Economic policy uncertainty and sectoral level output in India: The implications on structural change

Abstract

This study assesses the impact of economic policy uncertainty on sectoral-level output in India during 2003M01- 2020M12. In order to do this, we execute the combined cointegration analysis to establish the long-run relationship, while the Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Square (DOLS) are used for impact assessment. The results show a long-run relationship between economic policy uncertainty and sectoral-level output. Moreover, we observe that sectoral level output slows down as economic policy uncertainty increases in India. The adverse impact of economic policy uncertainty is more visible in the services sector, followed by the industry and agriculture sectors, respectively. Thus, we can infer that the process of structural change is in turmoil in the presence of economic policy uncertainty. The consistency of the findings was confirmed using canonical cointegrating regression (CCR). Besides, the study offers some valuable policy suggestions for policymakers in India.