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

Shiv Shankar, Pushpa Trivedi

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

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Copyright (c) 2021 Shiv Shankar

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Economic Journal of Emerging Markets (EJEM)

ISSN 1410-2641 (print), 2502-180X (online)
Email: editor.ejem@uii.ac.id

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Economic Journal of Emerging Markets by https://journal.uii.ac.id/JEP/ is licensed under a Creative Commons Attribution 4.0 International License.