ASSIGNMENT 1

Title: Understanding India’s National Output

Section: H
Member 1: Aditya Jain (PGP36352)
Member 2: Sameeksha Gupta (PGP36385)
We, Aditya Jain and Sameeksha Gupta hereby declare that the report is the outcome of our joint
effort and that no part of the report is copied from others, or from any published sources.

Source: Real Time Handbook of Statistics on Indian Economy 2018-19 of Reserve Bank of India
(www.dbie.rbi.org.in)
Q1: Collect the following data (nominal values) for the period between 1970 and 2014
 Gross Domestic Savings (GDS), household savings (S), private savings and public savings
– Refer table for Q 2
 Personal disposable income (Yd), personal consumption expenditure (C) – Refer table
for Q3
 Household spending on various individual consumption items (e.g., on food, housing,
medicines, services like telephone, recreation, etc and others) – given in question itself
 Distribution of household savings between financial and physical assets, and – Refer
table for Q6
 Composition of their financial savings portfolio (including bank deposits, equity, bonds,
PF, life insurance, and so on) – Refer table for Q7

Q2: Prepare a table and a graph for different sources of Gross Domestic Savings (GDS) viz.,
household sector, private business sector, public sector (government) and their relative share
in it. You may analyse the data and give your comments about the macroeconomic impacts
and implications of the leading role that household sector plays for contributing to the overall
GDS of the economy.

Private
Public
Year Household Corporate
Sector
Sector
GDS Gross Domestic Savings Components
1970-71 4531 672 1618 6821 2500000
1971-72 5229 769 1689 7687 2000000
1972-73 5330 806 1816 7952
1973-74 8020 1083 2363 11466 1500000
1974-75 8677 1465 3340 13482 1000000
1975-76 9790 1083 4192 15065
1976-77 11206 1181 5195 17582 500000
1977-78 13679 1413 5253 20345
0
1978-79 16482 1652 5976 24110
-500000 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13
1979-80 16338 2398 6331 25067
70- 73- 76- 79- 82- 85- 88- 91- 94- 97- 00- 03- 06- 09- 12-
1980-81 18116 2339 6135 26590 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20
1981-82 19013 2560 9120 30693
1982-83 21972 2980 10004 34956 Household Private Corporate Sector
1983-84 26955 3254 9030 39239 Public Sector
1984-85 32796 4040 8950 45786
1985-86 36666 5426 11322 53414
1986-87 42111 5336 11246 58693
1987-88 57304 5932 10471 73707
1988-89 67063 8486 11943 87492
 1989-90 82985 11845 11900 106730
1990-91 108603 15164 10641 134408
1991-92 105632 20304 17594 143530
1992-93 127943 19968 16709 164620
1993-94 151454 29866 11674 192994
1994-95 187142 35260 24266 246668
1995-96 198585 59153 31527 289265
1996-97 224653 62540 31194 318387
1997-98 284127 66080 29583 379790
1998-99 352114 69191 -3146 418159
1999-00 438851 87234 -9238 516847
2000-01 463750 81062 -29266 515546
2001-02 545288 76906 -36820 585374
2002-03 564161 99217 -7148 656230
2003-04 657587 129816 36372 823775
105070
2004-05 763685 212519 74499 3 Gross Domestic Savings Compenent
123515
2005-06 868988 277208 88955 1 Share (%)
148590 100.00%
2006-07 994396 338584 152929 9 80.00%
183633 60.00%
2007-08 1118347 469023 248962 2 40.00%
180262 20.00%
2008-09 1330873 417467 54280 0 0.00%
218233 -20.00%1 4 7 0 3 6 9 2 5 8 1 4 7 0 3
7 7 7 8 8 8 8 9 9 9 0 0 0 1 1
2009-10 1630799 540955 10585 9
70- 73- 76- 79- 82- 85- 88- 91- 94- 97- 00- 03- 06- 09- 12-
262174 1 19 19 19 19 19 19 19 19 19 20 20 20 20 20
9
2010-11 1800174 620300 201268 2
282446 Household Private Corporate Sector
2011-12 2054737 658428 111295 0
Public Sector
304347
2012-13 2212414 713141 117919 4
Table 1: Gross Domestic Savings (GDS), S, public and private savings Chart 1 & 2: Share of components of GDS

Savings lead to future growth in economy.

