The Relationship between Economic Freedom and Private Investment Across Indian States: Evidence from Panel Data

Abstract

This study examines the impact of economic freedom on private investment in the formal sector across 18 Indian states from 2015 to 2019. Using the Economic Freedom Index (EFI) and its components as explanatory variables, the analysis finds that higher EFI scores are significantly associated with increased private investment. The study employs panel regression techniques, allowing for the analysis of both cross-sectional and time-series variations in the data. A fixed effects model is used to control for unobserved, time-invariant heterogeneity across states, isolating the effect of institutional factors on investment.  Fixed effects regression results reveal a strong positive effect of labour and business regulation on investment levels. The findings align with prior research, indicating that streamlined regulations and secure property rights foster opportunity-driven entrepreneurship. The study concludes that enhancing institutional quality can significantly boost formal sector investment across Indian states.