/dt and d2x/dt2

are non-zero. To the extent that aggregate demand growth can be characterised as being dominated by a component, say con-sumption, we then explore whether there has been acceleration (change in second-order) or deceleration in consumption growth.

We have arrived at the above analysis of movements in relative shares by estimating a set of growth equations for each of our periods and using the estimated growth rates to arrive at a suffi -cient condition to establish dominance and acceleration or decel-eration (see Appendix I (p 58) for derivation).

In keeping with the rest of the literature, we fi nd that there is a clear break in the trend rate of growth around 1980-81 and that there is no statistically signifi cant break in the post-reform period. Therefore, we have treated the entire higher growth phase as a single period – Period III. Following Wallack (2003), we fi nd that 1967-68 might constitute a break in, what some in the literature have called, the low growth phase. Given that this also coincides with roughly the end of the Third Five-Year Plan, we felt that it might be useful to break the “low growth” phase into two periods – Period I going from 1950-51 to 1966-67 and Period II from 1967-68 to 1979-80.21

Our three periods, therefore, are as follows: Period I: 1950-51 to 1966-67; Period II: 1967-68 to 1979-80; Period III: 1980-81 to 2002-03.

To explore the behaviour of a growth rate or a ratio we can either estimate separate equations for each period or estimate a single equation for all three periods. We begin by estimating the follow-ing equations for each period:Ln Yt = a1 + b1(t- t¯) + c1(t- t¯)2 + Ut where t belongs to time Period ILn Yt = a2+ b2(t- t¯) + c2(t- t¯)2 + Ut where t belongs to time Period IILn Yt = a3+ b3(t- t¯) + c3(t- t¯)2 + Ut where t belongs to time Period III

Noting that the error terms (Ut) have constant variance across time periods, the above equations have been combined using suitable dummy variables and the model below has been esti-mated to capture the differences, if any, in growth rates or move-ments in ratios across the time Periods I, II and III.The Growth ModelLn yt = a3 + (a1-a3) D1 + (a2 – a3) D2 + [b3 + (b1-b3) D1 + (b2 – b3) D2] (t – t ̄ ) + [c3 + (c1– c3) D1 + (c2 – c3) D2] (t- t¯) 2 + Ut

where D1 = 1 when t belongs to Period I (1950-51 to 1966-67) and = 0 otherwisewhere D2 = 1 when t belongs to Period II (1967-68 to 1979-80) and = 0 otherwise

The RBI’s Handbook of Statistics on the Indian Economy is the data source for the paper. Data used are at constant 1993-94 prices.

All estimation results that have been reported, unless other-wise specifi ed, are signifi cant at the 5% level. It should also be

noted that from here on, K denotes constant growth of the variable in question, A an acceleration in growth and B a deceleration.

4 Aggregate Demand Decomposition

Equations have been estimated for GDPmp, GDPfc, Consumption, Gross Domestic Capital Formation (GDCF), Private Final Con-sumption Expenditure (PFCE) and Government Final Consump-tion Expenditure (GFCE). Given the paucity of space, estimated equations only for GDPmp and Consumption have been reported in Appendix II (p 58). The full set of estimated equations is avail-able in Mohanty and Reddy (2009).

The results for our estimated GDP growth equations for the three periods are summarised in Table 2.

Our estimated growth rates clearly bring out the break that occurs in the trend rate of growth in Period III as compared to the earlier two periods. Growth in Period II was marginally lower than in Period I. It is worth noting that there is no acceleration in growth rates in any of our three periods.

Before turning to analyse aggregate demand in some detail, we would like to point out that we have chosen to focus on consumption and investment because net exports have not been a source of demand for the economy over any of our three periods, given that, barring a couple of years at towards the very end, the economy has run a trade and current account defi cits for most of the period.

It however bears pointing out that (M-X)/Y has declined right through the three periods, with the rate of decline increasing sharply in Period III (Graph 3). The decline suggests two things: fi rst the leakage of demand in Period III is much lower than in Periods I and II when the leakage was quite substantial. That is to say, in Period III, despite the fact that (X-M) remains negative for the most part, (X-M) becomes positive in many years. That is to say that growth in domestic absorption has fuelled aggregate

demand growth much more in Period III than in Periods I and II; second, the declining current account defi cit would suggest that in Period III, particularly in the 1990s growth has been fi nanced much more through domestic resource mobilisation than by foreign savings despite the economy’s increasing integration into the global economy.