In India, household sector is the biggest contributor to GDS (Gross Domestic Savings), followed by private
corporate sector, and public sector. This indicates that GDP is directly impacted by household sector and
thus economy is dependent on household savings.
The above graph shows, household savings has increased drastically after 2008-09 recession owing to
uncertainty in economy and poor social security system. During recession, interest rates were lowered to
increase consumption, so the savings in the banks reduced, hence reduced private investment. Overreliance
of household savings isn’t recommended, an increase in savings in private and public sector is also needed.

Q3: State the equation for consumption function and briefly explain its parameters and their
expected values. Use regression method to estimate the equation (estimate autonomous C and
MPC) and derive the estimates of savings from it (autonomous savings and MPS). You may refer
to exercise-4 (“Relationship among income, consumption and savings”). You are required to (a)
use regression method to estimate autonomous C and MPC for the entire sample period, (b) to
present the complete results in the report, and (c) to explain why or why not the estimates tally
with the theory.

The equation of consumption is C = a + bY

Where,
a is autonomous consumption (that is consumption when income is 0)
b is the marginal propensity to consume (Change in consumption/change in income)
Y is disposable income.
Savings = Y-C = -a + (1-b)*Y
We can conclude, savings increases as income rises.
MPS for India is around 0.2837 and autonomous savings is -49147 crore rupees.
According to the theory of consumption, poor countries have a higher MPC as compared to rich countries
because they have a lower disposable income, leading to low funds to actually save; however, this is not
observed in India. India has a MPC of ~0.71 / 71%, which is a lot lower when compared with similar
countries like China (75%-85%), Russia (70-90%), and Maldives (90%).
These estimates do not tally as Indian people have a habit of saving more. This is because India does not
have a robust Social Security System such as the US, and people are scared because of the uncertainties.
So because of this, Indians are behaviourally more inclined towards savings.

Private
Final
Personal
Consumpti
Year Disposable
on
Income
Expenditur
e
1950-51 9154 9394
1951-52 9633 10307
1952-53 9602 10284
1953-54 10560 11190
1954-55 9884 10414
1955-56 10052 10417
1956-57 12035 12286
1957-58 12294 12462
1958-59 13777 14148
1959-60 14443 14707
1960-61 15550 15891
1961-62 16327 16617
1962-63 17376 17501
1963-64 19730 19430
1964-65 23293 22873
1965-66 24436 24144
1966-67 27954 28119
1967-68 33113 33509
1968-69 34823 33524
1969-70 38024 36265
1970-71 40042 38474
1971-72 42446 41496
1972-73 47029 45736
1973-74 57859 55135
1974-75 67356 66799
1975-76 71605 68314
1976-77 76254 71024
1977-78 88228 81788
1978-79 94859 88950
1979-80 103337 96590
1980-81 127703 118068
1981-82 147326 135676
1982-83 163050 149773
1983-84 192754 175357
1984-85 215122 194037
1985-86 237677 214154
1986-87 265725 240209
1987-88 301253 266649
1988-89 356552 310497
1989-90 409040 346807
1990-91 479712 398529
1991-92 547898 457735
1992-93 638528 516118
1993-94 739464 591308
1994-95 867809 687154
1995-96 991726 792015
1996-97 1183731 928629
 1997-98 1304768 1018559
1998-99 1523158 1166300
1999-00 1671151 1312537
2000-01 1831492 1406661
2001-02 2017154 1531672
2002-03 2135787 1620293
2003-04 2356499 1771305
2004-05 2582283 1917508
2005-06 2910911 2152702
2006-07 3328591 2476667
2007-08 3734756 2840727
2008-09 4531440 3249284
2009-10 5198450 3707566
2010-11 6004089 4360323
2011-12 7178787 5141897
2012-13 8066373 5772060
2013-14 - 6485037

Q4: In the light of the above results examine the pattern of consumption expenditure as Yd
grew in India over the period in the light of the theory of consumption. Provide sufficient
justifications for the values of autonomous C, MPC and MPS.

