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

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.

The determinants of private investment: Evidence from South Africa

“…Following Mutenyo and Asmah (2010) and Shankar and Trivedi (2021), the study adopts a flexible accelerator theory to establish factors that determine private investment. The general empirical model of domestic private investment as a function of the desired level of output and other determinants is specified as follows:…”

“…The ARDL found that financial development and trade openness significantly positively affect private-sector investment in the long and the short run. In another study for India, Shankar and Trivedi (2021) examined the relationship between public and private investment from 1981 to 2019 using the ARDL methodology. They found that the public and the private sector complement each other at the aggregate and sectoral levels.…”

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“…To estimate the impact of public investment on private investment, this paper controls for credit extended to the public sector and interest rates (Shankar & Trivedi, 2021;Shetta & Kamaly, 2014). It also controls for output, since the crowding out effect assumes that the economy operates at full employment (Ghali, 1998).…”

Does Budget Deficit Crowd Out Private Investment? Cote d’Ivoire As A Focus

“…The results obtained from the ARDL model suggest that budget deficit has a positive and significant impact on economic growth whereas it shows a negative and insignificant impact on private investment. Using data from 1981 to 2019, Shankar and Trivedi (2021) find that fiscal deficit has detrimental effect on private investment in India. The crowding-out effect of fiscal deficit is higher when public investment increases in mining and manufacturing but insignificant in infrastructure.…”