SAVINGS AND INVESTMENT GAP IN INDIA

SUMMARY: This report highlights various aspects of economic performance of the country with key

concerns for the economy. One of the key concept is that the concern on savings and investments front in Indian economy. While savings are on decline, investments are moving to physical assets. This is indeed an area of concern and it also describes the trends in savings year wise. While savings have been fluctuating since 2008 and has gone down sharply in 2011-12 compared to 2010-11, there has been a significant fall in financial savings from 10.4 percent from 2010-11 to 2011-12. During the same period savings in physical assets have gone up from 13.1 percent to 14.3 percent. The survey while analyzing trends in financial savings says, Within households, the share of financial savings compared to physical savings has been declining in recent years. Financial savings take the form of bank deposits, life insurance funds, pension and provident funds, shares and debentures, etc. Financial savings accounted for around 55 per cent of total household savings during the 1990s. Their share declined to 47 per cent in the 2000-10 decade and it was 36 per cent in 2011-12. In fact, household financial savings were lower by nearly ` 90,000 crore in 2011-12 compared to 2010-11. INTRODUCTION: SAVINGS AND INVESTMENT: Savings and Investment are necessary requirements for development of any economy. Savings originate from income and the financial intermediaries transfer them to investors. Investors use them for capital formation. Capital formation in turn generates a stream of income apart of which is saved. In terms of macroeconomic presentation, GDP=Consumption (C) + Savings (S) + Govt. Exp (G) -Taxes (T) GNP=C+S+G-T+ Exports (X) Imports (M) GDP= C + Investment (I) + G T GNP=C+I+G -T+X-M
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However, investment, that is capital formation, was not adequate to achieve higher growth rate of GDP. This was mainly because of low efficiency in the use of capital. In other words, the amount of capital required to produce one unit of output or GDP is called capital-output ratio. Inefficiency of capital use indicates high capital output ratio. In other words, in order to achieve high growth rate of output or GDP, we need to mobilize higher savings and use lower amount of capital. In India capital output ratio has been hovering around 4. It is lower in agriculture which ranges from 1 to 2, higher in manufacturing where it ranges from 3.5 to 4.5 and more or less the same in service sector. High level of capital coefficient is considered as one of the reasons for low GDP growth rate in India. TRENDS IN SAVINGS AND INVESTMENTS: Another aspect of concern brought out by economic survey is the decreasing flow of savings in capital market. The survey points out that , Shares and debentures accounted for 8.3 per cent of total financial savings in the1980s; their share increased to nearly 13 percent in the 1990s before declining to 4.8 percent in the 2000s. The reason given for this decline is high volatility in the equity market. As per the survey, the poor flow of money in equity market is explained by volatility which has been as follows: The major concern on increasing trend in movement of money towards gold. As per the survey, The returns on the BSE Sensex halved to 10.7 per cent in the 2000s and volatility increased as can be seen from the higher value of the coefficient of variation at 60.1. Thus a combination of lower returns and higher volatility in the 2000s comparing the 1990s could have contributed to the reduced share of shares and debentures in total financial savings. This, coupled with high inflation, could also be one of the reasons why gold has become a safe haven investment in recent times . Acquisition of gold by the households in the country tends to have a negative impact on savings and on household financial investments.

SAVINGS AND INVESTMENTS CONTRIBUTION TO ECONOMY:

THE GAP BETWEEN SAVINGS AND INVESTMENTS: The savings and investment are decreasing gradually in the years of 2005-2013.This determines that the savings are less and therefore investments are turned into physical assets. The gap between savings and investments at year 2004-2005 was -0.41 and from years 2006-2010 its fluctuated and at year 2011-2013 there is a large disparity to savings and investments.
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Savings are made by households, corporate entities and government & its enterprises and agencies. Savings are made in physical and financial assets. In India households generate almost 90 percent of the countrys savings and the corporate sector and government borrow from

