Themes > Features
India's Savings Rate Surge
|C.P. Chandrasekhar and Jayati Ghosh|
domestic savings rate or the ratio of gross savings to GDP is estimated
by the CSO to have touched a record level of 29.1 per cent in 2004-05.
This implies an increase of 5.5 percentage points since 2001-02, before
which the rate had remained stagnant and even declined since the mid-1990s.
The recent revision of the weighting system and revision of the base
year from 1993-94 to 1999-00 has made a difference to the savings
rate estimates for individual years for which estimates for both series
are available. But the trend remains broadly the same. The initial
rise in the savings rate was captured by the old series. And provisional
estimates for 2004-05 from the new series suggest that the trend has
continued. Overall, the rise in the savings rate has coincided with
an increase in the rate of growth of GDP over the last three years,
suggesting that the economy is transiting to a sustainable, higher
priori this is indeed a possibility. Savings are estimated by dividing
the universe of savers into the public sector, the private corporate
sector and the household sector (including unincorporated enterprises).
Public sector saving is computed from budgetary data, and captures
the excess of government expenditure at the central and state levels
over revenue; and private corporate sector savings in the form of
retained earnings are obtained from company balance sheet data.
These issues are of relevance because the gross savings rate in the household sector had indeed risen between 2000-01 and 2003-04 (provisional) (Chart 2). However, there are two features of movements in the sectoral savings rate that need to be noted. First, while the increase in the economy-wide gross savings rate between these two years amounted to 5.4 percentage points, that in the case of the household sector totaled 2.3 percentage points. That is, movements in household sector savings account for much less than half of the increase in the aggregate savings rate between these two years. Second, if we consider the quick estimates for 2004-05, we find that the savings rate in the household sector fell by 1.5 percentage points, whereas the aggregate savings rate rose by a further 0.2 of a percentage point. Overall, between 2001-02 and 2004-05 while the aggregate savings rate rose by 5.5 percentage points the household savings rate was stagnant.
point to note is that the composition of the household savings rate
(Chart 3) has not changed significantly in favour of financial instruments.
In fact the share of financial savings has been more or less stagnant,
falling in individual years like 2002-03 and 2004-05. This weakens
the argument that the rise of in the aggregate savings rate could
have been the result of a mis-categorisation of float FII funds as
The public sector itself consists of three sub-sectors: government administration, departmental enterprises and non-departmental enterprises. An interesting question to ask is which of these contributed to reduced dissaving or the increase in saving. There is a common perception that some of the non-departmental public enterprises, in the wake of liberalization of public sector pricing practices, have been able to accumulate large surpluses that are accumulated in the form of reserves. While this is indeed true, it does not seem to be the case that this substantially explains the improvement in public saving. Rather, as Chart 5 shows, while the savings of non-departmental enterprises have contributed to improved savings, especially in 2004-05, it is the reduced dissaving in government administration that substantially accounts for the estimated improvement in the savings rate. This sub-sector accounted for approximately 60, 90 and 80 per cent respectively of the contribution of the public sector to increases in the savings rate in 2002-03, 2003-04 and 2004-05.
The final question to ask then relates to the factors that contributed to the improvement in public savings. As Chart 6 shows both stagnation and decline in government expenditures and a significant improvement in government revenues seem to have delivered the reduction in net dissaving of the administrative departments of government.
is indeed a puzzle inasmuch as the liberalization years have seen
a sharp reduction in customs tariffs and that while the deficit at
the central level has come down relative to GDP, no sharp reduction
has been recorded. There could thus be three factors that could have
played a role here. First, a growing curtailment of public employment,
which is by no means positive given the massive deficit in public
services, especially in rural areas.. Second, improved customs duty
collections despite reduced tariffs, because of an increase in the
quantum of imports and the sharp increases in oil prices. Third, the
contribution of special dividends from to-be-privatised entities and
receipts from disinvestment and privatization to government ''revenues''.
© MACROSCAN 2006