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What drives growth transitions in India? Evidence from a Markov switching analysis of regime dynamics

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  • Sharma, Vineeta

Abstract

Growth transitions in India, identified through structural break models, often yield break dates closely aligned with recession periods. Since recessions have been found to be associated with persistent output losses, this underscores the regime dependent nature of output dynamics. This paper examines growth transitions in India as cyclical regime shifts, employing a Markov switching framework to identify three growth regimes - recessionary, moderate, and high growth during 1951–2022. It further examines the influence of domestic, external, and policy variables on regime-specific growth and transition probabilities. Results indicate that investment, productivity gains, and accommodative monetary policy drive growth during moderate regimes. However, rapid credit expansion and rising income inequality undermine high growth sustainability. While investment and monetary easing support recovery from recessions, fiscal policy is effective primarily in high-growth periods and is counterproductive during downturns. Robustness checks confirm the stability of these results across alternative model specifications and sample periods.

Suggested Citation

  • Sharma, Vineeta, 2026. "What drives growth transitions in India? Evidence from a Markov switching analysis of regime dynamics," Economic Modelling, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:ecmode:v:155:y:2026:i:c:s0264999325004213
    DOI: 10.1016/j.econmod.2025.107426
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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