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The gross savings of a country is calculated as gross national income, less total consumption, plus net transfers from abroad. As per an International monetary forecast, India's gross national savings as a percentage of GDP will slip this year to 30.2%, the lowest since 2003.
What does this mean?
Since companies use domestic savings to fund their capital spending, the fall would increase their vulnerability to external risks. This includes uncertainty over the US presidential election or the prospect of monetary tightening that could stop the flow of cheap investment dollars to emerging markets such as India.
When it comes to availability of funds, corporates have always had a tough time raising funds in India. More often than not, they have to raise cheaper capital abroad. Public savings are essential to fund various infrastructure projects.
Households are the main source of savings in India, but years of high inflation, weak job creation, sluggish growth in incomes and two successive droughts have left their finances under siege.
It needs to be mentioned here that while the household financial savings have fallen over the years, the private corporate financial savings (basically retained profits of companies) have gone up over the years. In 2007-2008, the private corporate savings had stood at 8.7% of the GDP. In 2014-2015, they stood at 12.7% of the GDP. So, a fall in household financial savings has more than been made up for, by an increase in corporate financial savings.
The trouble is that corporates do not like to lend long term in the financial system. Most of the private corporate savings are invested in short term bonds and mutual funds which in turn invest in short-term bonds. Hence, corporate savings are typically unavailable for long-term borrowers. They need to depend on household financial savings.
George Gilder wrote in Knowledge and Power: 'The fastest growing economies in the world have been heavy savers. Saving powerfully diverts consumption preferences from immediate goods to the array of intermediaries funded by savings. Savings prepare the economy for a long future of growth, compensating for the dwindling harvests of consumption in a world of impetuous spending.'
Raising the savings rate is one of the main pre-conditions for India's long-term sustainable growth. The tiger economies of China and East Asia realized their economic potential by keeping their savings rates above 30% for decades.
However, globally, interest rates are on a downward trajectory and India is no exception. This is one of the reasons India's small savers have reduced growth in bank deposits to its lowest level in 53 years. Cash held by households has, meanwhile, surged 40% from last year.
The question is, is there any remedy to boost savings? Since most of the household savings go into buying gold and real estate, the switch has to be made to financial products. Secondly, a large part of rural India lacks a strong banking system and hence the most viable mode of saving is gold. So, if the government wants to encourage more people to invest in financial assets; the savings need to be first channelized into the banking system. This requires more bank branches to be opened in rural areas.
Also, various financial products like stocks, debentures, mutual funds, insurance products as well as various other financial and saving schemes should be made more feasible in order to increase the savings rate.
We believe, if the fall in the savings rate is not reversed, India's economy will not grow at a high rate in the future.
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