A Time Series Analysis of Consumption Function of India

Abstract

The present paper aims to determine a suitable consumption function for Indian economy. For the purpose of the study, ‘private final consumption expenditure’ and ‘gross domestic product at current market price’ have been taken into the consideration to define and verify different consumption functions/hypothesis. The chosen hypothesis for verification are Duessenberry-Modigliani model, Keynesian and Brown-Davis-Friedm models and thus arrive at suitable consumption function model for India. The relevant and required time series data for the period 1950–51 to 2013–14 were obtained from sources such as Central Statistical Organisation and RBI. As part of analysis ‘propensity to consume (MPC and APC both for short run and long run)’ and ‘Elasticity (both for short run and long run)’ were estimated. The out-put of analysis suggest that Keynesian and Brown-Davis-Friedman are much efficient approaches to define consumption function of India. The study suggests that roughly one third of the Indian household realized their desired/expected consumption due to the influence of factors like saving tendency of Indian people. The results derived from the study is nothing but emphasizes that in India still income and savings(accumulated income) matters as regards to consumption thus may indicate suitable actions from various stakeholders of the economy such as government, bankers (both public and private), business houses of various types and others involved in the business of money, finance and credit.