As per the Keynesian model of consumption, as the personal disposable income increases, the
consumption increases. As can be observed in the graph, as the income is increasing, the consumption is
increasing. However, it can be observed that the consumption is not increasing proportionately. As the
income is increasing, the dependency on borrowings reduces and the consumption rises.
Also, the model states that, for high income countries, MPC is low and for low income countries, the MPC
is high. However, in India, the MPC is low, which does not resonate with the theory.
The reason for the same is:
1. Poor robust social security system
2. Government encourages provident and pension funds
The MPC is thus low and with increase in income, the autonomous consumption is reduced.

Q5: Study the disaggregated level (item-wise) consumption data and examine the variations in
MPC across various items of consumption as per capita income reportedly grew faster during
the post-reform period. For this purpose, you may bifurcate the sample periods between pre-
reform and post-reform (e.g., 1970-1991, and 1992-2014). This may help you to examine the
structural shift, if any, in consumption pattern after the economic reform in 1991. (For your
convenience an Excel file containing disaggregate level data for item-wise consumption
expenditure of households for the period between 1959-60 and 2011-12 will be posted to the
course folder in Google drive).

Item Pre Post

Globalisation Globalisation
Food 37.15% 18.55%
Clothing 6.03% 4.40%
Rent and Water 10.33% 6.73%
Fuel and Power 3.73% 2.60%
Furniture 3.22% 2.93%
Care and 2.06% 2.96%
Health
Communication 10.19% 12.43%
Recreation 0.19% 0.02%
Education 0.94% 1.00%
Table : Item wise consumption data Chart : Item wise consumption expenditure for pre and post globalisation

It can be observed from the above table that MPC for essential items like food, clothing has seen a
decline post globalisation while services like care & health, communication has seen an increase. This can
be attributed to the fact that beyond a certain income level, people start spending more on non-essential
luxury items as basic essential items are covered.

Q6: Examine the distribution of household savings between physical and financial assets. What
are the macroeconomic implications of increased savings held in the form of physical gold,
gold jewellery, ornaments, etc.?

  Household Sector
Year
Financial
Savings
Physical
Savings
Total Distribution of Household Savings (%)
100.00%
1950-51 62 619 681
1951-52 14 620 634 80.00%
1952-53 72 623 695 60.00%
1953-54 142 530 672 40.00%
1954-55 282 492 774 20.00%
1955-56 429 612 1041
0.00%
1956-57 333 889 1222
71 74 77 80 83 86 89 92 95 98 01 04 07 10 13
1957-58 291 737 1028
70- 73- 76- 79- 82- 85- 88- 91- 94- 97- 00- 03- 06- 09- 12-
1958-59 362 624 986 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20
1959-60 433 834 1267
1960-61 456 770 1226 Financial Savings Physical Savings
1961-62 489 748 1237
1962-63 499 1020 1519
1963-64 743 846 1589
1964-65 714 1183 1897
1965-66 1072 1524 2596
1966-67 864 2297 3161
1967-68 865 2410 3275
1968-69 795 2482 3277
1969-70 919 3456 4375
1970-71 1371 3160 4531
1971-72 1555 3674 5229
1972-73 2128 3202 5330
1973-74 3612 4408 8020
1974-75 2374 6303 8677
1975-76 3918 5872 9790
 1976-77 4852 6354 11206
1977-78 5853 7826 13679
1978-79 6658 9824 16482
1979-80 6081 10257 16338
1980-81 8610 9506 18116
1981-82 9614 9399 19013
1982-83 12739 9233 21972
1983-84 13294 13661 26955
1984-85 17879 14917 32796
1985-86 18538 18128 36666
1986-87 23336 18775 42111
1987-88 26820 30484 57304
1988-89 27183 39880 67063
1989-90 37998 44987 82985
1990-91 49640 58963 108603
1991-92 62101 43531 105632
1992-93 65367 62576 127943
1993-94 94738 56716 151454
1994-95 120733 66408 187142
1995-96 105719 92866 198585
1996-97 141661 82993 224653
1997-98 146777 137350 284127
1998-99 180346 171768 352114
1999-00 206603 232248 438851
2000-01 215219 248530 463750
2001-02 247475 297813 545288
2002-03 253255 310906 564161
2003-04 313260 344327 657587
2004-05 327956 435729 763685
2005-06 438331 430657 868988
2006-07 484256 510140 994396
2007-08 580210 538137 1118347
2008-09 571026 759846 1330873
2009-10 774753 856046 1630799
2010-11 773859 1026315 1800174
2011-12 632196 1422541 2054737
2012-13 717131 1495283 2212414

