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

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.