Table 2: Estimated Growth Rates of Gross Domestic Product (GDP) Period I Period II Period III

Nature of Growth Nature of Growth Nature of Growth Growth Rate (%) Growth Rate (%) Growth Rate (%)

GDP at market prices K 3.90 K 3.41 K 5.51

GDP at factor cost K 3.60 K 3.32 K 5.54

Graph 3: (M-X)/GDP16

14

10

6

2

0

-2

(M-X)/GDP

4 per Mov avg ((M-X)/GDP)

1950-51 1960-61 1970-71 1980-81 1990-91 2000-01

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We can now turn our attention to the behaviour of consump-tion and investment over our three periods.

Table 3 suggests that there have been two periods of relatively high investment growth, Periods I and III. We did not fi nd signifi -cant difference in the rate of growth of investment between these two periods. Table 3 also brings out that there is a clear decline in investment growth in Period II. It is worth noting that there is no underlying acceleration or deceleration in investment growth in any of our three periods, i e, growth has taken place at a constant level (Table 2).

Consumption, however, is quite another story. First, the esti-mated rate of growth of consumption in Period III is higher than in Periods I and II. Second, and equally importantly, consump-tion growth accelerates in Period III from a low of 3.89% to a high of 5.23%. It is noteworthy that the lowest rate of growth of con-sumption in Period III is higher than the average rate of growth of consumption in Periods I and II. Consumption grew at a constant level in Periods I and II, with Period I growth being higher than Period II growth.

To sum up then, Periods I and III are phases of relatively high investment growth. However, in both these periods, even though investment grew somewhat faster than consumption, investment growth was at a constant level. Consumption growth on the other hand, was highest in Period III and even though somewhat lower than investment, grew with a marked acceleration during that period.

Given that Investment has grown faster than Consumption in all our three periods, C/Y has declined over time and I/Y has in-creased over time (Table 4), as one would expect. However, as we will see in a moment, this is not enough to characterise demand growth as being investment-driven.

Relative contribution of consumption and investment: Turning our attention to the relative contribution of consumption and invest-ment to demand growth, we know that C = [C/C]C and I = [I/I]ITherefore (C – I) = [(C/C)C – (I/I)I] = [g

CC – g

II] =

[gC – gI(I/C)]C, where gC and gI denote growth rates in consump-tion and investment, respectively.

The expression [gC – gI(I/C)]C will therefore be greater than zero if gC>gI(I/C)The above implies that C > I if (I/C) < gC/gI

Obviously, the above also implies that lower the rate of growth of consumption and higher the rate of growth of investment, the lower the value of the required I/C. Or put it differently, the lower gc is and the higher gi is, the greater the probability that (I/C) > gc/gi, or I >C.

We have used our estimated Consumption and Investment growth rates to calculate gC/gI and therefore the I/C ratio that would need to be attained if I > C. We call this ratio the required I/C. We then examine if the maximum ratio attained by I/C in that period is less than the required I/C. If it is, then it follows that C must be greater than I for each year of the entire period.

We fi nd that in Period III, the required I/C is 0.581. However, the actual I/C is substantially lower, varying between a minimum of 0.23 to a maximum of 0.37. In Period I the required I/C ratio is 0.517 and actual I/C varies between a minimum of 0.15 to a maxi-mum of 0.25. In Period II the required I/C is 0.652 and the actual varies between 0.21 and 0.29.

Therefore, we fi nd that C > I for each year in all the three time periods. Therefore, if we use our strict defi nition of invest-ment-led demand growth, i e, I > C, there is no year in no period for which this is true.

It is worth noting that the required I/C ratio in Period III (0.581), whereas lower than in Period II (0.652) is higher than in Period I (0.517). The Period II results are explained by the fact that there was a signifi cant decline in the rate of growth of in-vestment relative to Period I and the decline in the rate of growth of consumption is not as much (Table 3).

As we have noted earlier, both Periods I and III are phases of relatively high investment growth, but at the margin, consump-tion growth has been more dominant in Period III than in Period I. Therefore, even though consumption has been the dominant marginal driver of demand growth in all three periods, aggre-gate demand was much more consumption-driven in Period III than in Period I.

