If Manmohan Singh needed to impress the audience at the World Economic Summit at Davoswith some positiveeconomic figures, the Central Statistics Organisation (CSO) provided himwith just that when it released its quick estimates of national income on February 1.
The highlight of the estimates was the 3 per cent increase inIndia’s savings rate for the year 1994-95, which touched 24.4 per cent of thecountry’s GDP at constant prices. This is the highest savings rate recorded in thepost-reform period. But it’s not as if Indians are saving more and spending less. Infact, they are doing a lot more of both. The country’s GDP increased by a healthy 6.3per cent in 1994-95, giving enough scope to both spend and save. Great news, no doubt, buteveryone is keeping their fingers crossed that when the final figures come in—and anew government will be in place by the time they are released—they conform to thesepreliminary estimates.
What does the surge in the savings rate, which takes into account both the householdand corporate sectors, imply? In its broadest sense, an increased confidence in theeconomy and the direction in which it’s going. The householder saves only when hebelieves that the future is going to be brighter; that is, his savings, when invested,will get him attractive returns. Otherwise, he would rather spend his money and accumulatetangible assets. In fact, one of the reasons for the low savings rate in the early’90s was the fact that not only were households saving less, they were also investingtheir savings in gold and real estate, which are not included in the savings ratecalculations. Economist Jairam Ramesh estimates that if savings in real estate, mutualfunds and gold are taken into account, the rate of savings will probably be in excess of30 per cent. This trend appears to have been reversed and households are now savingcomparatively more in stocks, bonds and deposits with corporates and banks.
Says Shashanka Bhide, chief economist, National Council of Applied EconomicResearch (NCAER): "In the earlier years of the reform programme, there was aperceptible decline in both savings and investment, probably because corporates did nothave confidence in the country’s economic fundamentals and were thus disinclined toinvest. One can argue that the current increase in the savings rate isbecause corporatesand households feel that the time is right to invest. There is thus a great inducement forhouseholds to save, because corporates are willing to provide adequate returns forhousehold savings which they utilise to invest." In fact, gross capital formation(investment) in 1994-95 exceeded the savings rate by 0.8 per cent due to positive netcapital inflows from abroad and touched 25.2 per cent, up from the earlier figure of 21.6per cent in 1993-94. Fixed capital formations accounted for the major increase ininvestments, rising by 23.7 per cent.
Bhide estimates that of the 24.4 per centsavings rate, households account for over 14per cent and corporates for roughly 8 per cent. The greater inducement to save for thesetwo sectors resulted in net savings of the household sector increasing by 32.4 per centand net corporate sector savings by 36.8 per cent. In comparison, net dissavings in thepublic sector declined by 19.6 per cent.
Confidence in the economy apart, the 6.3 per cent increase in GDP is also cited as amajor reason for the increase in the savings rate. "Savings are affected by anincrease in GDP, though it may be with some time lag," says former RBI governor R.N.Malhotra. "One of the reasons for low savings in the early ’90s was the low GDP growth.But the government has revised the estimates for increase in GDP in 1993-94 to 5 per centfrom the earlier estimate of 4.3 per cent. The healthy GDP growth figures for 1993-94 and1994-95 have definitely influenced the increase in savings rate."
Not only has GDP grown as a whole, both industrial and agricultural growth have beenquite satisfactory over the last two years. Corporates have been consistently reportinghigher profits, which they save to invest. And thanks to high agricultural growth, thecountry’s foodgrain stocks have also increased. Besides, says Malhotra: "Somepublic sector companies have increased their profitability, especially those in monopolyareas. Even otherwise, thanks to competitive pressures and budgetary constraints, bothforced on them by liberalisation, they are being forced to perform."
However, the public sector will continue to have a marginal effect on the savingsrate as long as the Government does not reduce its expenditure on subsidies. Even then,the CSO’s quick estimates are undoubtedly cause for cheer. As long as‘quick’ does not, in this case, mean ‘hasty’.
