Note: In preparation for the Raj Centennial conference, CDS faculty and PhD scholars have put together notes on the research work from the Centre using the conference panels as categories. This note on Macroeconomy, Money, and Public Finance should be interpreted as a work-in-progress, and the Centre hopes to work on it further based on feedback and more archival exploration. Further, we acknowledge that there are different possible thematic narratives of the research; the present note can be seen as a preliminary perspective constructed by the corresponding authors using a style and approach preferred by them.

Macroeconomy, Money, and Public Finance

The research on macroeconomics and public finance at the CDS was led by none other than the founder, K. N. Raj. He made major contributions in identifying the drawbacks in the measurement of aggregate savings and investment in the economy and their role and contributions to India’s planned development strategy and economic growth. His work has not only immensely improved our understanding on the efficacy of monetary policy and measurement of government deficits in the developing world but also provided ways to critically analyse macroeconomic reforms in India. He also discussed the practical problems associated with agricultural taxation in India. Researchers at the CDS later pushed these tracks further. I. S. Gulati, K. K. George, and Sudipto Mundle in the 1970s and 1980s, and R. Mohan and other scholars in the 2000s, have sustained a research focus on various issues related to fiscal policy. CDS researchers have greatly contributed towards enhancing our understanding on the role of various economic reforms and financial sector development in India, including capital account liberalisation and stock market development for achieving macroeconomic stability and growth. This also includes research on the impact of domestic and external shocks, asymmetric response of monetary policy, and issues relating to inflation propagation mechanisms. Research on public finance at the CDS has critically examined nuances related to tax reforms at the national and state levels and suggested ways to enhance buoyancy in revenues by bridging loopholes in the tax administration. Another important theme at the CDS was examining the evolution of fiscal federalism in India and the role of various Finance Commissions in improving resource sharing between the central and state governments while aiming to achieve greater fiscal decentralisation.

Aggregate shocks and stabilisation reforms

An important theme of macroeconomic research at CDS concerns understanding the impact of aggregate shocks. In an early work on this theme, Desai (1979) explored the consequences of oil price shocks to the Indian economy. He identified sectoral and balance of payments consequences and estimated the aggregate cost of adverse terms of trade in 1974-76 to be about 3 percent of GNP relative to 1972. I. S. Gulati (1980) studied the implication of oil price shocks for the stability of the global monetary system. He argued that while the global monetary system in the 1970s favoured the industrialised countries, the increased oil revenues of OPEC countries did not destabilise it. More recently, Mallick (2007) examined the macroeconomic significance of increased energy use in the context of global oil and other energy supplies. He found that economic growth increased the consumption demand for crude oil and electricity in India in 1970-2005.

Studies in the 1980s pursued more general questions of how propagation of various shocks hinges on the macroeconomic environment. Kumar (1988) attributed the underlying cause of increasing vulnerability of rural incomes and employment to harvest failures and droughts. Weak demand and low consumption levels aggravated inter-regional disparities in agricultural incomes. This was further amplified by an increase in the overall savings rate and the share of durable assets (both reflecting inequality) in rural India. Bose (1987) theoretical contribution provided a model to circumvent major criticisms of the IS-LM model relating to its investment and linkages between the goods and money markets. An interesting finding is that if investment hinges on investment financing, then a positive supply shock such as a good harvest may decrease aggregate investment by shifting income towards savers with low marginal propensity to save—thereby reducing availability of investment finance.
In a very early assessment of India’s macro-stabilisation programme—contractionary fiscal and monetary policies and devaluation of the rupee—Balakrishnan (1993) argued that reduction of inflation in 1991-93 was explained more by favourable agricultural production than by the stabilisation programme itself. He observed that India’s inflation rate depends on agricultural price behaviour, which in turn depends on agricultural production and is largely driven by supply factors. By contrast, the stabilisation programme targeted aggregate demand. Balakrishnan was critical of the potential of the 1991 reforms for sustained economic growth in India. Joseph (1996) and Mani (1997) also critically examined the implications of the stabilisation and structural reforms programme for income distribution, employment generation, and disinvestment of state-owned undertakings.

