Savings behaviour in India: savings- investment relationship
Student name: Ms Shruti Issar
Guide: Dr Sushmita Chatterjee
Year of completion: 2012
Host Organisation: TERI University
Supervisor (Host Organisation): Dr Shouvik Chakraborty
Abstract: The purpose of the study is to throw some light on the savings behaviour in India. The study
intends to investigate the savings behaviour in the Indian economy through exploring the
determinants of savings theoretically and further analysing the savings behaviour empirically
using a trend analysis. The study further tries to investigate empirically the causal
relationship between savings and investment which has been sharply debated in the empirical
literature following the pioneering work of Feldstein and Horioka (1980). The study tries to
explore the relationship between savings rate and investment rate (GDS as a percentage of
GDP & GDCF as a percentage of GDP) using annual time series data for the period 1970-71
to 2009-10. Thus the purpose of this study is to investigate the short run and the long run
dynamics of the relationship between savings and investment in India for the study period
and for the same purpose Johansen Multivariate Co-integration test was performed prior to
Granger Causality test which informs about the flow of causality between the two variables.
The analysis of the savings behaviour shows that household sector has always taken a
dominant position in GDS as opposed to its share in the GDCF. It has also been found that
the remarkable rise in GDS rate and GDCF rate has not been accompanied by any increase in
average growth rate of GDP. The empirical examination shows that both GDS rate and
GDCF rate share a long run positive relationship and the flow of causality is unidirectional
between the two variables i.e. causality flowing from Investment rate to Savings rate, but lack
of empirical support was found for the reverse causality to hold. Thus the results were more
consistent with the post Keynesian framework that investment determines savings.
