A cyclical uptrend in growth will lift savings rate, but this is not enough to fund government's grand investment plans, an HSBC report said today.
According to the global financial services major, a recovery in growth could bring more than USD 1 trillion in extra household savings into the financial system over the next five years.
"The Prime Minister's ambitious plans for growth and prosperity thus hinge on India's ability to mobilise enough funds for all this spending," HSBC said in a research note.
According to the global brokerage firm, the national savings rate is about 30 per cent of GDP. To achieve GDP growth of 7-8 per cent during Modi's first term in office, investment needs to rise to at least 35 per cent of GDP.
"Age is on India's side. Savings will continue to rise as the number of people entering the workforce grows. Over the next five years, the growing workforce generates up to USD 44 billion in extra savings," HSBC said.
HSBC, however, added that to ensure that a big chunk of this enters the formal financial system, inflation needs to be contained and financial inclusion improved.
Better public infrastructure support and easier trade would increase the size of the corporate sector and therefore the size of the savings generated.
"We estimate that public sector saving could climb by 0.4 -1.8 per cent of GDP over the next five years if reforms are implemented," HSBC said adding that in total, domestic saving could rise by 2-5 per cent of GDP over the next five years -- hardly small change.
The report further noted that dilution of the government's stake in banks would enable them to run on more commercial terms and improve allocative efficiency.
Moreover, sustaining reform momentum is important to keep equity markets buoyant, thus reducing corporate leverage and boosting savings, it added.
