Human Capital and Economic Growth in India: A Co-integration and Causality Analysis

Abstract

The aim of this study is to explore the causality relationship between the human capital investment (education & health investment) and economic growth of Indian economy using time series data running from 1991-92 to 2012-13. Co integration, Granger Causality analysis and Vector Error Correction Mechanism (VECM)has been used in order to test the hypotheses about the presence of causality and co integration among thevariables. The co integration test confirmed that education investment, health investment and GDP are co integrated, indicating an existence of long run equilibrium relationship as confirmed by the Johansen co integration test results. The Granger causality test confirmed the presence of two way causality between education investment and GDP and also between health investment and GDP. It justify that both the components of human capital under consideration i.e. education investment and health investment are the key variables which are affecting economic growth of India and in the same way economic growth providing a platform for the growth of human capital.