CHAPTER ll

INCOME SAVING AND INVESTMENT BEHAVIOUR IN INDIA A PROFILE

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2.1 Introduction
The developing countries like India face the enormous task of finding sufficient capital in their development efforts. Most of these countries find it difficult to get out of the -viciouscircle of poverty of low income, low saving, low investment, low employment etc. With high capital output ratio, India needs very high rates of saving and investments to make a leap forward in her efforts of attaining high levels of growth. Since the beginning of planning, the emphasis was on saving and capital formation as the primary instruments of economic growth and increase in national income. In order to have production as per target, capital fonnation was considered the crucial determinant and capital formation had to be supported by appropriate volume of saving. Growth will set in motion a self reinforcing process by which investment is encouraged, investment enhances growth and increased income raises saving. As Rao (1980)' has rightly pointed out, "increase in saving, use of increased saving for increased capital formation, use of increased capital formation for increased saving for a further increase in capital formation constituted the strategy behind economic: growth. This process of increased capital formation leading to increased saving and increased saving leading to increased capital formation will continue t:.ll saving, capital formation and income reach desired

' Rao, VKRV (1980), Op.cit., p.965.

levels after which saving and capital formation gets stabilised and there would be a steady and self sustaining increase in national income.

2.2 Growth Rate The Indian Experience
In the years since independence India has achieved considerable progress in terms of real GDP growth, real volume of saving and real investment. However, as was pointed out by Ray and Boss (!997)2, the growth trajectory of the Indian economy is often conceived in terms of transitional dynamics from one crisis 1.0 another. Starting from the average low growth rate called "the Hindu growth rate" termed by Raj Krishna (1983)', and passing through the unsustainable high growth path of the eighties, India has reached the high growth trajectory after major policy reforms in the nineties with occasional crisis years in between. During this process of growth, the Indian economy has undergone gradual structural transformation, the pace of the transformation being rapid in the last decade. For the analysis of the growth trends, the time period classification resorted to is the five-year plan periods, the interim periods being treated separately. The researchers have gone into various aspects of India's growth experience since 1951. The main focus of attention has been on the long tenn rate of growth of 3.5 percent by Rajkrishna , improvement in GDP growth rate from early 1980's by Dandekar (199214 and higher rate of growth since late

-

Ray, Partha and Dhritidyuti.Bo:;e (l997), op cit., pp. 98-143. Raj Krishna (1983), "Grouth, Investment and Poverty in the Mid-tern Appraisal of Sixth Plan", Economic and Political weekly, 18(47), pp.1972-77. 4 Dandekar, V.M. (1992), "Forty years after Independence", in Bimal Jalan (ed.): The Indian Economy, Problems and Prospects, New Delhi, Penguin.

seventies by Dholakia (199415, to mention a few. The above studies clearly point to the fact that there are different trends in the growth trajectory of India. Table 2.1 Gross Domestic Product at factor cost at current and constant prices

(in Rs. crores)
Year 1951-52 1955-56 1960-61 1965-66 1968-69 1973-74 1978-79 1984-85 1989-90 1996-97 2000-2001 1989500* 11.4
I
I

1209600*

6.0

* Up to

1996-97-1980-81 prices are considered, 1997-98 onwards - 1993-94 prices are considered Sources: (I) Government of India, National Accounts Statistics. (2) Government of India, Ministry of Finance, Economic Division, Economic Survey, 2001. In analyzing the growth rate of the Indian economy during the plan

periods, five extra ordinary years, termed as the crisis years, in which growth

* Dholakia, Ravindra H. (195'4), "Special Diversions of Accelerations of Economic Growth
in India", Economic and Politial Weekly, 29(35), pp.2303-9.

rate has been negative or exceptionally low should be treated separately. If the growth of the economy during the rest of the period is considered as a whole, the average works out to be 4.4 per cent. At the end of the first plan period, GDP at constant prices was Rs.51173 crores with an average annual growth rate of 3.6 per cent during the plan period. The economy grew at a higher rate of growth of 4.2 per cent during the second plan. However, during the next plan period, the extra ordinary environment that existed in the economy, namely the two wars and a draught brought down the growth rate to 2.8 per cent. Since the mid-sixties, as was observed by Ahluwalia (198516, "the emergence of a number of latent strains as well as a few new factors which were to change the course of industrialization in the following period" brought down the pace of industrial growth. Added to this, the first shock of 1972-73 has been responsible for a low growth rate of GDP during the fourth plan. Since the mid seventies due to an industrial turn around and better performance of the agricu:ltural sector the economy broke through the "Hindu rate of growth". However, the higher growth rate did not persist as the economy faced the next oil shock of 1979-80 bringing down the growth rate immediately. In the eighties, the stagnation seemed to be over and the economy shifted to the high growth path during the sixth and the seventh plans.

6

Ahluwalia, Isher Judge (19E85) Industrial Growth in India; Stagnation since the MidSixties, Delhi, Oxford University Press, p.8.

The impressive growth path of the eighties could not be sustained due to the deterioration of a number of macro economic indicators. The crisis of 1991 revealed that the growth experiences of eighties was unsustainable. The average growth rate came down during the crisis years which underlined the fragility of a rather good performance of the eighties. Due to a major shift in the economic policies oriented towards liberalization and globalisation, steady and sustained improvements in growth rate could be achieved in the nineties. Growth rate of 6.8 per cent was achieved during the eight11 plan. Even though the industrial sector suffered a set back in the initial years of the ninth plan, as the reform process was continued and due to the better performance of the agricultural sector, the higher growth rate could he maintained during the ninth plan.
2.3 Sectoral composition of Gross Domestic Product (GDP)

Every economy shows some kind of structural tranformation in the development process. Kuznets (1955)' explains this in terms of migration of labour from agriculture to industry. In the Indian development experience, the share of agriculture in the GDP has declined whereas the shares of industry and services have increased

7

Kuznets, Simon (1955), "Towards a Theory of Economic Growth", in Robert Lekachman (ed): National Policy for Economic Welfare at Home and Abroad, New York, Doubledey p.185.

Table 2.2 Gross domestic product by industry of origin (at constant prices)
--

Year

Primary

sector

Secondary sector

Tertiary sector

GDP at

factor cost

*

at 1993-94 prices.

