Crowding-Out or Crowding-In? Public and Private Investment in India

By Girish Bahal, Mehdi Raissi, Volodymyr Tulin

December 17, 2015

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Girish Bahal, Mehdi Raissi, and Volodymyr Tulin. Crowding-Out or Crowding-In? Public and Private Investment in India, (USA: International Monetary Fund, 2015) accessed April 21, 2025

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper contributes to the debate on the relationship between public-capital accumulation and private investment in India along the following dimensions. First, acknowledging major structural changes that the Indian economy has undergone in the past three decades, we study whether public investment in recent years has become more or less complementary to private investment in comparison to the period before 1980. Second, we construct a novel data-set of quarterly aggregate public and private investment in India over the period 1996Q2-2015Q1 using investment-project data from the CapEx-CMIE database. Third, embedding a theory-driven long-run relationship on the model, we estimate a range of Structural Vector Error Correction Models (SVECMs) to re-examine the public and private investment relationship in India. Identification is achieved by decomposing shocks into those with transitory and permanent effects. Our results suggest that while public-capital accumulation crowds out private investment in India over 1950-2012, the opposite is true when we restrict the sample post 1980 or conduct a quarterly analysis since 1996Q2. This change can most likely be attributed to the policy reforms which started during early 1980s and gained momentum after the 1991 crises.

Subject: Expenditure, Government debt management, Infrastructure, National accounts, Private investment, Production, Productivity, Public financial management (PFM), Public investment spending

Keywords: Cost trend, Crowding in, Crowding out, Global, Government debt management, Impulse response, India, Infrastructure, Infrastructure investment, Investment activity, Investment series, Math, Permanent shocks, Private investment, Productivity, Public investment, Public investment spending, Structural identification, Vector error correction models, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/264
Stock No:

WPIEA2015264
ISBN:

9781513541655
ISSN:

1018-5941

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