Even though we can characterise aggregate demand growth in India as being consumption-driven at the margin, it might be worthwhile adding some nuance to this story by looking at the behaviour of (C-I) over the low growth and high growth phase. Graphs 4 and 5 depict the movement of (C-I) normalised by Y and we think, add something to our understanding of aggregate demand behaviour. Graph 5 (p 54) depicts (C-I)/Y for the low

Table 3: Estimated Growth Rates of Consumption and Investment Period I Period II Period III

Nature of Growth Nature of Growth Nature of Growth Growth Rate (%) Growth Rate (%) Growth Rate (%)

C K 3.46 K 3.06 A 3.89-5.23

I K 6.69 K 4.69 K 6.69C refers to Consumption and I to Gross Domestic Capital Formation (GDCF). Consumption refers to [Private Final Consumer Expenditure (PFCE) + Government Final Consumer Expenditure (GFCE)].

Table 4: Period Averages of Actual Aggregate Demand Ratios C/Y I/Y I/C (M-X)/Y

Period I 91.8 17.4 0.19 9.2

Maximum 96.5 23.0 0.25

Minimum 87.2 12.5 0.15

Period II 88.2 20.7 0.24 9.0

Maximum 89.4 24.2 0.29

Minimum 83.3 18.8 0.21

Period III 80.4 23.7 0.30 4.1

Maximum 89.7 27.8 0.37

Minimum 73.7 20.0 0.23

Graph 4: Gap between Marginal Consumption and Investment (1950-51 to 1979-80)

-0.04

0

0.04

0.08

0.12

1950-51 1954-55 1958-59 1962-63 1966-67 1970-71 1974-75 1978-79

(C-)/Y

Poly. (C-)/Y

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growth phase, i e, 1950-51 to 1979-80 and Graph 6 depicts (C-I)/Y for the higher growth phase, i e, 1980-81 to 2002-03.

What both these graphs suggest is that even though aggregate demand growth has been consumption-driven at the margin right through all three periods, in Period I, the fi rst relatively high investment phase, (C-I) tended to narrow. In Period III, the sec-ond relatively high investment phase, the behaviour of (C-I) differs as between the 1980s and the 1990s. In the 1980s (C-I) narrows whereas in the post-reform period it tends to widen.22

Therefore, whereas we can characterise Period I and the pre-reform growth in Period III as being weakly investment driven where, i e, even though C>I, (C-I) is narrowing, the post-reform Period III growth is not even weakly investment driven, in that C>I and (C-I) is growing.

As far as Period III is concerned, the devil really is in the accel-eration in consumption growth in that period. If consumption growth had continued to grow at a constant level as it did in the low growth phase and aggregate demand at the margin was con-sumption-driven (i e, C>I), the process would also have been weakly investment-driven at the margin, in that (C-I) would continue to narrow through the process, as it was in the early part of Period III.

However, acceleration in consumption growth in Period III queers the pitch. As a result, in the latter part of period III, con-sumption and investment growth rates are much closer to each other and (C-I) is no longer narrowing and aggregate demand growth is not even weakly investment-driven! This slows down the rise in I/Y ratios and constrains output rates of growth, ex-plaining perhaps the slowdown in GDP growth after 1996-97.

Consumption Demand: It is worth dwelling a little on the com-position of consumption expenditure and the behaviour of its component parts. Underpinning the decline in (C/Y) is the decline in the (PFCE/Y) which has secularly declined right through all the three periods. As Table 5 makes clear, (PFCE/Y) declines from an average of 85.3 in Period I to 76.9 in Pe-riod II and to 69 in Pe-riod III. Exhibiting the exact opposite trend is (GFCE/Y). It has grown

secularly across all the three periods. It has increased from 6.5 in Period I to 9.6 in Period II and further to 11.4 in Period III. Gov-ernment consumption expenditure has therefore played an im-portant role in underpinning consumption demand growth in India and therefore slowing down in the decline in (C/Y).

Unfortunately, our growth equations for PFCE and GFCE did not yield results that were statistically interpretable. Even in terms of the behaviour of the ratios, (GFCE/Y) are not useful because the relevant growth equation has exhibited very low values of DW statistics. Thankfully, the growth equation for the ratio (PFCE/Y) was robust enough to be interpreted and it substantiates our ob-servation about the behaviour of PFCE. As Table 6 reports, what is noteworthy is that in both Periods II and III, there is an accelera-tion in the decline of the ratio (PFCE/Y), which probably explains why there is an acceleration in the declin e of the (C/Y) ratio (Table 4) even though the decline in the latter ratio (~ 11%) is much less than in the former (~ 16%).

