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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 31% fall thereafter. GDP per effective labor was 3% 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%.

Keywords: Relative price of investment; Policy reform in India (search for similar items in EconPapers)
JEL-codes: E17 E2 O11 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2020-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform (2017) Downloads
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