Thursday, August 18

Estimating Social Time Preference Rate for India:Lower Discount Rates for Climate Change Mitigation and other Long Run Investment Projects

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By M. N. Murty, Manoj Panda & William Joe

Working Paper No- 388

This paper provides estimates of social time preference rate for the appraisal of investment projects in India, It uses generalized Ramsay rule that accounts for impatience and wealth effects and precautionary effects of uncertain future consumption on rate of discount.Using relevant data from different sources for India, all three components of Ramsey rule mentioned above are estimated. Two approaches: (i) equal absolute sacrifice approach and (ii) Euler equation approach from optimal Ramsey growth models are used for estimating the elasticity of social marginal utility of consumption, a crucial parameter that determines both the wealth and precautionary effects. Estimates of social time preference rates for India are obtained as 8 percent and 6 percent respectively with original Ramsey rule and generalized Ramsey rule. Estimates of rates of discount for India based on further extended Ramsey rule accounting for uncertainty and persistence or correlation of future growth rates may suggest a term structure of declining discount rates. These rates could be 8, 6 and 4 percent respectively for projects with gestation periods 30, 50 and more than 100 years.

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