Nexus between Infrastructure and Economic Growth: An Empirical Study in the Post- Reforms Period in India

Abstract

This study empirically investigates the nexus between infrastructure and economic growth in India for the period 1991-2016 and tries to find out whether infrastructural development in the post-reforms period is cointegrated with economic growth. A composite time series index of Infrastructure is constructed using Principal Component Analysis (PCA) based on 8 infrastructural indicator variables for executing the present analysis. The cointegrating nature between infrastructure index and economic growth is checked using the Engle and Granger method of cointegration. The study further applies VAR based Granger causality test to assess the direction of causality between infrastructure and economic growth. The results reveal that infrastructure and economic growth are cointegrated and holds a long-run equilibrium relationship. However, in the short-run, the results of the study find no instantaneous effect of change of infrastructure on economic growth. Finally, the results of the Granger causality test confirm the unidirectional causality from infrastructure to economic growth. Therefore, the study concludes that infrastructural development can be an effective tool for achieving sustainable economic growth.