The Virtuous Circle Savings, Distribution and Growth Interactions in India

One of the landmarks of Anne Krueger’s tenure at the World Bank was the initiation of five large-scale comparative studies of various issues in development. Deepak Lal co-directed the study of the political economy of poverty, equity and growth. This unsurprisingly found that the proximate causes of growth and of differences in growth performance were differences in the rate and efficiency of investment. The synthesis volume (Lal-Myint, 1996) was largely concerned with explaining the latter. The purpose of the present contribution in honour of Anne is to try and provide some explanations for the differences in investment and hence savings rates. We do this by developing a very simple framework for charting the virtuous circle between growth and savings in India — in particular, the effects of growth on the shifts of households from low to higher savings income brackets, thereby raising aggregate savings, which in turn feeds back into higher growth.