Policy Change Key To Higher Savings: Imf
The International Monetary Fund (IMF) has discounted the efficacy of traditional tax and interest rate incentives as means to boost savings in the economy. Instead, it has backed a programme of financial liberalisation.
According to a study carried out in the Funds publication, Finance & Development, a sustained increase in long-term savings would require two major policy changes.
First, the government will have to sharply reduce its recourse to captive financing from pension funds and Life Insurance Corporation. Secondly, greater private sector involvement will be required to boost competition and more innovative product development, which would make savings instruments more remunerative and thus attractive to individual investors.
The reform agenda proposed by the study includes restructuring and privatisation of public enterprise, increased private involvement in infrastructure, agricultural reform, labour market reforms and exit policy, and end to privileges for small-scale units.
To achieve the governments projected growth objective, says the study, investment levels in the economy will have to touch 30 per cent of the gross domestic product. To achieve this savings rate by the turn of the century, strong action on both the public and private savings front will be necessary.
Traditional tax and interest rate incentives are unlikely to lead to a strong response of the private saving rate. Instead, the most promising way to boost domestic saving is through increased public saving and a strong structural reform programme, including financial liberalisation, says the study.
The Fund maintains that such an approach will initiate a virtuous circle in which higher growth would prompt further increases in private savings.
With a view to increasing the efficiency of savings allocation and financing the heavy infrastructure needs of the Indian economy, particular attention should be paid to long-term saving instruments, the study added.
According to the study, recent findings indicate that indirect approach to higher private saving is more fruitful in the long run than relying on direct means like higher interest rates and special tax incentives.
The responsiveness of private saving to changes in real interest rates is less at lower levels of per capita income, as a higher share of income must be devoted to subsistence consumption.
Further, given the small number of tax payers, a change in the tax regime will affect only a small section of the population and therefore is unlikely to alter the overall savings behaviour in the economy.
The study also proposes alternative means of estimating savings as it maintains that the method employed by the Central Statistical Organisation had a number of weaknesses.