All this to say that the PFCE ratio has behaved in the manner one would expect with the gap between GDP growth and PFCE growth increasing over time. Given that we do not have esti-mated values, we will use period averages of actual growth rates to get a sense of this – the average rate of PFCE growth in Period I was 91% of average GDP growth over that period. This ratio fell to 87% in Period II and declined again to 83% in Period III. However, it also worth bearing in mind that in Period III average PFCE growth was 4.4% pa which, compared with other economies, would be relatively high.

To get a sense of the relative importance of the growth of PFCE and GFCE during our three periods we plot the variable (GFCE/PFCE)*100.

Therefore even though as Table 5 suggests, on average, there has been a secular increase in GFCE/Y right through Periods I, II and III, it is not as if the rate of growth of GFCE has outstripped that of PFCE right through these three periods (Graph 6). By look-ing at periods over which the ratio GFCE/PFCE has risen, we can identify three broad periods when GFCE grows faster than PFCE – 1958-59 to 1972-72; 1977-78 to 1987-88; and fi nally 1994-95 to 1999-2000. This does not allow us any neat generalisations in terms of our three periods, but nonetheless it would not be incor-rect to say that Government consumption has played a much more important role in underpinning the growth of consumption demand in Periods II and III than in Period I.

Graph 5: Gap between Marginal Consumption and Investment (1980-81 to 2002-03)

-0.02

0

0.02

0.04

0.06

1980-81 1984-85 1988-89 1992-93 1996-97 2000-01 2002-03

Poly. (C-)/Y (C-)/Y

Table 5: Private and Government Consumption Expenditure PFCE/Y GFCE/Y C/Y

Period I average 85.27 6.51 91.77

Maximum 90.54 9.07 96.51

Minimum 79.16 5.32 87.15

Period II average 76.90 9.55 88.24

Maximum 80.85 10.81 89.42

Minimum 73.94 8.58 83.28

Period III average 68.95 11.43 80.38

Maximum 79.11 12.62 89.71

Minimum 61.98 10.42 73.66

Table 6: Growth Pattern of the Ratio (PFCE/Y) Period I Period II Period III Nature of Growth Nature of Growth Nature of Growth

(PFCE/GDP) Decreasing with Decreasing with Decreasing with Deceleration Acceleration* Acceleration*Significant at 5.4%.

Graph 6: GFCE/PFCE

0

5

10

15

20

25

1950-51 1956-57 1962-63 1968-69 1974-75 1980-81 1986-87 1992-93 1998-99

GFCE/PFCE

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Investment Demand: To round off the aggregate demand story we now turn to the composition of investment as between public, private and household investment. Graphs 7 and 8 below depict the movement of public, private and household investment as a proportion of total investment between the periods 1950-51 to 1979-80 and 1980-81 to 2001-02.

As Graphs 7 and 8 make clear, the drivers of investment in Period I and Period III, our two high investment phases, are very different. In Period I (see Graph 7), investment is driven by Public investment, which increases its share from approximately 30% to more than 50% of total investment. Private Corporate investment which begins the period with a share of less than 10% of total investment sees almost a doubling in its share and is particularly robust between 1954-55 and 1963-64. The share of Household in-vestment declines by more than half, from more than 60% at the beginning of the period to less than 30% in 1963-64. It recovers (at the expense of Private Corporate investment) to end period with a share of more than 40%.

As Graph 8 suggests, at the beginning of Period III, both Public and Household investment have shares of greater than 40%. That of the former however is somewhat greater than that of latter. The share of Private Corporate investment is a little over 10%. Up to 1986-87, Public investment is relatively robust and sees some increase in its share of total investment.23 Alongside again is an increase in the share of Private Corporate investment, with its share increasing from 11 to 18% over that same period. House-hold investment obviously sees a decline in its share.

From 1986-87 onwards however there is an almost secular de-cline in the share of Public investment, from more than 50% to less than 30% of total investment towards the end of Period III. During this period (i e, from 1986-87 onwards), investment is driven by Private Corporate and Household investment, though with somewhat different trend behaviour. The share of House-hold investment exhibits a secular increase from 30% to more than 50%. That of Private Corporate investment declines until 1988-89 and then begins rising again to reach a peak of almost 40% in 1996-97, after which it declines to 23% by the end of 2001-02. By 2001-02 therefore Household investment is the dom-inant component of investment with a share of 50%, with Public

and Private Corporate investment with roughly equal shares, 26% and 23%, respectively.

