Has Government Investment Crowded Out Private Investment in India?

In India, the relationship between government investment and private investment is a controversial issue. Economic theory suggests that government investment, financed by borrowing, reduces the loanable funds available for private investment, driving up interest rates, and reducing the level of private investment. If, as Keynesians argue, the positive impact of increased government investment outweighs the negative impact of reduced private investment then economic growth will increase. In the case of India, government investment would add to the momentum of India’s growth. In the opposite case which is often termed ‘full crowding out’, the negative impact of reduced private investment completely cancels the positive impact of increased government investment, and economic growth will remain unstimulated. The resources consumed by the government would have been more effective in the hands of the private sector. For India, this would mean that too much government investment is obstructing the path of India’s economic growth. This paper investigates and finds evidence of crowding out in India over the past thirty-five years through the analysis of movements of government investment, private investment, and gross domestic product (GDP) in a structural vector autoregression (SVAR) model. The majority of the empirical crowding out literature concentrates on the United States and other OECD countries. Evans