20 investment may play a dual role: public infrastructure projects raise the profitability of private production and encourage private investment, while non-infrastructure projects in areas where the public sector competes with private firms may have the opposite effect. The paper has sketched an analytical model highlighting these opposing effects of public capital.

The model is implemented empirically using investment data for India, which provides a good example of the dual role of public investment. The state-led development strategy adopted by India since the late 1950s resulted in an expansion of the public sector into virtually all spheres of economic activity. While basic infrastructure industries were legally reserved to the state, in others public firms competed with the private sector for productive inputs, customers, and investment licenses.

The empirical implementation follows a cointegration approach and makes use of a partial structural model of the private capital stock, that has important advantages in terms of transparency and tractability over the full-system reduced-form analysis, particularly in small-sample context like the present one. A battery of weak exogeneity tests shows that this simplified procedure entails no loss of information for the purpose of estimating the parameters describing the trajectory of private capital.

On the whole, the empirical results are quite supportive of the analytical model. The data provide convincing evidence of a positive and significant long-run effect of public infrastructure capital on the private capital stock, and an adverse effect of public non-infrastructure capital, after controlling for the effects of capital goods prices and real credit availability to the private sector. In the analytical framework outlined in this paper, this suggests that the goods supplied by public non-infrastructure enterprises and private firms likely were, on the wliole, relatively close substitutes. The estimated model's dynamics also reveal that the adverse effect of public non-infrastructure investment on private capital accumulation operate quite rapidly, while the favorable impact of public infrastructure investment only arises after a two-year lag. The estimated equation has high explanatory power, passes a battery of diagnostic tests, and the parameter estimates appear constant over the sample period.

Since the early 1990s, India's economic policies have experienced a substantial change. An effort -- still incomplete -- at fiscal adjustment has been accompanied by a shift towards a market-oriented development model led by the private sector -- a change propitiated by the large fiscal imbalances of the late 1980s that resulted from the overexpansion of the public sector. The paper's results indicate that, to have a maximum impact on private investment, the ongoing fiscal retrenchment should be matched by a radical redefinition of public investment priorities in favor of infrastructure projects.

One final clarification may be in order. While the results in this paper underscore the favorable impact of infrastructure investment on private capital accumulation, there is obviously no reason why