The economy would be back on a high growth trajectory, with the domestic savings rate likely to increase sharply in the coming years, said the finance minister’s chief economic advisor, Kaushik Basu.
“As the working population in India increases, savings rate will also rise,” Basu said at a post-Budget discussion organised by Business Standard on Thursday.
Gross domestic savings were estimated at Rs 18,11,585 crore in 2008-09, 32.5 per cent of the gross domestic product, compared with a higher savings rate of 36.4 per cent in the previous year.
Basu said even though the rate of 32.5 per cent was considered good, the government wanted it to go up and it would rise now, as deficits were headed lower. He added most Asian countries, except China that has a savings rate of over 50 per cent, had their savings rate between 30 and 40 per cent.
The fall in the savings rate in India has mainly been due to a fall in the rates of savings of the public sector from 5 per cent in 2007-08 to 1.4 per cent in 2008-09. Private corporate sector savings also went down from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09.
Basu also emphasised the need to improve the governance structure, and said it was high time the government did away with subsidies.
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“If we can clean up our system of subsidies, we can deliver double (of what we are giving now). Here you are subsidising the entire population. There is a limit to how much the government can provide. Let the market forces determine the prices. In retrospect, it would seem a good decision,” he said.
Basu explained that cutting subsidies would lessen the government’s subsidy burden, cut revenue and fiscal deficit, and divert some money into other productive sectors like infrastructure, health and education.
Former revenue secretary PV Bhide, also part of the discussion panel, justified the government’s move to hike fuel prices and said “people were prepared for it”. He also saw merit in the Budget proposal of levying service tax on rental income and said it was a global practice.
Talking about the proposed goods and services tax (GST), which has been deferred by a year till April 1, 2011, Bhide said the states and the Centre had still not arrived at a revenue- neutral rate.
“One year is not a short time and we could see it in 2011,” said Bhide, who was involved in policy making till the end of January this year.
Mukesh Butani, partner at BMR Advisors, noted the government had kept the service tax unchanged at 10 per cent, and increasing this to the pre-stimulus level of 12 per cent could prove challenging if the government had to implement GST next year.