Savings, Investment and Growth in India: An Empirical Analysis

Abstract

Savings and Investment are an indispensable part of economic growth. A good relationship between savings, investment and economic growth has a lot to do with the effective functioning of the economy. This paper examines the relationship between Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF) and Gross Domestic Savings (GDS) in the context of Indian Economy. To analyse the relationship, data for a long period of 63 years i.e., from 1950–1951 to 2012–2013 has been used. To derive accurate results usually a lengthy period is considered. Structural changes may take place when the regression model involves time series data to measure the relationship between the regressand and the regressors. In fact, structural changes may occur due to policy changes and many other factors. Therefore, to estimate these structural changes the chow break point test has been used. The data used has been divided into pre-reform period that is from 1950–51 to 1990–91 and post-reform period -from 1991–92 to 2012–2013. An analysis of the relationship suggests that GDS and GFCF have differently influenced GDP in the pre-reform and postreform period. The Chow break point test also confirms the results. Therefore all the intricacies of the impact on economic growth due to changes in Gross Domestic Savings and Gross Fixed Capital Formation is considered and analysed.