It is worth noting that in both our periods where aggregate de-mand growth has been weakly investment-driven, i e, in Period I and the early part of Period III, Public investment has been the dominant driver of investment growth. The importance of Public investment in Period I and its declining importance in Period III are corroborated by observing its share as a percentage of GDP, as depicted in Graph 9. The Public investment ratio declines from around 11% in 1987-88 to 7% in 2001-02 whereas it rises from 5% to 11% in Period I.

Government Expenditure as a Driver of Autonomous Demand: What can be said about government expenditure as a driver of autonomous demand? First, that government expenditure (here defi ned as government consumption expenditure plus public investment) has been an important component of aggregate demand right through all our three periods, indeed, if anything, its importance has risen in Periods II and III. Second, Period I be-gins with Government consumption expenditure accounting for about 6% of GDP and Public investment around 5%. With acceler-ated growth in Public investment, Period I closes with Govern-ment consumption at 9% of GDP and Public investment at 11%. Period averages are 7% and 8%, respectively. Therefore, the composition of government expenditure decisively moves in favour of investment in Period I.

Even as growth slows down in Period II, the weight of govern-ment expenditure in aggregate demand increases and cutbacks in Public investment (particularly in the early part of the period) mean that the share of Government consumption expenditure as a proportion of total government expenditure rises. Averages for Period II for Government consumption expenditure and Public investment are 10% and 9%, respectively.

Period III opens (1980-81) with Government consumption expenditure and Public investment balanced at approximately 11% of GDP each. However, by the end of the period (2001-02), Government consumption expenditure had risen to 12% and Pub-lic investment had declined to 7%. Period averages stood at 11% and 9%, respectively. Therefore, in Period III again government expenditure is dominated by consumption expenditure.

But, as we know, Period III can be divided into two parts – an early part where aggregate demand growth is weakly investment-driven and a later part where it is strongly consumption-driven. Averages of Government consumption expenditure and Public investment during the phase when aggregate demand was weakly investment-driven are approximately 11% each. In the latter part of the period (which for the most part is the post-reform period), when aggregate demand growth was not even weakly

Graph 7: Composition of Investment (1950-51 to 1979-80)

0

0.2

0.4

0.6

0.8

1951-52 1954-55 1957-58 1960-61 1963-64 1966-67 1969-70 1972-73 1975-76 1978-79

Ratioprivate

RatiohhRatiopublic

Graph 8: Composition of Investment (1980-81 to 2001-02)

0

0.2

0.4

0.6

1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01

RatioprivateRatiohh

Ratiopublic

Graph 9: Investment Ratios

0

0.04

0.08

0.12

0.16

1950-51 1956-57 1962-63 1968-69 1974-75 1980-81 1986-87 1992-93 1998-99 2001-02

(Private I)/Y

(Public I)/Y (HH I)/Y

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investment-driven, averages are 12% and 9%, respectively for Government consumption expenditure and Public investment. Or, in other words, in the post-reform period Government ex-penditure is dominated by consumption expenditure (see also Chandra 2010: 47). And it is worth bearing in mind that through most of the period Government expenditure is signifi cantly defi cit-fi nanced.

It is useful to remind ourselves at this point that in both the episodes (in Period I and the early part of Period III) where aggregate demand growth has been weakly investment-driven, robust Public investment and Private Corporate investment have gone hand in hand. In the latter part of Period III (essentially the post-reform phase), however, there is a secular decline in Public investment and investment is driven by Private Corporate invest-ment and Household investment. From 1996-97 onwards, how-ever, there is a sharp deceleration in Private Corporate invest-ment as well, declining from around 10% to less than 6% by the year 2001-02. And, as we know, the economy found it diffi cult to sustain the initial burst of growth and decelerates quite sharply after 1995-96.

As our analytical discussion in Section I suggests, one plausible reason for the growth slowdown in the late 1990s is that in the latter part of Period III, with the shift in favour of Government consumption expenditure at the expense of Public investment, Government expenditure is unable to sustain the inducement to invest. And, given that it is signifi cantly defi cit fi nanced, it also pulls down the economy onto a lower growth path. It is worth-while noting that a similar kind of analysis might explain the slowdown in Period II despite the increasing weight of Govern-ment expenditure as a proportion of GDP in that period as well. In Patnaik (1984), declining Public investment and increased capi-talist consumption causes economic stagnation. We are suggest-ing that “over-consumption” is due to the following three reasons: fi rst, the increasing weight of Government consumption expendi-ture in total consumption expenditure; second, the increasing weight of Government consumption expenditure in total Govern-ment expenditure; and fi nally, the secular increase in the Gov-ernment expenditure to GDP ratio even as the Public investment to GDP ratio declines.

