'Is saving the issue?', The Hindu, March 13, 1996.

One strand in the assessment of the economic reform since 1991 has focussed on the behaviour of the savings rate in the economy. It has been pointed out that the savings rate, measured as the ratio of savings to the gross domestic product, has steadily declined. This had led the Ministry of Finance to suggest in the Economic Survey of 1994-95 that there must be some estimation bias, and a committee is presently investigating the matter. In the accompanying Table are provided the data on savings both in the aggregate and by `institution', namely, the government, the private corporate sector and the households. It is evident that the decline in the aggregate domestic savings rate has been set-off by the decline in the household savings. Saving of the government has declined alright but it did not start-off the decline in the economy-wide saving rate which commences in 1991. The decline is entirely due to the steady decline in household saving, notably household saving in physical assets.

            The immediate response of many commentators to the observed decline in the savings rate is to see it against the background of the reforms in the Indian economy. Government, clearly aware of the potential uses of such serendipity to its detractors, has taken resort to suggesting incorrect estimation procedures even without providing any arguments. The riposte has been that there is no such error of estimation and that the measured decline is real so to speak. And the reason for the decline, it is argued, is to be seen in the nature of economic reform itself. The liberalisation process is said to have unleashed a demand for consumer durables, the increased consumption of which reduces the savings rate. It is interesting to see that there is little substance in this argument. Data on the production and consumption of consumer durables show that these actually increased at a rate faster during the eighties than so far in the nineties. This corresponds to our casual observation that the spurt in the consumption of these commenced in the mid-eighties. There is in fact the further evivence that expenditure on durables as a share of final expenditure has declined since 1991. So a white goods led consumption boom is not a credible explanation. What is then?

            There is really no puzzle at all in the decline in the savings rate. Both the government and its critics have got into a bind by seeing the decline in the savings rate in the light of reforms alone. But since 1991 we have also witnessed a conventional macroeconomic stabilisation programme. A stabilisation programme attempts to lower the inflation rate and rein-in the external deficit, both via a reduction of the budget deficit. Contrary to the assertions of its proponents, however, a conventional stabilisation programme lowers the rate of growth of income too. Now this has a direct effect on the rate of savings. Lower growth affects consumption and investment in the economy. Households are accustomed to a certain rate of growth of their consumption expenditure. The simplest reason why consumption must grow is of course the addition of new members into the household or what in an economy-wide context is the increase in the population. When a certain rate of growth of consumption is maintained in the light of a dip in the rate of growth of income it results in a lower rate of saving. The germ of this idea is captured in an elegant passage in Keynes's General Theory: "... a man's habitual standard of life usually has the first claim on his income, and he is apt to save the difference which discovers itself between his actual income and the expense of his habitual standard." We have only blown this up into a story of an economy in which both income and population is growing.

            A slowing down of the rate of growth of the economy also has an influence on investment. It may appear strange to refer to investment in trying to account for a lower rate of saving but for the household sector, the savings behaviour of which really accounts for the behaviour of the aggregate domestic savings rate since 1991, its saving in physical assets is identically equal to capital formation in this sector. In addition it must be remembered that `the household' itself is defined very broadly in the present context. It includes pure households and unicorporated enterprises. The latter not only save but they also invest. For this segment a temporary contraction in the economy is occasion to reduce investment, for not only is the lower growth in the economy signalling slack demand for their product but also their own incomes are now lower, inducing them to curtail investment expenditure. It has been for long recognised that macroeconomic stabilisation programmes lower investment, but it does require a particular insight into the Indian economy to see that it can also lower saving. For this we are indebted to the economist C.T. Kurien who over twenty five years (Indian Economic Crisis, Bombay: Asia Publishing House) ago argued that the core of the Indian economy is constituted by such "producer households" who combine their saving and investment decisions. Incidentally, he had also pointed out that by ignoring, in a Keynesian mode, this feature of the economy a fundamental premise of Indian Planning was untenable.

            The Table included here provides data only for the period upto 1994. Very recently, however, the government has released the Quick Estimates of saving and capital formation in 1994-95 produced by the Central Statistical Organisation. This points to a substantial increase in the savings rate for that year. What contributes some credibility to our explanation of the decline in the savings rate since 1991 in terms of the slower rate of growth of the economy is that in 1994-95 the increase in the savings rate is accompanied by an increase in the rate of growth. In fact, the rate of growth, at 6.3 percent is close to fifty percent higher than in each of the preceding two years. All this is heartening alright, but it yet leaves a loose end as it were. This is the experience of the year 1992-93. In this year the rate of growth of the economy had turned around quite substantially even though it had not reached the average rate attained say during the five years before 1991. Nevertheless, it rises from close to zero growth in 1991-92. However, the savings rate actually falls. This cannot be explained in terms of the story of a steady progress of consumption in the face of slowing income growth.

            There are indeed extraneous circumstances that account for the behaviour of savings in the year 1992-93. First, in May 1992 was unearthed the irregularities in the commercial banks dealings in government securities which clearly took the sheen off the stock market as a target for saving. It had come to be seen that a large part of the rise in the value of stock was propelled by these irregular dealings. However, while this may point to less saving in stocks it cannot account for a decline in saving in general. For this we have to look elsewhere but perhaps not very far. In March of 1992 in a major policy shift routed through his second Budget Mr. Manmohan Singh permitted the import of gold into the economy for the first time since the sixties. It is estimated that the import of gold into the Indian economy increased from 319 thousand dollars to 246, 378 thousand dollars between 1991 and 1992 (International Trade Statistics Yearbook 1993, New York: United Nations Statistical Office). This amounts to an increase of a little less than 800 times! The purchase of gold is not classified saving in the Indian national accounting practice. Nor is it elsewhere in the world, but in these economies the amount expended on gold is far less too.           Finally, while I have concentrated on household saving, 1992-93 also has seen the commencement of a slide in saving on the part of government, who in the first flush of weathering the crisis of 1991 had reverted to its spending binge

            So there is no puzzle here at all, nor is there a need to take resort to `faulty estimation' to explain the behaviour of the savings rate since 1991. But does the turn around in the savings rate since 1994 suggest then that all's well with the economy and that the reforms are on track? I think not. In the extreme the concern with the savings rate as with the volume of investment is a sort of supply-side fetish that has long plagued India's policy makers who pay scant attention to the crucial question of how effectively the savings is used, the answer to which is, in some rough and ready way, contained in the statistic the incremental capital-output ratio. Indeed it may be possible to argue that India's savings rate is quite high relative to its growth rate suggesting that we might channel it better and that we might also take greater care that investment fructify more. Or future generations will be left to say "How frugal was my country!" 


The savings rate since 1990




Private Corporate





























Notes and Sources: savings rates are calculated from the

`National Accounts Statistics 1995', CSO; `growth', the

change in GDP, is from the `Economic Survey 1994-95'.