Editorial. Low savings, and borrowings for consumption are red signals

The latest monthly economic report published by the Finance Ministry a few days ago paints quite a positive picture of the economy. It’s true that most indicators are on an even keel. But it is also necessary to be mindful of two major underlying problems: persistently slow income growth and, consequently, very slow growth of private consumption and investment. This appears to have necessitated a sharp increase in the reliance on consumption loans on the one hand and public investment on the other. And there’s always the ubiquitous inflation which, in all likelihood, is higher than what official figures can capture.

It’s useful in this context to hark back to John Maynard Keynes, the great 20th century English economist. He had formulated the paradox of thrift. This is a situation where, because during a recession people save more as they are uncertain about future incomes, they obviously spend less. And the less they spend, the more demand and production declines. As production falls, there is less investment, which means incomes either fall or grow very slowly. This results in savings going up even more. The whole cycle then repeats itself.

Is this the situation in India now? Not quite because, in fact, it’s not only consumption that’s low: savings at less than 30 per cent of GDP are also lower than they have been in over a decade. Indeed, that’s perhaps why the Bank of Baroda, in a recent report, has bluntly said that real incomes are actually falling because inflation is higher than what people can bear. Official statistics don’t always reflect the ground realities of economic distress. The government’s monthly economic report says the consumption of physical assets is increasing. Perhaps so, but the evidence for that is spotty: just home and high-end car purchases. That’s probably no more than a skew caused by inequality. It gives little comfort.

If incomes are not growing quickly, how is consumption expenditure being financed? By loans clearly, about which the Reserve Bank of India has been in a little tizzy, particularly because more than half of these are unsecured. Since much of this increase in loans is unlikely to be for the acquisition of assets like cars and homes, it’s necessary to ask why people are borrowing. The answer could be that people are finding it hard to make ends meet. So either they are not spending — lower consumption — or they are borrowing to spend. Neither bodes well for the economy. India has often been through this low savings-investment-consumption phenomenon. Some of what we are seeing now is cyclical but a very large part of it is structural. India’s famous inability to solve these persistent structural problems make it more vulnerable to cyclical movements. The really bad news is that the amplitude of these cycles is becoming shorter, with all the attendant social problems that invite populist political responses. We can see that around us.

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