By R Gopalan and MC Singhi
Recently, concerns were noted on the low net financial savings of the households in the country. According to experts, the plausible reasons could be decelerating growth in employment, high food inflation, investment in fixed assets and lack of higher-income-generating opportunities. Some even see household distress affecting future growth.
In the private non-financial corporate sector, a decline can be seen in investment and increase in savings in the form of internal accruals. The increase in internal accruals did not lead to higher investment. The corporate sector used internal accruals to retire debt and increase cash balances during this period while the government grew its investment at the fastest. Empirical evidence indicates a drop in investment in the last decade due to disinclination of the banks to give loans after the excesses of the previous decade; shrinkage of openness of the economy, especially of trade, leading to decreased investment; stringent provisions in the Companies Act 2013 with criminalisation clauses; implementation of the Kotak Committee recommendations; lack of predictability of the taxation regime; and the introduction of IBC.
Between 2011-12 and 2021-22, savings of the household sector grew faster than their investment. Gross disposable income and final consumption expenditure of the household sector witnessed growth at a CAGR of 10.2% and 11.3% respectively during this period. Growth in fixed assets investment for the household sector was, however, not linear. The impending GST regime cast a shadow on fixed investment in 2015-16. During 2019-21, the pandemic created uncertainty for fixed investment. High fiscal deficit, which moderated private investment and decelerating growth, increased governments’ draft on household savings. The ratio of general governments’ deficit to net financial saving of the household, in the accompanying graphic, reflects this situation. However, liquidity concerns remained largely subdued.
What is in store for the net financial savings in the medium term? With economic recovery, the household sector’s gross financial saving to total gross saving may be reverting to the long-term trend. This increases confidence in the households for building assets. Increasing internal accruals of the corporates and the committed fiscal consolidation path of the government are expected to reduce excessive demand on household savings. In the past five years, the sharp increase in the number of persons employed has also improved households’ expectation of sustained growth. The unemployment ratio during 2021-22 was significantly lower than the peak in 2017-18, though youth unemployment continues to be daunting. In view of the above, it can be said that investment is currently driving savings in India. Should we therefore not focus on increase in investment to improve savings?
An increase in non-financial assets of the household sector could be due to a very low allocation to household and residential assets in the earlier years. We can overcome the concern that personal loans have become somewhat risky to the financial sector through appropriate assessment and monitoring of such loans.Measures such as improving female labour force participation rate, continued fiscal consolidation through improved revenue generation and further liberalisation of financial markets could improve supply of savings.
Improving productivity of labour will attract investment. The RBI KLEMS data shows that the productivity of labour has plunged taking a toll on productivity of capital. The current ICOR number reflects this. Skill development, both by the public and private sector, is crucial to improving productivity.
Investment by the corporate sector must improve to achieve sustained growth. Increasing trust between corporates and government, predictability of taxation policies and their implementation, improvement in ease of doing business, skill improvement, increasing labour-intensive manufacturing, investment in infrastructure, and liberalising labour and land market are some steps that should be taken for a sustained growth of 8%, which requires investment to GDP ratio of 38% at a current ICOR of 5.4. Presently, capital formation is sticky, and this situation is not likely to help achieving this ratio.
The authors are former civil servants.Views are personal
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