The Dynamics of Demographic and Macroeconomic Variables in India

The Dynamics of Demographic and Macroeconomic Variables in India

Sovik Mukherjee (St. Xavier's University, India)
DOI: 10.4018/978-1-7998-3473-1.ch013
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The theory of economic growth is one of the principal branches of macroeconomics that tries to highlight the factors that have influenced the long-run trend of the growth of an economy. One of the leading issues in the literature on India's economic growth has been the manifold effects of inflation and employment among many others. The present paper aims to examine the relationship between economic growth rates, inflation, employment, and population growth in a Simultaneous Equations System (SES) framework, with an exclusive focus on the experience since economic liberalization in 1991. The literature on this subject has up till now analyzed the determinants of these endogenous variables disconnectedly. Not only does this paper endeavour to ascertain the existence of endogeneity among these variables but also highlight a multitude of factors that are connected in this regard. This paper comes to a close by discussing the possibilities for developing strategies that are overtly concerned with productive employment generation.
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“The difficulty lies not so much in developing new ideas as in escaping from old ones.” − Keynes



Coming to the issue of growth-employment linkage, the growth process in India shows evidence of the inability of high growth rates of output to stimulate sufficient employment opportunities. This phenomenon has been observed in India post-liberalization, since 1991. This indeed is what emerges from a more detailed consideration of the patterns of growth and employment dynamics in India. This absurdity has indeed haunted India’s economy for at least half a century and has threatened the developmental policy of ensuring employment opportunities for the populace as a whole (Ghosh and Chandrasekhar, 2007). The conventional Phillips curve in essence shows the inflation-unemployment tradeoff but the question is whether the negative relation holds good for the Indian economy. Growth is incomplete in an economy where there is not enough generation of employment. Phillips (1958) in his seminal contribution had affirmed that to control inflation in an economy, employment needs to be relinquished. Subsequently, we come to the population-growth linkage and how it affects employment. Instinctively, it can be argued that impacts can be both favourable as well as unfavourable. If a country has larger amount of inoperative resources, the population can supply laborers which when efficiently utilized will result in a rise in the rate of per-capita GDP growth through the generation of employment. On the other hand, an increase in population can also negatively affect the growth rate of GDP through poverty, lack of capital formation as employment generation in the formal sector has been miserable. Hence, an increase in population tends to press hard on economic resources as well as job opportunities. This paper will be looking into the fact that whether population growth affects GDP positively or negatively in the Indian context. It is also clear that there is enough simultaneity among the focus variables.

The present paper analyzes this crucial issue by building up an empirical model which highlights the liaison between economic growth, inflation rate, employment and population growth in a Simultaneous Equation System (SES) framework. The spotlight then shifts to the theoretical foundations of this analysis. Precisely, our objective is to bring out the presence of simultaneity among the focus variables in our proposed model. This is followed by the issues pertaining to the empirical model and the methodology applied. Next, the econometric exercise has been carried out which helps us to pencil in the comprehensive policy implications of this research. The paper comes to a close by resolving the fusillade of questions.

Key Terms in this Chapter

Stationarity: The statistical properties like mean, variance, autocorrelation, etc. of such a time series are all constant over a period of time. Statistical forecasting methods generally use this stationarity property through mathematical transformations in the process of predicting how the future varies in comparison to the past. It, thus, aims to identify whether there is unit root in the time series process or not.

T: Volume of Transactions of Goods and Services

Demographic Dividend: Demographic dividend occurs in the process of demographic transition when the proportion of working people in the total population is high and more people have the potential of productively contributing to economic growth.

Census: A census is the modus operandi of methodically acquiring and recording information about all the members of a given population in a given geographic area. The term is used most frequently with national population and housing censuses; other common censuses include the likes of agriculture, business, and traffic censuses.

Jobless Growth: Jobless growth is an economic phenomenon where an economy experiences a situation of growth coupled with a decreasing level of employment.

The original theory was considered orthodox among the 17th century classical economists and was overhauled by 20th-century economists: Irving Fisher, who formulated the above equation, and Milton Friedman.

p: Average Price Level

Quantity Theory of Money: In monetary economics, the quantity theory of money states that “the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply”. In its simplest form, the theory is expressed as:

V: Velocity of Circulation (the number of times money changes hands)

MV: PT (the Fisherian Equation):

Reserve Bank of India: The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee.

Each variable denotes the following: M = Money Supply

ILO: The International Labour Organization (ILO) is an agency of the United Nations mainly dealing with labour problems, particularly, the international labour standards, social protection, and work opportunities for all. At present, there are 187 member states in the ILO, 186 of the 193 UN member states plus the Cook Islands.

Simultaneity: Simultaneity is a specific type of endogeneity problem in which the explanatory variables are jointly determined with the dependent variable and thus, the error term is correlated with the explanatory variables.

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