CoPS/IMPACT Working Paper Number G-308

Title: The Effects on the Indian Economy of an Expansion in Financial Capital Supply

Authors: J.A. Giesecke, P.B. Dixon, M.T. Rimmer, N.H. Tran and D. Pratap


International financial institutions provide capital to a range of Indian financial intermediaries, and engage with these intermediaries in a range of ways that potentially improve the allocation of capital within India. We investigate the impact on the Indian economy of a hypothetical rise in foreign-supplied capital to local Indian financial institution investees, and the engagement activities that might be associated with it. We do this by modelling: (a) the effects on the Indian economy of the supply of additional $US 10 b. of financial capital phased in over five years, and (b) India benefiting from the capital efficiency enhancement effects arising from engagement with the providers of this capital. We undertake our investigation with a 150-sector dynamic computable general equilibrium model of the Indian economy (NCAER-VU-DYN, or NV-DYN) which builds on an existing comparative-static model (NCAER-VU). Compared with NCAER-VU, NV-DYN contains: (i) year-on-year dynamics, (ii) a treatment of the labour market that allows for temporary unemployment, (iii) a Lewis-style mechanism governing movement of unskilled labour between rural and urban activities, and (iv) a top-down facility for calculating employment impacts by gender.

JEL classification: C68, O16, J46

Keywords: dynamic CGE; Indian economy; capital supply

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