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Causal relationship between saving, investment and economic growth for India – what does the relation imply?

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  • Jangili, Ramesh

Abstract

This study investigates the relationship between saving, investment and economic growth for India over the period 1950-51 to 2007-08. The literature on the role of saving in promoting economic growth generally points to saving led growth. However, few studies show evidence for growth driven saving and some suggest no relationship. In theory, saving may stimulate economic growth, economic growth may also induce saving. This paper adds to the literature by analysing the existence and nature of these causal relationships. The present analysis focuses on India, where saving rate has been the most pronounced. The co-integration analysis suggests that there is a long-run equilibrium relationship. The results of Granger causality test show that higher saving and investment lead to higher economic growth, but the reciprocal causality is not observed. Further, it is empirically evident that saving and investment led growth is coming from the household sector. It may be inferred from the results that India is not too close to the technological frontier and hence not catching up with the new technologies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40002.

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Date of creation: 2011
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Publication status: Published in Reserve Bank of India Occasional Papers 1.32(2011): pp. 25-39
Handle: RePEc:pra:mprapa:40002

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Related research

Keywords: Saving; Investment; Economic growth; Granger causality;

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  1. Dipendra Sinha & Tapen Sinha, 2008. "Relationships among household saving, public saving, corporate saving and economic growth in India," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(2), pages 181-186.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  4. Sinha, Dipendra, 1996. "Saving and Economic Growth in India," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 49(4), pages 637-647.
  5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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