A decline to worry about

The Central Statistical Organisation's upward revision of GDP growth in 1998-99 from 6 per cent to 6.8 per cent means that in five of the first eight years after the commencement of liberalisation, the economy has grown by more than 6 per cent. Though the upward revision of GDP growth in 1998-99 has been on account of a recovery in agriculture, the recent performance of the economy is no mean achievement. All eyes will now be on the CSO's 'Advance Estimates' for 1999-2000 which will be put out later this month.

Though a revision upward for 1998-99 must mean that the earlier forecasts of a 6 to 6.5 per cent growth in 1999-2000 will be pulled down, it seems fairly certain that the CSO will estimate growth in the current financial year to be around 6 per cent.

Good as all this news must be, there is one element of the CSO's recent estimates which should be disturbing: the sharp fall in the rate of savings and investment in 1998-99 by as much as 2.4 and 2.8 percentage points respectively (See Table). This is the first decline of such magnitude since the early Nineties and should be worrying in the context of talk of pushing up the rate of savings and investment to 30 per cent of the GDP.

It is self-evident that growth requires investment, which in turn requires a substantial amount of domestic savings. External resources can supplement domestic savings - but that is what they will always be, a supplement to domestic savings. The importance of domestic savings is all the more important at present since the infrastructure sector - which is a priority - consumes investments in bulk.

After falling to a low level between 1991-92 and 1993-94, gross domestic savings as a percentage of GDP crossed 24 per cent in the next four years. With a substantial inflow of capital from abroad, gross domestic investment was more than 25 per cent of GDP in each of the four years between 1994-95 and 1997-98. Now there is the decline to cope with. With a lot of questions about the accuracy of the statistics on savings and investment, a final comment on whether or not the fall in 1998-99 was genuine must await closer analysis of the disaggregated data. But the decline in savings appears to have afflicted all the three sectors - the household, private corporate and government sectors.

The biggest decline has, however, been in the government sector - comprising government administration and departmental enterprises like the Railways - where savings last year were non-existent. The main culprit is ``government administration'' whose dissaving worsened from (-) 2.7 per cent of GDP in 1997-98 to (-) 4.1 per cent of GDP. This negative rate of saving was sufficiently large to swamp the savings of the public sector enterprises. It is not as if the private corporate sector has been doing very well. Its savings last year were only a little more than that of the public sector enterprises.

If the statistics are accurate then the across-the-board decline in savings in 1998-99 will jeopardise growth in the near future. It is not as if there is a one-to-one correspondence between the rate of investment and GDP growth. For example. GDP growth accelerated from 5 per cent in 1997-98 to 6.8 per cent in 1998-99 although the investment rate declined from 26.2 per cent to 23.4 per cent of GDP.

This particular case can perhaps be explained by the fact that growth in 1998-99 was fuelled by agriculture where a unit investment goes much further than in industry. But in general GDP growth does not go hand in hand with the overall rate of investment on a year-to-year basis.

However, a lesson to learn from the East Asian economies is that during their phase of rapid growth all of them had domestic savings rates of at least 30 per cent of the GDP. The Indian economy only stands to lose if the rate of savings stays on a declining path.

CRR

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