Monetary policy and financial flows

Balakrishnan & Parameswaran (2019) studied inflation dynamics in India by building on Balakrishnan’s (1993) argument that inflation in India is driven by the fortunes of the agricultural sector. In their structuralist macroeconomic model, inflation is driven by the balance between food and non-food producing sectors as well as by oil prices and wages. Their model fits well with Indian data unlike the case of the monetary policy approach of inflation targeting in which inflation is driven by output gap and inflation expectations. Based on the PhD thesis of I. A. Shah (2021), two recent papers by I. A. Shah & Kundu (2022, 2024) studied the conduct and effect of monetary policy in India in 1997-2019 and found both to be asymmetric and dependent on the state of the economy. As regards the monetary policy reaction function, I. A. Shah & Kundu (2022) found that the RBI reacted more aggressively to the output gap both in general and in periods of high interest rates. I. A. Shah & Kundu (2024) observed that the effect of monetary policy on output is stronger during booms compared to recessions while expansionary monetary shocks have stronger effect on inflation compared to contractionary ones.

Many researchers at CDS have focussed on analysing the nature of aggregate financial flows, financial sector reforms and their implications on foreign investment and economic growth. Mani & Nandakumar (1993) assessed the relative importance of private loans vis-a-vis foreign direct investment (FDI) in aggregate net financial flows to India and showed that private commercial loans from international capital markets radically increased during the 1980s along with associated increase in borrowing. Chakraborty (2001) examined the effects of inflows of private foreign capital on some major macroeconomic variables in India in the 1990s and found that trends in private foreign capital inflows and some other variables indicated instability in the macroeconomic environment. A PhD thesis by L. R. Nair (2011) also found that liberalisation of capital account in India, in line with a general trend of acceleration in the pace of international private capital flows to developing countries following such a development, marked a significant shift of reliance from official and debt-creating flows to non-debt creating private capital flows like FDI and FPI.

Anand’s (2010) PhD thesis found that financial liberalisation improved efficiency of both the banking and the corporate sector in India but led to imbalances in resource allocation—rural and agricultural sectors were underserved, underscoring the need for the state’s proactive role to ensure inclusive growth and long-term investment. Sanati’s (2012) PhD thesis, on the other hand, analysed the macroeconomic impact of the changing structure of India’s financial sector after liberalisation. She highlighted the complementarities between bank lending, stock markets, and real sector growth. Her findings suggested that while financial integration aids in economic development, excessive global integration without a resilient domestic market could lead to vulnerabilities, in the form of external shocks affecting financial institutions and market liquidity. Several PhD theses at CDS examined the general theme of stock market development and flows of foreign institutional investment as well as their determinants in the period of financial liberalisation (Abraham, 2013; Chittedi, 2012; Dash, 2011). They found that financial liberalisation has contributed to greater development of the stock market in India—majorly led by banking sector reforms—and this contributed to overall financial development and economic growth.

Deficits and centre-state financial relations

Public finance has remained a core area of research at CDS from the early years onwards. Major themes include fiscal policies for employment expansion, growth and equity; generation of government revenues; and centre-state financial relationships. I. S. Gulati & Krishnan (1973) explored the role of fiscal policies—such as taxing capital and subsidising industrial output—for employment expansion in underdeveloped economies. Kannan & Mohan (2003) critically evaluated the emphasis placed on fiscal deficit reduction strategy without paying attention to its quality. They found that both central and state governments in India resort to the ‘softer’ option of cutting productive capital and necessary maintenance and social sector expenditures, and this had adversely affected possibilities for equitable growth and structural transformation. Along similar lines, Lekha’s (2003) PhD thesis empirically examined the relationship between the fiscal deficit of the central government and several macroeconomic variables in 1970-2001. The study challenged the notion that high fiscal deficits ‘crowd out’ private investment and showed the opposite to be the case. Further, while interest rates significantly impacted private investment, fiscal deficit did not impact interest rates. She also found that the impact on inflation depends on the nature of government expenditure financed by fiscal deficits and that current consumption expenditure may lead to inflationary pressures. A later study by Mallick (2008) found that variations in economic growth in India can be attributed to some extent to government revenue expenditure.