Of course, as we know, despite similarities between Period I and early Period III we have noted above, what distinguishes the latter from the earlier two periods is the trend break in growth that takes place around 1980. Growth in Period III is signifi cantly (both statistically and in an absolute sense) higher as compared with the earlier two periods (see Table 1). However, alongside this increase in the trend rate of growth is a trend decline in the employment elasticity of output. Not only is the employment elasticity lower in Period III as compared with Periods I and II but even within the former there is a sharp decline in the 1990s as compared with the 1980s – from 0.5 to 0.2.24 In other words despite the fact that in Period III the economy is on a higher growth trajectory, that growth has happened, particularly in the 1990s, with an increase in both open unemployment and under-employment of labour resources. Put differently, the required rate of growth for full employment of all available resources has increased.25

5 In Lieu of a Conclusion

What then is the upshot of the above? Put simply, aggregate de-mand growth in India has been consumption-driven at the mar-gin, with the relative contribution of consumption having risen in the high growth phase that begins in the early 1980s. This, of course, does not imply that there has been no investment growth. Indeed, right through the 52-year period, rate of growth of in-vestment has been higher than that of consumption (see Table 3). But it does mean that relative to investment, consumption growth has been high. And equally importantly, in the high growth phase (Period III), consumption growth accelerated and the gap between rates of growth of investment and consumption nar-rowed substantially. As a result, in the latter half of the high growth, as opposed to the fi rst, aggregate demand growth is not even weakly investment-driven, i e, (C-I) does not narrow. The narrowing of the gap between investment and consumption growth as a result of the acceleration in the latter, by lowering the (I/Y) ratio constrains growth of the I/Y ratio, perhaps ex-plaining the growth slowdown in the latter half of Period III.

Aggregate demand growth in India was consumption-driven not because of increases in the PFCE26 ratio but because of in-creases in the GFCE ratio. GFCE ratios have risen rapidly because government expenditure shifted towards consumption at the ex-pense of investment, except in Period I and for a brief while in the early part of Period III. Therefore, given the complementarity be-tween public and private investment, GFCE dominated government expenditure was unable to underpin the inducement to invest, thereby constraining the growth of the economy. And even though the economy itself is on a higher trend rate of growth, given declining employment elasticities, this was inadequate to absorb the labour force – the market question is back staring at India.

How does this square with other explanations for the break in the trend rate in the early 1980s? It adds nuance to those offered by Rodrik and Subramaniam (2004) and Nayyar (2006). As far as Rodrik and Subramaniam (2004) are concerned, we would like to make a couple of observations: fi rst, when we pose the issue as that of an inducement to invest then, unlike them, public invest-ment by inducing private corporate investment (as we have seen there is a sharp increase in the 1980s), might still remain an im-portant candidate to explain the break in the trend rate; second, an important part of their explanation is the unleashing of Keynesian “animal spirits” in the 1980s. We agree, but are able to ground that unleashing far more concretely in the ability of public investment to induce private corporate investment rather than merely to “pro-business” attitudes of the government, which, beyond a point, is neither here nor there. With respect to Nayyar (2006), we have argued that growth in investment and aggregate demand may not be suffi cient to sustain output growth. The com-position of aggregate demand might be crucial. And fi nally, even though Patnaik (2007) relates much more to the post-2002-03 growth phase and therefore outside this paper’s ambit, unlike him (see p 2077), even in this phase we would maintain the sali-ence of investment-driven public expenditure.27

We would like to close this paper with a few observations about the growth during 2003-04 to 2007-08 which we feel vali-date the basic thrust of our paper: fi rst, at 1999-2000 constant

SPECIAL ARTICLE


prices PCY grew at a historically unprecedented 7.4%. Total con-sumption (C) grew at 6.4% whereas total investment (I) grew at 17.4%. Second, therefore, the gap between gi and gc was a phe-nomenal 11%. In comparison, using 1999-2000 constant prices, the gap between gi and gc for the period 1980-81 to 2002-03 was a mere 1.7%! Third, for the fi rst time in India’s growth history, I>C for most of 2003-04 to 2007-08. Finally, at current prices,

average I/Y and S/Y ratios for this period were 34.2% and 33.8% respectively, again historically unprecedented. And as Chan-drasekhar (2008) notes, business savings28 have made an impor-tant contribution to this improved savings performance. But as Patnaik (2007) suggests this acceleration in investment and out-put growth might not solve the unemployment problem. plus ça change, plus c’est la meme chose?

