The Planning Commission has projected a sharp increase in India's Gross Domestic Savings (GDS) during the 12th Plan (2012-17). Savings have been a key source of investment capital in India, but they have witnessed a decline in recent years amid the adverse economic environment. However, the situation could improve in the five-year period, a Working Group led by RBI Deputy Governor, Mr Subir Gokarn, has estimated.
The savings rate as a percentage of the country's Gross Domestic Product (GDP) could range from 36.2 to 37 per cent during the 12th Plan, the Group says, based on a study of different growth and inflationary scenarios.
Three scenarios
The group considered three scenarios to estimate the gross savings rate: a base case in which real GDP growth is 8.5 per cent and inflation is 5 per cent, a positive case with 9 per cent GDP growth and 5 per cent inflation and a negative case, with 8 per cent expansion and 6 per cent inflation.
In all the three scenarios, the working group assumed a turnaround in public sector savings, which would contribute significantly to the increase in the savings rate over the Twelfth Plan period.
The working group projected the GDS at 36.2 per cent of India's GDP at current market prices in a pessimistic scenario. In the base case, the rate was pegged at 36.5 per cent of the GDP. And in the most optimistic case, the domestic savings was projected at 37 per cent of the Gross Domestic Product.
Deficit
Pertinently, the study indicates that India's Current Account Deficit (CAD) will be lowest in a scenario where growth was low and inflation was high, at 2.7 per cent of the GDP. On the other hand, in the base case, the CAD will be 3.3 per cent and in the optimistic case, it will be 3.9 per cent. The working group has stated in the report that a CAD of 2.7-3 per cent is sustainable for the economy.
Despite the optimism, the report has acknowledged there are risks to its projections being derailed.
It has warned that the household savings rate could remain stagnant or even decline as financial liabilities increase with greater retail credit penetration. Furthermore, the projected increase in the public savings rate is contingent upon the continuance of the fiscal consolidation process.
In addition, the sustainability of at least the current levels of efficiency in the private corporate sector would be important. Last but not least, any large shocks to growth and inflation could alter the savings scenario, the panel has warned.