It is being increasingly recognised that the sustenance of our much-vaunted economic resurgence relies largely on our ability to improve the level and efficiency of savings in the country. Indeed, resource mobilisation through optimum savings is essential for critical investments. This would not only help in wealth creation and poverty alleviation, but would also be instrumental in creating valuable assets to enhance our competitive advantage in the global arena. It is against this backdrop that a search for options?including that of suitable tax concessions as savings incentives?assumes special significance.

Preliminary investigations indicate that savings show an upward trend, with the rate going up as a proportion of GDP from around 23% in 2001-02 to a record 34.8% in 2006-07. A break-up shows that there has been a remarkable turnaround in public sector savings and a pick up in private corporate savings. The rise in both public and corporate savings has been driven essentially by an increase in revenues accruing from robust economic growth and a consequent fall in the fiscal deficit of the government, indicating a strong correlation between savings and income.

The strengthening of our economic fundamentals and greater financial inclusion has also raised savings among households, albeit at a slower pace. This is a clear pointer to a shift in the saving habit among individuals. Besides, it is equally recognised that recent improvements in savings are not sufficient to achieve the targeted growth of 9% given our incremental capital-output ratio of 4%. In fact, investments continue to exceed savings, making it imperative to draw upon foreign savings to bridge the investment gap.

What is also worrisome is that the overall macroeconomic environment, which has so far helped lift our savings out of stagnation, is beginning to reflect the impact of global disturbances. The result is a minor slowdown in the growth rate, which is slated to dip from a vibrant 9.6% in 2006-07 to 8.7% in 2007-08. Besides, inflation has started inching upwards. All this could make it difficult to sustain the prevailing rate of savings, let alone raise it from the present level. It is in this context that a systematic move to sustain our savings at the present level has acquired renewed urgency. In fact, an impetus to domestic savings would also help avoid a much greater recourse to foreign savings and the risks associated with it.

It is unanimously agreed that the prevailing tax incentives available for investment up to Rs 1 lakh under Section 80C of the Income-Tax Act is not sufficient to provide that much needed push to savings. In fact, it is not even sufficient to secure one?s future cost of living. Also, those who save more than the Rs 1 lakh limit are effectively taxed at both the entry and exit stages, resulting in a situation that encourages consumption rather than savings. This anomaly needs to be corrected.

To encourage savings, the government should restore tax deduction on interest income on bank deposits under section 80L of the Income-Tax Act. Such a provision was available until March 2005 for interest income up to Rs 12,000. Perhaps, the ceiling could also be enhanced to Rs15,000, with a TDS ceiling of Rs 10,000. However, it is also important to ensure that tax incentives are extended to other modes of savings as well. This could include mutual funds, IPOs and bank deposits, so that funds are channelled into a diversified portfolio of instruments.

It is also beneficial to differentiate between short-term and long-term savings and incentivise the former to make them more remunerative and attractive for individual investors. Needless to say, the gains accrued by extending tax breaks would, through the multiplier effect of increased investment on economic growth, far outweigh the tax revenues foregone.

At the same time, other options such as deepening the capital market, strengthening the corporate bond market as well as introducing safe and innovative savings schemes should also be explored to supplement tax breaks as savings incentives and channel it to spur demand in the economy. Lastly, it is important to carry forward the reform agenda, that initiates a virtuous circle that enhances the efficiency of savings allocation.

The writer is an economist with PHDCCI. These are her personal views