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Did Public Investment Crowd Out Private Investment in India?

The maximum entropy bootstrap method is applied to overcome the econometric constraints of using a short time series after the publication of a new macroeconomic series in India. A short time series (quarterly data) of stationary and non-stationary variables between 2011 and 2016 is used to confirm the positive role of public infrastructure investment. The significant result has policy implications in terms of the current debate, whether public investment “crowds in” rather than “crowds out” private corporate investment in India.

Private investment in India has ­averaged around 25% of the gross dome­stic product (GDP) during 2004–05 to 2015–16, wherein both the corporate and household sectors consistently contributed more than 10%. Public sector contributed an average of 8%–8.5% of GDP during the same period.

Successive economic surveys in India (for instance, 2012–13, 2013–14, and 2014–15) have highlighted several factors causing the decline in private invest­ment over time. The Economic Survey 2013–14 stressed the severity of challen­ges in financing private investment. It also argued that high and persistent infla­tion, along with lower real interest rates, are reducing private savings, thus reducing the supply of funds. Accordingly, the survey urged policy measures aimed at reducing the fiscal burden (through fiscal consolidation), stabilising inflation, and reduction in resource pre-emption, thereby allowing more fin­ancial space for private investment (or reduced “crowding out”).

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Updated On : 29th Jul, 2020

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