June 29, 2019 4:59:36 am
Former Reserve Bank of India Deputy Governor Rakesh Mohan said there is a need to increase savings and investment rate to move India to a new growth trajectory in the future.
“Pushing up exports growth, which has been almost nil in the last six years, is needed to expand and it is possible since the world demand for manufactured goods will rise manifold in the coming years,” he said on Friday at the release of his new paper, ‘Moving India to a New Growth Trajectory’, at Brookings India.
Mohan said historically, Indian growth accelerations have been accompanied by higher gross domestic investment rates, largely financed from correspondingly increasing domestic savings, supplemented modestly by external savings including foreign direct investment (FDI). He said the secular uptrend in domestic growth since Independence is clearly associated with consistent trends of increasing domestic savings and investment over the decades.
Gross domestic savings increased from an average of 11 per cent of GDP during 1950–65, to over 33 per cent of GDP in 2003-08 (37 per cent in 2007-08); over the same period, the domestic investment rate also increased continuously from 12 per cent to 34 per cent (38 per cent in 2007-08).
But the savings rate has fallen in recent years, and the reasons are not very clear. “This is, to my mind, the major issue,” that needs to be tackled, Mohan said. Household savings reached about 21 per cent of GDP during 1997-2003 and ascended further to just under 24 per cent during 2008-11, but have since fallen to around 17 per cent in 2016-2018. There has been a dramatic fall in net household financial savings from the high of 11-12 per cent of GDP reached in 2007-08 to around 7 per cent in recent years, he said.
“These need to be restored to the 10 per cent level in the near future (from 7 per cent at present), and then increased gradually to around 13 per cent by 2030-35. Such a steep fall in recent years is difficult to understand since household financial savings had been around 10 per cent of GDP for almost 20 years right through the 1990s and 2000s,” he added.
Mohan also said the crisis in non-banking financial companies and their knock-on effects on debt mutual funds may, however, have an adverse effect on household confidence in these market-related instruments. “Ensuring positive real returns on bank as well as small savings deposits in an environment of low and stable inflation is necessary to reverse the downward trend in household financial savings,” he said.
Mohan said urgent policy attention is required to push growth to 8-7 per cent on a sustained basis. He also stressed on the need to relook the structure and functions of the think tank NITI Aayog, as well as giving it fund allocation powers analogous to that of the Planning Commission.
“The NITI Aayog must be technically strengthened and reorganised so that it can develop long-term integrated programmes for investment and management of key interconnected sectors,” the former RBI Deputy Governor said.
“The Aayog’s function to coordinate public investment programmes between ministries at the central level and across states must be restored, but within the framework of new cooperative federalism,” he added.
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