In an early study of centre-state financial relations, Gulati and George (1978) discussed the unequal distribution of institutional finance across richer and poorer states in India and argued for a larger role of central transfers in ensuring a more equitable distribution of overall resources. This general theme was picked up by R. Mohan and his collaborators in studies of revenue buoyancy of the central and state governments, particularly Kerala. Mohan (2004) argued for new methods for revenue mobilisation for the central government and Mohan & Shyjan (2007) for devolution of powers from the centre to states to tax services. Mohan & Shyjan (2009) analysed devolution of taxes and grants from the centre and found that formula-based tax devolution was more equalising than grants. Critically reflecting on the constitutional and political structure of Indian federalism and terms of references of Finance Commissions, Mohan et al. (2014) proposed an alternative methodology for horizontal devolution for the divisible pool of central taxes and disbursement of grants based on population and per capita own tax revenue gap of a state from the average of three highest states.

Kerala Economy

We conclude this selected review of literature by considering studies of Kerala’s macroeconomy. Reddy et al. (1992) argued that Kerala’s economic development depends on external linkages through trade and migration. Joseph & Harilal (2001) also discuss Kerala’s development experience in an open economy perspective and bring the question of migration and remittances within the structure of the regional economy. Rakhe (2003) highlighted that almost 35 percent of the total tax potential of general sales tax in 1972-2000 was not being tapped in Kerala. Shaheena’s (2003) PhD thesis analysed fiscal devolution and revenue mobilisation for Kerala during the 1990ss and found drastic changes in the composition of revenues sources of panchayats from the mid-1990s.

Later studies have examined state finances and shocks. Parameswaran (2011) examined trends in exports, foreign remittances, credit availability, and tourism in Kerala against the background of global financial crisis and recession. He found a reduction of exports of coir, cashew, marine products, and other commodities, as well as a decline in the growth of domestic tourists. Sen (2012) noted that despite falling liabilities/GSDP ratio, the extremely low coverage of financial liabilities by similar assets signals the financial fragility of the state government in the 2000s. Isaac & Mohan (2016) argued that a revenue-led fiscal consolidation is the way ahead for Kerala not only for sustaining and expanding the intervention in the social sector, but also for stepping up capital outlay. The latter is essential for improving infrastructure and inducing faster growth and higher revenue mobilisation, thereby making fiscal consolidation sustainable. Beyer et al. (2022) estimated the causal impact of the floods in 2018 in Kerala using monthly data during and right after the disaster. They found a decline in economic activity and consumer demand with a consequent rise in household borrowing for housing during the three months of the disaster. They also document an increase in labour demand due to reconstruction efforts after the floods that increased wages, with poorer households benefiting more.

References

Abraham, M. (2013). Foreign Portfolio Equity Investment in India: A Comparative Analysis of Determinants and Impact [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Anand, M. R. (2010). Financial sector reforms and resource allocation in the Indian economy (1990-2007) [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Balakrishnan, P. (1993). The Rationale and the Result of Current Stabilisation Programme. CDS Working Paper, 253.

Balakrishnan, P., & Parameswaran, M. (2019). The Dynamics of Inflation in India. CDS Working Paper, 485.

Beyer, R. C. M., Narayan, A., & Thakur, G. M. (2022). Natural disasters and Economic dynamics: Evidence from the Kerala flood. CDS Working Paper, 508.

Bose, A. (1987). Money and Commodities. CDS Working Paper, 222.

Chakraborty, I. (2001). Economic reforms, capital inflows and macro economic impact in India. CDS Working Paper, 311.

Chittedi, K. R. (2012). Stock Market Development; Integration and Contagion- An Empirical Analysis from the BRIC countries [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Dash, R. K. (2011). Stock Market Development and Economic Growth in India: A Study in the Context of Financial Liberalization [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Desai, A. V. (1979). Impact of Rise in Oil Prices in India. CDS Working Paper, 83.

Gulati, I. S. (1980). Oil Prices and World Monetary Scene. CDS Working Paper, 101.

