Monday, January 30

Investment Slowdown in India: Role of Fiscal-Monetary policy and Economic Uncertainty

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By Pravakar Sahoo & Ashwani Bishnoi

Working Paper No- 439

The current study attempts to understand the determinants of investment and the underlying reasons for its current slowdown in India. For the purpose, we estimate the investment functions by using the ARDL bounds-testing approach on quarterly data from 2004-05Q1 to 2019-20Q1 at three levels – aggregate investment, private investment and private corporate investment. The study finds that aggregate investment can be explained by aggregate demand, fiscal policy, monetary policy, financial resources, exchange rate and uncertainty. Similarly for private investment, determinants include public investment, fiscal deficit, cost of capital, business confidence and uncertainty, along with measures for demand and financial sector developments. Finally, private corporate investment is found to be responsive to bonds market development, real exchange rate, debt service ratio, business confidence and economic uncertainty, besides the conventional variables. Thus, in order to counter the current investment slowdown, there is a need to make efforts for developing capital markets, strengthening monetary transmission, implementing appropriate fiscal policies and, reducing uncertainty in the economy.

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