India's savings rate to dip to 30%: India Ratings

Earlier in the day, the Central Statistical Organisation (CSO) said the national savings rate may plunge to a decade year low this fiscal, which had slipped to an eight year low of 30.8 per cent last fiscal.

According to India Ratings Chief Economist and Public Finance Head Devendra Kumar Pant, the gross domestic savings will slip by 80 basis points to 30 per cent this fiscal.

"The estimates portray a weak picture of stabilising twin deficits. While the estimated investment rate this fiscal is likely to be similar to FY12, an 80 bps rise in the share of consumption expenditure (private and government) will reduce the savings rate further, leading to further widening of the current account deficit," Pant said in a note.

The domestic saving rate had touched a high of 36.9 per cent in FY08 but since then has steadily fallen. It fell to 33.8 per cent in FY10 and rose a tad in FY11 to 34 per cent but again fell to 30.8 of GDP in FY12.

A major impact of a low savings rate, considered as one of the biggest economic strengths, will be a higher current account deficit (CAD), which is already burgeoning to historic high of 5.3 per cent in Q2.

The CSO, in its advance estimates, pegged GDP growth at a low 5 per cent this fiscal, much lower than consensus estimate of over 5.5 per cent as the economy is expected to grow only by 4.6 per cent in the second half, against 5.4 per cent in the first half.

The CSO said while the manufacturing sector growth is estimated to increase to 3.1 per cent in H2 from 0.5 per cent in H1, growth of construction, and finance, insurance, real estate and business services is expected to slow down considerably in H2 to 3.3 per cent and 7.3 per cent respectively from 8.8 per cent and 10.1 per cent respectively in H1.

The projected GDP readings this fiscal will be the lowest after FY03 numbers when GDP had grown at 4 per cent.

ince then, the economy has been expanding at over 6 per cent, the highest rate being 9.6 per cent in 2006-07 and 9.3 per cent in FY10.

India Ratings said the projection indicates that the economy has not yet bottomed out.

Since the third quarter every analyst was saying that the economy has bottomed out and that FY13 will see the economy clipping at over 7 per cent or thereabout.

These very low growth numbers have implications for fiscal situation, said Pant.

However, a Noumra report early this week had pegged the savings rate to a low of 27 per cent this fiscal.

"Based on the available investment data, we estimate that savings will plunge even further to a 10-year low of 27 per cent of GDP in FY13," Nomura had said in a note.

National savings rate usually refers to the percentage of GDP savings by households.

According to the government data released over weekend, growth in per capita income fell both on current prices and real terms basis in FY12.

The per capita income rose 4.7 per cent on real terms basis to Rs 38,037 in FY12 as against 7.2 per cent in previous fiscal. Similarly, on current prices basis, it grew by only 13.7 per cent as against 17.1 per cent in FY11.

According to analysts, the slowdown in the savings rate takes resources away from investment, which will result in greater dependence on foreign capital. The lower savings rate is also having an impact on the current account, which is moving deeper into deficits.

"The slowdown is reflective on the poor tax collection. The government has changed its fiscal deficit target to 5.3 per cent this fiscal from the budget estimate of 5.1 per cent.

"Even after factoring in recent disinvestment proceeds, we expect the new fiscal deficit target will be difficult to be met," Pant said.

The CSO estimate is drastically lower than what has been projected thus far by the government and RBI, which pegged growth at 5.7 and 5.5 per cent respectively.

Last week, the government had revised downward the the FY12 growth to 6.2 from 6.5 per cent.

The CSO lowered the growth in agriculture and allied activities to 1.8 per cent compared to 3.6 per cent last fiscal, while manufacturing is also expected to drop to 1.9 per cent, from 2.7 per cent.

In its mid-year Economic Review, the government had also estimated growth ranging from 5.7-5.9 per cent. The current estimate is a sharply lower than the 7.6 per cent growth projected in the Budget.

The recent savings rate of the country is comparable to Indonesia, Thailand and South Korea but much lower than that of China, Malaysia and Singapore.

Consumer states like the US and Britain had their savings rate as low as 11 per cent levels in 2009, while the rate is 17 per cent for France and 21.4 per cent for Germany.