Only increased savings will fund the India growth story

Investments and savings are two major propellants for economic growth. This is particularly so in the Indian context where both private and public savings have had a lasting impact on economic growth rates. Finance ministers over the years have been aware that savings made resources available for investment, fuelled markets and growth, also created jobs across industry, farm and export sectors. Savings were primarily also the propellants for consumption-led growth in this country. Pre and post liberalisation, India’s growth story was spun around savings and investments as twin pillars of economic development. One would disagree with chief economic advisor Arvind Subramanian when he says that the slowdown in savings has had no impact on GDP growth as in the case of investments.

The western Keynesian model of investments — both public and private — being the sole driver of growth does not hold well in the Indian context. Housewives, children, salaried class to even the elderly at the individual level and as families are trained to make savings for a rainy day or a big purchase like a house, car or to fund a wedding. In contrast, most consumption in the western economies that John Maynard Keynes was exposed to was done on credit culture that boomed over the last five decades. Buying on credit extended to India as her economy opened up big time to the world. Hence, for Subramanian to prioritise investments over savings from the Indian point of view may not be completely true and accurate. In fact, Subramanian has no empirical data to prove his point on investments given that most middle class consumption in India, even now, rests on savings.

Even the scanty data presented by the chief economic advisor proves the point that savings and investments have to tango for a lasting growth story and not otherwise. As per the economic survey, the ratio of gross fixed capital formation to Gross Domestic Product or GDP climbed from 26.5 per cent in 2003 to a peak of 35.6 per cent in 2007 and then slid to 26.4 per cent in 2017.

The ratio of domestic savings to GDP registered a similar curve rising from 29.2 per cent in 2003 to a peak of 38.3 per cent in 2007 before falling back to 29 per cent in 2016. About eight per cent decline in savings — both private and public — has had a profound impact on growth rates as well as investments during the period. This is precisely the reason why Manmohan Singh, Pranab Mukherjee, Palaniappan Chidambaram, Yashwant Sinha to Arun Jaitley have banked on growth in savings to fund the India growth story. Most tax exemptions, changes in tax slabs have had been done to spur savings and thereby investments.

One big point that chief economic advisor Subramanian made was to emphasise the significance of domestic private investments that have been elusive for quite some time. Finance Minister Arun Jaitley will do well to treat both savings and investments alike to ensure double-digit growth. One point made by several analysts was to reduce the corporate tax rate to 25 per cent from the current effective rate of 34.5 per cent that includes cesses. In the backdrop of the deep cut in tax rates across the US and Japan, Jaitley will have to carefully tread over levies on companies in India as well. The finance minister had unveiled a roadmap for resting the corporate taxes at 25 per cent over three years. He will have to stick to time lines rather than fast-tracking the process.

Propelling savings and investments as twin engines for economic growth will be the best option for Arun Jaitley. Not many may subscribe to Subramanian’s view of banking on exports-led growth given that there is a basic difference between China and India. In this entire paradigm, he has completely missed out on the centrality of farm and rural sector that is the source of work opportunities and food security.