Table : Distt of household savings between physical &financial assets Chart :Distt household savings between physical & financial assets

Physical savings held the maximum share in the starting period, then financials savings took over, and
then again physical savings came up.It can be observed that physical savings started increasing from
2008-13, owing to the financial crisis. As people became uncertain about the economy and started
putting their money in physical savings as they are perceived to be safer.

Macroeconomic Implications of increasing savings in the form of gold, ornaments, etc. India is the
largest importer of gold in the world, which mainly caters to the demand of the jewellery industry. So,
increasing investments in gold, ornaments, jewellery, etc can have multiple implications.

 If more money is stuck in gold, that money is drawn out of the economy and not invested or used
further. This is not good for the economy as that money could have been used by banks to lend
further, and this could have been used for investment purpose
 As the demand of gold would rise, the country will have to increase the gold imports, which
would lead to greater current account deficit. This would lead to weaking of the domestic
currency, and reduction in national savings. This would lead to broader impacts. Income of
 domestic workers will fall, and a lot of them would be pushed to lower income segments. As
families with low income find harder to save, national savings would fall.

Other Reasons for sudden rise in Gold Investments

Gold investments rise because of various reasons. The major rise is generally because of hedging against
stock market declines and rising inflation. This happens as gold is considered a safe heaven in times of
economic crisis. When stock markets start falling, investors start withdrawing their money from the
market and start investing in gold. This takes the gold prices high because of rise in demand. On the
contrary when the stock market rises, people start taking out money from gold and start putting it into
the stock market.

Q7: Examine the changing pattern of household savings held in various financial assets, their
changing relative share, and comment on its economic relevance, if any, to the country.

Bank deposits holds the majority part in financial savings across years, however its share seems to be
volatile. High fluctuations in bank deposits have a negative impact on the investments

Currency deposits took a steep fall, while bank deposits rose sharply in 2016-17, owing to introduction of
demonetisation by the government on November 8, 2016. People started putting their currency in banks,
increasing the national bank deposit level.

In 2018, bank deposits took a dive, for which the probable reasons could be PNB scam and IL&FS default.
These events brought a negative impact on the credibility of the banking system, and people started
drawing out money.

After 2018, credibility of the banking system started to restore, which led to their rise again.
Another observation is that provident fund and life insurance fund is gradually rising, as people started to
save more and putting money in these funds, owing to compulsory 12% provident fund on employers.

