India's Prospects for Strong Growth Tied to Higher Savings

• Pages: 79-80

Page 79

If India is to raise its per capita income and keep pace with the high-growth economies of Asia, its authorities believe that it must sustain GDP growth rates of at least 7 percent over the coming decade. To achieve this goal without relying heavily on foreign borrowing, domestic saving rates must rise. In the 1990s, however, the country's traditionally high saving rates have been volatile and, in some years, have declined.

What constellation of policies can boost India's domestic saving rate? Recent empirical evidence casts doubt on the ability of more direct policy measures- namely, tax incentives and higher interest rates-to influence saving rates substantially. What holds great promise, suggests Martin Mühleisen in an IMF Working Paper entitled Improving India's Saving Performance, is increased public saving together with strong structural reform, notably financial liberalization. These steps-with particular attention to promoting long-term savings-would stimulate the virtuous growth-saving cycle that India needs to achieve and sustain high growth rates.

Background

Over the past four decades India's comparatively high domestic saving rate has followed an upward, but uneven, course. In the 1990s, saving rates have been volatile-reaching a record of 23!/2 percent in fiscal 1990/91, and then dropping 2!/2 points before rebounding to 25!/2 percent in 1995/96. Fluctuations in the overall rate have been accompanied by substantial changes in composition. Recent increases have been driven by financial household saving, while public saving weakened to a low of !/2 percent of GDP in 1993/94 from 4-5 percent in the early 1980s.

Mühleisen highlights the crucial relationship between growth and saving. Evidence from other countries suggests that higher growth tends to precede increased saving. His analysis, while noting the weaknesses inherent in the database, points to a similar relationship between per capita GDP growth and public and private saving in India. His findings also indicate that a high age dependency ratio-that is, the percent of retirees to working age population-will translate into an increased need for retirement saving. Also, as the Indian economy moves away from subsistence levels and as its financial sector deepens and affords investors a more attractive array of investment options, saving rates are expected to increase.

Over the medium term, Mühleisen projects a gradual...