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MOSL: FUEL OR ENGINES (ECONOMY)-Higher domestic savings must to increase potential output;

FUEL OR ENGINES (ECONOMY): Higher domestic savings must to increase potential output; Household savings in FY17 at two-decade low

 

According to official data, household savings have dropped by almost one third from 23.6% of GDP in FY12 to 16.2% in FY17. Not only have household savings fallen to the lowest level in two decades, but the fall of this magnitude is also unprecedented in India’s post-independence history. Such a decline in household savings in one of the youngest countries – with median age of only ~27 years – in the world is puzzling. Still, it has not received its due share of attention. While we keep hearing of various measures to boost consumption and investments in the economy, one rarely hears about measures to boost household savings in the economy. We highlight three factors that have led to limited discussion on domestic savings. First, the fall in total domestic savings (from 34.6% of GDP in FY12 to 30% in FY17) is lower than that in household savings (down by more than 7 percentage points). This is because private corporate savings have increased to a record high and public sector savings have remained unchanged. Second, the share of (net) financial savings in households’ total savings increased from ~31% in FY12 to ~50% in FY17, easing the concerns. This, however, does not necessarily present a rosy picture for the entire economy. Third, household savings may have increased in FY18; however, total domestic savings likely to have fallen further to 29.1% of GDP. In the absence of higher domestic savings, the Indian economy is unlikely to grow at 8% or higher without creating imbalances. Pushing domestic savings higher is the most potent and effective measure to increase the economy’s potential and actual output.