Saving, Investment and Economic Growth in India : A Co-Integration Approach

The present paper empirically analyses the relationship between Saving, Investment and Growth rate in India. During the period of Financial Liberalization, 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 savings during financial liberalization. This paper tries to focus only growth in private saving for the time period 1971-2012. To study this paper, we adopt the recent Time-Series methodology i.e. testing unit roots, Co-Integration developed by Johanson & Jusilius (1991) and to detect the Causality and to short run and long run dynamics we use the VECM methodology. From the analysis, we find that all the variables selected for the study i.e. Private Saving, Investment and M3/GDP are integrated to the order 1(1). Johansen Co-integration Test, LR test indicates 1 co-integrating equation at 5% and 1% level