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South Asia Economic Journal
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Articles

Savings, Investment and Growth in India

An Application of the ARDL Bounds Testing Approach

Reetu Verma

Reetu Verma is in the Economics Discipline, University of Wollongong, Northfields Avenue, Wollongong NSW 2500, Australia. Email: reetu{at}uow.edu.au

This article 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 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 nationalization of the banks. The study also utilizes 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.

Key Words: JEL: F43 • JEL: E21 • JEL: E22 • JEL: C22 • JEL: C52 • Structural break • ARDL model • Savings • Investment • Economic growth

South Asia Economic Journal, Vol. 8, No. 1, 87-98 (2007)
DOI: 10.1177/139156140600800105
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