The continued pick up in savings and investment rates to 37.7% and 39.1% of the GDP in 2007-08, the first year of the Eleventh Five Year Plan, highlights how the growth prospects of the economy has exceeded the most optimistic expectation. To gauge the extent of the gap between official expectations and the actual outcome, one has to only look at the numbers worked out in the Report of the Working Group on Savings for the Eleventh Five Year Plan. After drawing up four different scenarios, the report pointed out that achieving the maximum growth rate of 9% would require that saving to GDP ratio be pushed up from 32.7% in 2007-08 to 36.5% in 2011-12 so that the average savings rate would average to 34.7% for the Plan as a whole and push up overall investments to 37.5% of the GDP, all targets that have been exceeded in the first year of the Eleventh Plan.
Apparently the Working Group had failed to anticipate the changing structure of the savings and investments in the country. A comparison of the actual savings of the major segments in the first year of the Tenth and Eleventh plans shows that the economy?s dependence on household savings has been reduced significantly from around 87% to less than two third over a short five year span. This was facilitated by the sharp rise in corporate and public savings.
Though the doubling of the corporate savings rate to 8.8% of the GDP over the period is by itself remarkable what is more striking is the transformation of the public sector savings scenario from negative levels to a remarkable 4.5% of the GDP in 2007-08.
What is surprising is that the turnaround in the public sector savings has been limited to just one of the three major sub sectors, namely government administration, where the negative savings, which was as high as 6% of the GDP in 2001-02, was brought down to a negligible 0.1% of the GDP in 2007-08. However, the savings of both the government departmental enterprises and non departmental enterprises have remained largely stable. The savings of the departmental enterprises remained stuck at the 0.6% of the GDP mark while that of the non-departmental enterprises have hovered around the 4% mark.
However, even more radical changes have been cut on the investment side where the last five years have seen the private corporate sector investments boom from roughly equal the size of the public sector to close to double its levels.At the start of the Tenth Plan, household investments was the largest segment with its level at 12.6% of the GDP accounting for around half the total investments followed by public sector and the private corporate sector with their rates close to 6% of the GDP.
The scenario has changed substantially by the first year of the Eleventh Plan. The numbers for 2007-08 show that the private corporate sector has emerged as the biggest investor, raising its ratio to 15.9% of the GDP and accounting for around 40% of the total investments in the entire economy. The other segment making major gains was the public sector whose savings to GDP ratio went up by around half to 9.1% of the GDP. Only the household sector investments remained stable over the period at around 12.6% of the GDP.
However, the danger now is that those very segments that made these gains possible are likely to be most hit in the current slowdown. With the central government spending raising deficits to more than twice the budgeted levels and the slack demand impacting on corporate firms, it is unlikely that either corporate or public sector savings will be able to maintain the gains made in the recent years. Though there might be some gains in net financial savings of the household sector, with the banks slowing down the credit flows to this segment, the overall impact is likely to be marginal. So, there is every danger that the economy would be deprived off the additional savings and investments needed to sustain the growth momentum at the very time it is most urgently needed.
p.raghavan@expressindia.com