Limiting the Crowding Out Effect of Macroeconomic Variables- An Empirical Study of India

Abstract

Purpose: To use the empirical findings to advocate policies intended to enhance the crowding-in effects and to limit the crowding-out effects. The article analyses macroeconomic variables while controlling fiscal and monetary variables, focusing primarily on the relationship between capital formation and public debt in India. Methods: The research uses a multiple regression model to evaluate long-run and short-run investment flows within a dynamic catalyst theoretical perspective. We employ a core sequence of financials statistics that includes improved organized management sector coverage. Findings: Our findings imply that, if the amount is invested effectively, capital formation and economic expansion go hand in hand. Public investment encourages private counterparts in both the long and short runs, barring industry-level short-term crowding-out in the industrial and financial services sectors. Fiscal imbalance, implied macroeconomic variables, and sovereign susceptibility, however, have a negative impact on capital formation. However, when the government sector invests in extraction and production but less in infrastructure, the long-term crowding-out impact of budget deficit is quantitatively higher. Implication: Significant infrastructure spending as a percentage of total government spending would lessen the negative effects of the deficit on capital formation. Furthermore, sound fiscal reforms and control of the consumer price index would boost the private investment market.