Sources: (1) Government of India, National Accounts Statistics, various issues (2) Government of India, Ministry of Finance, Economic Division, Economic Sunrey, 2001. Agriculture and allied activities accounted for the lions share in the national output at the beginning of the five year plans. From 54.8 per cent (Table 2.2) in 1951-52, the share of this sector declined steadily to be the lowest contributor towards the GDP with a share of 25.2 per cent in 19992000. The fall in the share: of this sector has been notably steep during the liberalization period. But with the decline in the share of agriculture there has not been a corresponding fall in the labour force in the sector. According to

Kurian (1992)' "the fact that a sharp fall in the share of agriculture in national income in India is accompan.ied by a fairly stable proportion of labour force in that sector shows that there has been a relative decline in productivity there". With the fall in the share of agriculture and allied activities, the shares of industry and services have increased. The share of industry has shown a steady increase from 16.6 per cent at the beginning of the first plan to as much as 31.0 per cent by the end of the eighth plan. Since then this share has declined marginally to reach 26.9 per cent by 1999-2000. Like the secondary sector, the tertiary sector has also shown a steady increase in its share. From 28.6 per cent in 1951-52, this sector's share increased to 47.9 per cent in 1999-2000. In the post liberalization period the growth in the services sector has been tremendous. The upsurge that was experienced by this sector since the eighties has imparted resilience to the economy, especially in times of adverse agricultural shocks. But the structural transformation that took place in the Indian economy differs from that of the advanced countries in the sense that the increase in the share of the services sector was achieved in a short span of time. The economy jumped from the stage of lower order value addition associated with the agricultural sector to higher order value addition associated with the services sector which can be explained in terms of a late starter in the development paradigm.

8

Kunan, C.T. (1992), The Economy - An Interpretive Introduction, New Delhi, Sage Publications, p.342.

2.4 Trends in Domestic saving and Investment

Almost from the inception of economic planning, the prevailing low level of saving and investment was assessed by the planners and then targeted to achieve a self reliant and self sustaining economic growth by achieving a sharp increase in the saving 2nd investment rates. Table 2.3 Domestic Saving by institutions (as per cent of GDP) Household sector

Q = Quick estimate. Sources:(l) Government of India, National Accounts Statistics, various issues. (2) Government of India, Ministry of Finance, Economic Division, Economic Survey. Looking at the figures in table 2.3 it is quite evident that the saving ratio shows a secular trend to rise even though there are fluctuations. According to Rao (1980)' the increase in saving in spite of the fact that poverty is increasing points to the fact that the increase in money income is getting largely into the hancls of the people who are using it to increase their
Rao, V.K.R.V., Op cit,p.967

consumption and into the hands of the higher income groups who have a high propensity to save. It is also due to the transfer of household saving to the government and corporate sectors and partly by physical capital formation by the better off households. In the first three plan periods, the increase in saving rate was slow. From 10.4 percent of GDP, GDS rose to 14.5 percent at the end of the third plan. However, during this period, the financial infrastructure was established in the economy. During this period the household sector saving increased from 7.7 percent of GDP in 19210-51 to 9.9 percent in 1965-66. The public sector saving during the period increased from 1.8 percent of GDP to 3.1 percent of GDP, whereas the private corporate sector saving stagnated. This low rate of domestic saving during the first three plan periods was because of low propensity to save in the agricultural sector, (Chakravarthy), (1973)1°, and because of the larger shares of agriculture in GDP. During the annual plans and the fourth plan the saving rate steadily went up to reach 18.4 percent of GDP in 1973-74. This rate of growth in saving was made possible by the increase in household saving with nationalisation of the major commercial banks along with rapid branch expansion and also by the setting up of regional rural banks. With green revolution, the income distribution in the agricultural sector became skewed and with this the propensity to save in agricultural sector increased, as was

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10

Chakravarthy, S. (1973): "lieflections on the Growth Process in the Indian Economy" in Charan Wadhawa (ed) Someproblems of India's Economic Policy, 1977, New Delhi, Tata McGraw Hill. P.121

pointed out by Krishnamurthy and Saibaba (1981)" The public saving rate declined marginally and the private corporate saving rate stagnated. The period 1975-70 is considered to be the high saving phase in the Indian economy. The saving rate in the economy increased to 23.2 percent of GDP by the end of the fifth plan. The tremendous growth in the saving rate was achieved because of the higher rate of saving achieved in the household sector and public sector whereas the increase in the saving rate of the private corporate sector was marginal. The special factors that were responsible for the increase in the household saving in this period were the increased foreign inward remittances which enhanced saving in the non-agricultural sector as was noted by Krishnamurthy and Saibaba (1981)12 and the expansion in bank deposits as a result of branch expansion by nationalised banks as pointed out by Majumdar et. al (1980)". Raj Committee (1982)14 has found that the physical saving also increased during this period. The sixth plan saw the fall in the GDS from 23.2 percent of GDP at the end of the fifth plan to 18.2 percent of GDP at the end of the sixth plan. This fall in the saving rate was caused due to the decline in the saving rate of all the three sectors. Ghosh (1990)'~ finds that the decline in household physical saving is a reflection of the non-agricultural sector providing a greater

I1

Krishnamurthy, K and P. Saibaba(l981) op cit., pp. 225-249 (1981), Ibid. 13 Majumdar, N.A., T.R. Venkatachalam and M.V. Raghuvachari, "The High Saving Phase of the Indian Economy" KBI occasional papers, 1-32. l4 Raj, K.N., et a1 (1982) "Capital Formation and Saving in India 1950-51 to 1979-80", Report of the Working Group on Saving, RBI. IS Ghosh, Arun (1990), "Saring in India: Some Broad Reflections", in Datta, Roy Choudhari and Bagchi (1990). (ed) Domestic Savings in India; Trends and Isuues, New Delhi, Vikas Publishing House Pvt. Ltd., p.54.

''

quantum of saving. Chakravarthy (1990)'~finds the growth in consumption leading to dampened household saving. The declining trend of public sector saving rate is on account of the increased dissaving by the government administration. There was a recovery in GDS to 22.41 percent of GDP by the end of the seventh plan. This growth rate has been almost steady. The corporate sector saving started showing steady improvements whereas the public sector saving drifted downwards due to the growth of defence expenditure, interest payments and subsidies. During the eighth plan, the saving rate in the economy reached a new high of 25.1 percent of GDP in 1995-96, a rate comparable to developed European countries and that of the East Asian economies. This increase was made possible by the increase in the household sector's saving to 20.3 percent of GDP and that of the private corporate sector to 3.9 percent of GDP. The public sector saving was on the downward path because of the dissaving of the government administration to the tune of 2.4 percent of GDP. Even though the saving rate reached a new high in 1995-96, the initial years saw a fall. This fall is explained as 'spurious' by the Economic Survey (1995)" as it is not consistent with the economic fundamentals. This view calls for a review of the methodology for estimated saving and capital formation in the economy. Rao (1995)'' and Economic and Political Weekly Research Foundation (EPWRF)
l6

Chakravarthy, S. (1990) "Inaugural Address" to a seminar at National Institute of Public Finance and Policy, reprinted in Datta, Roy Choudhari and Bagchi (1990) (eds.),op cit., p.25. 11 Government of India, Ministry of Finance, Economic Survey, 1995, p.3. I8 Rao, C.H. Hanumantha (11>95), "Budget, Welcome Social Focus", The Economic Times, April 19, p.8.

