ECONOMICS

ASSIGNMENT-2

Submitted By:
Anuttara | Pooja Nandan | Sri Raajita |
Rhea | Shalini | ShivaSrri | Shiv Priya |
Swathi
Patterns of savings in India.
Saving is defined as personal disposable income minus personal consumption
expenditure. In other words, income that is not consumed by immediately
buying goods and services is saved. Other kinds of saving can occur, as with
corporate retained earnings (profits minus dividend and tax payments) and a
government budget surplus.

Investment is the production per unit time of goods which are not consumed but
are to be used for future production. At any period of time the stock of capital
includes all assets associated with productive capacity such as factories,
machinery, plant and equipment, inventories. These assets represent postponed
consumption that is; people invest in assets because they expect these assets to
deliver goods and services in the future. Therefore, investment is the flow into
this stock of capital goods and thus, investment is nothing but is the addition,
over some time period, to the real capital stock. In other words, capital is a stock
which is measured at a point in time whereas investment is flow over a period
of time which augment the stock of capital and add to the overall productive
capacity.

In measures of national income and output, gross investment (represented by the

variable I) is also a component of Gross domestic product (GDP), given by
GDP = C + I + G + X, where C is consumption, G is government spending, and
X is exports. Thus investment is everything that remains of production after
consumption, government spending, and exports are subtracted. Here both non-
residential investment such as factories and residential investment such as new
houses combine to make up overall investment I. Net investment deducts
depreciation from gross investment. It is the value of the net increase in the
capital stock per year.
Over the last two decades, the savings and investment patterns in India have
seen some changes. Opening up our economy has lead to variations in our
lifestyles and in our consumption habits. This in turn has influenced how people
save and invest their money. All of this has contributed to a series of continuous
ups and downs in the economy. In order to bring about economic growth, the
government is looking to make structural reforms that focuses on the saving
patterns of the common citizens. This will hopefully mean that investments and
savings of individuals can be used for the betterment of the Indian economy.

Types and Determinants of Domestic Saving

There are basically three types of private domestic saving, each with their own
different determinants, namely: voluntary saving; involuntary saving and forced
saving. Voluntary saving relates to the voluntary abstinence from consumption
by private individuals out of personal disposable income and by companies out
of profits.

Involuntary saving is saving brought about through involuntary reductions in

consumption. All forms of taxation and schemes for compulsory lending to
governments (including national insurance contributions) are forms of
involuntary saving.

Forced saving is saving that comes about as a result of rising prices and the
reduction in real consumption that inflation involves if consumers cannot
defend themselves. Rising prices may reduce real consumption for a number of
reasons. Firstly, people may suffer money illusion. Secondly, they may want to
keep constant the real value of their money balance holdings, so they
accumulate more money and spend less as prices rise. Thirdly, inflation may
redistribute income to those with a higher propensity to save, such as profit
earners.
Savings in general depend on the capacity to save and the willingness to save.
The capacity to save depends on three main determinants: the level of per capita
income; the growth of income, and the distribution of income. The willingness
to save depends, in turn, on: the rate of interest; the existence of financial
institutions; the range and availability of financial assets, and the rate of
inflation.

Trends of Savings and Capital Formation in India

The central statistical organization (CSO) has been preparing estimates

of saving and capital formation as part of National Accounts Statistics in India.

While preparing the estimates of capital formation, the economy is divided into
three sectors viz., the household sector which comprises productive economic
units either run on an individual basis or partnership or unincorporated business,
the private or the corporate sector which includes the joint stock companies and
the public or the government sector which includes the capital assets of the
government as also the assets of the enterprises run under state control. If we
sum up the net change in the value of the assets in a given period in these
sectors, we arrive at a total of net domestic capital formation. To this if we add
the net inflow of foreign capital we arrive at an estimate of the net national
capital formation for the economy.

For this purpose, the estimate is compiled by the type of capital goods
i.e., construction and machinery and equipment. This part of capital formation is
called fixed capital formation. Estimates of change of stock i.e., working capital
are added to gross fixed capital to arrive at the total of gross capital formation.

