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| June 19, 2000 | ||
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| KAUTILYA Save More Grow More By Jairam Ramesh A higher rate of economic growth will be constrained by the rate of home savings
Is this mere quibbling over numbers? The difference between 6 per cent and 8 per cent is, after all, a mere 2 percentage points. But this is not the way to look at it. These are compound annual growth rates. Thus, India growing at 6 per cent per year will double its per capita income in 17 years, while this doubling will take 12 years with an 8 per cent growth rate. For a civilisation that has had little respect for time this difference may look trivial but it matters in a most fundamental sense. No doubt, technology, productivity and efficiency will be crucial to attain a higher growth rate. But we also need a higher rate of investment. And for a higher rate of investment we need a higher rate of savings. Further, given the imperative to keep the current account deficit at about 2 per cent of GDP, domestic savings will be the major determinant of investment even as we take steps to increase the contribution of foreign savings. The importance of savings rates alone, however, must not be overdone. In 1960, South Korea and India had roughly the same rate of domestic savings. But thereafter, South Korea's growth rate was over twice that of India's. India has suffered less from insufficient savings as much as it has from inefficient investments. There is also new econometric evidence reported in a January 1997 IMF working paper prepared by Martin Muhleisen that the causation goes from growth to savings and not from savings to growth as has been the Indian theology. Even so, savings rates have to go up. Assuming that in view of the huge infrastructure backlog that has to be met, the incremental capital-output ratio (ICOR) remains at its recent historical average of between 4 and 4.5 (meaning that to generate one extra rupee of output an additional Rs 4-4.50 of investment is needed) the total savings rate has to be between 32 and 36 per cent of the GDP in order to trigger an 8 per cent rate of economic growth and to keep it going. This means the gross domestic savings rate has to be at least 30 per cent of the GDP. Compared to this, right now we are floundering. In 1998-99 the, the gross domestic savings rate had fallen to 22.3 per cent of GDP. The highest has been 25.5 per cent of GDP in 1995-96. There are three components of the domestic savings rate -- household savings, public savings and private corporate savings. Household savings are broken up into household financial savings and household physical savings, while public savings comprise savings of government administration, departmental enterprises like railways and non-departmental enterprises like sail, NTPC and other PSUs. As with most of our statistics, savings rate data are severely flawed. For example, the household financial savings do not cover gold and jewellery. Household physical savings are derived as a residual. Household savings include those of small-scale industry, the estimates of which are very difficult to come by. Corporate-sector savings are based on an outdated sample. Investment estimates are based on outdated production coefficients. But let us accept the estimates as they are. What has happened in 1998-99 is simply that public savings have fallen to zero from 1.4 per cent of the GDP in the previous year. Thus, increasing public savings is the single most important step to be taken to increase overall savings rates. This is where control of the fiscal and revenue deficits, tax management, privatisation and reduction in the government's establishment expenditure assume special significance. If the quantity and the quality of the fiscal deficit of both the Central and state governments continue as at present and if high real rates of interest persist, then there will be an investment famine in the country with disastrous consequences for sustained growth. Financial-sector reforms with focus on the provident fund, insurance and pensions market will stimulate greater private long-term savings, as will price stability. The savings rate has been the hardiest perennial in Indian economic planning. That hallowed status must continue but a whole new perspective on how its halo has to be regained and how it can stimulate an investment boom is called for. The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own. |
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An
embattled finance minister is thinking bold. In Bangalore on June 5 he
talked about going beyond a 7 per cent growth perspective. On June 6 in
Delhi, during his discussions with the visiting IMF chief, he talked of a
8-10 per cent rate of economic growth. But sadly, reality appears to be a
little different. In 1998-99, economic growth at constant 1993-94 prices
clocked 5.9 per cent. True, 1994-95 saw a 7 per cent growth, 1995-96 7.3
per cent and 1996-97 a peak 7.5 per cent -- the first time when we have
seen a 7 per cent hat-trick. But it has been downhill since then.