As the Indian economy continues to slow, there is growing fear about a lack of resources in the economy to fund a revival in investments and commercial activity. The dramatic fall in the domestic saving rate in the economy — which determines how much domestic funds government and businesses can access for investments—has fuelled such concerns.
Both the old and the new GDP series data suggest that the savings rate has been declining since the global crash of 2008, with the new series suggesting that the drop may be less sharp than what the old series reported. In 2017-18, the fall in the savings rate was arrested, primarily due to higher savings of non-financial corporations. But the improvement was marginal and savings as a percent of GDP—at 30.5%–remained substantially lower than the peak rate of 37.8% in 2007-08.
However, a closer look at the numbers suggests that the savings squeeze may not be as big a constraint in funding growth as is commonly assumed. National accounts data shows that the decline in India’s savings rate is primarily because of a decline in household savings. Within household savings, a sharp fall in ‘physical savings’ of households in recent years (since 2011-12) has led to the decline in overall savings rate.
It is worth noting that the term ‘households’ includes not only individual households but also non-corporate businesses including the unregistered micro, small and medium enterprises.
The estimates of physical savings of households — the component largely responsible for driving down household savings and the overall savings rate — need to be treated with caution. The savings of households in physical assets reflect the household segment’s investment in construction, machinery and intellectual property products—that is capital formation (or investments) by the household segment. In the absence of reliable data, this is derived by deducting investments by the public and private sector from total capital formation in the economy, and this method to capture ‘physical savings’ of households has come under question by statisticians several times in the past. Also, the decline in such ‘savings’ reflect the overall shrinking of the investment pie (overall gross capital formation in the economy) rather than a decline in financial resources for investments.
It is also important to note that physical assets of quasi-corporates — corporate entities which appear and maintain accounts like registered corporates — which were earlier captured under the household segment are now included as private corporate savings under the new GDP series. This also led to a bump-up in savings of the corporate sector with commensurate decline in the household sector, although even this change has faced trenchant criticism.
Thus not only does the decline in household savings reflect the decline in estimated capital formation on account of unorganized businesses and households, the accuracy of such estimates are questionable.
It is true that household savings in financial assets, especially in bank deposits, have declined (as a share of GDP) over the past decade but the decline has been less significant compared to the dramatic fall in household savings in physical assets. Since 2011-12, household savings in financial assets has hovered around 7 percent of GDP, with relatively muted year-on-year variations.
The financial savings rate of households has likely improved since fiscal 2018, since deposit growth has seen an uptick over the same period, according to Reserve Bank of India (RBI) data. At about 27%, bank deposits account for the biggest share in the total gross financial savings of households.
The national accounts data also suggest that the net financial liabilities of households as a share of GDP have remained steady over the past few years, belying the notion that households are saving less because they are now indebted.
A June 2019 NIPFP paper authored by Ila Patnaik and Radhika Pandey argues that the main challenge in India is not the (un)availability of savings but rather in the productive use of such savings for investments.
We must worry more about that challenge.
Source: livemint
