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A Multivariate Analysis of Savings, Investment, and Growth in India

This paper considers per worker household, private corporate and public sector savings and investment, foreign capital inflows and economic growth for India in a multivariate setting for the period 1950-2001. The analysis, uses FIML to estimate the long run cointegrating equilibriums and short run Granger causing dynamics for the non-stationary time series data, which includes endogenously detected structural breaks in 1989 and 1993, consistent with the recent period of financial reforms in India. The estimates do not support the commonly accepted Solow and endogenous models of economic growth. The popular view that increases in savings are a necessary condition for economic growth is supported with the detected strong direct links from per worker household and private corporate savings to output in the long run and sectoral per worker savings to investment links in both the short and long run. This implies the need to encourage savings, which is being realised with the estimated significantly higher growth rates in household and private corporate per worker savings during deregulation in the late 1980s and early 1990s. However, the link from investment to output is missing. Despite extensive analysis, per worker private corporate and household sector investment are not found to affect output in the short run or long run as required by the Solow and endogenous growth models. Indeed household investment, being the largest sector for gross domestic capital formation, does not appear to have any influence on other variables. Per worker public investment is found to adversely affect output per worker in the short and long run, contradicting Barro’s hypothesis of the benefits of the public provision of capital. These findings, plus the estimated reductions in the rates of growth in sectoral per worker investment during the 1990s, are worrying. The lack of empirical validation of commonly accepted growth theories is p roblematic for policy formulation and further research on the role of investment in the post-reform Indian economy is required.

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File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012207.pdf
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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp05-24.

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Length: 20 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:uow:depec1:wp05-24
Contact details of provider: Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
Phone: +612 4221-3659
Fax: +612 4221-3725
Web page: http://business.uow.edu.au/econ/index.html

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  1. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
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  4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  5. Perron, P., 1990. "Further Evidence On Breaking Trend Functions In Macroeconomics Variables," Papers 350, Princeton, Department of Economics - Econometric Research Program.
  6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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  9. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  10. Pravakar Sahoo & Geethanjali Nataraj, 2000. "Savings and Economic Growth in India: The Long-Run Nexus," Working Papers 77, Institute for Social and Economic Change, Bangalore.
  11. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  12. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  13. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
  14. V N Balasubramanyam & V Mahambare, 2000. "Liberalisation and savings in developing countries: the case of India," Working Papers 539675, Lancaster University Management School, Economics Department.
  15. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
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  17. Strazicich, Mark C. & Lee, Junsoo & Day, Edward, 2004. "Are incomes converging among OECD countries? Time series evidence with two structural breaks," Journal of Macroeconomics, Elsevier, vol. 26(1), pages 131-145, March.
  18. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  19. Seshaiah, S.V. & Vuyuri, S., 2005. "Savings and Investment in India, 1970-2002: A Cointegration Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(1).
  20. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
  21. Laumas, Prem S, 1990. "Monetization, Financial Liberalization, and Economic Development," Economic Development and Cultural Change, University of Chicago Press, vol. 38(2), pages 377-90, January.
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  23. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  24. repec:lan:wpaper:4052 is not listed on IDEAS
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