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The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform

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  • Alok Johri
  • Md Mahbubur Rahman

Abstract

India's relative price of investment rose 44% from 1981 to 1991 and fell 26% from 1991 to 2006. We build a simple DGE model calibrated to Indian data in order to explore the impact of capital import substitution policies and their reform post-1991, in accounting for this rise and fall. Our model delivers a 23% rise before reform and a 31% fall thereafter. GDP per effective labor was 3% lower in 1991 compared to 1981 due to import restrictions on capital goods. Their removal and a 71 percentage point reduction in tariff rates raised GDP per effective labor permanently by 20%.

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  • Alok Johri & Md Mahbubur Rahman, 2020. "The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform," Department of Economics Working Papers 2020-12, McMaster University.
    • Handle: RePEc:mcm:deptwp:2020-12
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    Cited by:

    1. Weicheng Lian & Natalija Novta & Evgenia Pugacheva & Yannick Timmer & Petia Topalova, 2020. "The Price of Capital Goods: A Driver of Investment Under Threat," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 509-549, September.
    2. Alok Johri & Md Mahbubur Rahman, 2022. "The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(1), pages 146-178, January.
    3. Weicheng Lian & Natalija Novta & Evgenia Pugacheva & Yannick Timmer & Petia Topalova, 0. "The Price of Capital Goods: A Driver of Investment Under Threat," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 0, pages 1-41.

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    More about this item

    Keywords

    Relative price of investment; Policy reform in India;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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