Session 3: Macroeconomics and finance
Dipak Dasgupta (Ministry of Finance, GoI) opened the first session of the second day of the IGC South Asia Growth Conference 2013 by explaining that economic and financial policy decisions are more of an art than a science, and they are made in a complicated context.
The first presenter, Mushfiq Mobarak (Yale and IGC-Bangladesh), examined informal insurance mechanisms and the quandary where people that the most need formal insurance, do not choose to buy it. His research in India shows that the type of informal insurance offered by a caste network – against aggregate or idiosyncratic risks – determines the demand for formal insurance. He also explained that offers of formal rainfall insurance can increase risk-taking, and potentially growth-enhancing, behaviour by farmers. Finally, he highlighted the importance of offering rainfall insurance to landless farm labourers, whose livelihoods are very weather-dependent, in addition to landed farm owners. Arvinder S Sachdeva (Ministry of Finance, GoI) praised this work as being one of the very few studies examining the micro-foundations of insurance markets, and explicitly using aspects of caste. He questioned the barriers being faced by farmers—such as credit constraints and trust—and the replicability of these insurance contracts in other States, particularly where there are high levels of poverty and a high proportion of Scheduled Castes/Tribes. Other comments referred to the behavioural effects of serial correlation in rainfall, and the level of subsidy in this project preventing break-even outcomes.
The second presenter, Pronab Sen, (IGC India-Central), discussed the incorporation of the Indian financial sector into the planning models of the Government of India, focussing on the relationship between savings and investments. He proposed that the increasing segmentation of the financial sector has some important effects on the macroeconomy. The main takeaway is that if the system is investment constrained (rather than savings constrained) opening up the capital account is more desirable than the Keynesian cure of increasing deficit financed public investment. Arvinder S Sachdeva (Ministry of Finance, GoI) agreed that all these issues remain relevant in policy-making today. He clarified definitions around intra-sectoral mobility, and questioned whether the propositions would change given that a high proportion of savings are in the form of physical—rather than financial—savings, or if the assumption of no asymmetric information was relaxed, or if the current account is partly, or fully, opened.
After a lively discussion between the audience and the authors, on issues like the potential endogeneity in the caste risk-sharing network, the treatment of assets like gold, the price adjustment mechanism in Sen’s model etc., the Chair closed the session by highlighting how improved understanding of insurance and financial markets continues to be relevant and papers such as these are extremely helpful in this.