Determinants of Manufacturing Sector Investment in India : An ARDL Bound Test Approach

What determines investment is a much analysed policy question all around the world. Growth and previous investments are the primary variable used to analyse current investment. But there is much difference in opinions among economists regarding which policy instrument should be emphasised more to increase investment rate of a country. In this analysis, the accelerator theorem of Koyck is validated with data from the Annual Survey of Industries (ASI) by MOSPI. To overcome the problem of the unit root process in data, this analysis employed the ARDL bound test approach to analyse data. This research found that profit and output affect firms' gross fixed capital formation, while the output is the only variable affecting the firm's investments in the long run. In the short and long run, the bank lending rate doesn't impact the firm's investment decision much. This work shows some light on the debate between output and previous investments. As per the results of this research, previous investment doesn't have much impact on the firm's investment behaviour. This may be because fixed capital investment is a long-term process, and its effects cannot be felt in the short or medium run