(1995)19 hold the view that the decline in the saving rate in the immediate years after the introduction of reforms is 'real' and is an unintended consequence of the reform process. EPWRF (1995)" argues that it is beyond doubt that the definitive 1:hrust of the new economic policy is to promote higher economic growth by promoting consumption by the middle and high income classes. The household saving rate fell from 20 per cent of GDP in 1990-91 to 15.9 percent in 1993.94. This decline in household saving is due to a decline in household physical saving from 11.3 percent of GDP in 1990-91 to 5.6 percent in 1993-94.. Thus, the explanation for the decline in overall saving rate lie in the behaviour of household saving in physical assets. According to Athukorala and Sen (199512', it is evident that the apparent

un decline in household investment in physical capital which has in t r ,reflected
in a significant decline in the total saving rate in the economy since 1991, has largely emanated from an under estimation of gross domestic capital formation in recent years. In the last year of the eighth plan and in the three years of the ninth plan, the GDS show a falling trend. By the year 1999-2000, the public saving rate has become -1.2 percent of GDP and there is a fall in the corporate saving rate during these years even though the household saving rate has improved marginally.

Economic and Political Weekly Research Foundation (EPWRF) (1995): "Economic Reforms and Rate of Saving", Economic and Political Weekly, vo1.30, Nos. 18-19, May 613,pp.1021-41. 20 EPWRF, Op cit., p.1040. " Athukorala, Premachandra and Kunal Sen (1995), "Economic Reforms and Rate of Saving in India", Economic and Political Weekly, Sept.2, p.2187.
l9

2.5 Sectoral compositio~~ saving of For a better understanding of the domestic saving picture, a disaggregated analysis of saving, breaking it into the household sector, private corporate sector and public sector is needed. 2.5.1. Household Saving Comparable data on net saving of the household sector are available from 1950-51 onwards with a break up between financial saving and saving in physical assets. From 73.'7 percent in 1950-51, the share of household sector in GDS increased to 88.8 percent in 1999-2000. There have been fluctuations in this share in different years in the period. Table 2.4 Sectoral composition of saving Year
1950 - 51 1955 - 56 1960 - 61 1965 - 66 1968 - 69 1973 - 74 1978 - 79 1984 - 85 1989 - 90 1996 - 97 1999 - 20004 Q = Quick estimates

total household

total household

1

73.3 88.8

39.4 47.0

60.6 53.0

Sources:(l) Government of India, National Accounts Statistics, various issues. (2) Government of India, Ministry of Finance, Economic Division, Economic Survey-200 1.

Table 2.5 Household Saving-Composition of Financial Ass'ets (Share in per cent)
Financial assets
w m m \ w O w

2

Years

t .

dC A V d w A ' ) , w

Z
m
P

m

Ln

P

m

0

m

t . a ,

2

2

d t .

ob

E",

5

r-

8

z

d m 2

-

6 m
a ,

a) Financial saving

Shares & debentures

140.24/ 9.94 124.951 1.99

1 1 1
6.86 1.22

2.63

(

7.38

1

13.18

1

6.17

1

Provident fund and pension fund b) Physical saving

35.74 20.38 23.73 20.62 25.58

16.80

58.6 71.87 57.81 62.48 43.49 54.93 39.81 household saving 39.54 51.63 43.30 45.94 32.64 44.61 30.94 5.6 5.8 8.11 7.98 10.64 5.45 9.92 8.09

Source: Government of India, National Accounts Statistics, 1997. It is worthwhile to look at the distribution of household saving into financial instruments, which represent a transfer of their use to other sectors and physical assets, which represent saving invested by households themselves. The share of financial saving has consistently increased from
12.81 percent of the total household saving in 1950-51 to 60.6 percent in

1996-97 and declined to 53.0 percent in 1999-2000, in the quick estimates. The phenomenal growth in financial institutions and their differentiated

structure together with the multitude of financial instruments available are the reasons for the growth of financial saving by the household sector. The indivisibility of physical saving and the regular income earned from the financial assets have also prompted investments in financial assets. The wide variety of instruments available along with government policies like compulsory deposit schemes have also been instrumental in diverting saving to the financial assets. 2.5.1.1Composition of financial assets in household saving Pandit ( 1 9 8 5 ) ~ ~ that the volume of financial saving determines the finds demand for financial assets. Given the volume of saving, the household determines about its allocation among competing assets, depending on a) availability of various assets b) their respective rates of return and c) the rate of return on physical assets. In the financial saving of the household sector, there is a decline in currency held by the households. The diversification of the financial structure, and the switching over to new financial instruments have been instrumental in thiz,. The largest increase in non-contractual assets is in the deposits. When the capital markets offer better returns there is a switching over to shares and debentures and units of mutual funds. Shares and debentures attracted investments by the households sector to the tune of 13.18 percent of financial saving of the sector in 1989-90. However, with depressed conditions in capital market this share came down to 6.17 percent. The net claims on government increased to higher levels to reach 16.2 percent of household financial saving by the end of the seventh plan, which declined to

22

Pandit, B.L. (1985) , op cit., p.89.

7.67 percent by 1996-97. However, in the asset preference among the different financial assets any speci tic trend was not visible.

2.5.1.2 Share of Physical Assets in Household Saving
The share of physical assets in household saving has declined from 87.19 percent in 1950-51 to 39.81 percent at the end of the eighth plan. However, this fall in physical saving has not been a smooth one. The quantum jumps and subsequent decline in physical assets formation was responsible for a similar behaviour in total household saving, whereas household saving in financial assets show a steady upward trend. The upward trend in the ratio of household saving in financial assets was considered by Rakshit (1982)~'and Shetty and Menon (1980:1~~ found that the household financial saving were and exaggerated due to certain extraneous developments such as the bunching of financial asset growth due to procurement and foreign inward remittances. Thus, household saving have been and continue to be of critical importance to physical asset formation in the economy. Not only they undertake almost half the aggregate physical investment, but, by transferring saving they make possible greater investment in the public and private corporate sectors.

