From UPSC perspective, the following things are important :
Prelims level : Nothing Much
Mains level : Decline in savings rates should be arrested as sson as possible.
Importance of savings
- Empirical evidence shows that developing economies have a positive long-term correlation between savings and growth.
- In a fast-growing economy like India, investments generally outpace domestic savings, and the gap gets funded by foreign savings.
- This shows up as current account deficit.
- Maintaining adequate domestic savings, therefore, is essential to sound macroeconomic management — more so in today’s challenging global environment.
Unfortunately, Indians have been saving less.
The decline in savings Rate
- Worse, our rate of savings has fallen sharply.
- The overall savings rate (households, public sector and private sector), or the proportion of gross domestic savings in the GDP, plunged to 30.5 per cent in fiscal 2018 from a peak of 36.8 per cent in fiscal 2008, rising marginally in the interim.
- It has been downhill since fiscal 2012.
- The external shock of the global financial crisis led to a sharp slowdown in public savings in fiscal 2009, with the government resorting to fiscal stimulus.
- The savings rate recovered marginally in the next three years, only to lose momentum thereafter. This could compound India’s problem of slowing growth.
1. Decline in household savings
- The largest savers in the economy, household savings, (the government and the corporate sector being the other two categories) fell from 23.1 per cent as a per cent of the GDP in fiscal 2010 to 17.2 per cent in fiscal 2018.
- That’s a major source of concern because households have been traditionally net suppliers of funds to the private corporate sector as well as the public sector.
- This means that excess of household sector savings over their investments is used to fund the saving-investment gap of the other two sectors.
- A continuation of this trend will shrink the pool of savings available to facilitate private investments.
What explains the decline in household savings?
Increased Consumption –
- A part of the answer lies in the consumption trend. National accounts data shows that over the past few years, private consumption as a percentage of the GDP has risen — in a reversal of the trend seen till the early 2000s.
- Given favourable demographics, households are becoming consumption-centric, and their financial liabilities have been rising, as evidenced in retail credit, which, at 17 per cent annually, is the fastest-growing loans segment in the past five years.
This fall in household savings rate is also corroborated by a sharp fall in household saving elasticity (the proportional change in savings to a change in income) since the beginning of this decade.
On the other hand, savings of government corporations (departmental and non-departmental enterprises) are largely offset by government dis-saving (as it runs a revenue deficit), which keeps the overall public savings rate low.
3.Private sector Savings
- But the private corporate sector savings bucked this trend, surging to 11.6 per cent of the GDP in fiscal 2018 from 7.4 per cent about a decade ago.
- So while private corporate savings surged, household savings declined commensurately.
- Yet, the rise in private corporate savings is in line with evolving global trends in savings after the global financial crisis.
- In India too, rising corporate savings could be channelled for financing private corporate investment when the opportunity arises.
- Beyond these domestic sources, an increase in private sector investment will need to be financed by foreign savings, which carries its own set of risks beyond a point.
- With the election-related uncertainty behind us, a softer monetary policy stance, and the government’s resolve to push growth up, investments are likely to increase in the future.
- Clearly, it’s time to reignite the virtuous cycle of high savings, investment, and growth so that the country returns to the high-growth trajectory of the past.
- Pushing up household financial savings would require greater efforts towards financial inclusion, and possibly, incentives for saving.
- These must be complemented by productivity-enhancing reforms that encourage private sector investments.