Economic Policy Uncertainty and Economic Growth in India

Abstract

Economic and political commentators in India have repeatedly noted their concern about the recent slow-down in the Indian economy. Several recent papers have provided evidence that increase in the economic policy uncertainty (EPU) has played a significant role in the slow-down and the increase in unemployment in the U.S. In this paper we construct a measure of economic policy uncertainty for India and study its impact on the Indian economy. We find Indian GDP and Indian fixed investment are negatively related to EPU in India. More relevant, the economic magnitudes of these relations are quite significant. For example, if the economic uncertainty in India were to decrease today to the level observed in 2005, India’s GDP growth would increase by 0.56%, and fixed investment growth would increase by 1.36%. Additionally, we document a negative correlation between the Bombay Stock Exchange (BSE) index and EPU in India.