The objective of this paper is to examine the short and the long-run interrelationshipsbetween sectoral savings and investment, foreign capital inflows and their roles in thegrowth process for India for the period 1950 to 2005. This paper uses theAutoregressive Distributed Lag (ARDL) procedure to test for both the long-run andshort-run effects between the eight variables, along with any endogenously detectedstructural breaks. This is in response to shortcomings relating to previous studies whichpredominantly analyse savings and investment aggregates only, over long time periodswhich contain structural changes, using bivariate estimation techniques, which areshort-run in nature. The analysis firstly tests for the short-run dynamic effects of savingsand investment on growth (consistent with the Solow-Swan model) and the long-runeffects of savings and investment on growth (in line with the endogenous AK models ofgrowth).The empirical estimations indicate that none of the three sectoral measures of savingsand investment have any positive impact on GDP growth in India. This result is robustin the short-run and the long-run, providing no evidence for both the short-run dynamicaffect of savings and investment on growth (the Solow model) and the long-run(permanent) affect of savings and investment on growth (the AK model of growth) inIndia.Foreign capital inflows is the only variable found to affect GDP growth, in the both theshort and long-run. A feedback effect exists between foreign capital inflows and GDPgrowth, although it is much smaller than from GDP growth to foreign capital inflows.The Carroll-Weil hypothesis and a strong accelerator effect of GDP are supported in theIndian context. GDP growth is affecting household and private savings in the long-run;and GDP has a large effect on household investment in the long-run and publicinvestment in the short-run.There is also evidence that household savings has a positive effect on private sectorinvestment in the long-run; and public sector investment in both the long and short-run.While the direction of these relationships from savings to investment is consistent withthe growth models, there is the serious missing link from investment to economicgrowth.Overall, the findings do not support policies designed to increase household, private orpublic savings and investment in order to promote economic growth in India. This isfurther strengthened by the findings that GDP has large elastic affects on householdinvestment in the long-run and public investment in the short-run. Further to this, publicinvestment has a negative impact on GDP growth in the long-run; however it is onlysignificant at the ten percent level. There is therefore, no statistical evidence of thepopular endogenous explanation that investment is the driver of long-run economicgrowth in India.
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