Chetan Ghate,Gerhard Glomm and Jialu Liu Streeter
Asian Development Review , Vol. 33, No. 2, September 2016
We construct a two-sector (agriculture and modern) overlapping generations growth model calibrated to India to study the effects of sectoral tax rates, sectoral infrastructure investments, and labor market frictions on potential growth in India. Our model is motivated by the idea that because misallocation depends on distortions, policies that reduce distortions raise potential growth. We show that the positive effect of a variety of policy reforms on potential growth depends on the extent to which public and private capital are complements or substitutes. We also show that funding more infrastructure investments in both sectors by raising labor income taxes in the agriculture sector raises potential growth.
Courtesy: MIT press