Create more channels for investment

ECONOMIC SURVEY 2004-05/ SAVINGS & INVESTMENT

Private consumption expenditure contributes 60% to GDP growth.

Driven by a surge in household savings in financial assets, the savings rate in the economy hit a historic high of 28.1 per cent in 2003-04. The investment rate, at 26.3 per cent, was also the highest since 1996-97.

Both the savings and investment rates rose for the second consecutive year, but the savings-investment gap widened further to 1.8 per cent, indicating a lack of avenues for investment in the economy.

The savings rate, which remained below the investment rate in the 1990s, first exceeded it in 2001-02, when the gap was 0.8 per cent. It rose to 1.3 per cent in 2002-03 and further to 1.8 per cent in 2003-04.

The rate, calculated as the proportion of gross domestic savings to gross domestic product (GDP) at market prices, was 26.1 per cent in 2002-03.

The two percentage point rise was driven mainly by an increase in the financial savings of households, which rose to 11.4 per cent of the GDP (market prices) from 10.3 per cent in 2002-03.

A decline in public dissavings "" for the second year in a row "" and improvement in private corporate savings also contributed to the trend, the Economic Survey said.

The investment rate "" gross domestic capital formation as a proportion of the GDP"" moved up to 24.8 per cent in 2003-04 from 22.6 per cent in 2002-03.

Public investment as a proportion of the GDP, after declining for 3 years, rose to 5.6 per cent in 2003-04. Gross capital formation in the public sector grew at 16.8 per cent in contrast to a decline of 5.8 per cent in 2002-03.

However, there was a deceleration in the growth of gross capital formation in the private sector from 17.1 per cent in 2002-03 to 13.1 per cent in 2003-04.

The increasing share of investment was reflected in a decline in the share of final consumption expenditure, both by the government and private sector.

Consumption expenditure, however, continues to be a major contributor to GDP growth. The contribution of private final consumption expenditure (PFCE) to GDP growth increased from 50.4 per cent in 2002-03 to 60.9 per cent in 2003-04.

The government's final consumption expenditure contributed 6.9 per cent, investment 30.6 per cent and the external sector contributed 0.3 per cent to growth in 2003-04, the survey said.

The contribution of investment to growth has, however, not been following any consistent pattern. It varied from 8.4 per cent in 2001-02 to 50.6 per cent in 2002-03 and 39.3 per cent in 2003-04.