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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.


Public investment private investment crowding-out statistical filter

Article Details

Author Biography

Shiv Shankar, Department of Statistics and Information Management, Reserve Bank of India, Mumbai, India

Statistician by education, presently I am working as Director, Department of Statistics and Information Management with more than 18 years of work experience in different capacity at Reserve Bank of India. I am responsible for providing sector specific inputs to the bi-monthly Monetary Policy Committee, preparation of Monetary Policy Reports, pre-policy consultations with external agencies and coordinating G20 DGI implementation status for India.

My responsibility also includes analyzing and timely dissemination of various indices on real estate and banking sector as per international standards.

My research interests include the domestic investment dynamics assessment, global spillover impact analysis and efficiency gain in internal debt management of India among the others.

I am also pursuing Ph.D from Department of Humanity and Social Sciences, Indian Institute of Technology Bombay, Mumbai, India.

How to Cite
Shankar, S., & Trivedi, P. (2021). Government fiscal spending and crowd-out of private investment: An empirical evidence for India. Economic Journal of Emerging Markets, 13(1), 92–108.