households and undertake investment. What is more, the composition of savings have been changing from land and such other physical assets to financial savings which have enabled the corporate sector and the government to borrow for undertaking investment. Investment can be made in physical assets which are used as means of production, in financial assets which only transfer entitlements from the savers to the investors, in non-productive physical assets like residential buildings, gold and other precious metals and in human capital, that is by investing in education to train the labour in productive skills which generate higher income in future. In India savings are made in financial assets as well as in physical assets. But the proportion of savings in unproductive assets has been more than in productive assets though in recent years but this tendency is changing. Likewise, until recently, the proportion of unproductive investment was more in India which reduced the availability of capital for productive investments. Apart from the normal scarcity of capital funds in a developing economy, the scale of productive investment undertaken in India has been so high that it could not be entirely financed by domestic savings. Therefore, India had to borrow funds from foreign governments and international funding institutions like World Bank, IMF and ADB. Even these borrowed funds
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became inadequate to meet the galloping rate of growth of investment in the wake of economic liberalization. Hence foreign direct investment (FDI) has been allowed in infrastructure projects like airports, ports and in manufacturing sphere. CONTRAST IN THE SAVINGS OF HOUSEHOLD,PRIVATE CORPORATE AND PUBLIC SECTORS: The rapidly evolving macroeconomic and policy environment has been associated with contrasting movements in the rates of savings of the household, private corporate and public sectors. the years 2002-04 could be viewed as a break point in the trends in the savings rates of the three sectors. While household savings has continued to account for the predominant share of gross domestic savings over the years, the households savings rate which had generally moved upwards at an increasing pace till 2003-04, generally leveled off thereafter at around 23 per cent. In contrast, the private corporate sector savings rate which had remained nearly stable at around 2 per cent up to the 1980s, picked up subsequently and increased sharply after 2002-03 to over 9 per cent by 2007-08, on the back of improved corporate profitability; the private corporate sector savings rate has hovered around 8 per cent since then.

I.

The private corporate sector has remained vibrant and has benefitted from increasing consumption and investment demand arising out of consistently high economic growth.

With robust sales growth, improved productivity and healthy profit margin, corporates recorded good growth in profits which translated into higher saving. II. The public sector savings rate declined steadily from around 5 per cent in the early 1980s and turned negative in the late 1990s and remained so for the next few years. This largely reflected the fiscal profligacy of the 1980s and the waning of the fiscal consolidation process in the late 1990s. The public savings rate turned positive once again in 2003-04 and peaked at around 5 per cent in 2007-08 largely reflecting the enactment of fiscal responsibility legislation and improvement in the finances of public sector enterprises. A sharp decline in public sector savings occurred in 2008-09 largely on account of the Sixth Pay Commission arrear payouts and fiscal stimulus measures, which persisted in 2009- 10 with the public sector savings rate declining further to 0.2 per cent. III. It is also evident that the contrasting movements in the savings rates of the private (i.e. household plus private corporate) sector and the public sector that were observed during the 1980s and 1990s - indicative of a form of equivalence were not discernable during 2000s

TRENDS IN HOUSEHOLD SECTOR SAVINGS-RATE AND CONSUMPTION: A striking feature of the 2000s is the general leveling off of the household savings rate at about 23 per cent from around the middle of the decade in contrast to the upward movement in the previous years. Moreover, this leveling off occurred even as the economy generally cruised along a high growth trajectory (barring a brief hiccup in 2008-09). The factors underlying the stability in the household savings rate are discussed next. Total saving of the households comprises financial savings and physical savings. Financial savings are treated on a net basis i.e. households (change in gross) financial assets less their (change in gross) financial liabilities. It is evident that while physical savings of the households increased sharply during the first half of 2000s, the pace of increase in gross financial assets as well as gross financial liabilities slowed down. With the net financial savings rate resultantly showing a modest increase, most of the overall increase in the households savings during the first half of the 2000s was on account of physical savings. The household sectors preference for savings in the form of physical assets since 2000-01 could be attributed partly to the robust economic growth as well as rising availability of credit to meet financing needs of the household sector. AVERAGE OF HOUSEHOLD SAVINGS:

During the second half of the decade, even though the gross financial savings (assets) and gross financial liabilities of the households increased sharply, the increase in net financial savings rate remained modest. At the same time, the rate of physical savings declined partly in response to the tightening in credit norms, offsetting the increase in the financial savings rate. Consequently, the households overall savings rate remained largely unchanged (at around 23 per cent) since mid-2000s.

Since the 1970s, the allocation of household savings between financial assets and physical assets had been progressively moving in favour of the former, with the notable exception of the first half of the 2000s. The allocation became almost evenly balanced during the second half of the 2000s. The extent to which household physical assets were funded through loans and advances increased sharply during 2004-05 to 2006-07, coinciding with the high growth phase and real estate boom. Subsequently, this ratio has declined. CONCLUSION: The savings are less investment are increasing in the in the years of 2005-2013.This determines that the savings are less and therefore investments are turned into physical assets. The gap between savings and investments at year 2004-2005 was -0.41 and from years 2006-2010 its fluctuated and at year 2011-2013 there is a large disparity to savings and investments.