Gulati, I. S., & Krishnan, T. N. (1973). Fiscal Measures to Improve Employment in Developing Countries. CDS Working Paper, 13.

Isaac, T. M. T., & Mohan, R. (2016). Sustainable Fiscal Consolidation Suggesting the Way Ahead for Kerala. CDS Working Paper, 469.

Joseph, K. J. (1996). Structural adjustment in India a survey of recent studies and issues for further research. CDS Working Paper, 267.

Joseph, K. J., & Harilal, K. N. (2001). Stagnation and Revival of Kerala Economy. CDS Working Paper, 306.

Kannan, K. P., & Mohan, R. (2003). India’s twelfth finance commission a view from Kerala. CDS Working Paper, 354.

Kumar, B. G. (1988). Consumption Disparities, Food Surpluses and Effective Demand Failure: Reflections on Macroeconomics of Drought Vulnerability. CDS Working Paper, 229.

Lekha, S. (2003). Macro Economic Impact of Fiscal Deficit in India: An Inter-temporal Analysis of Selected Macro-variables [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Mallick, H. (2007). Does Energy Consumption Fuel Economic Growth in India? CDS Working Paper, 388.

Mallick, H. (2008). Government spending, trade openness and economic growth in India: A time series analysis. CDS Working Paper, 403.

Mani, S. (1997). Divestment and Public Sector Enterprise Reforms: Indian Experience Since 1991. CDS Working Paper, 272.

Mani, S., & Nandakumar, P. (1993). Aggregate Net Financial Flows to India: The Relative Importance of Private Loan vis-a-vis Foreign Direct Investments. CDS Working Paper, 252.

Mohan, R. (2004). Central finances in India-alternative to procrustean fiscal correction. CDS Working Paper, 365.

Mohan, R., Ramalingam, N., & Shyjan, D. (2014). Horizontal Devolution of Resources to States in India Suggestions before the Fourteenth Finance Commission. CDS Working Paper, 457.

Mohan, R., & Shyjan, D. (2007). Taxing Powers and Developmental Role of the Indian States: A Study with Reference to Kerala. Review of Development and Change, 12(1), 99–127.

Mohan, R., & Shyjan, D. (2009). Tax Devolution and Grant Distribution to States in India: Analysis and Roadmap for Alternatives. CDS Working Paper, 419.

Nair, L. R. (2011). Capital Account Openness and its Implications for Indian Economy – An Empirical Study [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Parameswaran, M. (2011). Financial Crisis and Kerala Economy. CDS Working Paper, 441.

Rakhe, P. B. (2003). Estimation of tax leakage and its impact on fiscal health in Kerala. CDS Working Paper, 347.

Reddy, R., Isaac, T. M. T., & Duvvury, N. (1992). Balance of Trade, Remittance and Net Capital Flows: An Analysis of Economic Development in Kerala since independence. CDS Working Paper, 250.

Sanati, G. (2012). Macroeconomic impact of financial integration: Empirical evidence from India in a liberalised era [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Sen, T. K. (2012). Recent Developments in Kerala State Finances. CDS Working Paper, 449.

Shah, I. A. (2021). Monetary Policy of India: A Study of its Evolution, Conduct and Transmission [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Shah, I. A., & Kundu, S. (2022). Asymmetries in the monetary policy reaction function: Evidence from India. Studies in Nonlinear Dynamics & Econometrics, 26(4), 541–558.

Shah, I. A., & Kundu, S. (2024). Asymmetric effects of monetary policy: Evidence from India. Empirical Economics, 66(1), 243–277.

Shaheena, P. (2003). Fiscal Devolution and Revenue Mobilization: A Study of Gram Panchayat Finances in Kerala [PhD Thesis]. Centre for Development Studies / Jawaharlal Nehru University.

Prepared by Ashraful Khalq, Devika Dileep Kumar, Dr. Gogol Mitra Thakur, Prof. Hrushikesh Mallick, Mahitha K., Rhythm Sparsh Narayan, Dr. Ritika Jain, Sabeer V. C., Sangeetha Kethapaka, and Swathi Krishnan..