Non- Provident Claims Shares

Life
Bank banking and on & Units of
Year Currency insurance
deposits deposit pension Govern- debent- UTI
fund
s fund ment ures
1970-71 17.23% 36.60% 3.25% 10.05% 23.79% 5.10% 3.30% 0.68%
1971-72 17.67% 44.77% 4.55% 10.98% 20.73% -0.09% 0.87% 0.52%
1972-73 21.85% 41.65% 3.70% 10.53% 17.94% 2.74% 0.93% 0.65%
1973-74 22.76% 44.72% 1.33% 10.54% 17.85% 2.57% -0.47% 0.71%
1974-75 0.59% 54.66% 3.04% 11.37% 26.01% 2.38% 2.05% -0.10%
1975-76 6.58% 40.81% 2.50% 8.14% 23.56% 17.31% 0.79% 0.31%
1976-77 16.51% 56.78% 1.65% 7.59% 16.98% 0.28% -0.07% 0.29%
1977-78 10.16% 50.89% 3.28% 8.56% 19.02% 4.70% 2.91% 0.49%
1978-79 15.74% 50.91% 2.55% 7.52% 17.66% 2.50% 2.25% 0.87%
1979-80 13.57% 47.47% 4.86% 7.88% 17.81% 5.41% 2.58% 0.42%
1980-81 13.84% 47.25% 3.22% 7.79% 18.07% 6.06% 3.51% 0.26%
1981-82 7.44% 40.02% 6.89% 7.99% 19.11% 13.75% 3.93% 0.88%
1982-83 12.93% 42.51% 5.55% 7.88% 18.29% 7.93% 4.12% 0.78%
1983-84 14.65% 42.09% 5.38% 7.26% 16.10% 10.43% 2.93% 1.17%
1984-85 12.50% 41.94% 4.08% 6.62% 15.99% 13.22% 3.24% 2.41%
1985-86 8.67% 41.41% 5.56% 6.95% 16.36% 13.33% 5.44% 2.29%
1986-87 9.62% 45.16% 4.71% 6.72% 15.73% 9.62% 5.50% 2.94%
1987-88 13.52% 41.22% 3.72% 7.27% 18.28% 10.34% 2.28% 3.36%
1988-89 10.75% 37.24% 3.99% 8.64% 19.07% 13.83% 2.87% 3.60%
1989-90 15.62% 28.55% 3.75% 9.01% 19.41% 13.79% 5.42% 4.45%
1990-91 10.53% 31.63% 2.17% 9.43% 18.79% 13.28% 8.38% 5.79%
1991-92 11.92% 26.07% 3.24% 10.23% 18.26% 7.08% 9.93% 13.27%
1992-93 8.03% 36.11% 7.38% 8.70% 18.12% 4.75% 10.05% 6.86%
1993-94 12.06% 32.70% 10.52% 8.62% 16.54% 6.23% 9.09% 4.25%
1994-95 10.85% 38.07% 7.87% 7.75% 14.60% 8.99% 9.19% 2.66%
1995-96 13.26% 32.06% 10.59% 11.15% 17.93% 7.70% 7.09% 0.21%
 1996-97 8.57% 31.97% 16.32% 10.12% 19.09% 7.40% 4.16% 2.37%
1997-98 7.41% 42.95% 3.90% 11.25% 18.70% 12.85% 2.59% 0.34%
1998-99 10.20% 37.12% 3.58% 10.95% 21.69% 13.19% 2.39% 0.88%
1999-00 8.79% 34.94% 1.62% 12.07% 22.72% 12.22% 6.87% 0.76%
2000-01 6.32% 38.30% 1.21% 13.69% 20.57% 15.77% 4.51% -0.38%
2001-02 9.84% 39.49% -0.12% 14.41% 15.45% 18.15% 3.44% -0.65%
2002-03 8.85% 37.94% 3.86% 16.08% 14.21% 17.34% 2.20% -0.50%
2003-04 10.95% 40.02% 0.50% 13.41% 12.56% 22.43% 2.33% -2.20%
2004-05 8.27% 39.14% 0.02% 15.20% 12.47% 23.79% 1.81% -0.70%
2005-06 8.92% 45.47% 0.09% 14.29% 10.60% 14.92% 5.79% -0.08%
2006-07 8.86% 56.62% 0.60% 15.15% 9.56% 2.53% 6.71% -0.04%
2007-08 10.71% 51.28% 0.17% 22.39% 9.43% -3.73% 9.80% -0.04%
2008-09 12.83% 58.16% 2.05% 21.28% 10.22% -3.84% -0.32% -0.38%
2009-10 9.78% 40.15% 1.87% 26.20% 13.10% 4.38% 4.52% 0.00%
2010-11 12.78% 51.10% 0.48% 19.58% 13.15% 2.75% 0.16% 0.00%
2011-12 11.45% 56.66% 1.08% 21.08% 10.31% -2.36% 1.78% 0.00%
2012-13 10.51% 54.21% 2.63% 16.96% 14.75% -0.67% 1.61% 0.00%
2013-14 8.39% 53.91% 1.92% 17.24% 15.00% 1.94% 1.60% 0.00%
Table : Composition of financial savings portfolio

Financial Assets Component Share (%) Chart : Financial

asset component
120.00% share (%)
100.00%

80.00%
60.00%
40.00%

20.00%
0.00%

-20.00% 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
70- 72- 74- 76- 78- 80- 82- 84- 86- 88- 90- 92- 94- 96- 98- 00- 02- 04- 06- 08- 10- 12-
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20

Currency Bank deposits Non- banking deposits

Life insurance fund Provident and pension fund Claims on Govern- ment
Shares & debent- ures Units of UTI