Economically, Still A Long Way To Go

The Central Statistical Organisation has recently revised its estimates of savings and investment for the year 1998-99. These estimates should make everybody sit up. There is a decline under every head. The household sector, which saved 19 per cent of GDP in 1997-98, saved 18.5 per cent in 1998-99. The private corporate sector saved only 3.8 of GDP in 1998-99 against 4.3 per cent in 1997-98. The public sector in 1998-99 did not save at all against 1.4 per cent of GDP in 1997-98. Total gross domestic savings declined in 1998-99 to 22.3 per cent from 24.7 per cent in 1997-98. Net capital inflow also declined to 1 per cent from 2.6 per cent in 1997-98. As a result, gross domestic investment in 1998-99 was only 23.4 per cent. This stood at 26.2 per cent in 1997-98.

 

The decline in public sector savings is for reasons well-known -- the bloated size of government employees, who are no longer low-paid, subsidies and loss-making public enterprises. In 1998-99, one of the reasons for the decline in savings was payment of arrears and enhanced salaries to government employees as a result of the implementation of the Fifth Pay Commission report. The government, however, did not act on that part of the Commission's report which would have saved money, i.e., reduction of staff. Thus, the public authorities had a net dis-saving of 3.6 per cent in 1998-99 against 2.8 per cent in 1997-98.

The other component of the public sector, non-department enterprises, saved much less than their potential. They saved only 3.6 per cent in 1998-99, a marginal improvement over the 1997-98 figure of 3.5 per cent. A special problem of public sector enterprises is the uncertainty over ownership. There is a widespread feeling that these enterprises will be privatised. As a result, the present managers have no involvement in the job. For many years now, the government has not been putting any money into these enterprises. A recent exception is the Steel Authority of India Ltd.

The public sector is sitting over huge resources -- comparable to the zamindari system. Zamindars used to sit over vast areas of rich land. But the zamindari system did not allow full exploitation of these land resources. Just as it did then, the government must abolish the zamindari system in public enterprises. Uncertainty regarding ownership must end and resources should be released to produce better results for the economy.

The contribution of the private corporate sector has also declined. This is because profits of this sector had come under squeeze as a result of the recessionary trend and high interest rates. However, the Indian corporate sector has to learn to give precedence to conserving its profits over distributing them through dividends. They have to understand that people primarily invest in the capital market because of capital appreciation of shares rather than the dividend that they get. If companies invest their profits rather than distribute them, they have a better chance of capital appreciation of their shares. Indian companies need to undergo nothing less than a cultural revolution in this regard.

The marginal decline in the household sector is chiefly because India is rapidly becoming a consumer society. This process has been hastened by advertisements on TV which have a big demonstration effect. The consumer revolution has been aided by the fast-expanding hire-purchase system. Liberalisation was expected to attract investments in infrastructure. But there is a flood of investment in consumer goods -- automobiles, fridges, microwave ovens etc. There is hardly any investment coming into infrastructure. The taxation system has also helped in boosting consumption.

There has also been a perceptible decline in capital inflows in 1998-99. This was partly due to the Asian crisis. Except for portfolio investments, there are no signs of reversal of foreign direct investment. This is primarily because infrastructure in the country is in bad shape. Power and roads have tremendous problems that will take quite sometime to solve. Till then, the public sector has to invest. But then, it has no money. This is the dilemma that the government must resolve.

India is hoping to become another Asian Tiger. But the key issue in this regard is domestic savings and net foreign inflows. Asian countries have a domestic savings rate of over 30 per cent and the rate of foreign inflows is 5-6 per cent. India's rate of domestic savings is stagnating at around 24 per cent. It went further down to 22.3 per cent in 1998-99. Hence, we have to go a long way if we are to become another Asian Tiger.

It was primarily because of low savings that the 90s were not a remarkable decade for India. The average rate of industrial growth in this decade will hardly be 6 per cent against 7.5 per cent in the 80s. Agriculture has largely been responsible for the impressive growth rate in the 90s. Industrial growth rate in the 90s has been poor unless statistics have not been able to capture the growth of new industries, for instance, software. Even then, the industrial growth rate of the 90s will not match that of the 80s, notwithstanding all the noise about liberalisation, globalisation etc.

Savings and Investments

(as percentage of GDP)

---------------------------------------------

Gross domestic savings 1997-98 1998-99

---------------------------------------------

Household sector 19.0 18.5

Private corporate sector 4.3 3.8

Public sector 1.4 --

Total 24.7 22.3

Net capital inflow 2.6 1.0

Gross domestic investment 26.2 23.4

---------------------------------------------