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MOSL: FUEL OR ENGINES (ECONOMY): Busting two myths about India’s domestic savings

FUEL OR ENGINES (ECONOMY): Busting two myths about India’s domestic savings; Physical savings don’t include gold imports

 

• The , as we call it, underpins our entire understanding of how the Indian economy works. Domestic savings, thus, play a pivotal role in shaping our thought process. In this note, we intend to clarify the two most commonly held misconceptions about India’s domestic savings.
• Myth 1 – domestic investments are equal to domestic savings. This is true only for a closed economy, which does not exist in the real world. For an open economy, domestic investments are equal to the sum of domestic savings and current account deficit (CAD), which is exactly what we call the ‘Theory of Everything’. The latter has accounted for a quarter to one-third of the total rise in the investment rate during the past episodes of a pick-up in India’s investment rate. However, with CAD at the upper end of the threshold level of ~2.5% of GDP now, higher domestic savings are an absolute necessity to fund higher investments. If higher investments, on the other hand, drive higher savings, the economy runs a serious risk of external imbalances.
• Myth 2 – physical savings of Indian households include gold imports. Any movement in households’ physical savings is immediately – and highly misleadingly – associated with real estate and gold. Nevertheless, it is important to understand that no part of imports (including gold) is included in domestic savings. Mathematically, the same ‘Theory of Everything’ helps explain why gold imports are not included in physical or any other part of domestic savings.