THE ECONOMIC GROWTH VIS-A-VIS SAVINGS RATE

The post Independence India saw our nation as frugal despite the fact that India was considered as a country of thrifty individuals. Though by and large the people were thrifty the savings rate remained static. This was so because the house hold savings was mostly invested in land and gold. Investment in land was mostly considered as a source of livelihood. Investment in gold was in consonance with the Indian tradition. As there was no generation of employment opportunities the savings rate among the individuals remained static. The savings rate then was comparatively lower to the rates of developing countries. The savings rate which was about 10 percent during 1950 showed a marginal increase of 5 percent in 1971. The new age development has ushered in economic growth since the past few decades. It has seen the magnificent resurgence of India after decades of poverty even at the middle class level. Encouraging economic growth has thrown up a few magical tricks and turned a bleak situation into a bright one. With the economic growth picking up there was a spurt in the savings rate which stood at 25.5 per cent in 1995. Since then there was no looking back. With a robust economy the savings rate spiraled to 32.4 percent in 2005-06. Consequently the per capita income also rose considerably.

With the advent of I.T. revolution and globalization services led growth has brought about phenomenal increase in the employment of the educated. The Industry which is reported to be employing 1.3 million people has a revenue growth potential of about 25 percent. Globalization has culminated in massive technological growth. The IT Industry and the BPO deluge offering high pay and perquisites have become a blessing and bane to the present youth. In contrast to the old socialistic system we have emerged into a society that is money oriented. Public have become more status conscious and money obsessed. With more money supply there is sharp rise in savings rate. Today the house hold savings is about 70 per cent of the aggregate savings, despite the consumption splurge. With the increase in income of the individuals, the consumption among the Nouveau Riche and the younger generation has catapulted. According to the Max New York Life 81 percent of Indian house holds have savings but only 51 percent deposit in Banks. This is so because there are other avenues for parking their savings with better returns like in Real Estate, Gold and to a certain extent even in Share Market. Substantial amount is invested in real estate which is presently at its pinnacle. However real estate boom depends on demand and supply and also the government policy. Hence such investments are not devoid of risk. It was envisaged that a faster growth in producing capital goods will entail in the savings rate increasing appreciably. With globalization and post liberalization boom the Indian markets were exposed to the foreign consumers abroad. This led to phenomenal increase in exports of garments, leather goods, carpets, rice, shrimp etc. India is today considered as an economic power house with the growth of economy projected at 9 percent. Apart from the house hold savings the corporate sector is reported to account for 60 per cent increase in private corporate savings. The reduction in wasteful expenditure at the Central and State Government level also contributed to the increase in the savings rate which was conspicuous by its absence a few decades back. With the appreciable increase in the savings rate which presently stands at 32 percent despite the spending splurge by the individuals, shopping has turned out to be an established national pastime in India. Retail outlets have given way to shopping malls. The right to splurge in a licentious way has become a way of life. Despite the substantial savings rate individuals in service sectors have gone berserk about material acquisition.

How ever the disturbing trend is the economic slow down in US which are a cause of worry for the global economy. The US economic slow down is expected to hit the software exports to the Banking Financial and Insurance sector in US. If the impending recession in US turns out to the full blown, it will impact the I.T. Industry severely so much so the annual growth in software exports may reduce from 30 per cent to 20 per cent. This in turn will have an adverse effect on corporate savings. The rupee appreciation against the dollar has added to the woes of the exporter. There is also an apprehension that a full blown recession in US will result in US cutting, spending and slashing outsourcing to India. All this means the job opportunities will fall drastically and consequently the savings rate will go for a tail spin. Coming events cast their shadows. This is best exemplified by the downward trend in the share market which has shed 4000 points within a span of few months. It is a known fact that the bulk of the investments in share market comes from foreign Institutional investors who sway the share market. As a result of the slow down of economy in US due to sub prime crises the foreign Institutional Investors have started pulling out their investments from the share market. The subprime crisis in US is as a result of non repayment of mortgage loans by the borrowers. The fall in the share market has resulted in retail and corporate investors loosing crores of rupees.

Fortunately for India the foreign exchange reserve is high at $283 billion. Since India's economy is robust foreign Institutional Investors are expected to reinvest in our share markets sooner or later.

The need for prudence and austerity in spending by the individuals and corporate sector will go a long way in sustaining the present growth in savings rate.