Notes

1 Patnaik (1984) points out that the market ques-tion comprises three distinct, though interrelated, questions: the realisation question; the induce-ment to invest question; and the increasing sur-plus question.

2 Whether the current rate of growth of an economy is suffi cient can only be judged in relation to that which allows for a full employment of available capital and labour resources.

3 Also see Chakravarty (1984: 846) in this regard. 4 Growth models that use these assumptions have

very different outcomes depending on how wages are modelled. In classical growth models, if the wage rate is held constant, an increase in savings ratio results in an increase in growth rates. In neoclassical Solow-type models, where wages are the adjusting variable, an increase in savings ratio has no impact on steady state growth rates.

5 See for example, Goodwin (1951) on how the in-teraction of the multiplier and accelerator would result in business cycles.

6 Robinson (1962) is able to retain the paradox of thrift in the short-run along with normal rates of capacity utilisation in the long-run. But as Lavoie (2010) points out, this also implies that there ex-ists a necessary negative relationship between real wages and accumulation.

7 See Marglin and Bhaduri (1990). Kurz (1990) uses the terms under-consumptionist and supply-side regime respectively for what Bhaduri and Marglin term as stagnationist and exhilarationist. Blecker (2002) calls them wage-led and profi t-led. As Lavoie (2010) points out, an exhilarationist aggregate demand regime is as likely as a stagnationist one, unless there are a priori views about the parame-ter values of investment and savings functions. Chapter 10 in Foley and Michl (1999) has a good discussion on what the literature calls investment constrained models of growth.

8 Shaikh (2009) demonstrates that expansionary fi scal policy will lead to an increase in output growth only if the share of government expendi-ture and exports in output falls over time. From our standpoint this must imply that the invest-ment ratio rises faster than the ratio of autono-mous demand injection to GDP, i e, only if autono-mous demand injection by the government re-sults in a suffi ciently large private sector invest-ment response.

9 In a world of asymmetric information, retained earnings can be seen as a signalling device that actually improves access to credit markets. See also Fazzari et al (1988) and Hoshi et al (1991).

10 It is useful to recall that in a standard Keynesian framework, savings are completely passive and respond to investment only if output adjusts via the multiplier.

11 See UNCTAD’s Trade and Development Report 1996 on the role of a “dynamic export-investment nexus” in explaining east Asian growth.

12 See Patnaik (1997) for a model of the nexus be-tween the ability of to infl uence terms of trade and stability and accumulation in advanced capi-talism. As UNCTAD (1996) would imply, east Asia is able to escape the Prebisch (1950) terms-of-trade trap because of the nexus between rising invest-ment, manufacturing value added and export to GDP ratios.

13 See, e g, Amsden (1989), Wade (2003, 1990), Chang (1994) and Aoki, Kim and Okuno-Fujiwara (1998).

14 In the Indian case, the complementarity between public and private investment was pointed out by Srinivasan and Narayana (1977) and Shetty (1978). Athukorala and Sen (2003) provide evi-dence that the complementarity still holds good.

15 For a retrospective look at this debate see the “Introduction” to Nayyar (1994) and Chaudhuri (1998). Also see, among others, Nayyar (2006) on the “low growth” debate.

16 Rostow in his 1965 tract Stages of Economic Growth: A Non-Communist Manifesto had sug-gested that take-off (i e, sustained growth in per capita incomes) would happen at an investment ratio of around 20%!

17 Between 1820 and 1870 when Britain was the world’s leading superpower, per capita income grew at an average rate of 1.3% and during the period of US’ ascendancy to superpower status, i e, the half century before the fi rst world war, she had an average annual per capita income growth of merely 1.8% (see Maddison 2001).

18 See also Bardhan (2010: 6). 19 In this context also see Bose and Chattopadhyay

(2009), particularly pp 4-13. 20 In case of a trade defi cit, this will refer to the rate

at which the defi cit narrows. If the defi cit is wid-ening and investment growth is positive, then I> (X-M).

21 Nayyar (2006) incorporates the colonial period and fi nds two statistically signifi cant breaks in the trend rate of growth of the Indian economy – one around 1950 and the other around 1980 with the former more signifi cant than the latter.

