Document Type

Conference Paper

Abstract

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 problematic for policy formulation and further research on the role of investment in the post-reform Indian economy is required.

RIS ID

25306

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