Private investment has slumped in India and its revival is vital for accelerating India’s growth rate on a sustained basis. This paper analyzes the determinants of aggregate private investment and its components corporate and non-corporate private investment for the period 1980-81 to 2013-14. This paper finds that the key determinants of private investment are the size of the public sector capital stock, the real effective exchange rate, the output gap and the availability of credit to the private sector. So, higher public investment would crowd-in more private investment. When we break it down further private corporate investment is significantly explained by the real exchange rate and the availability of credit to the private sector whereas for non-corporate investment public capital stock is the most significant variable- as it crowds in private investment. Real interest rate has no significant effects on investment.

Simulations show that if India increases public investment by 5% of GDP, depreciates the real exchange rate by 10-15% and fixes the bad loan problems in the banking sector so that credit growth to the private sector is restored, India can increase its GDP growth rate by at least 2% points on a long run sustained basis and achieve 8% plus GDP growth.