Fiscal discipline is necessary to not just rebuild public savings, but also to redirect government spending towards productive purposes.
The country’s high savings rate, which underpinned much of its growth and investment boom of the past decade, is increasingly becoming history. The Government’s latest national income data shows a significant fall in gross domestic savings in the Indian economy from 34 to 30.8 per cent of GDP between 2010-11 and 2011-12. This is bad enough. But indications are that the savings rate could drop even further. The Japanese brokerage firm, Nomura, basing its calculations on more current trends in investments, reckons that it might touch 27 per cent this fiscal. The implication of it for investments in the economy is straight forward. During the period from 2001-02 to 2007-08, for instance, gross domestic capital formation – investment rate, in common parlance – soared from 24.3 to 38.1 per cent of GDP. Much of it was facilitated by the increase in the savings rate, from 24.9 to 36.8 per cent, that took place correspondingly. A decline in savings to 30 per cent or below means that much less of internal resources available to finance investments.
A plunge in domestic savings may not necessarily bring down investment though, to the extent of there being compensating foreign capital inflows. These inflows can keep the investment engine going for sometime. But there is a limit to how much such external capital can neutralise the erosion in the domestic resource base, which a rising cost of imports relative to exports (evident in the higher levels of current account deficits or CAD) causes. Thus, the economy may have survived a more than trebling of the CAD, from under 1.3 to 4.2 per cent of GDP during 2007-08 to 2011-12, and a sharp reduction in domestic savings as a consequence, with only a modest decline in the investment rate during this period (38.1 per cent to 35 per cent of GDP). However, the present CADs are not sustainable. In the event, either the investment rate will have to drop substantially – not a desirable outcome – or the domestic savings rate should go up to be able to finance the desired levels of investment. The latter is the only sustainable and desirable solution for restoring macroeconomic balance.
Key to this process, of course, is the Government. Fiscal discipline is necessary to not just rebuild public savings, but also to redirect government spending towards productive purposes that can stimulate the economy, thereby generating more jobs and incomes. These will, then, translate into higher savings with households and firms, besides bringing in more tax revenues for the Government. We actually saw all this happen during the last decade, and need to make it happen again.
Comments:
The sharp fall in domestic savings rate at 30.8% of GDP in 2011-12 is surely a matter of concern. More alarming is the forecast of its further fall to 27% during this fiscal. While it is a fact that domestic savings have contributed to India’s growth in the past, its decline may be attributed to, inter alia, the growth of consumerism in recent times. The inflation figure being on the rise, more money is spent for daily consumption thereby leaving a meager or no surplus in consumers hands to save. The volatile global market has also adversely contributed to our economy bringing in a lower interest regime in place. We know higher savings lead to higher investments and higher investments help contributing to savings. In absence of adequate savings, investment cannot take off smoothly except the induction of external fund. But that too cannot sustain for a long time as you have mentioned. Need of the hour is focusing on the avenues of more income generation. More savings will follow.
Sustained high inflation (reflcted by sustained high CPI) is the major cause of decline in savings/GDP ratio. It should a serious cause of concern...domestic savings will put limits on our ability to investment given the overall pesimistic external environment andIndia's poor macroeconomic management...(and the fact that it is less likly to improve given the impending general election and its implications for FDI inflows).
The Govt needs to act fast... may be in this budget itself to rationalize food and fertilizer subsidies, introduction of GST, removing all supply side obstacles in the economy. This will make businesses efficent, improve food supply...and tame inflation....
But the question is - will the govt be bold enough?
It is a concern that savings are eroding and inflation depletes savings
making people unable to save and poorer.with reduced investment,supply
side bottle necks can furthur aggravate inflationary
expectations...Government must act bold and increae rates of interest
for household savings and start the investment cycle through various
bold reform measures...so that a virtuous circle of savings,investment
and growth is established and sustained..
next few years will be bqb for g.d.p.
The share of Personal Final Consumption Expenditure in GDP is ~59% and
that of Gross Fixed capital Formation is ~33%. Let us seek a consensus
on what kind of growth do we want: led by consumption or led by fixed
capital formation? Jab creating growth or jobless growth? Export led
growth or domestic consumption led growth? Do we want households to
save more or spend more?
We need to push for productive, efficient and globally competitive
investment, not just any investment.
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