2.5.2 Private Corporate Sector Saving
The importance of corporate sector saving and public sector saving in the growth performance of economies has been highlighted with reference to and East Asian economies by Woo ( 1 9 9 1 ) ~ ~ Akyuz and Gore ( 1 9 9 4 ) ~ ~ .
21
24

*'

Rakshit, Mihir (1982): "Income, Saving and Capital formation in India", Economic and Political Weekly, 18 (May): pp.753-766. Shetty, S.L., and K.A. Menon (1980) "Saving and Investment Without Growth", Economic and Political Weekly, 15 (May 24), pp. 927-36. WOO,Jung En (1992): Race to the Swiji: State and Finance in Korean Industrialisation, New York, Columbia University Press, pp.58-66

Table 2.6 Private corporate saving (in current prices)

I

Corporate saving

As a percent of GDS

1

As a percent of corporate saving

Source: Government of India, National Accounts Statistics, 1997. As pointed out by Reddy ( 1 9 9 5 ) ~ the growth of private corporate ~, saving is determined by macro-environment and also by micro conditions at the firm level. Until late seventies the private corporate saving stagnated and this poor performance of the private corporate sector has to be attributed to the low profitability of the sector due to dependence on borrowed funds. However, in the eighties and in the post reform period the corporate saving
26

Akyuz, Y and C Gore (1994) "The Development Profile Nexus in East Asian Economies" Discussion paper, No.91, October p. 35-40. 27 Reddy, Y.V. (1995) Prospects for Saving and Growth in Uma Datta and Kapila (ed), Economic Development iri India,vo1.4, p.76.

rate increased. The private corporate saving crossed the public sector saving rate in 1988-89 and remained higher ever since. A striking feature of this rise in private corporate sector saving is the increase in the share of financial joint stock companies. The share of co-operative banks and societies show a downward trend also. From. 8.07 percent of the corporate saving by the cooperative banks in 1970-71 the share declined to 1.78 percent in 1996-97. The improved performance of finance companies was made possible because of the development of new financial institutions, mutual funds and the reforms for the improvement of the strength of the financial institutions.

EPWRF ( 1 9 9 ~ attributes the more reasonable tax regime and the reduction )~~
in corporate tax rates as the major reasons for the rise in corporate saving. Macro economic stability and policy stance regarding interest rates and exchange rates also had certain favourable effects on corporate saving and investment.
2.5.3 Public saving

One important factor influencing the saving performance of the country is the public sector saving. Contrary to the private corporate sector the public sector has contributed substantial amounts towards national saving in the period up to the end of the fifth plan. From 20.6 percent of GDS in 1960-61, the share of public sector drifted marginally to 19.8 percent of GDS in 1979- 80. This comparatively higher rate of saving is attributed to the measures for controlling fiscal deficit in response

28

EPW Research Foundation., Op.cit., p.1023

to double digit inflation and also because of decreased government revenue ~ due to increased tax efforts. However, as Joshi and Little ( 1 9 9 4 ) ~have pointed out, "drought and recession of the mid sixties resulted in reduction in tax revenue and expenditures were reduced by reduction in capital expenditure." Table 2.7 Gross domestic :saving - public sector (in current prices)
I

Source: Government of India, National Accounts Statistics, 1997. The share of public sector saving peaked in 1978-79 when it was 4.9 percent of GDP and remained above 4 percent in the early eighties owing to higher government revenues and better performance of non-departmental enterprises. However, the government administration started to record negative saving by the end of the sixth plan even though the non-departmental enterprises have been performing better. The departmental enterprises also
29

Joshi, Vijay and I.M.D. little: India, Macro Economics and Political Economy I964 to 1991 Delhi: Oxford University Press, pp.49,50.

started to show an upward trend from this time period onwards. The net result was a drift in public saving from the mid eighties to reach 1.9 percent of GDP in 1996-97. The huge amount of negative saving of government administration is principally because of the increasing subsidies and interest payments due to rising debt. The only silver lining in the public sector saving is the steadily increasing saving rate of non-departmental enterprises.
2.6

Trends in capital formation
Capital formation in the country represents a major production potential

and is a major determinant of economic growth. The assets in which the fixed capital is formed, its distribution into different production sectors like the public sector, private corporate sector, and households sector, the gestation periods involved, the degree of utilisation of capital and the efficiency of utilisation are all factors that influence the impact of capital formation on the generation of income. The gross capital formation in the economy is estimated under three types of assets namely construction, machinery and equipment and change in stocks. However, capital formation under these heads is not based on the functional concept of capital as it includes residential construction, which does not generate income. The functional role of inventories depend on their composition by raw materials, semi-finished goods and finished goods and by producers goods and consumers goods. (details of which are not available in the CSO white papers) But as Rao (1980)~' points out, " with all these limitations, however, data on fixed capital formation given in National
30 Rao,

V.K.R.V.: (1980), Op sit., p.973

Accounts do represent a major production potential in the economy and as such constitutes a crucial element in the analysis of economic growth as represented by the NDP or national income or other national magnitudes of the output of goods and services". Table 2.8

Source: Government of India, National Accounts Statistics, 1997. Note: Figures in italics indicate per cent of GDP.

The estimate of public and private sector capital formation is obtained from the national income accounts and budgets. The excess of GCF over the organised sector capital formation is treated as household capital formation which is equal to household physical saving. From 10.6 percent of GDP (Table 2.10) during the first plan, the average annual capital formation increased to 14.7 percent of GDP in the second plan. The average annual rate of capital formation further increased to 16.4 percent during the third plan. However, the tempo of growth has been dampened due to the shift in emphasis of the plan objectives from quantitative targeting of investment rate to the qualitative targets. This reorientation strategy was essential as accompanying growth was not achieved in spite of high saving and investment. During fifth plan, average annual rate of GCF shows further improvement to reach 20.72 percent of GDP. This wa:; achieved due to improvement in household and private corporate investment rate in the period 1976-1977 to 1978-79, despite the fall in public sector capital formation. During these years, the saving rate
. exceeded investment rate even though, as Shetty and Menon (1980)31 nghtly

observed, "the growth rate did not increase proportionately to the increase in saving realised by higher fc~reign inward remittances, as these saving were not productively invested". During the sixth plan period, the rate of capital formation deteriorated, till it started improving in 1984-85. This fall in investment rate was mainly because of the fall in the household sector capital formation. During the seventh plan period, the inflow of foreign capital increased together with increase in domestic saving which led to the increase in the annual rate of
3'

Shetty, S.L. and K.A. Menon (1 980), Op cit, p.932.

