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This paper attempts to build a four sector aggregative, structural, macro-econometric model for India. There are significant structural shifts in production from agriculture to infrastructure and services in the Indian economy. The estimated model indicated significant crowding-in effect between private and public sector investment in all the sectors.
Counter factual policy simulations of sustained increase in public sector investment in infrastructure, financed through borrowing from commercial banks, shows substantial increase in private investment and thereby output in this sector. Further, due to increase in absorption, real output in the manufacturing and services sectors also seem to increase, which sets-in motion all other macro economic changes. A 10% sustained increase in public sector investment in infrastructure, which is less than 0.4% of GDP, can accelerate the macro economic growth by nearly 2.5% without causing any inflation. Further, this increase in income will lead to 1% reduction in poverty in India. This shows the potential for achieving the much debated 10% aggregate real GDP growth in the Indian economy.
Fiskal & Monetary Variables
In developing countries, the economic policies of the government play an important role in the growth of the economy. Govt. total expenditure consists of current and capital expenditures. The nominal total govt. expenditure has decelerated from 16.2% in ‘80s to 14.1% in ‘90s. The govt. consumption expenditure, however, accelerated from 15.4% to 16.3%. Some fiscal prudence has led to deceleration in the fiscal deficit over the years. In fact, fiscal deficit decelerated from 18.7% in ‘80s to 15.8% in ‘90s. Money supply grew more or less steadily at about 17% during the study period. Nominal interest rate grew marginally during ‘80s by 0.8% p.a., but dropped significantly since then and the trend continued. This study has analysed the likely macroeconomic effects of changes in public investment in infrastructure in India. The real sector further decomposed into four sub-sectors, agriculture, manufacturing, infrastructure and services. This has important consequences for investment/disinvestment policies of the govt. in each of these sectors. Sustained increase in public investment in infrastructure was found to stimulate substantial increase in private investment in all the sectors.
A 10% sustained increase in public sector investment in infrastructures (about Rs. 3500-3800 crores p.a. at 1993-94 prices) will enable the Indian economy to grow at an additional 2.5% p.a. and achieve the much debated 10% aggregate real GDP growth per annum in the medium- to long-run. Thus, public sector investment in infrastructure has the potential to provide the much-needed push and accelerate the growth process of the Indian economy.

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