The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform

Alok Johri and Md Mahbubur Rahman

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 1, 146-78

Abstract: India's relative price of investment rose 44 percent from 1981 to 1991 and fell 26 percent from 1991 to 2006. We build a simple DGE model, calibrated to Indian data, in order to explore the impact of capital import substitution policies and their reform post-1991 in accounting for this rise and fall. Our model delivers a 23 percent rise before reform and a 31 percent fall thereafter. GDP per effective labor was 3 percent lower in 1991 compared to 1981 due to import restrictions on capital goods. Their removal, and a 71 percentage point reduction in tariff rates, raised GDP per effective labor permanently by 20 percent.

JEL-codes: E22 E23 F13 O11 O16 O19 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform (2020)
Working Paper: The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform (2017)
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DOI: 10.1257/mac.20180411

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