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Does Fiscal Deficit Crowd Out Private Corporate Sector Investment In India?

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  • RANJAN KUMAR MOHANTY

    (National Institute of Public Finance and Policy, New Delhi, 110067 India)

Abstract

This paper examines the impact of fiscal deficit and its financing pattern on private corporate sector investment in India, for the period from 1970–1971 to 2012–2013. Using Autoregressive Distributed Lag (ARDL) Models, the study finds that fiscal deficit crowds out private investment both in the long run and in the short run. The results also show that internal (domestic) financing of fiscal deficit has significant negative impact on private investment but external (foreign) financing of fiscal deficit has insignificant effect. In the short run, availability of bank credit plays a more important role in investment decision making than the rate of interest in India. The study suggests that government should maintain the fiscal deficit within a sustainable level by reducing its unnecessary non-developmental expenditure, subsidies etc. The government should restructure its financing pattern of fiscal deficit since internal financing has a significant negative impact on private investment.

Suggested Citation

  • Ranjan Kumar Mohanty, 2019. "Does Fiscal Deficit Crowd Out Private Corporate Sector Investment In India?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1201-1224, December.
    • Handle: RePEc:wsi:serxxx:v:64:y:2019:i:05:n:s0217590816500302
    DOI: 10.1142/S0217590816500302
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    Cited by:

    1. Ranjan Kumar Mohanty & Sidheswar Panda, 2020. "How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(3), pages 253-284, August.
    2. Sofia São Marcos & Sofia Vale, 2024. "Is there a nonlinear relationship between public investment and private investment? Evidence from 21 Organization for Economic Cooperation and Development countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 887-902, January.
    3. Pravakar Sahoo & Ashwani Bishnoi, 2021. "Investment Behavior in India: What led to Investment Slowdown and how to Revive it?," IEG Working Papers 436, Institute of Economic Growth.
    4. Yaya Keho, 2024. "Does Budget Deficit Crowd Out Private Investment? Cote d’Ivoire As A Focus," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 16(2), pages 1-86, February.

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