The Hindu Business Line : Importance of the savings rate

EARLIER this week, in London, the Deputy Chairman of the Planning Commission, Dr Montek Singh Ahluwalia, told an august gathering at Chatham House that India was well on its way to entering a phase of rapid growth.

Quoting a Goldman Sachs study, he said that India's growth rate — at 8 per cent a year — was projected to become the fastest in the world, even faster than China's, "which has been the fastest growing economy in the world". Capping the scenario is the conclusion of the study that, in the next 35 years (by 2040), the Indian economy will become the third largest, after the US and China.

All this is heady stuff, and is certain to eclipse any apprehension that rapid climate change is all set to bring Doomsday for Planet Earth much nearer than could ever be imagined.

Indeed, this last thought has been triggered by the report (appearing on the same day as Dr Ahluwalia's London speech) that most glaciers in Antarctica are in headlong retreat because of the changing climate, there being a strong possibility that average temperatures could rise by as much as two degrees Celsius in the course of this century, which would be a historic increase over the past 10,000 years or so.

One school of thought argues that there is little point in talking about the success in economic growth rate if the ecological stability of the planet itself is under threat, which could, in fact, endanger human and other life forms in the next 500 years.

Another view holds that life should be lived as long as there is scope to do so and that, using this yardstick, efforts to improve the national growth rate should be persisted with as long as there is a gap of generations separating "today" from the prophecies of the "doomsdayers".

Getting back to Dr Ahluwalia and his message, the point was also made that despite all the optimism surrounding the performance of the Indian economy, the fact remained that there were obstacles in the way of growth, one of which was the scarcity of capital.

This is a crucial point because if growth is to be spurred to the levels aimed at by the UPA Government (from the current 6.5 per cent), infrastructure in sectors such as power, roads, airports and ports need to be improved. But to do so, money is required, which is in short supply.

There are two ways to get this money (or capital) — from outside the economy and from domestic sources. The former method would imply a rise in the nation's external borrowings, which is appropriate up to a point but dangerous and even suicidal beyond it.

It would be much better to source it internally. This would directly depend on the rate of savings in the national economy. As Dr Ahluwalia, a seasoned economist himself, said: "The weak spot is public savings, which is negative".

So, how does one increase public savings, which depends partly on PSU (public sector units) corporate earnings and partly on the interest rate structure?

The latter depends on a complex web of interest rates, each part of which is connected to the other parts, not to speak of the fiscal deficit, which is delicately poised at the moment and is dependent, in part, on the "expenditure" incurred on interest out-go on public deposits, etc.

PSU earnings is, of course, dependent on business decisions and commercial transactions, but there is also a subsidy element involved, which is basically a leakage on the public savings front and is determined wholly by political and social considerations.

Can we then say that public savings is the Achilles' heel of the Indian economy, and that without a substantial improvement in its performance the economy will be unable to scale the heights like the Chinese economy?

This is a question that cannot be answered easily.

What an be said with some degree of confidence is that the Goldman Sachs scenario will be easier to attain with a better public savings performance... a banal enough observation but true nonetheless.

Ranabir Ray Choudhury

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