Savings, investment and growth in India: an application of the ARDL bounds testing approach

This paper considers savings, investment and economic growth for India using annual time series data for the period 1950/51 to 2003/04. The analysis uses Perron’s innovational outlier model to conduct unit root tests which endogenously determines a structural break. The empirical results show that the null hypothesis of unit root cannot be rejected for gross domestic product. Moreover, the results show that the most significant structural breaks over the last five decades correspond to the wars, regime change and the nationalisation of the banks. The study also utilises the Autoregressive Distributed Lag (ARDL) approach to test for cointegration. Whilst the results support the existing evidence for the Carroll-Weil hypothesis; the study also finds that saving unambiguously determines investment in both the short and long runs. No evidence is found to support the commonly accepted growth models in India, that investment is the engine of economic growth.