Do Size-dependent Tax Incentives Discourage Plant Size Expansion? Evidence from Panel Data in Indian Manufacturing

The article presents a new empirical application of the idea of threshold burden of tax incentives in India. The Indian government provided tax exemption to manufacturing units with sales turnover below a specified level over the years. The turnover threshold limit was US$1 million in 2009. Whether size-based tax rules incentivise firms to reorganise their production structure in order to stay below the threshold to take advantage of fiscal incentives is the key question addressed in this article. A significant factor that is widely believed to encourage small firms to stay small has been the tax incentives in the form of excise tax (turnover tax) exemptions below a specified value of sales each year. A key strategy followed by Indian firms to stay small and below the threshold has been product subcontracting or capacity subcontracting. We provide econometric evidence on this particular mechanism. The study is based on a unique unbalanced panel data of 29,213 manufacturing plants spanning the period 1999–2008 and a panel of 4,613 manufacturing firms covering the period 1990–2010. Average subcontracting intensity was found to be significantly higher in manufacturing establishments and firms with sales turnover below the ceiling level set by the tax rules. Econometric tests supported the hypothesis that establishments take advantage of tax incentives by staying below the threshold value of output. Econometric tests for a subgroup of domestic-market-oriented firms provide additional support to the hypothesis of threshold effects. These findings are relevant for policy design in developing and emerging economies. JEL Classification: O14, O17, L60, H32, H25

Monetary Policy Pass-through, Ownership and Crisis: How Robust is the Indian Evidence?

Employing disaggregated data for 2001–2016, this study investigates the lending and loan pricing behaviour of state-owned and domestic private banks in response to monetary policy. Three major findings emerge. First, although both the interest rate and the bank lending channels are relevant for monetary pass-through, there is a trade-off: the impact of the former is much higher than the latter, although it occurs with a significant lag. Second, domestic private banks have a far greater response to a monetary policy shock under the interest rate channel, whereas state-owned banks display a greater response under the bank-lending channel. And finally, state-owned banks cut back lending during periods of crises, although no such response is manifest in domestic private banks. JEL Codes: C23, D4, E43, E52, G21, L10

The Transition in Household Energy Use for Cooking in India: Evidence from a Longitudinal Survey

This article seeks to assess the transition in household energy use for cooking in India based on data from two rounds of the India Human Development Survey in 2004–2005 and 2011–2012. In this study, we have used the multinomial logistic regression and Multiple Classification Analysis conversion model to assess the transition in household energy use according to the socio-economic characteristics of households. Our findings suggest that although the transition from solid fuel to clean fuel is universal across households, it is greater among the socio-economically better-off households than their poorer counterparts. The use of solid fuel for cooking was more prevalent among the socio-economically disadvantaged households than among their socio-economically better-off counterparts in both 2004–2005 and 2011–2012. Convergence in clean cooking fuel use across the households can be possible only when socio-economically disadvantaged households progress faster than their already better-off counterparts. JEL Codes: B5, C23, D31, I3, Q5

India–European Union Trade Integration: An Analysis of Current and Future Trajectories

In a dynamic global environment of increased economic interdependence, nations are more than ever seeking to remove barriers to trade, despite growing trends of protectionism. In this context, India and the EU-27 have initiated talks for the establishment of a Bilateral Trade and Investment Agreement (BTIA) in an attempt to bring their economies together. However, after 16 rounds of negotiations, the failure to conclude this agreement has raised questions regarding the benefits of the agreement to India. This study attempts to examine the current trade scenario and the effects of the proposed regional trade agreement by estimating a structural gravity model. This study employs the Poisson Pseudo Maximum Likelihood (PPML) estimator for analysing the trade-creation and trade-diversion effects of the BTIA to overcome the shortcomings of ordinary least square (OLS) estimators. For the empirical analysis, the merchandise export data from the Gravity database has been taken for a period of 19 years from 2001 to 2019. The results indicate that the BTIA could lead to trade creation and trade diversion, highlighting the need for a re-evaluation of India’s trade policy. JEL Classification: F10, F13, F14, F15, O24

Environmental Kuznets Curve for Carbon Dioxide Emissions and Economic Growth in Algeria

