Demand-led versus supply-led growth transitions

This paper develops a saving/investment causality hypothesis to distinguish between demand- and supply-led growth transitions. The empirical application shows that India's growth transition in 1980 entailed a shift out of a suboptimal demand regime (1953-78) into an optimal demand regime (1980-2007). A key insight from the causality results is that the fiscal expansion of the 1980s initiated demand growth at the natural rate, while faster export growth in the post-1990 liberalization period relaxed the open economy solvency constraint on demand and played a crucial role in sustaining demand growth at its maximum potential rate.