The Hindu : Opinion / Editorials : SAVINGS AND INVESTMENT

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Wednesday, Feb 16, 2005

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SAVINGS AND INVESTMENT

RECENT DATA FROM the Central Statistical Organisation (CSO) on domestic savings and investments for 2003-04 reinforce certain trends discernible in previous years. The savings rate — gross savings as a proportion of GDP — has grown to 28.1 per cent during 2003-04, up from the 26.1 per cent of the previous year. The savings rate, 8.9 per cent in 1950-51, had moved up to 18.9 per cent three decades later and to 23.7 per cent in 2001-02. Barring one decade — the 1990s — it has been on the ascendance throughout. India has now one of the highest savings rates in the world, higher than those in developed countries such as the U.S. and the U.K. (it is around 15 per cent in both). Among the major economies only China with a savings to GDP ratio of around 40 per cent surpasses India by a wide margin. The other noteworthy feature is that in India it is households that continue to contribute overwhelmingly to aggregate savings. Last year households saved as much as 26.6 per cent of the GDP through financial and physical savings. However, it is not household thrift alone that has boosted national savings. The official data indicate that more than the growth in household savings, it is the sharp lowering of revenue deficits by the governments and the savings by government bodies that accounted for the increased savings rate in the recent past. That augurs well for public finance, especially in the context of the fiscal responsibility legislation under which the Central Government and many States have committed themselves to a gradual phasing out of wasteful expenditure.

A rise in the savings rate, however impressive, cannot be viewed in isolation from the investment rate. It is here that the official data suggest an interesting paradox. The rate of gross capital formation has been growing in tandem with the savings rate, but over the last two years it has lagged. Gross domestic capital formation, the resources needed for maintaining capital stock, grew by 26.3 per cent during 2003-04 — up from 24.8 per cent in the previous year. The implication of this development is enormous for a capital-shy economy such as India's. While households continue to save more year after year, their savings could not be invested within India. The government data reveal that during 2003-04 nearly Rs.50,000 crore of domestic savings found their way into investments outside the country. That might partly be due to the liberalisation policy concerning outward capital flows but there is no escaping the fact that investment opportunities within the country have not been large enough to absorb the savings. Until recently, the flight of savings was also reflected as a surplus in the current account of the balance of payments. Neither the economy's inability to absorb domestic savings nor a surplus in the current account is a positive factor for a developing country such as India.

There are of course other explanations. Over the recent past it is the growth in the services sector that has driven the overall GDP growth in the country. As a general rule, services require less capital than manufacturing to generate an additional unit of output. Hence it might well be that the dependence on the services sector has released domestic savings for investment outside the country. Yet there has always been a strong case for reinvigorating domestic industry through policy prescriptions that promote a more congenial climate for investment.

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