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Ricardian equivalence and the public and private saving nexus in India

Tarlok Singh

Applied Economics, 2017, vol. 49, issue 36, 3579-3598

Abstract: This study tests the Ricardian equivalence theorem (RET) and examines the responsiveness of private saving to public saving in India. Most estimators do not provide support for the empirical validity of RET and long-run cointegration between public and private saving. The increases in household saving (HHS) seem to have been engendered by the provision of saving incentives, institution of saving schemes, self-driven motivation to save, and the precautionary accumulations induced by uncovered uncertainties in incomes, rather than by Ricardian behaviour of households. The self-imposed aversion to debt and debt bequest, borrowing and liquidity constraints, and the intertemporal smoothing of consumption have been the added catalysts that contributed to the increases in HHS. The households with binding borrowing constraints, inadequate or no insurance and uncovered uncertainties in incomes seem to have been saving more to pay for higher inflation-tax. The fiscal consolidation and generation of public saving are essential to reduce the tax burden (both explicit through fiscal taxes and implicit through inflation-tax), minimize the likelihoods of economic and financial crises, and maintain the internal and external value of domestic currency.

Date: 2017
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