Business Today

Potential Minefield

India's declining savings rate could well pose a serious challenge to overall growth and macroeconomic stability.
twitter-logo Niti Kiran   New Delhi     Print Edition: September 9, 2018
Potential Minefield

That the savings rate of a country is important for its GDP growth has long been known. In recent years, both India and China have grown fast and have had high savings rates. But since 2011/12, the saving rate, measured as a share of gross saving to GDP has been continuously falling in India - there was just a minor improvement in 2014/15. It declined 4.7 percentage points over the period to stand at 30 per cent in fiscal 2017. The highest contributor to gross savings is the household sector, with a share of 54.2 per cent in 2016/17; this declined from 56.9 per cent in 2015/16. The household saving rate plunged to 16.3 per cent from a high of 23.6 per cent in 2011/12.

The recent decline in the household sector can be attributed to the decline in its gross financial savings, which has reduced from Rs 15.21 lakh crore in 2015/16 to Rs 14.05 lakh crore in 2016/17. The private sector savings rate has also declined a bit, while that for public sector has gone up marginally. The overall savings rate, however, has dropped to its lowest in years because of the plunge in household savings rate. The twin shocks of demonetisation and Goods and Services Tax have affected the savings rate and while the shock seems to be over now, the savings rate has only gone down. If this declining trend continues, it will mean less money for lending and investments and therefore will impact GDP growth rate going forward.

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