Table 2.9 Average annual sectonvise and assetwise distribution of investment during plan periods (as percentage of GDP at Current prices) Terms1 Period

I plan

I1 plan

I11 plan

Annual plans

IV plan

V plan

VI plan

VII plan

VIII plan

IX plan*

1. Sectorwise GCF
a) household 5.72 1.36 3.5 5.92 2.58 6.2 5.14 3.5 7.76 7.73 2.17 6.6 8.16 2.27 6.84 9.2 2.15 9.0 7.38 4.34 10.2 8.58 4.52 10.54 8.62 5.98 9.08 8.47 7.12 6.68

b) Private corporate
c) Public sector 2. Asset wise GCF a) Construction b) Machinery & equipment c) Change in stocks 3. Gross capital formation

6.76 3.46 0.23 10.58

8.06 4.92 1.72 14.70

8.48 6.32 1.64 16.4

9.06 5.9 1.57 16.50

8.76 6.04 2.38 17.26

9.92 7.54 2.48 20.72 21.52

9.98 9.62 2.3 21.92 21.34

10.42 11.1 2.1 23.64 22.26

10.44 11.88 1.3 23.68 22.52

10.33 11.07 0.93 25.92 25.93

13.46 17.88 19.32 19.1 19.92 4. GDCF Source: I. Government of India, National Accounts Statistics, 1997-98. 2. Government of India, Ministry of Finance, Economic Survey 2001 * Average for first three years

Table 2.10 Institution-wise distribution of capital formation by type of Assets (at current prices)
Construction

lFive year

I

I
I

Machinery and

equlpmentspT
-

Change in stock
I

Share in GLF

I

I

First plan Second Plan

4 1.24 47.94

2.7 5.06

56.06 47.0

22.5 34.4

24.04 27.88

53.18 37.74

54.08 100.5

102.12 43.6

56.34 44.1

33 42.3

11.4 17.32

55.08 40.3

Annual Plan Fourth Plan Fifth Plan Sixth Plan Seventh Plan Eighth Plan

42.5 45.52 46.56 53.62 54.34 44.38

3.36 3.44 2.44 5.08 4.94 6.84

54.1 51.1 53.62 41.32 40.7 48.78

39.06 33.8 42.4 44.38 42.52 36.36

20.53 19.98 17.5 30.36 27.14 40.7

40.4 46.22 40.12 25.24 30.34 22.96

32.53 27.4 41.32 23.58 0.38 -22.42

69.16 43.76 26.88 34.0 51.5 52.78

-1.7 28.84 31.8 42.4 48.86 69.94

40.03 39.26 43.36 46.6 44.56 38.44

13.17 13.8 12.2 19.54 19.14 25.38

46.83 46.98 44.46 33.9 33.9 36.16

Source: Government of India, National Accounts Statistics, 1997-98.

capital formation. Immediately after the crisis of 1990-91, domestic investment rate showed a decline owing to reduction in both domestic saving and net inflows from abroad. However, from 1993-94 there is a great improvement in aggregate investment rate due to increase in domestic saving. The average annual gross capital formation rate peaked at 23.68 percent during the eighth plan period. A particular feature of the Gross Capital Formation (GCF) rate is the tremendous increase in the corporate sector investment and a fall in the public sector investment rate, even though the household sector investme:nt rate shows no change.

27 .

Asset-wise Distribution of Gross Capital Formation
The asset wise distribution of GCF shown in tables 2.10 and 2.1 1

present a picture of steady increase in stocks. Construction sector shows an increase from 6.4 percent of GDP during the first plan period to nearly 10.4 percent of GDP during the eighth plan period. The greatest increase was seen in the machinery and equipments. The effect of this increase in investments in machinery and equipments resulted in greater production in the economy. An interesting dimension of the increase in investment in machinery and equipment is that nearly 40 percent of this increase was in the private corporate sector. The investment in terms of change in stocks was on an average 0.23 percent of GDP, during the first plan. However, these figures steadily improved to 2.48 percent during the fifth plan and started declining slowly in the subsequent periods. The increase in stocks reflects a bulge in the undesired investment. The decline in inventories during the sixth, seventh and

eighth plans are reflected in the increase in machinery and equipment, enabling the achievement of higher growth. Asset-wise constntction has accounted for the largest share in the gross capital formation. From 6.76 percent of GDP in the first plan, this has steadily increased to reach 10.44 percent of GDP in the eighth plan. Only in the seventh and eighth plans the gross capital formation in machinery and equipment exceeded construction. In the initial periods of development, more of investment in construction is to be expected, as this was the time for the development of infrastructure in the economy. This has led to higher capital output ratio in the economy. Rao (1981)~' has rightly observed , "there is therefore, no doubt that a secular increase has taken place in the capital output ratio in India and this is certainly a matter of great concern for our future economic growth, especially in view of the general tendency of the average capital output ratio to remain constant in most developed countries and in the history of economic development in general.

2.8

Sectoral Distribution of Gross Capital Formation
Taking the whole period of 1950-51 to 1996-97, the share of public

sector in total capital formation was, on an average, 41.8 percent. The share of private corporate sector was 17.15 percent and the average share of the household sector was 41.05 percent. But the distribution among the public sector, private corporate sector and household sector has been widely fluctuating during the years.

j2

Rao, V.K.R.V. (1980), Op cit., p.974

2.8.1 Public sector capital formation

The average inveslment per year in the public sector during the first five year plan was 3.5 percent of GDP and this share increased tremendously in the later years to touch 10.54 percent of GDP during the seventh plan, the peak being achieved in 1086-87 when it was 11.7 percent of GDP. In the mid have sixties, however, as Joshi and Little ( 1 9 9 4 ) ~ ~ pointed out, there was a downward slide in the public sector investment as restrictions were imposed to cope with the macro ec:onomic imbalances. However, the acceleration of public investment rate in the late seventies was achieved due to government's response to the oil shock by expansionary adjustment. In 1986-87, the public sector investment dwindled , as there was the need to slice down expenditure to counter the failure of monsoons. During the eighth plan, the public sector investment further came down to an average annual rate of 9.08 percent of

GDP as a consequence of'the fiscal adjustment of the government.
Analysing the asset-wise pattern of public sector investment (Table 2.10) it is found that the greatest investment throughout the period has taken place in construction, poi,nting to the emphasis placed in the five year plans on the development of infrastructure. During the third plan, the public sector investment in construction was 58.94 percent of the total per annum. This came down to 42.50 percent during the annual plans, picked up again to reach 54.34 percent in the seventh plan. However, during the eighth plan period, this came down to 44.38 percent of the total. The investment in machinery and equipment has shown an upward trend till the sixth plan. From a share of

" Joshi Vijay and I.M.D. Lit.:le (1994), Op cit., p.316.

