A multivariate analysis of savings, investment, foreign capital inflows and economic growth in India
This paper considers the interdependencies between per worker household, private corporate and public sector savings and investment, foreign capital inflows and GDP in a multivariate setting for India. This is in response to shortcomings relating to previous studies which predominantly analyse savings and investment aggregates only, over long time periods which contain structural changes, using bivariate estimation techniques, which are short run in nature.A sectoral model is developed to provide a theoretical basis for the empirical research and to demonstrate the possible complex interdependencies between these variables and sectors. The analysis is applied over the period 1951 to 2005 with two endogenously determined structural breaks occurring in 1966 and 1981. The long run cointegrating relationship is estimated in a multivariate setting using Johansen's procedure to determine which variables are subject to permanent, semi-permanent and transitory shocks according to Pagan and Pesaran's (2008) innovative classification. Consistent with the recent DSGE and structural VAR modelling, a VAR containing these specifications is estimated to determine the short run interdependencies using statistical tests and the analysis of forecast error variance decompositions.The findings show that the causation runs from per worker household savings and investment positively to private corporate savings and then to private corporate investment, which in turn affects household savings and investment. Per worker public investment is found to negatively (with small elasticity) affect GDP, which negatively affects foreign capital inflows, which subsequently negatively affects private corporate savings. These results imply the need to encourage savings, which is being realised with higher growth rates during the recent period of financial deregulation in India. However the offsetting reduction in the rates of growth in investment during the 1990s, the lack of any identified links to output and the apparent negative influence of public investment, means that policy prescriptions to promote economic growth in India are not straightforward.