Ex RBI deputy governor tells what India needs to do to achieve new growth trajectory

There is a dire need to increase household savings as there has been a steep fall in the net household financial savings in recent years, Former Reserve Bank of India Deputy Governor Rakesh Mohan said.

What happened in January 2015 was more than a base year change from 2004-05 to 2011-12. There was a switch from GDP at factor cost to GVA
What happened in January 2015 was more than a base year change from 2004-05 to 2011-12. There was a switch from GDP at factor cost to GVA

There is a dire need to increase household savings as there has been a steep fall in the net household financial savings in recent years, Former Reserve Bank of India Deputy Governor Rakesh Mohan said. The net household financial savings have significantly slumped to 7 per cent of gross domestic product or GDP in recent years from 11-12 per cent of GDP in 2007-8. “These need to be restored to the 10 per cent level in the near future (from 7 per cent at present), and then increased gradually to around 13 per cent by 2030-35. Such a steep fall in recent years is difficult to understand since household financial savings had been around 10 per cent of GDP for almost 20 years right through the 1990s and 2000s,” Mohan said on Friday at the release of his new paper, ‘Moving India to a New Growth Trajectory’, at Brookings India.

The fall in savings rate is a major issue and the reasons behind the dramatic fall in household savings is still not very clear, said Mohan.Household savings reached about 21 per cent of GDP during 1997-2003 and ascended further to just under 24 per cent during 2008-11, but have since fallen to around 17 per cent in 2016-2018. There has been a dramatic fall in net household financial savings from the high of 11-12 per cent of GDP reached in 2007-08 to around 7 per cent in recent years, added.

The export growth needs to be expanded which has been almost nil for the last six years. The former deputy governor said it is possible to push exports growth as the world demand for manufactured goods will increase manifold in the coming years. According to him, the increase in domestic growth since the time of Independence is associated with consistent trends of rise in domestic savings and investment over the decades. 

Mohan said historically, Indian growth accelerations have been accompanied by higher gross domestic investment rates, largely financed from correspondingly increasing domestic savings, supplemented modestly by external savings including foreign direct investment (FDI). He said the secular uptrend in domestic growth since Independence is clearly associated with consistent trends of increasing domestic savings and investment over the decades.

“The NITI Aayog must be technically strengthened and reorganised so that it can develop long-term integrated programmes for investment and management of key interconnected sectors. The Aayog’s function to coordinate public investment programmes between ministries at the central level and across states must be restored, but within the framework of new cooperative federalism,” the former RBI Deputy Governor further said.

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