Savings rate may be bloated

The savings rate of 28.1 per cent in 2003-04, the highest recorded so far in India, could turn out to have been overestimated by 3.3 percentage points.

The investment rate of 26.3 per cent, as reported by official figures, could also consequently, have to be brought down to a level of around 23 per cent.

The matter is being looked into by the Prime Minister's Economic Advisory Council, which has to submit a report on the issue by the end of the month. 

Overstatement of the savings rate could be on account of a part of foreign institutional investment inflows being captured in the domestic savings data, economists said.

Another possibility is that the household savings in physical assets  --  up from 11.4 per cent of the gross domestic product in 2002-03 to 13 per cent in 2003-04  -- were overstated.

A contrary view, however, is that there has indeed been an increase in the savings rates, primarily due to smaller revenue deficit of the government, which has gone down from 4.4 per cent of the GDP in 2001-02 to 3.6 per cent in 2003-04.

Savings in the economy should equal the investment level plus "errors and omissions" a catch-all head meant to balance the equation.

If savings have been overestimated, the resultant overstatement of the investment figure could be reflected in the steep 74 per cent rise in the "errors and omissions" figure in the capital formation calculations, from Rs 52,330 crore (Rs 523.30 billion) in 2002-03 (provisional estimates) to Rs 91,174 crore (Rs 911.74 billion) in 2003-04 (quick estimates) released by the Central Statistical Organisation.

The GDP at market prices  --  Rs 27,60,025 crore (Rs 27,600.25 billion) in 2003-04 as per the quick estimates of the Central Statistical Organisation  --  should equal the sum of consumption, investment and current account surplus in the economy. This is, however, Rs 28,52,778 crore (Rs 28,527.78 billion).

If the difference of Rs 92,753 crore (Rs 927.53 billion)  -- about 3.4 per cent of GDP at market prices  --  is deducted from the investment level, the investment rate comes down to 22.9 per cent.

And deducted from the level of gross domestic savings, it yields a savings rate of 24.8 per cent.

The hike in the investment rate, from 24.8 per cent in 2002-03 to 26.3 per cent in 2003-04, and in the savings rate from 26.1 per cent to 28.1 per cent could, therefore, turn out to be overestimates.