This week, all eyes were on inflation and industrial production data, neither of which was exceptionally bad. And yet, the Reserve Bank of India’s (RBI) much-awaited mid-quarter monetary policy ended as a non-event.
While bankers are still griping about the lack of a clear easing signal from RBI, optimists are now talking about rate cuts starting in the April-June quarter. But there is another crucial piece that seems to have escaped many — the falling rate of savings (personal, private and public) and its impact on investments and GDP growth. Besides lower interest rates, the structural imbalance between savings and investment needs to be bridged if economic growth has to return to eight per cent levels. Economists find the Economic Survey’s estimate of a 7.6 per cent GDP growth in FY13 more aspirational than real.
The overall savings rate has fallen to 32 per cent in FY11 from 37 per cent in FY08. Household savings slowed to 22.8 per cent of GDP in FY11 from 25 per cent in FY10, while corporate savings fell to 7.9 per cent from 8.2 per cent. Public sector savings however, edged higher to 1.7 per cent, from 0.2 per cent. According to Dhananjay Sinha, equity strategist and economist at Emkay Global, the savings rate has slid further to 27 per cent in FY12 and would remain low at 26.5 per cent in FY13. He says: “The structural savings rate is now less supportive given the decline in household savings rate, lower corporate profitability and government revenue deficits.” However, investments have falled to 35.1 per cent in FY11 from 36.6 per cent in FY10. This imbalance between savings and investment too, is putting pressure on liquidity, say economists. Widening of the current account deficit is an added challenge.
Rohini Malkani, chief economist, Citi, had flagged off similar concerns last month: “Given India’s high financing needs, structurally high savings have supported growth in investments in the past. The moderation in savings adds downside risks to potential growth.” Investment and domestic savings cycle, which moved in tandem between FY94 and FY08, has broken and “the widening non-household saving-investment gap rose to a historical high of -7.8 per cent of GDP in FY12 after rising to -3.5 per cent in FY11,” explains Sinha. This could mean RBI will draw down on forex reserves to fund deficits and monetise the government’s deficits through open market operations. Finally, slowing growth could well derail the consumption story.
