Government fiscal spending and crowd-out of private investment: An empirical evidence for India

Shiv Shankar () and Pushpa Trivedi ()

Economic Journal of Emerging Markets, 2021, vol. 13, issue 1, 92-108

Abstract: Purpose - The paper evaluates the crowding-in or crowding-out relationship between public and private investment in India, controlling fiscal and monetary variables.Methods - In a flexible accelerator theoretical framework, the paper estimates long and short-run investment dynamics, employing Autoregressive Distributed Lag (ARDL) cointegration approach. We use a back series of national account statistics that incorporates enhanced coverage of the organized corporate sector. Findings - Our results suggest investment complementarity between the public and private sector at an aggregate and sectoral level over the period 1981-2019. Barring short-run crowding-out in construction and financial services at industry level, public investment stimulates private counterparts, both in the long and short-run. However, fiscal deficit, inflation expectation, and sovereign vulnerability influence private investment adversely. Moreover, the long-run crowding-out bearing of fiscal imbalance is quantitatively higher when the public sector invests in mining and manufacturing and insignificant with infrastructure.Implication - Sizable infrastructure investment as a proportion of government finances would moderate the adverse impact of the deficit on private investment. Further, quality fiscal adjustments and containing inflation would enhance private investment activities.Originality - Besides aggregate and sectoral levels, the study also evaluates the impact of industry-level public investment on private capital expenditure. This paper also incorporates derived variables in the regression framework using statistical filters and the principal component technique.

Keywords: Public investment; private investment; crowding-out; statistical filter (search for similar items in EconPapers)
Date: 2021
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