An Empirical Analysis of the Asymmetric Association of Public Investment with Private Investment: Revisiting Crowding-In/Out Effect

Abstract

The crowding-in/out effect of government spending on private investment has been a much-debated topic. As the controversy surrounding this topic persists, the subject is revisited using an improved nonlinear autoregressive distributed lag model for the Indian economy using the sample period 1980–2022. In the framework of the flexible accelerator model, the present study considers the positive and negative shocks in the two public investment series and positive and negative shocks in other macroeconomic variables (such as FDI, lending rate and credit availability to the private sector) as determinants of private investment. The results depict strong nonlinear short-run and long-run cointegrating linkages establishing the tendency of the Indian economy to converge to a long-run and short-run equilibrium threshold. The long-run estimation shows that private investment decreases at a much higher rate when public investment falls as compared to its tendency to rise when public investment increases. Further, contrary to our expectations, public investment in the non-infrastructure sector crowds in private investments, while public investment flowing into the infrastructure crowds out private sector investments, possibly because of the long gestation period of public investments. An important policy implication is to channel investments in the non-infrastructure and infrastructure segments of the public sector that boost private investments aligned with sustainable development goals. Efficient qualitative fiscal and monetary policy measures are recommended to encourage private investments.