Economic policy uncertainty and growth in India

Abstract

A measure of economic policy uncertainty or EPU for India is constructed to study its impact on the economy. It is found that gross domestic product growth and fixed investment are negatively related to EPU in India. For instance, if the economic uncertainty were to decrease to the level observed in 2005, India's GDP growth would increase by 0.56%, and fixed investment growth would increase by 1.36%. Additionally, a negative correlation between the Bombay Stock Exchange index and EPU in India is observed, suggesting that increases in EPU lower expectations of future growth or increase perceived risk of listed stocks. Lastly, it is found that firm-level capital expenditure rates are lowered when EPU increases.