Capacity Output and Cycles in Non-agricultural Output of the Indian Economy

Vikas Chitre ()
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Vikas Chitre: Indian School of Political Economy, 968/21-22 Senapati Bapat Road, Pune 11016.

Journal of Quantitative Economics, 2010, vol. 8, issue 1, 1-41

Abstract: We estimate capacity output and cycles relative to it in India’s non-agricultural sector from 1951 to 2008, defining capacity as the level of output beyond which demand leads to a rise in prices. We postulate a delayed response of the price level of non-agricultural goods and services after demand exceeds capacity output, and use a VAR involving growth rate of non-agricultural output and inflation to estimate underlying structural demand and supply shocks. We estimate the structural parameters of the model, treating them as unknown polynomial functions of the lag operator rather than as scalars. We identify nine cycles in India’s non-agricultural output. Capacity utilisation in non-agricultural sector, while showing the above-mentioned cycles, has declined till 1979 and increased thereafter.

Keywords: Capacity Output; Capacity Utilisation; Output Gap; Trends and Cycles; Business Cycles; Growth Cycles in Indian Economy; Blanchard-Quah De-composition; Estimation of Demand and Supply Shocks; Growth and Inflation; Structural VAR; Estimation of Structural Parameters from VAR; Estimation of Structural Parameters as Polynomial Functions of Lag Operators (search for similar items in EconPapers)
JEL-codes: C C32 E E22 E32 N15 (search for similar items in EconPapers)
Date: 2010
Note: This is a revised and up-dated version of the author’s Presidential Address at the 41st Annual Conference of the Indian Econometric Society (TIES) will be held at Jadavpur University, Kolkata, during January 20-22, 2005. Helpful comments from Professors A.L Nagar, K.L. Krishna and M. Ramachandran are gratefully acknowledged. Earlier versions of this paper were also presented in seminars at Department of Economics, State University of New York at Buffalo and at Indira Gandhi Institute for Development Research, Mumbai. I am also thankful for useful comments received at these seminars, particularly from Professors Winston Chang, Dilip Nachane, Nagesh Revankar, and Rajendra Vaidya. I received valuable comments on the paper from Professors Romar Correa, Mihir Rakshit and V. M. Rao, for which I am extremely grateful, though it was not possible to adequately revise the paper to address their comments. Assistance most willingly provided by the members of the staff of the Indian School of Political Economy, especially by Mrs. Shaila Konlade and Shri Dnyaneshwar Bagade for preparing the type-script of the paper is deeply appreciated. However, the author alone is responsible for any errors and omissions which still remain in the paper.
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