Profitability and Investment: Evidence from India's Organized Manufacturing Sector

Using a state‐industry panel data set of 55 industries for 19 major Indian states over the period 1983–84 to 2007–08, we analyze the contemporaneous and long run impacts of the rate of profit and its components—profit share, capacity utilization rate and capacity‐capital ratio—on investment using linear dynamic panel data models. Our results show that: (a) the rate of profit has both short and long run positive impacts on investment; (b) the profit share and capacity‐capital ratio have mainly long run positive impacts, but the capacity utilization rate has a more complex pattern of impact on investment.