Market, Regulations and Finance India Studies in Business and Economics The Indian economy is considered to be one of the fastest growing economies of the world with India amongst the most important G-20 economies. Ever since the Indian economy made its presence felt on the global platform, the research community is now even more in- terested in studying and analyzing what India has to offer. This series aims to bring forth the latest studies and research about India from the areas of economics, business, and manage- ment science. The titles featured in this series will present rigorous empirical research, often accompanied by policy recommendations, evoke and evaluate various aspects of the econ- omy and the business and management landscape in India, with a special focus on India’s relationship with the world in terms of business and trade. For further volumes: http://www.springer.com/series/11234 Ratan Khasnabis • Indrani Chakraborty Editors Market, Regulations and Finance Global Meltdown and the Indian Economy 1 3 Editors Ratan Khasnabis Indrani Chakraborty Institute of Development Studies Kolkata Professor of Economics Kolkata Institute of Development Studies Kolkata West Bengal Kolkata India West Bengal India ISSN 2198-0012 ISSN 2198-0020 (electronic) ISBN 978-81-322-1794-7 ISBN 978-81-322-1795-4 (eBook) DOI 10.1007/978-81-322-1795-4 Springer New Delhi Heidelberg New York Dordrecht London Library of Congress Control Number: 2014933557 © Springer India 2014 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Dedicated to our respected teacher Amiya Kumar Bagchi Preface All is not well with the state of the Indian economy post 2007–2008. The growth rate of GDP declined following the subprime crisis in USA. Subsequently, the econ- omy experienced serious volatility in terms of fluctuations in stock prices, exchange rates and rise in inflation rates. There were signs of revival of the economy in 2010– 2011, but the growth rate has declined recently. As a manifestation of concerns in policy-making circles, we may cite the recent Reserve Bank of India initiative for an international deliberation on the new trilemma between monetary policy, debt sustainability and financial stability. Many of the certainties of the old macroeco- nomic management have been called into question by recent developments. For example, a membership of OECD (Organisation for Economic Co-operation and Development)—a rich nations’ club—was supposed to shield an economy against the kind of crisis that has repeatedly embroiled the smaller or newer members of the eurozone. Or to take another example, fiscal prudence was supposed to be a guarantee of investor faith and therefore balance-of-payments sustainability of an economy. Those kinds of certainty are now gone. Or to take yet another example, with high rates of interest on loans and a turbulent stock market, why is Indian in- vestment so capital-intensive? In a world in which there is so much unemployment everywhere and in which incomes have become highly concentrated in a few hands, usual calculations of Engel elasticity-driven demand should have predicted a crash in food prices. But that has not happened. We are perhaps again facing problems of stagflation. But the old conservative remedy of defanging trade unions or weaken- ing social security nets is not working. In order to suggest appropriate policies, we need better to understand the macroeconomics of this situation and the incentive structures that are nested within that macroeconomic framework. With the aim of throwing more light on these burning issues the Institute of Development Studies Kolkata (IDSK) organized a national conference on “Money, Finance and Macroeconomics of the Real Economy” which was held during 26–28 April, 2012 at the Institute. The present volume is an outcome of the papers pre- sented at the conference. Many people have helped us in this endeavour. First of all, we are greatly in- debted to Amiya Kumar Bagchi, former Director and presently Emeritus Professor of IDSK, for constant support and inspiration to organize the conference as well as vii viii Preface to complete this volume. We are also grateful to Achin Chakraborty, the Director of IDSK for constant support. Support from Ramkrishna Chatterjee, the Joint Director of IDSK, should be specially acknowledged. We are also indebted to the other fac- ulty members and administrative staff of IDSK to organize the conference success- fully. Our heartfelt thanks to Poulomi Lahiri, Simantini Mukhopadhyay, Abhinab Ghosh, Soumali Banerjee, Sucheta Sardar and Dyuti Sinha, the rapporteurs of the conference. We finally express our gratitude to all the eminent scholars who have contributed to this volume, for their active participation in the conference which enriched the quality of deliberation as well as their sincere cooperation which made it possible for us to prepare the volume without delay. Finally, we thank Sagarika Ghosh and Nupoor Singh of Springer (India) for agreeing to publish this volume. Contents 1 Introduction ............................................................................................... 1 Ratan Khasnabis and Indrani Chakraborty 2 Monetary Policy, Financial Stability and Macro-prudential Regulation: An Indian Perspective .......................................................... 17 Dilip M. Nachane 3 Crisis as Paradigm Shifter: Reflections on 2008–?? .............................. 41 Subir Gokarn 4 The Financial Sector and the Real Economy: Some Considerations in the Indian Context ..................................................... 53 Pronab Sen 5 Recent Drivers of Global Commodity Prices: An Exploration ............. 63 Partha Ray 6 Fiscal Reforms, Fiscal Rule and Development Spending: Two Decades of Indian Experience .......................................................... 83 Pinaki Chakraborty 7 Inflation Targeting in Developing Countries: Barking up the Wrong Tree ................................................................................................ 95 Rohit Azad and Anupam Das 8 Global Ramifications of Reoriented US Policies Towards Employment Generation .......................................................................... 113 Parthapratim Pal and Atulan Guha 9 Employment, Growth and Inequality in India: A Critical Analysis ..... 141 Subhanil Chowdhury ix x Contents 10 Effects of Changing Pattern of Corporate Savings on Firm Profitability in India: A New Approach .................................................. 169 Indrani Chakraborty 11 Determinants of Price Deviations Across Regions in India ................... 195 Kaushik Bhattacharya 12 Globalisation and Growth: The Indian Case in Perspective ................. 213 Surajit Mazumdar 13 Oil Price Shock, Pass-Through Policy and its Impact on India ........... 231 Surajit Das, Sukanya Bose and N. R. Bhanumurthy