This article examines how economic growth affects the environment through the lens of carbon dioxide (CO2) emissions, by testing the validity of the environmental Kuznets curve (EKC) for the case of Algeria during the period 1973–2016. For this, the auto regressive distributed lag (ARDL) method is used. The results of the econometric analysis confirm the existence of a positive long-term relationship between CO2 emissions and real GDP and show that the direction of this relationship goes from economic growth to CO2 emissions according to Granger causality tests. Specifically, for a developing country like Algeria, economic growth determines the level of emissions. This implies that an energy policy in favour of the environment can be put in place without risking negative repercussions on economic growth. In addition, the results of the ARDL regression validate EKC’s hypothesis: in the first phase, economic growth leads to a higher level of CO2 emissions, however, when a given threshold (inflection point) is reached, these emissions decrease. JEL Codes: O10, O47, Q50, Q53

Factors Influencing China’s Outward Foreign Direct Investment

The main purpose of this study is to explore factors determining China’s outward FDI (OFDI), with particular emphasis on the unique characteristics of China’s economy during the period of institutional transformation. The empirical results obtained in the present study show that Chinese enterprises tend to invest in countries that have a mature economy. Exports have a significantly positive effect on China’s OFDI, with the relationship between OFDI and exports in China being a complementary one. The relationship between imports and OFDI for China is one of substitution, as Chinese enterprises have often relied upon the importation of key components as a means of acquiring the technology they need. Exchange rates, monopolistic advantage, foreign exchange reserves and the level of technology intensity, all have a significant impact on China’s OFDI, while the GDP growth rate and geographical distance have not had a significant impact. JEL Classification: F200, O160, P450

Citizens’ Perceptions of Local Government Services and Their Trust in Local Authorities: Implications for Local Government in Mauritius

The linkage between local perceptions of municipal services and the level of trust in the local government is an under-researched and yet relevant aspect for a small multi-ethnic island like Mauritius. This research draws from the opinions of some 400 Mauritian inhabitants gathered through a Citizens’ Satisfaction Survey carried out in 2018 to evaluate the attitudes of citizens towards local government services and trigger further research on future options for improving the local government sector. The results from a structural equation modelling (SEM) indicate that satisfaction with local outputs is a significant predictor of trust in local authorities. Trust in public institutions is also found to be a possible mediator in this nexus. Further probing into citizens’ responses reveals that their preferences for local public goods differ across jurisdictions and vary with level of education. Findings also point to a tendency for citizen mobility which can have important implications for improving local services through fiscal decentralisation. JEL Classification: H1, H3, H4

Exchange Rate Uncertainty Effects on Domestic Investment in South Africa

The main goal of this study is to examine the effect of real effective exchange rate uncertainty on domestic investment for the South African economy over the sample period 1985Q1–2019Q2. To address this objective, Jordà’s (2005) local projection method is employed in this study. The generalised impulse response functions indicate that domestic investment decreases between the second and seventh quarters in response to one standard deviation shock in exchange rate uncertainty. Furthermore, high exchange rate uncertainty affects domestic investment negatively while low exchange rate uncertainty affects domestic investment positively. In other words, domestic investment declines due to a rise in exchange rate uncertainty while a drop in exchange rate uncertainty enhances domestic investment. Regarding the effects of control variables, output and export influences domestic investment positively and significantly. Inflation, however, has a negative and significant effect on domestic investment. Lastly, the Diks–Panchenko nonlinear Granger’s causality confirms bidirectional causality between exchange rate uncertainty and domestic investment. JEL Classification: C32, E22, F31, F41

Relationship Between International Factoring and Cross-border Trade: A Granger Causality Approach

Trade finance is integral for international trade as it offers fluidity and safety to the movement of merchandise and services globally. After the financial crisis of 2008–2009, there has been an increase in the use of open accounts, which enhances the possibilities for availing factoring for international trade. International factoring has witnessed considerable growth in the last decade. This article examines the relationship between international factoring and cross-border trade using Granger causality. It also examines the causal relations of international factoring with disaggregated data of cross-border trade of imports and exports. We find a unidirectional causal flow from international trade to international factoring, and a unidirectional casual flow from exports to international factoring. JEL Classification: F10, F30

Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks

This study analyses the impact of competition on liquidity creation by banks and investigates the dynamics between diversification, liquidity creation and competition for banks operating in India during the period from 2005 to 2018. Using the broad and narrow measures of liquidity creation, an inverse relationship is determined between liquidity creation and competition. The study also indicates a trade-off between pro-competitive policies to improve consumer welfare and the liquidity-destroying effects of competition, and it highlights how diversification affects liquidity creation. Highly diversified banks in India create less liquidity compared with less-diversified banks, both public and private. The liquidity-destroying effects of competition is intensified among highly diversified private banks, which suggest that diversification has not moderated the adverse impact of competition. JEL Codes: G01, G18, G21, G28