India's relative price of investment rose 44 percent from 1981 to 1991 and fell 26 percent 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 percent rise before reform and a 31 percent fall thereafter. GDP per effective labor was 3 percent 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 percent.
Johri, Alok, and Md Mahbubur Rahman.
"The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform."
American Economic Journal: Macroeconomics,
Investment; Capital; Intangible Capital; Capacity
Trade Policy; International Trade Organizations
Macroeconomic Analyses of Economic Development
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
International Linkages to Development; Role of International Organizations