The impact of unprecedented growth in public investment on stimulating the Indian economy

Abstract

The aim of the article is to compare the effects of public investment and public consumption in the Indian economy. This issue is particularly relevant in the context of the unprecedented increase in public investment in India, which is becoming one of the biggest economies globally. The empirical research is based on a New Keynesian model. The novelty of the applied methodology lies both in the inclusion of public capital as a factor of production, and the partial substitution between public and private consumption in the model. The results show that government gross capital formation in the short run is a slightly more effective method of stimulating the Indian economy than government final consumption expenditure. However, the biggest differences between the effects of public investment and public consumption are evident in the long term. The impact of public consumption on GDP fades out quickly, while public investment raises the level of output for a long period. Government gross capital formation also affects employment and consumption more strongly than government final consumption expenditure does. Thus, the main implication of the study is to recommend increasing public investment in emerging markets, to boost their economies.