Publication Date


Publication Details

Verma, R and Wilson, EJ, Savings, Investment, Foreign Inflows and Economic Growth of the Indian Economy 1950-2001, Working Paper 05-23, Department of Economics, University of Wollongong, 2005.


There is a large research literature on the roles of domestic savings and investment in promoting long run economic growth. This paper attempts to identify the major interdependencies between savings, investment, foreign capital inflows and real output for India since independence. An endogenous growth model is adapted to specify the possible complex interrelationships between the sectors of a growing economy. The time series of real per worker household, private corporate and public savings and investment, per worker foreign capital inflows and GDP are tested for stationarity under structural change where the structural break is determined endogenously. The Johansen’s FIML cointegration procedure is used to provide efficient long run and short run parameter estimates for the non-stationary variables in a simultaneous setting. The elasticity estimates provide robust evidence of the Solow proposition that household, and to a lesser extent private corporate, per worker savings have driven household per worker investment in the Indian economy from 1950 to 2001. There is also evidence of an inverse, crowding-out relationship between per worker household and public investment. Foreign capital inflow per worker is found to be unstable in the short run and residually determined by per worker household and private corporate savings and investment. Despite the strong links between the sectors, there is little evidence that sectoral per worker savings and investment affect GDP in the long run. Whilst per worker GDP has significant but small effects on per worker household savings and investment in the short run, the feedbacks to GDP are non existent in the long run and only small and imprecise in the short run. Whilst savings certainly affect investment, there are only weak links from investment to output. These findings do not support the Solow and endogenous growth policy prescriptions that it is necessary to increase household savings and investment in order to promote economic growth in India.