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Trillion dollar savings please - Views on News from Equitymaster
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  • Sep 17, 2009

    Trillion dollar savings please

    It is not surprising for us to find that the per capita consumption for Indian households in almost every category of consumables is amongst the lowest in the world. While one might think that this is because of our colossal population, let us assure you that is not the whole truth. This is because even as a percentage of GDP our consumption expenditure has fallen from 77% in FY02 to 67% in FY09 (source: CMIE). This is because Indians have been more inclined towards saving. So much so, that we are today amongst the highest per capita savers in the world. And now, we are expected to save even more! A trillion dollars over the next ten years to be precise.

    As per the latest Goldman Sachs report, India will require US$ 1.7 trillion in financing over the next decade to meet its infrastructure needs. This estimate tops both Goldman Sachs' earlier estimate of US$ 620 bn as well as our government's 11th Five-Year Plan (2007-2012) infrastructure spending of US$ 500 bn. Even if the financing for the 11th Plan have been accounted for, we will need at least a trillion dollars more to execute the investments required.

    Goldman Sachs expects most of the infrastructure investment to be funded by India's domestic savings without significant recourse to external borrowings. This belief stems from the trend of rising domestic savings rate and robust balance sheets of private sector companies. Goldman Sachs has pegged the gross savings rate in Asia's third largest economy to rise to 40% of GDP by 2016 (from 38% in FY09) and remain at high levels for well over a decade. These savings will be pertinent to fund public private partnership (PPP) projects that are estimated to fund 30% to 50% of the total infrastructure investment in the next decade.

    While there is no denying the fact that India's favourable demographics has the potential to deliver the savings required, whether the same will be optimally utilized is the question. Doubling the country's electricity generation capacity and the length of paved roads besides adding substantially to our railway, irrigation, port and airport networks in 10 years seem uphill tasks given our poor track record. However, as per Goldman, these are all required to achieve better GDP growth rates in the next decade.

    What is even more important to note is that for this plan to fructify, India's household savings must be intermediated through the financial sector (pension funds and the like) to the government, which then spends on infrastructure. India's infrastructure buildup and financing thus presents enormous opportunities, not just for producers of capital goods, developers and raw material providers, but also for financial intermediaries. However, in the same breath we need to mention that red-tapism and corruption could erode plenty of these savings. Quoting an earlier Goldman report "Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages". The conflux of the increased infrastructure spending requirements and the burgeoning fiscal deficit leaves India with only one viable option to meet its forecasted growth - substantially stimulate the private sector's participation in infrastructure. The PPP route is being touted as the best bet at leveraging private sector participation into the sector.

    So, how much are you saving and investing?



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