† Economic Advisor and Research Co-ordinator, ICRA Limited and Executive Editor of this journal. This note largely derives from work originally done for the Economic Advisory Council to the Prime Minister, under the guidance of Dr. C. Rangarajan, Chairman of the Council. Acknowledgements are due to the Central Statistical Organisation, particularly Ramesh Kolli and K.S. Prasadarao, and to the Reserve Bank of India, particularly R.B. Barman and S. Ramachandra Rao, for their kind co-operation and assistance
In January 2005, the Central Statistical Organisation (CSO) issued its estimates of investment and savings for 2003–04 and revised the earlier ones for 2002–03. The most remarkable feature was that domestic savings were estimated to have been 28.1 per cent in 2003–04 and 26.1 per cent in the previous year. These represented a very large increase from the measure of savings for previous years: of nearly 3 percentage points of GDP in 2002–03 and of 5 percentage points in 2003–04. The estimate of investment did not however rise from the level of 23 per cent of the years immediately preceding 2002–03. In consequence “errors and omissions” rose to 2.1 and 3.3 per cent of GDP in 2002–03 and 2003–04.
Opinion has been expressed that the savings estimate for 2002–03 and 2003–04 were erroneous, that in reality savings were much lower. A close examination of the data does not indicate much scope for the savings rate to have been significantly over-estimated, but it does find that on the investment side there appears to have been a sizeable underestimation of working capital formation. The principal factor underlying the increase in the savings rate was the welcome reduction in the consolidated government revenue deficit (dis-saving) and some increase in private household savings in physical form. While there is little doubt about the actual decline in the consolidated revenue deficit, the sharp increase in household savings in physical assets has been adduced as evidence to argue that the savings rate was an over-estimation. This note argues that the factors which could conceivably affect the pace of direct physical asset creation by households have indeed become larger in magnitude, explaining thereby its observed increase.
A close examination of the data does not indicate much scope for the savings rate to have been significantly overestimated, but it does find that on the investment side there appears to have been a sizeable underestimation of working capital formation.
On the whole, this note concludes that while the savings rate might have been at most slightly over-stated to the extent that fixed capital formation in the corporate sector might have been underestimated, especially in 2003–04, on the investment side the extent of under-estimation has indeed been larger. Based on the known flow of credit from the banking system, it makes some suggestions, as to how the latter could be accommodated in the statistics and in which event not only does the “errors and omissions” term in 2003–04 fall dramatically to just over 2 per cent, but on the aggregate for the period 1993–94 to 2003–04, the average value of the “errors & omissions” also comes within intuitively acceptable limits.Finally if savings are close to 28 per cent of GDP, then financial resources cease to be a constraint to growth. Which marks the departure of the final member of the trinity of constraints that have ever since Independence been viewed as the principal constraints to economic growth in this country; the other two — food and foreign exchange — having had made their respective exits some years earlier.
