SAVING AND INVESTMENT TRENDS SINCE 1950

SAVING AND INVESTMENT TRENDS SINCE 1950 There has been a consistent increase in the saving rate (gross domestic saving as a ratio of gross domestic product) in India through the post-independence period, from about 10 percent in the early 1950s to 17 percent in the early 1970s, and then to over 25 percent by the dawn of the new millennium (see Table 1). Private saving has accounted for the lion's share of total domestic saving throughout, with public saving declining from the early 1980s. Household saving has remained by far the most important component within private saving, despite the growth of corporate saving. The share of household saving in total private saving declined marginally from over 88 percent in the early 1950s to 84 percent in the late 1990s, reflecting increased corporate saving, from 1 percent to 3.6 percent of India's gross domestic product (GDP) over this period.

India's public saving rate steadily increased from 1.7 percent in the early 1950s to over 4 percent in the late 1970s, then declined persistently to less than 1.5 percent by the late 1990s. Public saving accounted for a mere 7 percent of total saving by the late 1990s, from over 20 percent in the late 1970s, a decline that can be attributed to the increasing fiscal deficits over this period.

An International Comparison

In the early 1960s independent India's saving rate (around 16 percent) was much higher than that of Korea, Taiwan, and Singapore, but from the early 1970s India's saving performance fell behind that of all these high-performing East Asian economies; by the mid-1990s, India's saving rate of 22 percent amounted only to a little over half their average rate. However, India's saving rate remained impressive by comparison to all other South Asian countries.

Differences in saving performance between India and the East Asian high-performing countries is a reflection of differences in overall growth performance. India's success in providing an economic setting conducive to domestic saving and financial deepening is in some measure thanks to the nominal interest rate India has maintained, an administered price, changed only infrequently based on budgetary considerations. Unlike many other developing countries, India has not seen adverse movements in real deposit rates, thanks to the long-standing official commitment to an anti-inflationary macroeconomic policy. Thus, the incentive for saving has remained positive. Perhaps more important, the rapid spread of banking facilities, following the nationalization of commercial banks in 1969, played a pivotal role in increasing private financial saving. Bank density (population per bank branch) declined persistently from over 90,000 in the mid-1950s to around 14,000 in the mid-1990s,

improving the access of India's average household to banking facilities, reducing the cost of banking transactions.

Investment

Domestic investment in India has been predominantly financed through domestic saving. Foreign capital inflows accounted for less than 1 percent of GDP (compare the last columns in Tables 1 and 2). India has been a significant recipient of foreign aid, but total aid flows have remained negligible relative to the size of the economy. The role of foreign direct investment and other forms of private capital, portfolio investment, and bank-related flows has been even less important, reflecting the Indian government's unwillingness to invite foreign investment uncritically as well as the highly restrictive capital account regime. The saving-investment nexus has not undergone noticeable change, even after the reforms of 1991. The time pattern of the domestic investment rate has virtually mirrored that of the saving rate during the entire period (see Table 2).

The relative contributions of the public and private sectors to gross domestic capital formation have changed considerably from the early 1950s to the early 1980s. Public investment, which increased from about 30 percent to 50 percent, accounted for much of the total increase in investment. However, the rise in the investment rate after the mid-1980s can be attributed primarily to the increase in private investment. Private investment since the 1990s has mostly come from private corporate investment. The share of corporate investment in total private investment increased to over 45 percent in the 1990s. Relative to GDP, private corporate investment increased from 4.3 percent in the second half of 1980s to 7.1 percent by the mid-1990s. (Household investment, on the other hand, fell from 9.3 percent of GDP to 8.5 percent.) Market-oriented reforms since 1991 have begun to play an important role in promoting corporate investment, reflecting the declining cost of capital brought about by import liberalization and favorable changes in investor perception.

Investment-Growth Nexus

As already noted, throughout the postwar period, India has managed to maintain domestic saving and investment rates well above that of many other developing countries—not only those in a low-income category but also most of the middle-income countries in Latin America. However, in terms of growth performance, until the 1990s India remained a typical low-income country, with an average growth rate of around 3 percent. This incompatibility between saving/investment behavior and growth performance can be explained in terms of the nature of overall development policy stance. In the first three decades of the post-independence period and well into the 1980s, a highly interventionist (dirigiste) trade and industry policy regime constrained the potential growth effect of domestic investment. Thus, investment levels maintained through macroeconomic stability and financial deepening simply enabled India merely to keep its head above water.

Liberalization reforms since 1991 have set the stage for transforming the investment-growth nexus by lifting import restrictions and dismantling India's industrial "license raj," thus lowering the relative price of capital goods, leading to more investment and the replacement of outdated machinery. Reforms have also contributed to

improved efficiency of investment, shifting business investment to machinery, which has a larger growth effect than structures and inventory investment.

Data Sources

The Indian saving and investment database is relatively good by developing-country standards, and data are available on a comparable basis from 1951. India's Central Statistical Organisation is responsible for generating and disseminating data through its annual publication, National Account Statistics. The Economic and Political Weekly Research Foundation of Mumbai has brought together all historical series in its electronic database, National Accounts Statistics of India, 1950–51 to 2000–01 (>http://www.epwrf.res.in<).

Prema-chandra AthukoralaKunal Sen

See alsoEconomic Reforms of 1991 ; Economy since the 1991 Economic Reforms

BIBLIOGRAPHY

Athukorala, Prema-chandra, and Kunal Sen. Saving, Investment and Growth in India. Oxford and Delhi: Oxford University Press, 2002.

Joshi, Vijay, and I. M. D. Little. India: Macroeconomics and Political Economy, 1964–1991. Washington, D.C.: World Bank, 1994.

Lal, Deepak, and I. Nagaraj. "The Virtuous Circle: Savings, Distribution and Growth Interactions in India." In Trade, Development and Political Economy, edited by Deepak Lal and Richard Snape. Basingstoke, U.K.: Palgrave, 2001.

Modigliani, Franco. "The Life Cycle Hypothesis of Saving and Inter-country Differences in the Saving Ratio." In Induction, Growth and Trade, edited by W. A. Eltis, M. F. G. Scott, and J. N. Wolfe. London: Clarendon Press, 1970.

Sen, Kunal, and Rajendra R. Vaidya. The Process of Financial Liberalization in India. Delhi and New York: Oxford University Press, 1997.