Low savings, high real interest rate: Is India’s economic growth sustainable?

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Published: April 8, 2019 6:43:23 PM

Further, high real interest rates in the economy despite rate cuts by the RBI also threaten the growth prospects and will keep the 10-year government securities (G-Sec) yields at relatively elevated levels.

India continues to be one of the fastest growing economies in the world, but its sustainability looks questionable with the government borrowings growing faster than domestic savings.

The gross household financial savings, net of financial liabilities, continue to grow slower than the net borrowings of central and state governments plus extra budgetary resources (EBR). The gap between the two is funded by external sources, according to a recent report by India Ratings and Research, a unit of Fitch Ratings. The phenomenon has potential to run the risk of a wider current account deficit and other associated consequences, the report said.

“Gross households’ financial savings net of financial liabilities increased to Rs 11.29 trillion in FY18 from Rs 6.43 trillion in FY12 (CAGR: 9.8 per cent). However, net central government, state government and EBR borrowings increased to Rs 11.55 trillion in FY18 from Rs 6.28 trillion in FY12 (CAGR 10.7 per cent),” said India Ratings.

Further, high real interest rates in the economy despite rate cuts by the RBI also threaten the growth prospects and will keep the 10-year government securities (G-Sec) yields at relatively elevated levels.

The fall in household savings despite high real interest prevailing in the economy was also highlighted by a report released by Kotak Securities last month. Household savings rate declined to 17.2 per cent in FY18 from 22.5 per cent in FY13, according to the report. This can be attributed to low employment opportunities, continued high consumption and rise in financial liabilities of households over the last five years, said the Kotak report.

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There is a need for improvement in the ratio of gross household financial savings net of financial liabilities compared with net borrowings of central and state governments and EBR, according to India Ratings and Research. This would require either a rise in former or fall in the latter.

Though India can rely on foreign funding to meet the government borrowing and investment requirement, but higher reliance on external funding has its own problems such as the fickle nature of FPI can be quite destabilising for the economy, added the report.

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