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

Alok Johri () and Md Mahbubur Rahman ()

Department of Economics Working Papers from McMaster University

Abstract: India's relative price of investment rose 44% from 1981 to 1991 and fell 26% 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% rise before reform and a 28% fall thereafter. GDP per worker was 2.9% lower in 1991 compared to 1981 due to import restrictions on capital goods. Their removal and a 64 percentage point reduction in tari rates raised GDP per worker permanently by 17.8%.

Keywords: relative price of investment; policy reform in India (search for similar items in EconPapers)
JEL-codes: O11 E17 E2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017-08-04, Revised 2017-10-03
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