| Abstract: |
This paper considers per worker household, private corporate and public sector
savings and investment, foreign capital inflows and economic growth for India
in a multivariate setting for the period 1950-2001. The analysis, uses FIML to
estimate the long run cointegrating equilibriums and short run Granger causing
dynamics for the non-stationary time series data, which includes endogenously
detected structural breaks in 1989 and 1993, consistent with the recent period
of financial reforms in India. The estimates do not support the commonly
accepted Solow and endogenous models of economic growth. 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 corporate per
worker savings during deregulation in the late 1980s and early 1990s. However,
the link from investment to output is missing. Despite extensive analysis, per
worker private corporate and household sector investment are not found to
affect output in the short run or long run as required by the Solow and
endogenous growth models. Indeed household investment, being the largest
sector for gross domestic capital formation, does not appear to have any
influence on other variables. Per worker public investment is found to
adversely affect output per worker in the short and long run, contradicting
Barro’s hypothesis of the benefits of the public provision of capital. These
findings, plus the estimated reductions in the rates of growth in sectoral per
worker investment during the 1990s, are worrying. The lack of empirical
validation of commonly accepted growth theories is p roblematic for policy
formulation and further research on the role of investment in the post-reform
Indian economy is required. |