Savings set to decline, hurting both investment and growth

Savings set to decline, hurting both investment and growth
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First Published: Wed, Mar 04 2009. 12 06 AM IST

Updated: Wed, Mar 04 2009. 12 06 AM IST
One of India’s strengths supposed to insulate it to some extent from the global economic meltdown is supposed to lie in the fact that the economy is dependent mainly on the strength of the domestic consumer. While it’s true that the share of domestic private consumption in gross domestic product (GDP) is much higher than in China, the fact remains that even in India, the share of consumption in GDP has fallen sharply in recent years. The table shows the steady fall in consumption as a share of GDP as well as the rise in capital formation.
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Notice how there was little difference in the share of capital formation in GDP during most of the 1990s right up to 2003. It was only from 2004 that there was a sudden sharp jump in capital formation as a proportion of GDP. That was due to a rise in the proportion of savings in GDP, which rose from 23.5% in 2001-02 to 35.7% of GDP in 2007-08. The share of savings in GDP had gone up only marginally between 1989-90—when it was 21.75% —and 2001-02, when it rose to 23.5%. That was in spite of a rise in the proportion of household savings. In fact, most of the rise in savings between 2001-02 and 2007-08 was not because of household savings, which went up from 22.1% of GDP to 24.1% of GDP over the period, but on account of a sharp rise in corporate and government savings. The proportion of private corporate savings rose from 3.4% in 2001-02 to 8.3% in 2007-08, while public sector savings rose from -2% to 3.3% of GDP.
The current slowdown has already resulted in a huge fiscal deficit, which will draw down government savings, while the fall in corporate profits will hit private corporate savings. That, in turn, is bound to impact capital formation or investment, which has been the driver of growth in the economy in recent years. And since consumption is no longer as important to the economy as it used to be, the falling off of investment will hurt growth very badly, unless the government is able to use its deficit financing to prop up investment.
Graphics by Sandeep Bhatnagar / Mint
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First Published: Wed, Mar 04 2009. 12 06 AM IST