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


  • Vikas Chitre

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


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.

Suggested Citation

  • Vikas Chitre, 2010. "Capacity Output and Cycles in Non-agricultural Output of the Indian Economy," Journal of Quantitative Economics, The Indian Econometric Society, vol. 8(1), pages 1-41, January.
  • Handle: RePEc:jqe:jqenew:v:8:y:2010:i:1:p:1-41
    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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    References listed on IDEAS

    1. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, vol. 49(3), pages 741-751, May.
    2. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    More about this item


    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;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E - Macroeconomics and Monetary Economics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East


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