Saving and Investment Relationship in India: A Vector Error Correction Modelling

The study of the relationship between saving and investment has a wide relevance for developed as well as developing nations. Economists often claim that higher savings contribute to increased investment and growth of Gross Domestic Product in an economy and thus, savings and investment are key factors for the sustainable development of a country. So, the objective of this paper is to investigate the relationship between savings and investment in the context of the Indian economy over the period 1950–51 to 2008–09. The use of the annual data in their natural logarithms in co integration test provides the evidence of existence of long-run equilibrium relationship between saving and investment. And, the vector error correction modelling suggests that there exists long-run unidirectional causality between the variables running from saving to investment. The Granger causality test supports the existence of short-run unidirectional causality running in the same direction too. This result disproves the classical theory, and establishes the Keynes view on saving-investment relationship. In addition, since higher economic growth warrants a balance between savings and investment, the policy makers should bring a trade off between monetary and fiscal policies.