22.50 percent of the public sector investment in the fourth plan, it increased to

44.36 percent in the sixth plan. However, it started coming down in the seventh plan, reaching 36.36 percent during the eighth plan reflecting the trends of privatisation and liberalisation in the economy. The share of inventories was very high during the first two plans, reaching 1.72 percent of
GDP during the first plan. This trend continued till mid-seventies due to the

high level of food procure~nentand stock of food grains. However, the share of public sector in inventories has come down since then to be negative during the eighth plan.

2.8.2 Private Corporate Sector
The share of private corporate sector in the GCF has been the lowest in all the plan periods, compared to public and household sectors. However, this share has risen, which is a welcome feature from the point of view of the economy. From 11.4 percent of the GCF in the first plan, the share of this sector increased to 21.44 percent during the third plan. However, since then, till the fifth plan, the average annual capital formation in the private corporate sector was very low. In the early eighties the investment in private corporate sector increased, but it could not be maintained in the latter half of the eighties. The eighth plan is a period of higher investment in the private corporate sector due to the favourable investment climate that was made possible in the economy as a result of the reforms. The private corporate sector investment contributed 33.40 percent and 32.40 percent of the total investment in the economy in 1995-06 and 1996-97 respectively, when for the first time it surpassed the investment of the public sector. Bulk of the investment in private corporate sector has been in machinery and equipment. However, due

to the stagnation in the corporate saving in the early years and its delayed acceleration a saving investment gap was created.

2.8.3 Household Sector
It is the capital formation in the household sector, which has led to a respectable figure for capital formation in the country. From 55 percent of the total capital formation during the first plan, its share decreased during the next two plan periods to touch 31.42 percent during the third plan. During the next three periods, this sector contributed the lion's share in the total capital formation in the economy. However, with increase in financial saving of the household sector, physical capital formation by this sector has come down ~ tremendously. According to Raj committee report ( 1 9 8 2 ) ~the increase in household capital formation in the late sixties and seventies has been due to the substantial growth ot'the incorporated enterprises out side the farm sector and the larger quantities of machinery and equipment.

In the assetwise classification, the share of the sector in construction
has been very high throughout this period which include residential construction also. The share of this sector in machinery and equipment has been constant at arouncl 40 percent till the fifth plan, which came down to reach 22.96 percent in the eighth plan. The household sector showed negative inventories till the annual plans, which increased to touch 69.94 percent of the total inventories in the eighth plan.

34

Raj, K.N. al. (1982) Op cit., p.68 et

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The growth rate of capital formation in agriculture has been slow throughout the five-year plans. The growth in investment in manufacturing was marginal during the first plan, but during the second plan, as plan objectives stressed industry, the investment in manufacturing sector doubled. In the periods between second and fifth plans there was an industrial deceleration. However, it was in the nineties that the greatest increase in investment in manufactur~ngwas experienced. The policy changes in the economy have been responsible for this notable increase in investment. Transport and communication, finance, insurance, trade, hotels and restaurants and electricity, gas and water supply have also experienced considerable increase in investment.
2.9 Saving, Investment and Growth Causality

There is a debate on the form of causality between saving and growth. )~~ For ~ o l o w ( 1 9 5 6 higher saving leads to higher per capita income in steady state and higher growth rate in transitional trajectory. Most cross-country studies report a strong positive effect of income growth on saving. Carrol and using two data sets for two groups of countries for the period Weil ( 1 9 9 4 ) ~ ~ 1960-87, finds that growth causes saving and saving does not cause growth. Deaton (1989)~'has established that consumption habit that changes with a lag, despite increase in income may lead to higher saving rates with growth.

35

36

37

Solow, R.M. (1956): "A Contribution to the Theory of Economic Growth", Quarterly Journal of Economics, 70, pp.6:;-94. Carroll, C.D. and D.N. Weil (1994): Saving and Growth: A Reinterpretation, Carnegie Rochester series on Public Polic:y,40, pp. 133-192. Deaton, Angus (1984) "Saving in Developing Countries: Theory and Review", Proceedings of the World Bank: Annual Conference on Development Economics, pp.61108.

Extending Carrol and Vleil result for India, Balakrishnan (1996)" and Muhleisan (1997)'~got similar results. Ray and Boss (1997)~' find that the causality directions are almost uniformly from growth to saving with nonsignificant causality from saving to growth. In India available evidences on long-term patterns of saving and growth support the idea that virtuous circles of development and saving exist along with traps of under saving and poverty. Average saving of 20 percent of GDP is high by the standards of developing countries. Gross capital formation is also high compared to other less developed countries. However, these saving and investment are not reflected in the GDP growth rate of the country. Different hypotheses have been put forward by different economists for this low rate of growth. Rakshit (1982)~'finds that over estimation of saving and investment result due to three reasons, namely, upward bias in the use of commodity flow method in investment, failure to account for the bunching effect of intra year fluctuations in financial saving and the upward bias in the estimation of and changes in stocks. Raj Committee ( 1 9 8 2 ) ~ ~ Chelliah Committee (1997)~' have recognised various sources of error in the estimation of saving and capital formation in hldia. However, Muhleisen ( 1 9 9 7 ) ~finds that the ~
Balahishnan, P. (1996): "Saving rate in Indian Economy since 1991 "Economic and Political Weekly Special, 'Yovember, pp.2527-35. 39 Muhleisan, Martin (1997) "Improving India's Saving Performance", IMF Working Paper, No.9714, p. 38 Ray, Partha and Dhritidyuti Bose (1997): Op.cit., p.135. 4 ' Rakshit, Mihir (1982): op cit.,p.569 42 Raj, K.N. et a1 (1982): Op cit. 43 GoVt. of India (1996): "Saving and Capital formation in India, 1950-51 to 1994-95": Report of the Expert Group on Saving and Capital Formation, (Chairman: Professor Raja.J.Chellaiah) 44 Muhleisen, Martin (1997) Op cit., p.39

household saving for the post liberalisation period in India is to be under estimation due to non- inclusion of assets like jewellery and gold. Athukorala and Sen ( 1 9 9 5 ) ~ ~ agree that household physical saving is likely to be under estimates during the nineties. Thus, estimation errors, possibly upward bias in estimation of saving and c:ipital formation has been responsible for the high saving low growth phenomr:non in India. Another explanation for the high saving low growth phenomenon in the country is the low productivity due to high incremental capital output ratio. According to Rao (1980)"~the incremental capital output ratio at constant prices is a disquieting feature of our economic development especially in the light of the general shortage of capital in our factor resources. Accordingly increase in construction and inventory do have the same functional role as that of increase in machinery and equipments. The share of construction in the capital formation was 63.90 percent in the first plan, which declined marginally in the subseqrient plan periods. However, in the eighth plan, its share was still very high at 44.10 percent. Investment in construction has long gestation periods and also household investment in construction includes residential construction, which is not productive. Thus, the higher share of construction and inventories has caused higher incremental capital output ratio leading to low growth with high saving and capital formation. Raj Committee (1982)~'finds that since the mid seventies, the price index of capital goods had risen farther than the GI)P deflator and hence a large chunk of the capital is

