Working Paper of the Day- Crowding Out in India

"Many a citizen will never be able to understand fully the problem of the public debt, for it is too complicated for the average layman. On these technical matters he will have to accept the word of the experts." -Professor Seymour Harris, quoted by Buchanan

Working paper from NIPFP- Fiscal Deficit, Capital Formation, and Crowding Out: Evidence from India;

“Theoretical literature identifies two variants of crowding out in an economy–real and financial. The real (direct) crowding out occurs when the increase in public investment displaces private capital formation broadly on a dollar-for-dollar basis, irrespective of the mode of financing the fiscal deficit. The financial crowding out is the phenomenon of partial loss of private capital formation, due to the increase in the interest rates emanating from the pre-emption of real and financial resources by the government through bond-financing of fiscal deficit. The paper analysed the real and financial crowding out in India during 1970-71 to 2002-03. Using asymmetric vector autoregressive model, the paper finds no real crowding out between public (in particular, infrastructure) and private investment; rather complementarity is observed between the two. The dynamics of financial crowding out is captured through the dual transmission mechanism via real rate of interest; that is, whether private capital formation is interest rate sensitive and in turn whether the rise in real rate of interest is induced by fiscal deficit. The study found empirical evidence for the former, but not the latter, reinforcing no financial crowding out in India.

The paper has useful summary of 'Selected Empirical Evidences on Crowding Out' as an appendix.

Further reading;
Buchanan, 1958. “Public principles of the public debt,”
Two Illustrations of the Quantity Theory of Money, by Lucas, Robert
The Theory of Interest by Irving Fisher
The Fallacy of the Fiscal Theory of the Price Level
Does fiscal policy matter? Alan S. Blinder and Robert M. Solow
Autoregressive modelling and money-income causality detection
Fitting autoregressive models for prediction

Willem Hendrik Buiter's Lecture Notes

Causality Between Monetised Deficit and Primary Revenue Expenditure

Trends in private investment in developing countries - statistics for 1970-2000 and the impact on private investment of corruption and the quality of public investment
India - Macroeconomics and political economy, 1964-1991
The financing of investment in India, 1975-85 : a sources and uses of fund approach
Determinants of private industrial investment in India, 1979
The macroeconomic underpinnings of adjustment lending