The public-private investment nexus in India: Evidence from a policy simulation approach

Abstract

This study investigates the influence of public investment on private investment in India, at both the aggregate and Sectoral levels and under two different modes of deficit financing-monetisation and commercial borrowing-in an eclectic macroeconometric modelling framework. Using Generalised Method of Moments (GMM), the two simulation exercises conducted in the study highlight the crowdingin effect of public investment on aggregate private investment, irrespective of the mode of financing. The favourable accelerator effect and the complementary effect are found to outweigh the deleterious interest effect in both simulation exercises. At the Sectoral level, public investment is found to most strongly and positively affect private investment in manufacturing, followed by agriculture, the service sector, and finally infrastructure. The impact of public investment on the other sectors included in the model accords well with theoretical expectations.