Page 85 - ES 2020-21_Volume-1-2 [28-01-21]

68 Economic Survey 2020-21 Volume 1

Figure 15: No evidence of crowding out through savings channel (FY 1991- FY 2019)

15a: Correlation between change in Public 15b: Correlation between change in Public
Sector Savings with 1 year ahead change Sector Savings with 1 year ahead change in
in Private Corporate investment Private Corporate Savings

Source: MosPI
Savings, Investments and GDP upto FY2011 is 2004-05 series and from FY 2011 to FY 2019 is 2011-12 series

2.31 We also examine whether REP holds in the Indian context. Note that the validity of
REP rests on a number of assumptions including (i) the representative citizen pays taxes;
(ii) taxes are non-distortionary and are collected as a lump-sum; (iii) perfect capital markets
with no borrowing constraints; (iv) future flows of income and future tax liabilities are certain;
(v) representative citizen is infinite living, rational and forward looking. Numerous studies
have found that REP does not hold in developing countries (see Haque and Montiel (1989),

Khalid 1996). Leiderman and Blejer (1988) discuss the various channels that lead to possible
deviations from the assumptions underlying REP. Ghatak & Ghatak (1996) test REP for the
years 1950-1986 for India and find that REP does not hold in the Indian context.

2.32 We examine the validity of REP for India for the time periods 1950-2019 and 1990-2019.
Figure 16 exhibits that there is no significant correlation between change in public savings
and 1-year ahead change in public savings for India for various time durations over the last 70
years. The variable ‘change in private savings’ is taken with a 1-year lead to factor in adaptive
consumer expectations as the representative consumer may not immediately alter his savings
behaviour in response to the government’s budget announcements. The results remain similar

when contemporaneous correlations are examined between these two variables.