While preparing the estimates of saving, the economy has been divided
into three broad sectors viz., the public sector, the private corporate sector, and
the household sector. The public sector comprises public sector undertakings
along with departmental enterprises. The private corporate sector limits itself to
the organized corporations run under company form of ownership and
management. The household sector is a residual sector comprising all economic
units other than the nits of public sector and private sector. Thus, the household
sector includes besides individuals, all non-government and non-corporate
enterprises like sole proprietorships, partnerships and non-profit institutions
which furnish educational, health, cultural, recreational and other social and
community services to households.

The Gross and Net Domestic Capital Formation of India are presented in
Table 1 and Sector-Wise Gross Capital Formation is shown in Table 2. Gross
Fixed Capital Formation (GFCF) includes investments in fixed capital goods
such as construction, machinery and equipment, plant and machinery etc. The
aggregate Gross Domestic Capital Formation (GDCF) is estimated for the entire
economy for each year by adding the GFCF and change in stocks. From the
total of GDCF estimated, the independently estimates for the gross capital
formation for the public sector and private sector are deducted to obtain the
residual investment in the household sector.

The Sector-Wise Gross Domestic Savings of India is depicted in Table 3.

Aggregate or the Gross Domestic Savings is derived as the sum of the domestic
savings of different individual sectors plus foreign savings (i.e., net capital
inflow from abroad).

Gross Domestic Savings as a percentage of GDP

Table 4 presents the Sector-Wise Gross Domestic Savings (GDS) as a

percentage of GDP in India. As can be observed form the table, that GDS as a
percentage of GDP has increased from 8.9 per cent in 1950-51 to 14.6 per cent
in 1970-71 to reach a level of 23.1 per cent in 1990-91. By the end of 2004-05,
the percentage of GDS to GDP was around 29.1 per cent.
Public sector savings which were 1.8 per cent of GDP in 1950-51 increase to
3.4 per cent in 1980-81. However, thereafter it declined to 1.1 per cent in 1990-
91 and became negative in 1998-99 and deteriorated further to -1.9 per cent in
2002-03. This is mainly due to dis-saving in the government sector, as the
public sector enterprises have shown a distinct improvement in their
performance during 1990-91 to 2002-03. The situation has improved and by the
end of 2004-05 the savings accounted for 2.2 per cent of GDP.

The private corporate sector contributed 0.9 per cent pf GDP to GDS in 1950-
51 and subsequently its share improved to 2.7 per cent in 1990-91 and it has
further shown an improvement and contributed nearly 4.9 per cent to GDS by
the end of 2004-05.

Table 4: Sector-Wise Gross Domestic Savings (GDS) as a percentage of

GDP in India

(As a percentage of GDP at market prices)

Year Household Private Corporate Public Sector Total

Sector Sector

1950-51 6.2 0.9 1.8 8.9

1960-61 7.3 1.6 2.6 11.6

1970-71 10.1 1.5 2.9 14.6

1980-81 13.8 1.6 3.4 18.9

1990-91 19.3 2.7 1.1 23.1

1995-96 18.2 4.9 2 25.1

2000-01 21.2 4.1 -1.8 23.5

2001-02 22 3.6 -2 23.6

2002-03 23.1 4.1 -0.7 26.5

2003-04 23.5 4.4 1 28.9

2004-05 22 4.9 2.2 29.1

Source: CSO, National Accounts Statistics, 2006

Note: 1. Ratios of individual sectors may not add to total because of rounding
off.

The household sector contributed 6.2 per cent to GDS in 1950-51 and its share
markedly improved to 19.3 per cent of GDP in 1990-91 and it further reached a
level of 22 per cent by the end of 2004-05. Thus, from Table 4, it is clearly
evident that out of the three sectors, the contribution of household sector to total
GDS of the Indian economy was significant.

Gross Domestic Capital Formation as a percentage of GDP

Gross domestic capital formation (GDCF) of India as a percentage of GDP is

shown in Table 5. The GDCF was 8.7 per cent of GDP in 1950-51, which
increased to 20.3 per cent by 1980-81. Further, it increased to 26.3 per cent in
1990-91, and improved to 26.9 per cent in 1995-96 and thereafter, it increased
further to 33.8 per cent in 2005-06.

