Testing of Savings-Growth Relationship in India : An Application of Cointegration and Error Correction Techniques

This paper mainly attempts to examine the causal nexus between Gross Domestic Product (GDP) and savings (at 1993-94 prices) in India, using the annual observation from 1950-51 to 2002-03. Although a number of studies have shed light on this issue using time series data, the present study attempts to analyze the relationship between the variables using cointegration and causality models. The results show the presence of cointegration between the GDP and savings series implying the presence of a stable long-run relationship between them. Having verified that GDP and savings are cointegrated, the Granger test indicates the absence of any causal relationship between the variables in log-difference form. Despite the absence of Granger causality, a negative coefficient of the error correction term in the regression equation of savings on GDP is observed. This negative coefficient signifies that savings converge to its long-run equilibrium level