There are reasons to believe the economy will grow at over 7% in the next fiscal as projected by the Economic Advisory Council to the Prime Minister. This would be way above the 6% growth projected by IMF last month in its Global Economic Outlook (Update.)
The latest savings and investment data from GDP estimates, released by the Central Statistical Organisation on Friday, bears out this optimism.
The figures for 2007-08 show investments rose by 2.2 percentage points to 39.1% of GDP. The government?s own projection for the economy was far more modest. It estimated that the investment rate would move up from 32.4% of GDP to 36.7% by 2012. This was considered good enough to sustain a 9% GDP growth each year in the Eleventh Plan.
The better performance of the economy is significant as this means India has crossed the projected savings and investments rate for the Plan period in the very first year. Even if the investment rate for 2009-10 drops to 32% as projected by the council, the economy has enough headroom to withstand the shock and keep growth ticking along at plus 7%.
The story for the savings trends in the economy, as the table shows, is very similar. Savings shot up by 2% over the previous year to touch 37.7% of GDP in 2007-08. Here too, the Eleventh Plan has projected that the average savings rate will go up from 30.9% of GDP to only 34.8% in the Plan years. How had the savings and consequent investment data moved up so fast? As the council points out in its Review of the economy, 2008-09, ?the present crisis has come upon India at a point in time where several of its components are in relatively strong shape?.
A break-up of the data shows the highest increase in investments were in manufacturing, rising by 0.8 percentage points to 15.7% of GDP in 2007-08. The next highest increase was in the transport, storage & telecommunication segment where investments picked up by 0.7 percentage points to 5% of GDP.
But despite the overall pick-up, investment growth was stagnant in two important sectors: agriculture, and electricity, gas & water supply. While investment in agriculture & allied activities remained at 2.4% of GDP for the last three consecutive years up to 2007-08, that in electricity, gas & water supply it remained stagnant for two years.
The worry note is the stagnancy in the growth rate of financial savings of households which stayed put at 11.7% of GDP for the past three years. This means consumption spending had been relatively more buoyant. It also reflects on the inability of the financial institutions to mop up additional savings from the widely scattered households. Most savings came from the public sector where the rate rose by 1.2 percentage points to 4.5%.