Column: Where are the savings?

Jul 07 2014, 00:29 IST
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SummaryFalling domestic savings rate could emerge as a crucial stumbling block to investment revival

Two key macroeconomic aggregates—savings and investment rates—provide a perspective on India’s 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 lag—the 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, 2015—analysts 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 India’s investment rate (unadjusted for errors & omissions—E&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.

Budget

What is even more remarkable is that half of this decline, 3.3 percentage points, took place in 2013-14 alone. This isn’t such a surprise as foreign savings fell a hefty 3 percentage points due to sharp compression of the current account deficit by RBI—to 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

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