Table 5: Gross Domestic Capital Formation (GDCF) as a percentage of

GDP in India

(As a percentage of GDP at market prices)

Year Gross Domestic Capital
Formation

1950-51 8.7

1960-61 14.4

1970-71 15.4

1980-81 20.3

1990-91 26.3

1995-96 26.9

2000-01 25.9

2003-04 28.0

2004-05 P 31.5

2005-06 QE 33.8

Source: CSO, National Accounts Statistics, and Economic

Survey (2006-07)

Note: 1. P indicates provisional and QE indicates quick estimates

Mobilization of the Domestic Saving

In order to achieve the desired savings and investment rates, there would
be need to raise large resources domestically. Today, India has a reasonably
high and growing savings rate. However, for meeting the financing
requirements of a growing economy what is important is mobilization of
financial savings and this can be done by channeling the savings in the form of
both financial and physical savings.
 In India, households undertake savings in the form of both financial as
well as physical savings. Financial savings include currency and bank deposits,
shares and debentures, life insurance, provident fund and pension funds, etc.
Physical savings are mainly in the form of construction of houses, and
equipment possessions of households.

Table 6 shows the composition of financial and physical savings of the

household sector of India. In 1950-51, due to underdeveloped capital and
money market in India the share of financial savings in the total household
savings was only 0.6 per cent of GDP and bulk of savings were undertaken in
the form of physical assets. However, the situation changed by 1980-81, where
the financial savings as a proportion of total savings accounted for 43.5 per cent
of total household savings. This was mainly due to the rapid expansion of
banking sector in rural as well as urban areas, nationalization of banks, and a
large increased of employment in the organized sector which started
contributing towards provident funds and pension. The mobilization of rural
savings towards Life Insurance Corporation also added to the growth of
financial savings.

Table 6: Composition of Household Savings in India

(As a percentage of GDP at current prices)

Year Financial Savings Physical Savings Total

1950-51 0.6 5.5 6.2

1960-61 2.7 4.6 7.3

1970-71 3.0 7.1 10.1

1980-81 6.0 7.8 13.8

1990-91 8.7 10.6 19.3

2000-01 10.2 11.0 21.3

2004-05 10.3 11.7 22

Source: EPW Research Foundation (2002)

With the development of capital markets, especially, after financial

liberalization, the households began investment in shares and debentures and
this further strengthened the share of financial savings in total household
savings. In 2004-05, out of the total household savings as a per cent of GDP, the
share of financial savings was around 10.3 and that of physical savings was 11.7
per cent.

In order to facilitate substitution of physical savings in favour of

financial savings, there would be need for innovative and attractive financial
instruments. Appropriate instruments should also be available for the generation
of longer term savings that are needed for financing infrastructure. Financial
markets, therefore, would have a crucial role to play in mobilizing resources of
the required nature.

Gross Domestic Capital Formation by Industry-Wise

The economy is broadly classified into three sectors viz., Agricultural

and Allied activities, Industrial sector and Services sector. The composition of
gross domestic capital formation by industry-wise is shown in Table 7.

Table 7: Composition of Gross Domestic Capital Formation in India

(As a percentage of total GDCF at 1999-00 prices)

Industry 1950-51 2004-05

1. Agriculture, Forestry and Fishing 19.3 7.8

2. Mining and Quarrying 0.9 1.7

3. Manufacturing 19.2 34.8

4. Electricity, Gas and Water 2.2 8.1

5. Construction 0.6 2.0

6. Trade, Hotels and Restaurants 12.4 3.7

7. Transport, Storage and 12.7 12.6

Communication

8. Finance, Insurance, Real estate and 21.3 13.8

Business Services

9. Community, Social and Personal 11.3 13.5

services

Source: EPW Research Foundation (2002)

As can be seen from the Table 7, that the percentage share of

manufacturing sector in total GDCF has increased to about 34.8 per cent by the
end of 2004-05 from 19.2 per cent in 1950-51 where as the percentage share of
agriculture, forestry and fishing in total GDCF has declined to 7.8 per cent in
2004-05 from 19.3 per cent in 1950-51. over the years, industries in services
sector such as trade, hotels and restaurants, transport, storage and
communication, finance, insurance, real estate and business services and
community, social and personal services have also contributed a major
proportion of total GDCF in India.