Column: Where are the savings

Written by Renu Kohli | Updated: Jul 7 2014, 05:59am hrs
Two key macroeconomic aggregatessavings and investment ratesprovide a perspective on Indias future outlook for growth. It is of keen interest to examine what happened to these variables in the last two years, when growth decelerated to under 5%. Did they decline equally sharply If yes, what would be its implications for the government, which is keen on reviving investment

The first of the accompanying tables presents the savings-investment trends since 2007-08. Since these critical macro data are released with almost a ten-month lagthe latest savings-investment numbers are for 2012-13, published in the first revised national income estimates on January 31, 2014; so the 2013-14 data will be released at end-January, 2015analysts and policymakers typically overcome this problem by a simple but rough derivation from provisional GDP figures, which were released by the CSO on May 31, 2014, combined with balance-of-payments statistics from RBI (May 26, 2014). Using this method, we can see that Indias investment rate (unadjusted for errors & omissionsE&O) came in at 31.4% of GDP in 2013-14. It has fallen 6.6 percentage points from its peak rate of 38% in 2007-08.


What is even more remarkable is that half of this decline, 3.3 percentage points, took place in 2013-14 alone. This isnt such a surprise as foreign savings fell a hefty 3 percentage points due to sharp compression of the current account deficit by RBIto 1.7% of GDP from 4.7% of GDP the previous year, 2012-13. To the contrary, the higher rate of investment in the two years preceding 2013-14 was based on unsustainable current account deficit levels which pushed the country to the brink of an external crisis last year. Therefore, should RBI support a macroeconomic framework that confines the current account deficit to current levels, the burden of financing investments would primarily devolve upon domestic savings.

Can domestic savings recoup the loss of foreign savings The observed trends do not suggest such a possibility: The table shows gross domestic savings have fallen off 7.1 percentage points from its peak of 36.8% in 2007-08. The decline has been steady, moreover. Our rough estimates for 2013-14 do hint that the fall in domestic savings may have been arrested somewhat; at 29.7% of GDP, the savings rate is just 0.4 points lower than 30.1% in 2012-13.

Before any conclusion however, one must point out that these estimates exclude E&O, which have varied between 0.2% to negative 1.2% of GDP in the last six years. The implication is that if this term turns out to be marginally positive, both domestic savings and investment rates would accordingly be higher; the flip side is that if the E&O figure is eventually a negative number, say, negative 1.2% or more, both savings-investment rates will be further reduced.

The natural question, therefore, is if we can get a sense of the drift in the sign and magnitude of errors and omissions from elsewhere Since gross domestic savings are also estimated from the supply side by adding physical and financial savings of households, corporates and government, in the second table we look at some of the key components relative to nominal GDP growth of 12.3%.

The first focal point is household physical savings, which are nearly 50% of the total gross domestic savings: Gold imports, in rupee terms, fell a staggering 43% in 2013-14 compared to an 8.3% increase in 2012-13, due to import restrictions imposed by RBI and sharp correction in international gold prices. Aggregate data for the next major componenthouseholds savings invested in real estateare unavailable, but many private sector reports show a significant fall in property transactions as well as mounting inventories. Taken together, it is fair to expect a sharp decline in household physical savings in 2013-14.

Does this imply a commensurate increase in household financial savings Trends in some of its key components suggest the opposite: In 2013-14, total bank deposits grew slower at 14% compared to 15.8% in 2012-13; net investments in mutual funds were down 29.7% in 2013-14; first year premium collected by life insurers grew, albeit at a slower pace of 11.8%; while retail participation in the primary market remained mostly subdued. Although the list of savings in financial assets isnt exhaustive, the broad direction is of a decline. Further, there is nothing to suggest that either corporate and government savings rate improved substantially in 2013-14. Quite the contrary; in fact, we shouldnt be surprised at a marginal decline here as well.

The sense one gets, therefore, is that at an aggregate level, the errors & omissions term could eventually turn out to be negative and possibly larger in magnitude. Of course, this means the final savings rate in 2013-14 may be much lower than the 29.7% estimated from the demand-side GDP figures. As an aside, one inference is that provisional 2013-14 GDP estimates (expenditure or demand-side) are currently understating private final consumption (PFC); there is a large statistical discrepancy of 3.2% of the GDP, the same as for 2012-13. Although a higher PFC would be consistent with the persistent, elevated consumer price inflation, little can be said with certitude on this until the revised data is published in January 2015.

To return to the core questionwhether domestic savings can offset the loss of foreign savingseven if the preliminary data implications were discounted and eventual adjustments were assumed zero or marginally positive, the trend decline in the domestic savings rate is unmistakable, although this may not be structural as yet. The key concern, therefore, remains: How to revive investment if the pool of savings is going to be increasingly limited

These days one comes across numerous suggestions that the government needs to fast divest its stakes in PSUs, possibly monetise its land pool, etc, so as to increase spending on public infrastructure for stimulating private investment demand. In the same breath, we also hear that several private sector corporations are eager to step up investments as more and more projects are cleared by the central and state governments. But if both public and private sectors were to compete for the same pool of savings, the cost of capital would certainly go up, pressurising firms margins and denting their profits! The corollary is that the economy can absorb only so much of investment that would be profitable and not land up as future non-performing assets on banks balance sheets. Hence, it is up to the policymakers to take a call on how much is so much that does not disturb the delicate macroeconomic balance!

The author is a New Delhi-based macroeconomist