45 Authukorala,
46

Premachandran and Kunal Sen (1995) Op cit., p.2189. Rao, V.K.R.V. (1980) Op ait, p.975. 47 Raj, K.N., et a1 (1982) op cit.p.55

eaten away. According to Rao (1980)~'public sector has doubled its share in the gross capital formation and to the extent that public sector management is less efficient than private sector management, it could be one reason for increasing capital output ratio. Chakravarthy (1984)~'has argued that a capital intensive agriculture in the post green revolution period, the increased cost of energy related investment and delays in the completion of projects are causes of increasing capital output ratio.

2.10 Growth of State Domestic Product, Saving and Capital Formation in Kerala
In the above paragraphs, we have examined the trends and pattern of saving at the federal level. Similar discussions are appropriate at state levels also. But the availability of time series information on different states in India is doubtful and even if they are available their comparison are not very meaningful because o-f the differences in geographical size, population, infrastructure and so on. Considering these difficulties, interstate analysis is not attempted. A study of the determinants of saving behaviour of Kerala households requires an analysis of the growth of income, saving and capital formation in the state. Though data on state domestic product is published by the State Planning Board, normally official agencies do not compile data on saving and capital formation in the state. Hence a systematic analysis of the saving and capital formation in the state and in the different sectors of the state is beyond the scope of this study.
Rao, V.K.R.V.(1980) Op cit., p.975. Chakravarthy,S (1984) "Aspects of Indian Development Strategy for the 1980'sn, Economic and Political Weekly, 19 (26), pp.845-52

49

2.10.1 Growth of State Domestic Income

Since the formation of the state in 1956, the Kerala economy has undergone the process of planned development with the objective of achieving economic growth with equity and justice. Table 2.12 State domestic product, se1:toral composition and per capita income in Kerala at current prices (1950-51 to 1999-2000)

Source: 1) Government of Kerala, Directorate of Economics and Statistics, Statistics for Planning 1977, 1986, 1988. 2) Government of Kerala, State Planning Board, Economic Review, various issues.

State domestic product provides the most important and widely accepted index of overall economic development of the state. The SDP of Kerala at current and constant prices for the period from 1960-61 to 19992001 are given in tables 2.12 and 2.13 on a five year period break up. Table 2.13

at 1993-94 prices, # Estimates at current prices Source: 1) Government of Kerala, Directorate of Economics and Statistics, Statistics for Planning 1977, 1986, 1988. 2) Government of Kerala, State Planning Board, Economic Review, various issues.

Taking the state domestic product at current prices it is found that the average growth rate was 5.72 per cent during the first five year period. The state domestic product increased to Rs.1206186 lakh in 1990-91 and further to Rs.5656282 lakh in 1998-99. However, this tremendous growth is to be understood in the background of the inflation which reduces the growth rate in real terms. During the 50 years from 1950-51 to 2000-01 SDP at current prices increased by 309 tiines and in the three sectors the increase was 150 times, 308 times and 5 11 times from the primary sector, secondary sector and tertiary sector respectively. The state domestic product at constant prices gives a better idea about the growth performance of the state economy. However, one problem with the data is that the state domestic product is computed and published as different series based on different base year prices. At constant prices, SDP doubled during the period 1950-51 to 1970-71. However, during the decade 1970-71 to 1980-81 the growth of SDP was 1.25 times. At 1980-81 prices the growth in SDP was 1.37 times during the period 1980-81 to 199091. The growth in SDP during the next eight years was 1.33 times which was estimated at 1993-94 prices.
2.10.2 Sectoral Composition

At constant prices the share of primary sector in the SDP was 54.51 per cent in 1950-51, which increased to 55.98 per cent in 1960-61. Since then, this share has shown a decline to reach 50.56 per cent in 1970-71. Since 1970-71 the share of the agricultural sector shows faster decline to reach 26.36 per cent in 1998-99 and 20.1 1 per cenl. in 2001-02. With the fall in the share of the primary sector, the share of the other two sectors registered increase, the increases in the tertiary sector being more pronounced. At constant prices, the

share of the secondary sector increased from 16.17 per cent to 24.63 per cent in 1980-81 and hrther to 26.31 per cent in 1990-91. But the share of this sector declined again to reach 20.69 per cent in 1998-99 with a marginal increase to 20.90 per cent in 2001-02. According to Surendran (1999)'~"since 1980-81 a boom has occurred in the construction sub-sector which is mainly due to Gulf remittances that lifted the share of secondary sector from 17 per cent to 24 per cent. The share of construction remained at a fairly high rate of

9 per cent for the whole period except some setbacks in recent years." The
share of tertiary sector increased steadily from 29.32 per cent in 1950-51 to reach 40.20 per cent in 1990-91. From 1990-91 onwards, this share leaped forward to touch 47.80 per cent in 1994-95 and further to reach 50.76 per cent in 1998-96. According to Pillai (1994)" "at both state and national levels the change in the sectoral composition of domestic product was indicative of the unhealthy tendency of the tertiary sector to outgrow the secondary sector." Thus, the tertiary sector has enjoyed more than its due share from the state resources and made a clear dominance over the productive sectors of the economy.

Saving and Capital Formation in the State
Due to lack of reliable data on saving mobilized in the state and on capital formation, an analysis of these two variables are beset with problems. One of the important forms of financial saving is the deposit mobilized by the commercial banks, co-operative banks and regional rural banks. Rs.3433.79
50

51

Surendran, P. (1999) The Kerala Economy, Development, Problems and Prospects, Delhi, India Publications, p.21. Pillai, P.P. (1994) Kerala Econon~y, Four decades of Developmenl. Institute of Planning and Applied Economics Researc:h, John Matthai foundation, University of Calicut, Thrissur, pp.178-79.

crores was mobilized by the banking sector in Kerala in 1986 which works out to 54.34 per cent of the :state domestic product. 24.58 per cent of this is in the form of NRE deposits. Total deposits increased to Rs.6620.08 crores in 199091, that is, 54.89 per cent. In 1994-95, the deposits mobilized by the banking sector show a further increase to Rs.17457.91 crores and further to Rs.3 1531.84 crores in 1999, which comes to Rs.55710.29 crores in 2001. Table 2.14 Deposits and credit deposit ratio in Kerala (Rs. crores) Share of Credit Year Deposits NRE deposits devosit ratio

1

1

1

/

Source: Government of Kerala, State Planning Board, Economic Review, various issues.

