Saving and investment gap widens to 3.6 percent of GDP

The gap between the savings and the gross domestic product (GDP) has widened to 3.6 percent during 2005-06, up from 1.6 percent, said official sources.
The sources further said that a high saving-investment gap had adverse implications for the macroeconomic stability, but the present widening in this gap was not an immediate concern since the economy was able to finance this resource gap through higher foreign direct investment (FDI) and remittances.
Moreover, the country's level of foreign exchange reserves was also relatively sufficient as compared to the 1990s, when the saving-investment gap was quite high, they said. However, given that a significant part of FDI, consisting of privatisation proceeds, a sustained saving-investment gap could pose serious threat to macroeconomic stability, said the sources. "Thus, there is a need to improve domestic savings through institutional arrangements and conducive policies," they opined.
They are of the view that an expansion in the network of banks, micro-finance institutions and postal savings to the far-flung areas was needed with a friendly atmosphere for the small depositors.
In addition, savings schemes for school/college students could also help inculcate in students' savings behaviour from the early age. Admittedly, there should not be regulatory intervention in the determination of rate of return on deposits. However, if the financial institutions form a cartel to artificially suppressed returns on deposits, they should be treated accordingly through regulations.
Although national savings rose sharply by 16.5 percent during FY06 compared with 7.5 percent growth in the preceding year, nonetheless this increase is lower than the rise in nominal GDP.
As a result, the national savings to GDP ratio slightly dropped by 0.1 percent to 16.4 percent of GDP during FY06, the lowest level of national savings since FY2001.
In fact, rising interest rates on national savings to GDP ratio did not improve mainly due to the following reasons:
-- Prevailing negative real returns on deposits being offered by the banks.
-- Rise in NSS rates was not in line with the expectations.
-- Continued ban on institutional investment in the NSS, which has been relaxed during FY07.
-- Continued consumption boom in the economy.
In particular, the strength of aggregate demand, supported by both an expansionary fiscal policy as well as rising private consumption in recent years, deteriorated the savings rate in the economy.