• China
  • Economic Growth
  • Global Economy
  • Report
  • Eurozone Crisis
  • USA
July 04, 2019

Indian Economy: Stoking savings

Savings rate, or the proportion of gross domestic savings in gross domestic product (GDP), in India has trended down in the past decade. In a fast-growing economy like India, investments generally outpace domestic savings, and the gap is funded by foreign savings that shows up as current account deficit (CAD). Maintaining adequate domestic savings is, therefore, critical for sound macroeconomic management given the challenging global environment. Savings (household, corporate, and government) are needed to finance investments and sustain growth over the medium to long term. Notably, expansion of the economy between fiscals 2003 and 2008 coincided with a significant lift in both savings and investments. In that light, the current decline in savings rate is a matter of concern. 


Overall savings rate fell to 32% in fiscal 2018 from a peak of 37% in fiscal 2008, with a steep fall in household savings rate. Within household savings, both financial and physical savings rate diminished, with a sharper fall in the latter. However, this must be read considering the change in base year to fiscal 2012. Now, physical assets of quasicorporations are included in private corporations, instead of households. This has led to a bump-up in savings of the former with commensurate decline in the latter, which partly explains the sharp drop in household savings. 


Over the past few years, private consumption as a percentage of GDP has risen, in a reversal of trend seen till the early 2000s. Concurrently, there has been a fall in household savings rate and an increase in their financial liabilities. This typically happens when the population is dominated by youth and their consumption needs exceed income (life cycle hypothesis). With the demographic dividend playing out, households are likely to have turned consumption centric, dipping into their savings as well as leveraging themselves to finance consumption. Retail credit has been the fastest growing segment in the last few years. 


Household savings are currently at 6.6% of GDP and foreign savings, at 2.4%, i.e., availability of total financial savings of 9% for financing government deficit (6.6% of GDP) and private investment. The silver lining is the rise in private corporate savings, which jumped to 11.6% of GDP in fiscal 2018 from 7.4% a decade ago, in line with the global trends post 2008 financial crisis. These savings could be channelled for financing private investments when the climate turns favourable. 


India clearly needs to turn the wheels of the cycle of high savings, investments, and growth. Pushing up household savings would require more efforts towards financial inclusion and possibly, incentives. This must be complemented by productivity-enhancing reforms that encourage private investments to lift growth.