Per cent of the SDP
However, bank deposits cannot be used as a real indicator of the financial saving in the economy as it also includes the derived deposits of these institutions. A point worth noting is that as much as 24.58 per cent of these deposits were made by the non-resident citizens of the state, which increased to 30.39 per cent in 1990. In 1995, as much as 39.44 per cent of the deposits was from this group which increased to 45.90 per cent in 1998 which declined marginally to 42..27 per cent in 1999. In spite of these huge figures of deposits mobilized in the state, the capital formation in the different sectors has been very low and has been

declining alarmingly which is manifested by the falling credit deposit ratio. The credit deposit ratio was 61.2 in 1986, which increased marginally to 62.20 in 1990. The reform period has witnessed noticeable fall in the credit deposit ratio to reach 44.66 in 19'95 and declined hrther to reach 43.37 in 1999 and 42.74 in 2002. The contribution of the rural sector in the saving of the state is not little which is evident from the increasing deposits mobilized by the primary agricultural credit societies in Kerala, as shown in table 2.1 5. Table 2.15 Deposits mobilized by primary agricultural credit societies in Kerala Deposits

1'389-90 1094-95 1998-99 2000-2001

189123 301594 534181

Source: Government of Kerala, State Planning Board, Economic Review, various issues. The primary agricultural credit societies in Kerala have mobilized an amount of Rs.32237 lakh in 1985-86, which doubled to Rs.64703 lakh by 1989-90. By 1994-95 it increased to nearly three times, and the increase by 1998-99 was 1.6 times. By 2000-2001, this increased to a level of Rs.534181 lakh. Thus, the rural sector in Kerala has been contributing considerable amount towards financial saving in the state. The All India Debt and Investment Surveys have estimated average capital formation in the rural households in Kerala and a summary of the

average gross capital expenditure and average fixed capital formation is given in tables 2.16 and table 2.17 respectively. Table 2.16 Average gross capital (expenditureper household in different years in rural Kerala (Rs.1
Type of household Farm business 93.20 Gross capital expenditure Residential Durable Non-farm 'lots & assets business buildings 15.92 78.11 10.59 12.36 30.05 2.45 15.22 68.71 9.0

Total 197.82 62.5 171.36

I

kI
All household:; All household:j

Cultivators Non-cultivators

1 /

544.0 79.0 512

1 1

109 23 104

1017 151 959

1768 253

1

1575

I

572

668

2707

3947

Source: Reserve Bank of India, All India Debt and Investment Survey. Report on Statistical 'Tables relating to Capital Expenditure and Capital Formation for different years. The average gross capital expenditure by rural households in Kerala was Rs.171 in 1961-62, which increased to Rs.3947 in 1991-92. Among the different heads under which these expenditures were made, farm business accounted for 45.61 per cent and residential plot and buildings accounted for 40.09 per cent in 1961-62. The share of farm business gradually declined to reach 14.49 per cent, whereas the share of residential plots and buildings increased to 68.58 per cent in 1991-92. The share of non-farm business was only 8.88 per cent in 15'61-62, which increased to 16.92 per cent in 1991-92.

Among the cultivators, the share of investment in farm business was 47.21 per cent, which declined to 15.50 per cent in 1991-92, whereas investment in nonfarm business increased from 8.05 per cent to 17.36 per cent during the same period. The share of residential plots and buildings was 39.49 per cent in 1961-62, which increased to 67.12 per cent in 1991-92. For the non-cultivator households, the increase in capital expenditure was from Rs.62.50 to Rs.2115. Table 2.17 Average fixed capital formation per household in rural Kerala in different years (Rs.1
Fixed capital formation Year Type of household Farm business 22.30 0.47 18.03 22.84 1.43 20.77 135.0 1.O 126 378 44 305 Non-farm business 10.35 7.15 9.72 20.23 1.38 18.40 93.0 23.0 88 759 276 653 Residential plots & buildings 39.93 7.67 33.62 63.72 13.08 58.81 891.0 132.0 840.0 261 1 1480 2364 Total 72.58 15.29 61.37 106.79 15.89 97.98 11 19.0 156.00 1054 3747 1800 3322
-

Cultivators 1961-62 Non-cultival:ors All households Cultivators 1971-72 Non-cultivators All households Cultivators 1981-82 Non-cultivators All households Cultivators 1991-92 Non-cultivators All households

Source: Reserve Bank of India All India Debt and Investment Survey. Report on Statistical Tables relating to Capital Expenditure and Capital Formation for different years.

All India Debt and Investment Surveys revealed that the average fixed capital formation has increased alarmingly during the period from 1961-62 to 1991-92. From a meagre Rs.61.37 in 1961-62, the average fixed capital formation per household increased to Rs.3322 in 1991-92. However, the share of farm investment has come down and that of non-farm investment and investment on residential plots and buildings has increased. The average value of fixed capital expenditure by urban households in 1991-92 was lower at Rs.3036 compared to that of the rural households. Among the urban house:holds, the self-employed households have made an average fixed capital expenditure of Rs.2203 whereas for other households this amount is Rs.3474. For the urban households also, the average expenditure on residential plots and buildings is 75.07 per cent of the total. For those households who are not self-employed, this share is higher at 81.64 per cent. The saving and investment survey conducted by the Kerala State Planning ~ 0 a 1 - d 'estimated that the average annual saving per household in ~ Kerala was Rs.1031. For the rural households this average was Rs.965 whereas for the urban households average saving amounted to Rs.1369 inclusive of all saving in all forms. In this survey it was also found that the total financial saving by the rural households worked out to be Rs.125.48 crores as against 64.95 crores for the urban households, the total adding up to Rs.190.43 crores. The total physical saving was estimated to be Rs.245.91 crores, that is Rs.215.00 crores from the rural households and Rs.30.91 crores

52

Kerala State Planning Board (1983),Op.cit., p.8

from the urban households. Thus, the available literature on saving mobilized in the state points to the large volume of saving in the state economy. With declining credit deposit ratio capital formation in the productive sectors of the economy has been very low resulting in the low growth rate of the economy.