22 It is possible to mathematically establish the be-haviour of (C-I) over our three periods. Only, given the acceleration in consumption growth in Period III, the math gets somewhat a messy and long, adding to the length of an already long paper. We therefore decided to adopt the visual route. We thank Ashok Dhareshwar for helping mathematically establish the behaviour of (C-I) over our three periods.

23 Also see Nayyar (2006), p 1456. We however date the decline earlier than he does.

24 See for example, Chandrasekhar and Ghosh (2007), Sections I and II in Mohanty (2009) and Kannan and Raveendran (2009).

25 The last NSSO (61st round) suggests both an im-provement in employment elasticities and some revival of employment growth (see Rangarajan et al 2007). However see Kannan and Raveendran (2009) on how organised manufacturing has seen capital intensifi cation at the expense of employ-ment growth. Also see Mohanty (2009) on the changing nature and dynamic of employment generation.

26 The distribution of PFCE across income classes might in itself be problem at least to the extent that it determines the output profi le which in turn might impact upon employment elasticity of out-put. For the moment, however, we have left out of the ambit issues related to the distribution of PFCE.

27 In Patnaik (2007), the stagnationary impact of over-consumption is mitigated by investment demand fuelled by elite consumption of new products.

28 On business savings, also see Chakrabarti and Mohanty (2009).

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Appendix I

The equations below establish suffi cient conditions to be satisfi ed if both ratios and the underlying rates of change have to be increasing with re-spect to time. YtRt = Eq 1

xt dR xy

.

– yx. xy y

. x

.R.

t = = = ( – ) = Rt (gy – gx) 0, if gy gx Eq 2 dt x2 x2 y x

where, gy and gx are growth rates at time t.

y. dgy yy

.. – y

. 2 y.. y

. 2 y..

gy = g. y = = = – = – gy2 Eq 3 y dt y2 y y2 y

y.. y

..

g. y = – gy2 or = g

. y + gy

2 or y.. = (g

. y + gy

2) y Eq 4

y y

Similarly x.. = (g

. x + gx

2)x Eq 5 d x2 (x

. y. + xy

.. – yx

.. – y

. x. ) – (xy

. – yx

. )2xx

.Now consider R

. t = R

.. t =

dt x4

(xy.. – yx

.. ) 2xxyx

. (gy – gx) = –

x2 x4

xy[(g.

y + gy2) – (g

. x + gx

2)] y = – 2gx (gy – gx) x2 x

= Rt[(g.

y – g.

x) + (gy – gx) (gy + gx) – 2gx (gy – gx)] Eq 6 = Rt[(g

. y – g

. x) + (gy – gx)

2] Eq 7

For Equation 7 to be greater than 0, g. y g.

x is a suffi cient condition.

Appendix IIEstimated Equation for GDPmp

R2 = 0.99; SE = 2.35E-02; DW = 1.627

Coefficientsa

Model Unstandardised Coefficients Standardised Coefficients t Sig B Std Error Beta

1 (Constant) 13.582 .007 1840.811 .000

D1 -1.358 .011 -.965 -119.893 .000

D2 -.820 .012 -.537 -66.605 .000

X1 5.507E-02 .001 .461 74.382 .000

D1X1 -.016 .001 -.069 -11.744 .000

D2X1 -.021 .002 -.060 -11.134 .000

X2 1.285E-04 .000 .006 1.026 .310

D1X2 .000 .000 -.011 -1.470 .149

D2X2 -8.6E-006 .001 .000 -.016 .987a Dependent Variable: LNGDPMP.

Estimated Equation for Total ConsumptionR2 = 0.99; SE = 1.945E-02; DW = 1.400

Coefficientsa

Model Unstandardised Coefficients Standardised Coefficients t Sig B Std Error Beta

1 (Constant) 13.354 .006 2191.619 .000

D1 -1.221 .009 -.972 -130.577 .000

D2 -.747 .010 -.548 -73.528 .000

X1 4.558E-02 .001 .427 74.550 .000

D1X1 -.011 .001 -.053 -9.793 .000

D2X1 -.015 .002 -.049 -9.880 .000

X2 3.046E-04 .000 .017 2.947 .005

D1X2 .000 .000 -.011 -1.662 .104

D2X2 5.545E-04 .000 .008 1.241 .221a Dependent Variable: LNCE1.

18136 Mohanty Reddy India Explorations Into Growth Process Demand-side Epw

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