Disentangling India's Investment Slowdown
19 Pages Posted: 10 Apr 2014
Date Written: March 2014
This paper documents the recent slowdown in investment in India and explores its underlying causes. The sharp investment deceleration has sparked an intense debate about the role of interest rates, as well as business confidence and economic policy uncertainty. Our results suggest that while explaining aggregate investment activity better than nominal interest rates, real interest rates account for only one quarter of the explained investment downturn. In addition, standard macro-financial variables do not fully explain the recent investment slump. Using a new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.
Keywords: Investment, India, Interest rates, Economic policy, Economic models, Investments, Policy Uncertainty., inflation, real interest rate, real interest rates, monetary policy, monetary fund, nominal interest rate, relative prices, nominal interest rates, money market interest rates, real rates, inflation rate, coefficient on inflation
JEL Classification: D80, D81, E22, E44, G18, L50
Suggested Citation: Suggested Citation