Domestic savings and investment rates at low levels

While the Planning Commission hopes that high savings and investment will boost GDP growth to 9 per cent and more, the fact is that the gross domestic savings and investment rates appear stuck at relatively low rates.

The Reserve Bank of India's Currency and Finance Report for 1999- 2000 released earlier this week points to two factors holding down GDP growth. One is the ``halting recovery of aggregate demand,'' that is, demand for consumption, intermediate and capital goods from households and industry. The other is the ``variability'' of investment rates, especially after reaching a level of as much as 27.2 per cent of GDP in 1995-96. Variable savings and investment rates have been there all through the 1990s, but a better way of describing the trend in recent years is that they seem to be caught in a stagnant if not an actually declining trend.

The RBI report, released on the eve of the Central Statistical Organisation's publication of GDP and savings/investment statistics for 1999-2000, ventured to predict that the savings and investment rates would have declined last year. However, the CSO statistics put out on January 30 show a rise and not a fall in both gross domestic savings and investment. But the increase in 1999-2000 is marginal and does not materially alter the picture of a decline/stagnancy since 1995-96. Besides, revision of the data for 1997-98 and 1998-99 has marginally lowered the rates of both savings and investment in the two years. Indeed, the savings and investment rates in the past two years are at their lowest levels since 1993-94.

The recent statistics show that while household and private corporate savings are growing, what is pulling down the overall gross domestic savings rate is the performance of the government sector. Public sector savings (of government departments and non- departmental enterprises such as the Railways) have been negative. Moreover, while the non-departmental public enterprises (mostly PSEs) do show positive savings, these are not large enough or have not been growing fast enough to compensate for the dissavings of the government administration and non-departmental enterprises. The result is that public sector savings turned negative for the first time in 1998-99 and stayed that way in 1999-2000.

The RBI/government statistics on savings and investment are not perfect. There has been and continues to be a fair amount of uncertainty about a number of components that go into the making of the overall estimates. But there is nothing to suggest that the errors are so large as to turn the low rates of recent years into high ones.

It is true that in the mid-1990s GDP growth accelerated in spite of a commensurate pick up in domestic savings and investment rates, suggesting a rise in productivity in the economy.

But productivity growth - and there is some debate on whether or not it did take place in the 1990s - cannot by itself raise economic growth to 9 per cent a year over a long period.

High rates of growth can come only if the gross domestic savings and investment rates increase substantially. And there is no sign of that happening.

CRR

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