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Savings rate key to 9% GDP growth in 11th Plan

Savings rate key to 9% GDP growth in 11th Plan
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First Published: Thu, May 03 2007. 12 45 AM IST
Updated: Thu, May 03 2007. 12 45 AM IST
Asustainable growth of 9% is feasible only when the economy generates a gross domestic savings (GDS) rate close to 35%, says a Planning Commission report.
GDS is measured as the excess of national income over consumption and taxes.
According to the latest government data pertaining to 2005-06, while the nation’s GDS was 32.4%, the gross domestic investment was 33.8%.
Gross domestic investment is one of the components that makes up the country’s gross domestic product (GDP), or the market value of all goods and services produced in the country in a given period.
A group of experts, under Rakesh Mohan, deputy governor of the Reserve Bank of India, has posited several scenarios depending on the savings rate. At the highest level of savings of 34.7%, it projects the corresponding growth rate at 9.4% in the next five years—the 11th Plan period. On the other hand, for a savings rate of 33.4%, the expert group has projected an average growth rate of 8.7%.
In all these projections, the report has assumed an incremental capital output ratio (ICOR) of 4. ICOR essentially means the quantity of capital needed to increase output by one unit, and is a rough measure of productivity in the economy.
The report says that overall GDS, projected in the range of 33.4% to 34.7%, points to a strong and buoyant domestic resource base for the growth process during the 11th Plan, which can finance an investment to the extent of 34.8% to 37.5% of GDP.
The optimism of the working group springs from various factors.
For instance, savings mobilization is expected to be higher in the 11th Plan because it has been observed that savings mobilization by banks and other institutions has led to a shift of wealth portfolios from non-reproducible tangible assets such as gold to reproducible tangible assets such as capital market instruments, which are directly available for investment purposes.
Similarly, the report observes that with the rise in the proportion of people in the working age group of 15-64, savings will be higher compared with the preceding generation.
It adds that with the dependency ratio on the decline, the household savings rate is set to rise with rising income levels in the next five years. Coupled with a larger and younger labour force gainfully employed in production, GDS is all set to rise in India.
Economists, however, feel that while the saving rates have been encouraging, achieving an ICOR of 4 may be difficult.
According to Kanchan Chopra, director, Institute of Economic Growth, productivity may be an issue.
“I wonder if we will be able to achieve the ICOR of 4 given the infrastructural constraints and energy scenario, especially the low availability of power,” she said.
Another economist, who is part of the working group but did not wish to be identified, said ICOR is based on several assumptions.
“But it will roughly be around 4,” he added. In previous plans also, ICOR has been around 4—it was 4.5 in the Ninth Plan and 3.7 in the 10th Plan.
According to Samiran Chakroborty, chief economist, ICICI Bank, an ICOR of 4 has almost become a standard, but growing savings rate should propel growth.
“It has been generally seen that a savings rate of 20-25% has been able to fetch a growth rate of 6-7%, that between 25%-30% a growth rate of 8% and above 30% has got a growth of 9%. Since we are expecting a savings rate of over 30%, the 11th Plan will see an average growth rate of over 9%,” said Chakroborty.
Chakroborty added that that’s because higher savings help widen the production possibility frontier.
He also does not see a problem of capacity in the economy in the 11th Plan.
“I personally feel policymakers will have to assume that whatever capacity is created will have the corresponding demand and that capacity addition will be optimal,” Chakroborty said.
He added that sectors that were not generating good savings earlier are doing so now. “While the household sector continues to be a major contributor in total savings, public sector and corporate sector savings have also gone up in the past. In fact, savings in the public sector have risen from negative to positive in the last few years,” he said.
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First Published: Thu, May 03 2007. 12 45 AM IST
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