Growth Acceleration of the Indian Economy in the Post-Independence Era: A Story of Sustained Savings and Investment

Abstract

The present paper discussed the procyclicality story of savings in India since independence and then analyzed the trends in savings, investment, and economic growth of India for the period from 1950-51 to 2010-11, and finally examined the Feldstein-Horioka proposition by taking into account South Asia, East Asia, and Latin American economies. It strongly argued that India's growth is largely financed by the availability of domestic savings, and household savings are the main contributor to domestic savings. The Feldstein-Horioka proposition was validated for all the countries taken for the study, which suggested that domestic investments were predominantly determined by domestic savings. Moreover, India's long term capital-output ratio, which shows the efficiency of resource use is around 4, which can be compared to the best in the world. As household savings play a vital role in the domestic savings, and the deficit public sector and private sector draw on household savings 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 savings and reinforce the acceleration of income and growth.