Investment Slowdown in India: Role of Monetary policy, Financial Sector and Economic Uncertainty

Abstract

Investment slowdown during the post-GFC period in India has affected the growth potential and productivity-led growth in India. We study the underlying factors for investment slowdown in India at disaggregate level - private investment, private corporate investment and household sector investment - using quarterly data from 2004-05 to 2019-20. The study finds that aggregate investment gets affected by aggregate demand, fiscal-monetary policy measures, financial sector development, exchange rate and economic uncertainty. We find similar results for private investment along with other essential determinants such as public investment, cost of capital, business confidence and uncertainty. Finally, private corporate investment is found responsive to bonds market development, real exchange rate, debt service ratio, business confidence and economic uncertainty, besides the conventional variables. Thus, to counter the current investment slowdown, there is a need to develop capital markets, strengthen monetary transmission, implement appropriate fiscal policies and reduce uncertainty in the economy. JEL Classification: E22, E52, E62, E32.