Alberto Bagnai, Ph.D., Department of Regional Economics and History, University "Gabriele d'Annunzio" of Chieti, viale Pindaro, 42, Pescara, 65127, Italy and Christian A. Mongeau Ospina, B.A., Department of Public Economics, University of Rome I, via del Castro Laurenziano, 11, Roma, 00161, Italy.
Purposes – India is widely recognized as one of the most promising country in economic terms. Its growth performance in the last decade has been remarkable, with an average growth rate of about 7% in real terms, and its economy is proving resilient to global recession: among the most significant countries, only India and China are expected to feature positive growth rates in 2009. Many authors trace back this record of economic achievements to the economic reforms adopted since the 1980s. The purpose of this paper is to assess the structural changes of the Indian economy induced by the reform process, and to quantify the impact of the economic reforms on the growth path of India.
Data/methods – To this end we estimate a medium-size model of the Indian economy, whose specification accounts for the possible existence of structural breaks of unknown date in the estimated equations. The model is estimated on annual data from 1970 through 2008 using the Gregory and Hansen (1996) cointegration estimator, that allows for the presence of a regime change in an a priori unspecified point of the estimation sample. The model structure draws on the standard AS/AD framework, which is adapted to the Indian economic structure in several ways. First, the aggregate supply block is disaggregated at the major sectors level (primary, secondary, tertiary); second, while demography is taken as exogenous, the model features a disaggregation of total population into urban and rural population, and the share of urban over total population responds to the urban/rural income differential; third, on the demand side the consumption function is disaggregated accordingly in urban and rural consumption.
The Indian model is linked to a six poles model of the world economy (including submodels for the US, the euro area, Japan, China and the rest of the world) through a set of trade linkages equations that represent price competitiveness and world demand for Indian output. This approach results in a 48 equations model, of which 24 are stochastic equation, specified as error correction models. The exogenous variables are 32, of which 15 refer to the rest of the world.
Expected results – The estimation results allows us to identify and quantify the structural changes induced in the behavioural and technical parameters of the Indian economy by the economic reforms. This enables us to compare the impact of the different rounds of reforms on the Indian economic structure. Moreover, a number of simulation experiments compare the dynamic paths of the Indian economy conditional on the pre- and post-reform structural parameters. These experiments shed light on the dynamic multipliers effects of the reform measures, thereby providing useful information and policy recommendations on the nature and timing of the most effective reforms.