The Dynamics of Demographic and Macroeconomic Variables in India

Background

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.