Growth cycles of investment, output and trade balance– long run dynamics in India

This paper is an attempt to investigate empirically the long run dynamics of economic fluctuations in India by concentrating mainly on the real sector economy. We have analysed the stochastic behaviour of growth cycles of the macroeconomic time series of output, investment, and trade cycles in India during the past six decades. The observed time series are decomposed into trend and cyclical components by using HP filter. Indian economy frequently exhibited significant cyclical variations of distinct pattern and origin comprising the boom and bust. We observe eight major cycles of real GDP with different length and depth during the period 1950–2011. The length of the cycles varied from three years to eight years. Private investment in India has not been affected badly by the severe balance of payment crises. Rather, a cyclical downturn was seen as an opportunity to invest by the large business houses. This type of entrepreneurial decision can hopefully be analysed with rising animal spirits. This empirical study fails to reject the animal spirits hypothesis in explaining investment behaviour of the country.