Abstract
The relation between income and consumption has been observed by economists for a long time. However, J K Keneys, for the first time, studied the
theoretical level of the consumption behaviour and proposed Absolute Income Hypothesis (AIH) from The General Theory according to which the current consumption expenditure mainly depends on current income. India, being a country with diverse culture and socio economic conditions, is developing at a rapid pace with the introduction of economic reforms. A large private sector and functioning markets are subject to rigid state controls until the uncertain and gradual reforms of 1980s. In the political environments under which reforms are initiated and implemented, India continued to be open, participatory, and multiparty. This, in turn, led India to rise and can be considered to be one of the important events of the present century. This study attempts to analyse the relationship between income and consumption using the new approach of ARDL. Finally, along with long run relationship, the short term relations and structural breaks are also checked using this approach. It has also been revealed that India’s consumption was significantly affected by the increase in GDP in the short and long run.
Keywords: Income, Consumption, ARDL Bound
Testing, Long-run Analysis, Short-run Analysis, India.
Introduction
The relation between income and consumption has been observed by economists for a long time.However, J K Keynes, for the first time, studied the theoretical level of consumption behaviour and proposed Absolute Income Hypothesis (AIH) from The General Theory according to which the current
consumption expenditure mainly depends on current income. There is a positive and linear relation between consumption and income. In other words, it could be said that the current consumption is a stable function of current income. This aggregate relation between consumption and income is called as consumption function. This also means that as the level of national income increases, the level of the economy’s
consumption as well as saving increases.
