Determinants of long-term growth in India: a Keynesian approach

Abstract: This paper attempts an eclectic synthesis on long-term growth, which integrates two standard models – the neoclassical model with the endogenous growth and export-led model of growth. A vector autoregressive (VAR) model has been used for India from 1950 to 1995 using Johansen’s multivariate cointegration approach to derive latent equilibrium relationships, and the short-run error correction equations are then estimated. Two cointegrating relationships for real output and real private investment, respectively, were found. Output is determined by private investment, human capital, real interest rate and public investment. Private investment is driven by public investment, domestic credit to the private sector, real interest rate and human capital. This seems to support a McKinnon–Shaw model in the long run and a Keynesian/Structuralist view in the short run. The long-run model also validates the hypothesis that growth has not been export-led in India, rather it is growth-driven exports. Key words: demand-driven growth, endogenous growth, export-led growth.