Crowding-Out or Crowding-In? Public and Private Investment in India

IMF Working Papers, December 17, 2015

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Title: Crowding-Out or Crowding-In? Public and Private Investment in India
Authors: Girish Bahal, Mehdi Raissi, Volodymyr Tulin
Date: December 17, 2015
Core question: Relationship between public-capital accumulation and private investment in India across different historical periods and frequencies.

Novel quarterly dataset constructed for aggregate public and private investment in India over the period 1996Q2-2015Q1 using investment-project data from the CapEx-CMIE database.
Long-run, theory-driven relationship embedded in the model.
Estimated a range of Structural Vector Error Correction Models (SVECMs).
Identification: decomposing shocks into those with transitory and permanent effects.

Over 1950-2012: public-capital accumulation crowds out private investment in India.
Post 1980 (sample restricted): public investment is complementary to private investment (the opposite result).
Quarterly analysis since 1996Q2: public-capital accumulation crowds in private investment.
The change in the public–private investment relationship is most likely attributable to policy reforms that started during the early 1980s and gained momentum after the 1991 crises.

Structural change matters: relationships estimated over long historical spans (1950-2012) can differ from those estimated over more recent periods (post 1980 or 1996Q2 onward).
Policy reforms from early 1980s and post-1991 likely altered the interaction between public and private investment, turning public investment from a crowding-out force into a crowding-in force in more recent decades.
Implication for policymakers: assessment of public investment effects on private-sector activity should account for structural breaks and frequency (annual vs. quarterly) in the data, and consider the role of reforms and institutional change.