Does Domestic Saving Cause Economic Growth? A Time-Series Evidence from India

Abstract

This study examines the long-run effects of domestic saving on income and tests the null of non-causality between saving and growth in India. The optimal single-equation and the maximum-likelihood system estimates of the model consistently support the predictions of the neoclassical exogenous and the post-neoclassical endogenous models of economic growth, and suggest the significant long-run effects of saving on income. The innovation accounting shows the bidirectional causality between saving and growth. The stylized evidence for the steady-state effects of saving on income suggests the need to accelerate domestic saving to finance capital accumulation and foster higher income and growth. Most of the saving comes from the surplus household sector, and the deficit private corporate and public sectors draw on household saving to meet their investment requirements and finance the resource gaps. A two-pronged approach with the incentive-based measures to induce the motivation to save and the productivity-based measures to increase income and strengthen the capacity to save, would be useful to generate higher saving and reinforce the acceleration of income and growth.