Sectoral Infrastructure Investments in An Unbalanced Growing Economy: The Case of Potential Growth in India
Asian Development Review 33:2, 2016
23 Pages Posted: 16 Sep 2016
Date Written: September 12, 2016
We construct a two-sector (agriculture and modern) overlapping generations growth model calibrated to India to study the effects of sectoral tax rates, sectoral infrastructure investments, and labor market frictions on potential growth in India. Our model is motivated by the idea that because misallocation depends on distortions, policies that reduce distortions raise potential growth. We show that the positive effect of a variety of policy reforms on potential growth depends on the extent to which public and private capital are complements or substitutes. We also show that funding more infrastructure investments in both sectors by raising labor income taxes in the agriculture sector raises potential growth.
Keywords: Indian economic growth, misallocation, public capital, structural transformation, two-sector OLG growth models, unbalanced growth
JEL Classification: H21, O11, O20, O41
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