An empirical investigation into dynamics of growth of Indian economy impacted by public and private sector investment: Is there evidence of crowding out effect?

Abstract

This study examines the dynamic effects of public and private investments on India’s economic growth, focusing on disaggregating public sector investments into infrastructure and non-infrastructure Gross Fixed Capital Formation (GFCF). Key questions include: How do public infrastructure and non-infrastructure investments impact economic and private sector growth? What roles do Foreign Direct Investment (FDI), labour force participation, and the real interest rate play in shaping economic growth? The study uses the Autoregressive Distributed Lag (ARDL) model to analyze 40 years of macroeconomic data from 1980–81–2019–2020, offering insights into both short- and long-term effects. Findings reveal a crowding-out effect of public infrastructure investment on private investment in the short term but a crowding-in effect in the long run. FDI, labour participation, and the real interest rate significantly influence GDP growth, confirming their roles as critical drivers of economic expansion. Disaggregating public investments shows infrastructure and non-infrastructure investments play distinct roles in shaping economic outcomes. This study contributes by addressing the gap in understanding how different types of public investments affect private sector activity in India and broadens investment analysis by incorporating FDI, labour participation, and the real rate of interest, offering new evidence for research and policy formulation.